Tata Motors: Driving in Reverse Gear

Tata Motors 08Sep15The stock of Tata Motors has fallen ~45% in the last 7 months! That’s a big drop for a big company. The stock’s around 10 times it’s trailing 12 months’ earnings.  Upstarts like Flipkart are getting valued more than Tata Motors. That’s surprising. Is it about the unattractiveness of the business of making cars or is it a case of over-valuation of ecommerce businesses or is it both? Tata cars are everywhere, including China. It’s quite a venerable brand not to have a Peter Lynchian roadhead moment on:


I am a hard working taxi driver and I have seen my share of cabs and cars (mostly cars that looked like cars) and have even heard of some feline roadhogs (read Jaguars) and then my last passenger told me about this massive 45% drop in the share price of the company that makes these things. I have this Peter Lynch moment and I want to buy this stock.

It’s the crumbling of the Chinese walls that is a part of the reason why the stock’s down. Cool Chinese have been doing uncool things like not buying Jaguars as much as they used to earlier. Things have been very bad for the company during the last couple of quarters. So bad that they chose to raise capital via a rights issue. That’s a sure shot sign of severe financial stress. Worse, the stock price kept of falling leaving the rights price level far behind. And then the unkindest cut was the skipping of dividend by the folks that run this rather complex business.

But then I am a surfer. An opportunist and a speculator. I am rooting for a 35% return on this idea.

Here’s some pointers to mull over:

  1. Commodity prices have hit rock bottom. Cars require a lot of metal to make. Should be cheaper to build a car. Selling them is a totally different matter altogether!
  2. Valuation is attractive. Trailing 12 months’ P/E of around 10.
  3. Stock’s corrected 45% now from 7 months back
  4. The technicals don’t scream a buy, but are giving a very strong hint. The next few days price action should confirm.
  5. We can (and should) forgive the management for skipping dividend for the first time in 15 years. That’s so unlike a Tata. A black swan Tata, perhaps.
  6. We can (and should) ignore the fact that the management seems to have pulled off an opportunistic rabbit from the (minority) shareholders hats by pricing the recent rights issue at 450.



Can Fin Homes and Gruh Finance

Some time during the last few days have been spent in looking up housing finance companies that lend to the growing lower income urban population of India. According to a report by the Technical Group (11th Five Year Plan) on Estimation of Urban Housing Shortage, there is a whopping 99.9% shortage of affordable housing for the economically weaker sections of India. The folks who maybe just have one bank account, are aware of insurance but mostly aren’t insured, aren’t required to pay taxes and may not be very educated are the customers of this industry. Gruh, CanFin, Repco, LIC Housing, Dewan, Sahara etc are names that come to mind. First the names that were discarded:

  • LIC Housing Finance – the recent scam related newsprint is yet to dry so dropped.
  • Repco – still cheap but risky given their higher gross NPAs as compared to some of the other companies here
  • Dewan Housing – Ok, so DLF sells its stake in its insurance jv with Prudential since its not core to the real estate company. How come insurance becomes core to low income urban housing finance? The fact that the Big Bull bought a big chunk of Dewan doesn’t change my view, whatever the opportunity cost turns out to be. Also Dewan’s NPAs have been cyclical whereas those of Gruh have smartly trended down with time. And then once upon a time there was a tale of two brothers
  • Sahara – full page ads don’t swing it for me…
  • others – Indiabulls housing, GIC etc: didn’t bother.

The two that slipped through and have managed to wedge into my consciousness:

  • Gruh Finance: story is sterling silver; pedigree is great; performance has been stellar. expanding at a very measured pace. have systematically reduced gross NPAs and increased net interest margins. Their apparently clinical risk management discipline is borne by the fact that their current gross NPAs are around 50 basis points of their outstanding loan assets – clearly showing the benefit from the risk modeling experience of HDFC. What amazes me is that they have just c 517 employees across their 134 odd retail offices – unless of course I got that wrong. Question is – is this is a good price to buy? Maybe I will buy a very small quantity to ensure I continue tracking it and will take it on from there in terms of deciding a larger commitment.
  • Can Fin Homes – I like this tiny South Indian company. Promoted by Canara Bank, it may perhaps have an image of a slow moving, non-aggressive, sarkari company. Their price by book is around 0.8 (as compared to around 1 for Dewan and a nice 8 – 9 for Gruh).

