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)

Reliance Industries Limited

The biggest sloth in recent times has been the Reliance Industries (RIL) stock. As the market (i.e. the NIFTY) traipsed on from 4,800 to 5,500 in a matter of 3 months (~15%), I have been licking my chops (no, I do not work in the chop shop) and have been generally sporting a nice spring in my step. But now I do not know how long my sunny demeanour will last for I have just about picked up a biggish position in RIL and am squarely on the path of Mukesh Ambani. It’s a trading call, unlike the Godrej Industries investment of mine. I feel quite sanguine about the Godrej depoyment, but not so about the RIL punt. The former has careened up 22% (weighted average returns) in 2 months for me and I will surely add to the position should the stock correct in the future. There was news and informed criticism of the US Fed’s solving of its debt related problems by adding on more debt. It definitely means that they’ll have loads of cash sloshing around in their backyard which they will want to deploy in high alpha economies. So some of it will come to India and that may take our local market higher on from here. But since this is hot money and the investment managers need to keep booking profits, sure enough and soon enough the market should correct. Will give some more cash to Mr. Adi Godrej to manage when that happens.

But coming back to flirt with RIL, I have gone long the stock (cash) and have also bitten a bite of the 30Sep 1040 call. There is next to no liquidity (as of now) on the Sep call and maybe the informed, knowledgeable pundits will shake their heads – but I feel that I have a story. I almost never get my options right – the brokerage charges are also too high for my liking and moreover you need to A) be understanding of the math behind how option pricing works in reality and B) be nimble enough to strike (both in and out) at the right moment.

Earlier, I had briefly written about the drowsiness in the RIL counter here and have been keenly watching this oily worm every other night. As you can see from the chart, it has slithered down to 970. The Bollinger Bands and the RSI seem to be giving a buy signal unless the stock is stuck in a downward channel. Then it would be akin to catching a falling knife. These technical indicators work best when the underlying is smugly oscillating in an escalating envelope. Anyway, I have my grip on my stop losses. If one fears or loathes getting wet, then one should not venture into the sea. But remember, only deep sea fishing gives the largest catch. I also scoured the internet to see some reason behing this very sleepy state of this behemoth – at least on the bourses. there are a few things happening (as listed below) but I do not know if they matter much. You may be aware of the old chestnut about the market being a voting machine in the short term.

  1. They’ve started pimping their pumps. They are selling at same rates as that of the PSU oil retailers. I remember some of my trips around Bombay – the Reliance pumps were always closed. The price decontrol announcement by the Government seems to have opened up the nozzles at private oil vendors like RIL and Essar Oil (have a position there as well). BTW, one comes across a very interesting string of letters when we read about fuel retailing trade lingo – DODO COCO CODO (Dealer Owned Dealer Operated – Company Owned Company Operated and Company Owned Dealer Operated). Notice the absence of DOCO.
  2. Maybe the stock has been moribund due to the announcement of RIL’s acquisition of shale reserves in the US? Perhaps the markets did not like it?
  3. The company is going to raise some money by selling off some of its treasury stock. Is that why the stock has been tied down while the rest of the market was inching up?
  4. I think the real reason has been the orchestrated downgrading of RIL by some domestic and international brokerage houses towards the end of July based on the realisation that the KG Basin may not be able to pump out as much oil and gas as what was expected/communicated by RIL. So it’s like the force of gravity acting on a balloon. Things seem to have reached a state where the forces of buoyancy (market rising) and the forces of gravity (broker downgrades) have been counterbalacing each other. Any trade is now a bet on what gives.

My personal take is that RIL is too complicated a business to understand. I do not know how many brokerage houses themselves understand it’s business thoroughly. But the brokerage community lives by its own code – one of them being a shared recognition in the importance of belonging. There’s tremendous security if the whole bunch believes in, talks about and does the same thing. While you are not better off, but most importantly you are not worst off either. In fact there has been a book called Zachs method of investing whose central tenet is to make investing decisions based on a statistical analysis of brokerage ayes and nayes.

STOP LOSS. DONT THROW GOOD MONEY AFTER BADNot that I can claim to “undestand” the companies that I invest in. You really have to be a senior member of the insider team to know it all. But since the trajectory of the Indian market has been upwards during this past decade, it would take a terribly unlucky bloke to lose money on the markets – on a longer term basis. For me one thing is clear – most of the experts who I lend my eyes to are saying (in print) that there seem to be no signs of the market having topped out in the intermediate term. The logic therefore is that if the market needs to move up and reach it’s intermediate top (before the hot money decides to leave our shores), RIL needs to perform. Hope I get lucky on these punts. Stop losses are my pillows.

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.

