Shakti Met Dor

Here is another dilemma that I face now. I had invested in Shakti Met-dor about a month back. The company looked undervalued, some people were beginning to notice and write about it but the charts were not indicating anything stellar to me – at least then. I was more happy to cream off 7 – 8% in about a month’s time and get out. I am sitting on an upside of 26% now. Of course, my digging around on the net had made me aware of a much larger upside that was possible on this stock. So I was waiting for the market to discover the hidden value in it – perhaps around the time of it’s quarterly results declaration? I also thought it a good omen to have dumped some money on the stock of a company which is domiciled in the same city where I am working currently.

The company fabricates doors and windows. That’s it. My money is hinging on these humble pieces of building fitout equipment. Doors and windows are not cool enough, I guess. Maybe that’s why the company has never really been able to command a good enough valuation despite doing pretty well for itself. Some time back it recently upped its manfucturing capacity and no one seemed to have noticed back then. The additional capacity seems to have come on board and the additional widgets are now contributing to the bottom line. The coffers seem to be filling up and now people are starting to see it on their screens due to the falling P/E ratio.

What’s my dillemma? When to sell. Again. The same problem.

And what’s the catch? The management – or so it seems. They must have realised that since the market cares two hoots about them, it was time they got out of the party where they were not invited. They now want to delist. The promoters own around 55% and it may seem that they have a long way to go (SEBI requires 90% ownership for promoters before they can slink away). But there’s more to it – we need to open our doors of perception wider. The problem is that, in true Pareto style, just about 100 shareholders seem to own around 90% of the stock under issue. I am afraid that if the management is able to corner these 100, then I’m done for. Who knows what relation exists between these 100 and the management? I hope they do not locate me – but that seems difficult as I work just 7 kms from their head office. The website of the company is nothing great. I am sure some creative webmaster can create quite a few interesting themes with doors and windows opening and closing on their website. They do not have an investor relations page or section but that’s all undestandable since the management has said that the reason for seeking an exit from the listed secondary market is the heavy burden of listing and exchange fees that the company has to bear. If that is such a heavy expense then why would they ever want to pay a few thousands to a web designer to spruce up their website? But despite the frugal website, they have managed to slip in an extract about their company culture (Career With Us >> Our Culture) which should help us investors:

“Openness: We like to be ethical, fair and forthright in all our endeavors; openness not just in the sharing of knowledge across the organization, but also in terms of respecting the feedback given by our people.”

I hope they feel the same about their investors? Or are some investors more investors per share of holding than others?

Despite such nobility, there is some speculation that the promoters have been quietly ferreting away bite sized chunks of shares away from the market ever since 1998 and do not appear to have been open and honest about it. That sounds like fraud to me. Stock analyst Mudar Pathreya said all this and also a bit more in his interview to CNBC-TV18 on 27Jul’10. He says that the company should be worth more than Rs. 500/share and advises shareholders to hold on.

Where is SEBI when it is needed the most? I need you, SEBI for I need to make money. I remember Prof. A, who during my first year of management studies had remonstrated very vigorously and animatedly:

“SEBI should be plucked out and thrown into the Arabian Sea”.

 Serious, risk averse dyed-in-the-wool kind of value investors will stay away and look the other way. But I am greedy. Greed is good. Greed is good.

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Sugar me baby

Sugar me baby, NOT.

The problem with too much of a fixation on charts is that we sometimes tend to ignore their non causality. Past patterns may not repeat. Just because a stock is at its 52 week low/high does not automatically mean that it will start rising/falling. In fact, quite the opposite. Momentum surfers say that, if accompanied by strong volumes a rising tide is likely to rise further and a sinking ship is bound to plunge deeper. Trouble is that we amateurs tend to sell too early (“too much of greed is not good”) or hold on to falling lines sliding further. That is what I had in mind when I said (here and here) that its not important when you buy – when you sell is what determines your worth. Another category of misadventures has to do with those with blood on their hands as they attempt to catch falling knives. Many look at a 6m or 1yr chart, and buy into a stock if they see that its fallen quite sharply. These are  people hopping onto a slide midway in the hope that the slide will magically metamorphise into a roller coaster and take them up. While they lose lesser than the ones who have been around at the top before the slide, it hits the ego more. Guys who have been losing money on a losing investment for some time seem have turned accepting to the fact that they have hit a rough patch and bravely ignore  further losses. Guys who get in fresh in the middle of a drop have to brace themselves for the stock market equivalent of a tight slap.

