Trade Ideas – Oct’10

Some trading ideas are occupying my mind at the moment. Much was said about the QE2 in the previous post but free capital must be employed and given my nervous, edgy nature these days, I prefer flitting in and out of positions hoping to compound to a modest proportion. While I am contemplating these opportunities that caught my eye yesterday, let me set the background score with these opening lines from Charles Dickens’ masterpiece about duality:

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way.

In fact some lines from the book are so very apt in the current global financial markets:

The Fed to all of us: “Keep where you are because, if I should make a mistake, it could never be set right in your lifetime”. Also, “For I’m the devil at quick mistakes, and when I make one it takes the form of Lead”

The global economy to its planners: “Crush humanity (read economy) out of shape once more, under similar  hammers (read printing presses), and it will twist itself into the same tortured forms”.

Inflation rate in US to whoever cares to listen: “It is a far, far better thing I do, than I have ever done; it is a far, far better rest that I go to than I have ever known”.

And so on. These are issues far beyond my full comprehension, so I’ll do what I am forced to do – seek some new punts and see what happens. I just can’t remain still for long. And rotting my money in the bank is criminal.

1. Jain Irrigation Systems: I know that this seems to be a fairly valued stock with it’s 1 yr forward P/E running at 30 and that it’s market cap is in the region of INR 8,700 crores (= USD 1.9 billion) on an expected FY11 sales figure of INR 4,200 crores (= USD 933 million). The stock has recently seen a 1 yr forward P/E band of 33-34 as well, so on that logic there could be some steam there. The company has compounded it’s revenues at a crazy 40% CAGR over the past 5 years using a mix of organic (!) and inorganic methods. So, the market obviously feels that this kind of growth will continue into the future (say 3 – 5 more years) and that’s why a P/E of <40 appears justified. But I am not sure if net earnings growth will also grow at the same clip. Currently, around 6% of the money that the company earns goes into servicing its debt. But I picked up a (moderate sized) position today as I feel that there is a short term 10% – 15% opportunity here. Another important point for me is that this company is from my home district, Jalgaon so I do feel my agrarian roots rising up as I sow this small packet of capital here. But really, the company is cool, having delivered world class drip irrigation methods to a country so sapped of water. It is now pioneering the concept of using drip techniques for paddy – the killer crop when it comes to water requirements. If that clicks, then it will be awesome for the country. From the chart above, I guess 1050-1075 seems to be a support level and given the Lower Bollinger Band touch, a negative plunge of the MACD and a code red, buy signal from the RSI, I will venture out here. A mental stop loss of 1000 is in place. 1000 also appears to be the next support? Lets see.

2. Balmer Lawrie: We have been hearing and reading so much about logistics and transportation being a huge opportunity that many of us may not even bother to check if the story still has some room for possible fresh investments. I have invested in and out of Balmer Lawrie in the past and like the logic for Jain Irrigation above, I guess this could turn out to a small, skim the top kind of opportunity. But in this case, I would be content to hold on to this stock for longer given that A) it is cheaper than Jain Irrigation and B) I am familiar with the company. I once worked in an office buidling next to a Balmer Lawrie Grease Division plant and I like to believe that the proximity and therefore some induction effect helped me make money on this counter in the past! I have not yet taken a position here but the chart on the right looks tempting to me.

 3. Banco Products: What I am really doing is flipping coins between Balmer Lawrie and Banco Products. This one is a Gujarat based company which has been around for 50 years but appears to be selling cheaply as well. It has made auto-equipment all these years and is now getting into cement business as well. Duh. It supplies it’s gaskets and radiators to companies like Tata Motors, TVS Suzuki, M&M, Maruti Udyog etc. It’s operating margins (@ 26%) are highest amongst peer group companies like Bosch, Bharat Seats and UCAL fuel systems. With an expectation of a FY’11 EPS of 12, the CMP gets discounted 9.25 times – that’s not bad. This really has been a turnaround story over the past couple of years with the share price jumping up from the 20s to the current 110 levels. Given the market cap of INR 800 crores (= USD 178 million) over an expected sales of INR 550 – 575 crores for FY’11, the stock still looks a tad cheap. Recently they acquired a company in Europe and are setting up a cement plant in Tanzania. Seems like these guys are confident of what they are doing. On the charts, I see a Bollinger Squeeze which to me means that it can shoot up or down from here. But the RSI and MACD are not there yet for me. I am biased towards Banco, so I think I’ll throw in some coins tomorrow. Let’s see.

4. Talwalkars Fitness; KSB Pumps; MIC Electronics were other punts that came to mind. And a long term possibility on TV Today (but that requires more thought, and I don’t have time at the moment. Maybe later this week).