Chartistically speaking, while Gruh seems to have broken out of its resistance that was established at the start of 2013, Can Fin is getting close to it’s resistance level of 180. So I wouldn’t bite unless the prices come down. The problem is the high opportunity cost of sitting out of these opportunities if the expected corrections don’t happen. I think I am being greedy for no reason…

SCI, BDI and my Luck Index!

This has been a pretty good trade and I guess it’s time to unwind now. I am never good with breakouts and get extremely edgy at the top – it runs counter to how many momentum people think and act but I think I suffer from vertigo. This is lucky cause I had no clue what the Shipping Corporation of India (SCI) has been doing or is about to do. I later on realized that they are in the doldrums and are getting rid of their “Black Pearl” and their attempts to raise prices are getting whooped by competition. No wind in their sails, so to speak. The pearl bit is not off the mark given that SCI is in danger of losing its “Navaratna” status – whatever it means. I am no Jack Sparrow. I entered when I happened to see the Baltic Dry Index (BDI) spike up at end Sep. I had no clue about the differences between spot contracts and forward contracts rates and the billing mix for SCI. All that wisdom comes in hindsight!! In this case it has been pure luck. 🙂

BDI and SCIBDi technical from ycharts

The BDI technical chart (via ycharts.com) looks overbought to me. I may be wrong and I guess breakouts are all about RSI remaining in elevated levels, but when you get some gains on pure luck and nothing else, I don’t believe in “letting the profits run”. 😉

Moment of Truth?

There are these points in time which are like moments of truth in investing/trading/speculating that I hate the most. The point where you have to take a decision and use whatever intuition, experience, awareness and knowledge that you have accumulated in your investing career till date. Where is a crystal ball when you need one?

One such moment of truth that I am facing is what to do with my Gitanjali Gems holding. The chart below shows where the share price has come from historically. Looks like the 200 DMA line has been a good support in recent times and given that it is now poised on the 200 DMA makes me pensive.






What should I do?

  • Nothing
  • Buy more
  • Sell





 I asked this question to some people whose opinion I value. One of the response was:

If you think it is a long term play – book some partial profits and hold on to the rest. If you have made looks like 200% then if you sell 1/3 you have recovered your capital..

Sound advise perhaps – and there definitely is a good school of thought which believes in taking out the capital invested and letting the profits run. Only in my case if I were to do this, I’d add my hurdle rate (my long term expectated rate of return that I wish to earn) to 100% and take out that % of my capital – ensuring that not only do I get my capital back but also the time value of money component. But my big problem with this approach is that once I have done that I am really back to square one. The feeling of having secured my capital is illusionary since I intend to remain invested in the markets for a looooong time to come. Who knows, I could end up sqaundering this recovered captial on a dud investment which could erode it quickly, stop losses notwithstanding. The truth is that I’d have to find another ‘sparkling’ idea like this one – or at least one that fetches me my expected rate of annualized return. That’s tough in today’s times for someone like me who cannot devote much time to studying the market. Caught between the ‘rock’ and a hard place I guess. Ultimately I have decided to do nothing and see if its breaks the 200 DMA conclusively. If it does then I guess I would fold completely.

United Phosphorus

Sorry about the boring ‘stock forecast’ type of posts, but the United Phosphorus (UPL) chart set-up has caught my eye and I thought I should record this here today to come back and revisit the idea at a later date to check if the hunch was right. The chart clearly shows a very reliable support level of 125 – the stock has always bounced up a bit from that level giving returns in the range of 21% to 36% each time it has touched that level (see dotted red line on the chart). To me this looks like a good short term opportunity to pick up a 10% till the stock’s relationship with its 200 DMA becomes clearer. On their part various brokerage houses have come out with predictions for the stock ranging from 172 to 196 so there indeed looks like sustained buying interest.

UPL ranks 4th amongst the top global agrichemical generics companies with presence across the US, EU, Latin America and India. The market is divided into innovators who sell patented molecules and the generics. Given that a lot of patent expires are due in the next couple of years, this should serve as a good pipeline of opportunities for the generics companies. UPL gets 80% of its revenues from international markets and 20% from domestic sales. So buying this company again means that we are effectively shorting the INR. And important factor in this case since forex benefit due to favourable exchange rate movement contributed to ~19% of UPL’s 3Q12 revenue growth when compared to its 3Q11 revenues. The company is selling for a price of ~INR 127 per share today and given an expectation of a FY12 EPS of INR 14, this implies a P/E of 9 (looks attractive on this front). Equity research reports point out that its other Indian competitor, Rallis India Limited is ~50% – 60% higher on the 1 yr forward P/E front.