If there’s some sudden, extraneous shock (the PIIGs dominoing themselves to bankruptcy, terrorist strikes, political events, my turning up to work in pink  corduroys, et al) then it can help to get in during sudden drops. Else, it’s not so simple. Better bet would be good stocks that have done nothing and might be on the verge of a breakout. See the chart of Reliance Industries Limited (RIL), for instance – there has been a reconcilation between the brothers, global energy stocks are firming up, entry into communications and power…but the RIL stock has been sleeping.

On the other hand, one sector that has definitely turned quite bitter of late is sugar. Take a look at the chart alongside – while the NIFTY has done a handsome 23%, the sugar stocks have fallen from 12% – 32% during the past 12 months. EID Parry has trumped the NIFTY though to return a nice 46%, but then only 65% of EID Parry is sugar. Now, I do remember a colleague of mine buying into one such sugar producer and losing quite a bit in the bargain. Not a sweet deal at all. Same has been the case with Airtel. A couple of people I know bought into the leading telco, drawn by its image and brand name hoping for a quick rebound. But the rebound has not come about and they are still ringing up losing numbers.

Food is not good here in India. The stomach turns to see so many people going hungry only to realise that mountains of rice are allowed to rot in the Food Corporation of India’s (FCI) godowns.  The Indus Valley civilization taught us to build granaries but somewhere down the line we forgot how to manage them. Its pointless to blame Mr. Sharad Pawar since he is, by his own admission, quite overworked. I am not quite sure what role the food ministry mandarins have played in the local sugar mandis, but the the picture looks bleak for these cane crushers.

Sugarcane is quite a popular crop back there in my village. Its yield per acre is high since these grasses can be planted quite close to each other. Its almost impossible to venture deeper into the growth since the stems are quite stubborn and the rough leaves do scratch and irritate the skin. Wild boars gorge themselves on the canes and I remember my cousins/uncle/labourers taking turns watching over the farm under the starry skies.  Later in the morning it was always a pleasure to watch a village belle walking around, with unkempt hair digging her incisors and tearing into the outer skin of a sugarcane stump with a beautiful ferocity that can now be matched with the savage manner in which some investors have been mauled into losses over these stocks.

Sometime back there was a shortage of cane since there were many takers. There was talk of ethanol doping of fuel, the liquor companies where in attendance too, the gur producers and of course the sugar refiners. As a kid, I remember seeing serpentine queues of bullock carts laden with sugarcane waiting to offload their ware at the local sugarcane factory. I am not sure if you know but sugarcane needs to be processed immediately upon harvesting, else the sugar content declines rapidly. But a year or so back, we heard of millers coming directly down to the farms to collect the produce. This is a cyclical stock and once you see such un-natural behaviour (home pickup), it is almost sure that the good times are about to turn.

The heady demand drove up cane prices and the sugar producers had to stock up on inventory procured at very high costs. They are still holding on to these stocks. Since sugar prices are coming down now, the sugar companies have no option but to eat this cost. Further, since the Indian monsoon seems to be ok ok this year, there will be fresh produce coming into the sugar mandis later this year. Which will cause prices to fall even more. Also, there is a wide acceptance of the fact that the RBI might increase domestic interest rates. I do not know offhand, how much debt is carried by the sugar producers, but if they indeed do – then its one more nail into the coffin. Domestic brokerages have thumbed the sector down – many are predicting a 30% – 50% drop in quarterly profits.

Only deregulation of the sector can spike up the sector. But one wonders why talk of deregulation always surfaces when the sector underperforms. It is again a digital event, not in one’s control – and with Mr. Sharad Pawar overwhelmed with work, this is one coin flip which we’d rather ignore. These are cyclical stocks – roller coasters, ferris wheels, etc. Lets have them increase their P/Es first and then look at investing in them. Depressed earnings of cyclicals reduce the denominator of the P/E ratios and therefore they become attractive when their P/Es are high.

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