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.

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