What is not clear to me is the company’s ability to hike prices in case it experiences margin pressures. I doubt it would have too much of pricing power – which means that if the exchange rate turns unfavourable (RBI cuts repo rates even more) or if their working capital requirements continue to zoom up, then UPL may have to take a hit on its margins. Since most brokerages are targetting a price range of 172 – 196, this target range could scale down to the 165-168 range in case these risks materialize. Incidentally, 165-168 may also be the resistance level for the stock. Regardless, the prospect of a 10% short term and a 35% medium term gain isn’t bad.

Redignton, Pennar on charts

Redington India is a very low margin game (PAT margins ~ 1.3%) and the company is piling on foreign debt to finance buyback of stake in one of its subsidiaries from a private equity investor. Now interest servicing costs and its core business are both long the INR. It’s anyone’s guess really, but there could be some who are predicting that the INR will rise up from here – will that be able to take up the price of this stock to 100? If look at the price chart on the right (trailing 18 months), it does look like a coiled spring – what remains to be seen is which way will it uncoil. Up or down?

Now there is a company headquartered less than a kilometer from my residence: the integrated engineering company called Pennar Industies. Is proximity to where you live a good reason to invest in a company? The stock really has just dropped and dropped but I read somewhere that a venture capital investor has picked up a 7.74% stake through secondary market purchases spread over the past 6 months. Well, they certainly managed to strike their purchases within the narrow 37 – 40 price band. This gives a valuation of ~450 crores to the company. The current market cap is ~ 414 crores so that looks like fair. The investors’ presentation on the company’s website puts the replacement value of the business at 700 crores as compared to its gross block of 345 crores. Now, on a consolidated net sales of ~ 1,200 crores, the mcap looks like well, ummm. Even with a net profit margin of ~ 6%, the mcap to sales ratio looks a bit low. Its chart (on the right) also shows what looks like a bollinger band squeeze. Is this the nadir for this stock? Good to plonk a small amount? I guess i’ll sleep over it and at least wait for the 50 SMA line to cur above the 200 SMA line. Have to check leverage and shares pledged, if any.

Hardly Halcyon

The Tuamotu Kingfisher (TK) is one the world’s most endangered birds. So is Kingfisher Airlines (KFA). The entire population of the TK has dwindled down to less than 125 (on one lone, tiny island is the South Pacific). The stock price of KFA has dwindled down to less than 20! A lot of myths and stories abound on the mirthsome kingfisher.

I can recount some of them (NB: the distinction between Kingfisher and kingfisher is intentional)