(I had taken a position on 31Aug’10 in MIC Electronics and written about it in my Earths, Lights and Money post but got out with a 14%. It has corrected only around 8% since then. I’m not fully sure but I do want to hitch a ride on it again and again since the story appeals to me a lot)

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Earth, Lights and Money

The night lights of the world, India and parts of Asia look like these (click images to enlarge):

I was surprised to see India pretty well lit up and not looking too bad on the world slate. I now know why the BJPs India Shining political campaign did not work on terra firma – since it you can see this only from extremely high altitudes and politics is all about keeping your ear to the ground. To me Japan looks the brighest and USA a very close second. Africa is truly the dark continent. Given what is now being said about Nigeria and Ghana, I guess they’ll light up in the decades to come. South Africa, as expected stands out and so does the Nile channel in Egypt. Western Europe, is aglow with the prosperous lumens that dissipate quickly as one moves eastward eventually following the path of the Trans Siberian Railway. If the natural earth glow is filtered out, I’d have missed Australia completely. And finally, China is well lit on its eastern side. The fact that the eastern sides of largish land masses are better lit than the western side is striking. The US east coast, China’s eastern provinces, Australia, the African continent, South America, the sliver of light that is Japan, UK, the Meditteranean Coast – all have brighter eastern sides. Why? The exception seems to be India. Its east side is darker.

From personal aerial experience I know for sure that Mumbai shines the brightest of all Indian cities. I guess it’s got to do with two factors – A) density of population in an area and B) the degree of urbanization. The latter is more important, I think since while Mumbai has the world’s largest slum, the slum lights will fade out if seen from such high an altitude. These are closely placed street lights (the streets lights in Hyderabad are not closely placed at all) and residential light fixtures. Highway lights again, would get too diffused, I think. But just take a look at the Indus basin. No wonder the rich alluvial soil and the 5 rivers spawned the Indus Valley Civilization 5000 years ago. The Punjab provinces (both Indian and Pakistani side) seem to be bathed in white! On the other hand, you just cannot make out the path of the Ganges at all. Beats me. Also, if you follow my eye, you can almost see the lights carving out the combined boundary of Maharashtra and Andhra Pradesh. Leaving out Orrisa, Chattisgarh, Madhya Pradesh and Jharkhand in the dark. It’s almost as if the previous two states had dotted light beacons along their perimeters. Is there a correlation between insurgency and electricity consumption? The problem of naxalism seems to be hitting states that are darker at night. And therein lies the answer – light up these areas and the arms that hold the guns will pick up laptops instead. Alas! If wishes were horses, beggars would ride – read my latest tweet on our Government crazy Robin Hood logic. Agreed, that the income disparity amongst states needs to be reduced. But don’t do this by making the richer states poorer! The New Delhi think tank is tackling the problem of runaway food inflation in the agrarian states of India (Punjab, West Bengal, etc.) by increasing the procurement price of food stuff. Their logic is if food prices are increasing (it’s c20% in these states), lets give more money to the farmers so that they can afford to buy more. How can you fight inflation by increasing prices?

Leaving bumbling babus behind, I panned out to look at Asia and peg the two big neighbours against each other. The electricity consumption in India is quite less as compared to China. Now, while China has a much larger land mass, much of China is in its east. Also, the land masses of eastern China and India are almost equal in size. So what explains the fact that despite the higher consumption of electricity by China it does not appear brighter than India? China seems to consume 3,650 TWH of electrcity per annum (a neat 10 TWH per day!) as compared to just 568 TWH/yr for India. So, eastern China should appear 6 – 7 times as bright, right? I guess whats happening is that almost all of the incremental electricity (as compared to what India eats up) is being used to fire the foundries that line up the dragon’s belly.  This article from China Daily sheds some light on the issue. Are the Chinese producing too much too soon. Maybe they should slow down.

This sudden reading up on lights, lighting and night lights came about when I was contemplating a company called MIC Electronics – they’re the LED solutions company that’s lighting up stadia, streets, festival venues, the Commonwealth Games, village lanterns, railway coaches, airports etc. They’ve got a nice banner on their website and the spooky thing is that this company is also from Hyderabad! God knows whats wrong with me – Shakti Met Dor, Hyderabad Industries (contemplating) and now this! It’s a nice city ok, perhaps a bit sleepy but investing like this is crazy. I’ve taken up a small position in this company so that I don’t lose track of it and am reminded that I need to think more about it. I read a reseach report about it sometime back but as yet I am not fully convinced that it has the power to light up my portfolio. My first issue with this company is that it currently shows up at rank 33 when I search for “LED lighting india” in Google. Which is not that bad considering that A) they are largely B2B and that B) this website itself shows up at rank 58 in a google search on Kaushal! And no, I have not heard of search engine optimisation – but maybe the MIC guys have? Actually doesn’t matter since they largely sell to people like Indian Railways and other assorted organisations who don’t really need Google to find out about them.

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