  • How the kingfisher got its bill: Actually, in today’s day and age of “good times”, the whole point is not about the Kingfisher getting any bills, its about refusal to pay bills! Whether it be tax bills; PF bills; ATF bills; Interest on loans bills etc etc. But yes, at approximately the time of creation, there was a council of wise animals who deliberated over the raw deal that the kingfisher had got. These wise animals were the Stately Bird of India (SBI); the Bird of India (BOI); Bird of Birds (BOB); Punjab’s Naive Bird (PNB);  I See that I See Insolvency (ICICI) etc. These wise animals expressed that while the kingfisher was supposed to be a sea bird, it was neither given webbed feet (more FDI!) nor a good bill (in the form of govt protectionism!) making it extermely difficult for him to earn a decent living. So, the council of wise animals, in all their wisdom, decided to be owls and attach an awl at the tip of kingfisher’s beak (generous credit lines!). The council of wise animals was really very wise – they kept increasing Kingfisher’s bill so that it could fish more. For fish were hard to come by during these “good times”. Some of them were in fact becoming more like Kingfishers themselves (by taking on equity) and some of them were lengthening  their beneficiary’s beak further using its good name (lending against a franchisee brand value as collateral!!!)
  • The daughters of UB Holdings: The Alkyonides were the seven nymph daughters of Alkyoneus, king of giants. Just like Kingfisher Airlines, UB Engg, United Spirits, Mangalore Chemicals and McDowell Holdings are some of the daughters of UB Holdings, King of Good Times. When their father was slain by Hercules, the daughters flung themselves into the sea. Amphitrite, sea-goddess and wife of Poseidon, transformed them into ice birds, or kingfishers. The Alkyonides signified prosperity, joy, liberation and tranquility. The daughters of UB Holdings  however seem to represent lack of these today!
  • Hardly Halcyon any more: The “good times” between the mortal king Ceyx and his wife, the  goddess Halcyon were numbered on the (Kingfisher) calendar as they had caught the envy of the higher Gods. The Greek Gods, peeping toms that they were, overheard some private jokes being passed between Halcyon and Ceyx where they were comparing themselves to Hera and Zeus respectively. The Pantheon’s pride wounded, a chain of events followed which ultimately resulted in Halcyon and Ceyx transformed into kingfishers. Such generosity from the Gods had conditions – Halcyon could lay eggs only in winter and by the sea, always coming to grief as the wind and tide kept washing them away. So Halcyon’s father, Aeolus (a lesser God. Of winds) intereved and procured a period of quiet and calm approximately 2 weeks around winter solstice when the winds would die down and the kingfisher could roost. Winter solstice is usually on 22/23 December. The Halcyon days are usually observed from 14/15 Decemeber. Will something happen and save Kingfisher yet again?

This is all myth anyways. Just like some tricks and inconsistencies that the auditors pointed out during their statutory review of Kingfisher’s accounts. The moment when the banks were asked to convert their loan exposure into equity exposure, one should have dived underwater on this stock. Personally to me, it all seems odd and nostalgic since UB Holdings has been my best multibagger investment to date. I had bought this on 29Dec2004 @ 100.25 per share and jumped out at 719.71 a share. Considering a generous lottery of 1:1 bonus granted in Jul’06, this meant a 14 bagger for me. The investment logic was simple – A) world’s second largest retailer of daaru was selling at a few hundred crores and B) every evening when I used to travel back home from work (Fort area in Mumbai to Kandivali) all the liquor shops I’d see on the way were thronging with customers. Buying the share was easy/a stroke of luck – keeping the investment and letting it run its full potential was the hard part. Honestly, I did not do any big analysis before deserting the slender tree branch on which Kingfisher sat. I just felt that a 14 bagger was good enough for me. But yes, in hindsight, one can see warning signs begin to emerge the moment a company departs from its core competence (making and selling liquor to a rapidly urbanising economy growing at 5% – 7%) to more colourful adventures (airlines).

Well, there may yet be some nice fat and juicy worms which the Kingfisher may just grab at using his much discussed beak and whatever people are writing about it may not be its obituary, but as far as I am concerned this stock is too risky to own as of now.

Godrej Industries Limited – 1Q12

My core holding, Godrej Industries Ltd. (GIL) continues to inch up amidst all this talk about desi rate hikes, debt ceiling, Greco-Roman excesses and Obama’s insomnia. Over the last one year, the stock is up 15.7% compared to the NIFTY. The company announced its 1Q12 results on 30Jul11 covering the following points:

  • The agri business has grown 40% yoy while the other core business of Chemicals is up 28% yoy. Both in revenue terms.
  • A 46.34% growth in consolidated net profit at INR 71.33 crores. The consolidated net sales increased 35.85% at INR 1,307.42 crores for 1Q12.
  • Godrej Properties witnessed revenue growth of 83 per cent despite a difficult quarter for the real estate sector

So to me, the results look very good indeed. In my previous post on GIL (dated 31Oct’10), I’d written about the integration challenges that GIL will face as it goes about acquiring companies. Well, the recent Godrej – Hershey breakup just adds to the fears. I guess global majors may be seeing low barriers to entry in the yummy Indian food sector and therefore itch to go solo. I’m thinking – how expensive would it really be to set up a sales & distribution & marketing infrastructure when denominated in GBP or USD? I don’t know but it may not be a large sum for a global foods major who has decided about getting serious in India. I know I may be trying to justify but typically I do not fall in love with the stocks I own!!

Another update I wanted to share was about the general notion that holding companies are duds because they trade at a massive discount to the market value of the assets that they own. Last month there was a lot of buzz about these holding companies – thankfully the general downward bias of the markets stopped spikes of manic proportions. As of now, I don’t give a rats ass about holding companies other than GIL obviously. Speaking of which I did start wondering about who moved my cheese when I came across this video clip of an interview of Basant Maheshwari on CNBC-TV18!! This is what he had to say about the Godrej gang of shares.

Godrej Industries did very well for 4 – 5 years because investors who wanted to buy Godrej Properties, couldn’t buy Godrej Properties. The only option was to buy Godrej Industries, but now if Godrej Properties is listed and I am bullish on Godrej Properties, I’ll go and buy Godrej Properties. Why will I buy Godrej Industries?

And these are the nuggets of wisdom I picked up from this interview:

  • Embedded values in holding companies always remain valuable!!
  • Investors make money in a cheap stock only when the cheap stock becomes expensive. So it has to bloody well move. There is no point in holding up your capital on a sloth.
  • If you are playing for the valuation gap i.e. the discount factor of the holding company to aggregate market value of its assets, then that’s wrong since the discount will always continue to exist.
  • Key play should be in holding companies which A) consolidate the earnings of their subsidiaries; B) the subsidiaries pay dividend and C) the holding company has a majority holding. C being the cause of point A  really.
  • Buy those kind of holding companies whose subsidiaries are not listed such that the act of taking them public monetises  the discount factor and unlocks value.
  • A holding company that receives discount from its subsidiaries usually does not go into too steep a discount. That is because if the dividend yield of the subsidiary is X% and the holding company is at a Y% discount then the dividend/income yield on the holding company’s portion of investion would be X%/(1 – Y%). The market will flatten this discrepancy by reducing the discount.
  • The reason why discount is justified is because if a holding company decides to monetize its assets and sell of all its holdings, it will still have to pay taxes on the income recieved. Therefore, the logic for discounting holding company’s asset values is correct.
  • Finally, if you are bullish on the holding company you have to be bullish on the underlying assets. If those assets are listed, it always makes sense to buy the underlying assets directly.

Now this has me thinking. Need to investigate and read up more to figure out what to do.

Finally, This is how some people are valuing the company: 9 times multiple for core businesses of GIL + 40% haircut to the market value of GIL’s stake in Godrej Properties and Godrej Consumer Products Limited. Adding all of this up gives a Sum Of The Parts valuation of ~240 – 250. Given CMP of 225 – 230, the company looks fairly priced. From the short term technicals perspective, 240 looks like a good resting place for the stock. From the longer term perspective, which is mine, the play is to ride the business growth and hope for a measured EPS expansion in the quarters to come.

Sun TV Network

Keeping Sun TV in my sights. The stock is currently trading at a 1 yr fwd P/E of 17 (“broker consensus”). I have printed these two charts regarding the stock and kept it on my desk so that I do not forget about it. The first is a one year chart which shows us that the stock has really not gone anywhere. The second chart is on a past 3 year plot, which surprisingly paints the same picture. My first reaction is that the stock must have clearly been pricey during that time with P/Es of > 30 I am sure. Anyways, as of today, the 3 yr chart seems to be saying that a line which is near 360 – 365 seems to have been acting like a support line of late and has behaved like a line of resistance during the earlier part of the 3 yr trailing window. The hitch is that the stock is below both the 100 and 200 day SMA lines. Need to think more. But since I have a heavy exposure to the Indian export industry – both in my stock portfolio as well as my profession, I am inclined to give such charts a second, third and perhaps a fourth look!!

Atrologically, my ruling planet is indeed the Sun. Lets see.

Godrej Industries Limited – 2Q11

A deluge of work kept me away from the keys momentarily. As I had said in some of my previous posts, I am massively long Godrej Industries Limited. While the stock has moved up quite a bit since my first post on it dated 11Jul’10 it did give back some 13% of its gains during the previous 45 days or so. I am perfectly happy with the situation. The position is net up 34% (weighted average) for me over the past 5 months that I’ve been holding it. I guess I was lucky to have bought into it at a good time and from here on I am content for it to give me a slow and steady compounding. In fact the purchase logic was based on the diversification that GIL gives – given it’s 69.4% and 23.4% holding in Godrej Properties Limited (GPL) and Godrej Consumer Products Limited (GCPL) respectively (and other group companies). Of course, there is the native chemicals business of GIL as well . While holding companies will never trade at a sum predicated by the value of their assets, the beta reduces as compared to a direct exposure to GPL. In the case of holding companies, the sum of parts is always less than the whole.

The quartely results of GIL were announced on 27Oct’10. The net profit on a QoQ basis increased by 12.5%; their chemicals and agri business is looking up and other regulation stuff. Nothing much to write home about the results – along expected lines of the company and the analysts. There was an expressed fear about inflaton eating into the profits of GCPL but that did not happen. The possible hardering of the interest rates could eat into the margins of consumer durables industry though which is generally believed to be a rate sensitive sector like auto. That remains to be seen.

I keep tracking the news stories about GIL fairly regularly. The company has certainly kept the news wires busy in the past months. I don’t know why but I end up investing in companies which use Bollywood and regional film personalities to peddle their products. A lot of names have been coming up in my alerts on GIL – the likes of Raveena Tandon, Soha Ali Khan, Vijayalaxmi, Malaika Arora Khan, Vidya Balan, Mugdha Godse et al. The other company whose products are endorsed by stars is Gitanjali Gems, which is now up a further 10% since my last post on it dated 25Oct’10. Cool. Here are some other important news stories that I caught re Godrej Industries:

– The new Godrej Appliances ad tries to shift the customers’ focus from refrigerators to other white goods. The company sells one fridge every 30 seconds in India so they’re correct in spending ad money on stuff other than fridges. The other good thing about the ad is that it does not feature Preity Zinta – which is a good change, according to me!

– Godrej Agrovet is exploring acquisitions in micro irrigation (competition for my other position in Jain Irrigation?). The prime minister shook a lot of hands in Malaysia recently – maybe that bodes well for Godrej Agrovet’s palm oil business?

– I keep the Godrej hand sanitiser (Protekt) at my work place. It’s good. This market (currently at 25 – 30 crores only) is growing at 50% per annum and is in its infancy. GCPL is eyeing a quarter of this pie.

– GPL expects it’s revenues to rise 50% this fiscal. There have been a few assorted stories saying that realty stocks will fall since the RBI has come out with tougher norms for bank lending to the housing sector. I don’t subscribe to that view. Point being, first time home buyers can always borrow the additional 5% – 10% from family while older home buyers should have the necessary funds. In any case, 1) GPL wants to increasingly focus on affordable housing in cities like Nagpur and Kanpur – where the demand should continue to remain high and 2) some banks were anyways calculating the % of finance at 85% of property value+ stamp duty. There is a tremendous ambition in smaller towns to go upscale and improve the quality of lives – and GPL should benefit. There is another company called Ashiana Housing Limited – which looks reasonably priced and is also following the joint venture model of GPL. Need to check on that story. But later.

– They’re looking to merge GCPL with Godrej Household Products Ltd (GHPL). GCPL is keen on acquiring FMCG firms, particularly in hair colouring, household insecticide and personal wash segments in Asia, Africa and South America. Good luck on that. The proces of consolidation will show whether GCPL can truly make itself over into a true multinational with a common footprint across multiple countries rather than merely being a company with a motley collection of stakes in various companies across the occident and the dark continent.

– Close to 80% of construction of GPL will be for residential purposes. Thankfully, we need not worry about SEZs and other commerical sales, which are highly correlated to business environment. The good thing about GPL (had mentioned in previous posts) is that it just wants to focus on its core area of expertise – getting the projects, the JVs with land owners, marketing and sales and using its brand pull to get in the home buyers.

– While the focus is on affordable housing in the 25 lakh bracket, GPL also has its game right in the mecca of big property in this country: Bombay. The story about it’s gigantic plot of land in Vikhroli is old hat. What’s new is the JV with Bombay Footwear to develop 1.5 lakh sq ft in Chembur and a MoU with Jet Airways to deliver 1 million sq ft of office space in Bandra Kurla Complex.

Mutual funds have been on a selling spree while the Foreign Institutional Investors lap up our desi shares. GIL however has been on the buy list of the fund houses like DSP, Edelweiss, HDFC and Religare. I am ready to load up more on my already massively long, passively managed position but it needs to dip down (on unrelated news). Till such time I will have to keep suffering Preity Zinta I guess. Cheers.

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