Mirror, Mirror on the Wall…

Some Asian women have cause to crinkle up their pretty noses. For the trusted mirror has turned out to be one heck of a fairweather friend. What is causing these cracks to appear? Well, it’s the fact that their menfolk are now asking the same question! We naturally assume the name Snow White to be belonging to the sex that’s conventionally and in literature referred to as the fairer sex. Not anymore. And it’s not some bunch of really white people living in the poles of this planet who are causing this paradigm to shift. It’s a tropical thing. The title of this post could very have been “Papa don’t Bleach”, but nothing like a fairy tale beginning to the end note that fairness creams are creeping into locker rooms. So that’s all in this post – still read on if you must. If you a guy, read ahead only if your mirror isn’t cracked and if you are a lady, read on to size up your new competition!

The craze to become fairer is catching on fast in certain parts of the world and cosmetic marketers have been busy biting their fair share of the male pancake.  I read somewhere that Indian men (some of them) as also their Japanese and Korean counterparts are squeezing fairness cream tubes in a collective frenzy. Japanese and Korean as well? I am not exaggerating, but to be fair I think I am getting too old and there’s an ever widening generation gap. Check out this video from YouTube which represents a random pick out of a bunch of home videos made by young strapping Indian men extolling the virtues of fairness creams. There are other such amateur flicks as well. If you are so inclined…

The company that played Pied Piper to legions of our sub-continent rats was Emami. Not great rats, small rats, lean rats, brawny rats as per the first line describing the rodent diversity of Hamelin. But more like the second: brown rats, black rats, grey rats and tawny rats. All following the modern Indian male dream of becoming fairer. In the early 2000s, Emami Industries carried out a survey based on a gender bender premise. The survey results must have come out on expected lines, for in 2005, Emami got our brothers and nephews and uncles out of the closet when “Fair and Handsome” was launched. This was followed by Fair and Lovely Menz Acitve by Hindustan Unilever. Lux’s 75 year old female bastion had to fall as the King Khan forcibly took that position as well when he took the plunge – into a bathtub filled with rose petals and the women receeding into the background. I think they were needed in the picture to make it look hetero. Emami’s contemporary ad during that bashful time was all about a guy sneaking into a girls’ hostel to steal a tube of fairness cream. He is caught and chastised by his friend who advises him to hoist his sail only when the wind is fair. Stealing into and from the dames’ dorm was no fair play. Our hero (ha ha ha) is advised to go and get his own tube of fairness goo. Finally, in an interview with NDTV, the Khan laid all speculation to rest when he declared that he was neither fair nor handsome. Rich and smart – oh yes, but those options were not given I guess. The print ads (and even the later television ones) posed this seemingly rhetorical question: “Hey man, are you using lipstick?” Followed by a revealing riposte: “Then why are you using fairness cream for females?”

I can very well see where this is going: “Hey man, are you wearing skirts? Then why are you using lipgloss meant for women?” yeeesh. A very disturbing (to me) survey got published by Gillete (in 2004, I think I read) which concluded that the average Indian male spent 20 minutes in front of the mirror as compared to 18 minutes for Indian women. I can live with that given that guys usually do not carry compacts and that shaving must be consuming a largish chunk of that 20 minutes. But I wouldn’t want to be in King Gillete’s camp repeating the survey on today’s Gen X, Y, XY, Z….whatever. Times have really changed and it seems that callous people like me are still in the dark. So as usual, I trawled a quick trawl on the net to catch up and get a fair crack of the whip. I eavesdropped:

To a poser regarding which is the best fairness cream for men on an internet discussion board:

“(a woman says) My husband uses Fair and Lovely Men’s Active and he says that it is effective”

“(a man says) For 1 month use Melacare by Ajanta (at night during sleep). Use Melalight by Nicholas – at day timing after 15 minutes. Use Photoban sunscreen (Note: do not expose yourself to the Sun by using this sunscreen. wait for 1/2 hours then go outside no problem). After one month please do not use these cream. Then use  1 Melaglow by Nicholas at Night and daytime use Photoban sunscreen. For better result use Bright Night (at night time (on alternate days)) and wash it after 1/2 hours and use Melaglow. thats it you will get fairer skin”

I rest my case. BTW, I was wondering who is this Nicholas by Night fellow? If he uses his own medicine he must be glowing like a firefly in the night, no?

Whatever happened to tall, dark and the handsome (TDH)? It’s a western concept. At one level, it seems to be a case of the serpent chasing its own tail – Asians want to be whiter while the Westerners keep flocking to tanning stations to become TDH. Therefore here in Asia, TDH seems to have gotten changed to  fair and handsome! Cutural cleft or a flaky fad? Culturally, fair skin seems to be associated with positive notions of class, lifestlye and beauty. In India, the upper priestly castes (Brahmins) were given the task of studing the scriptures while the lower castes toiled under the hot searing sun. I don’t think this has got to do with the English fascination that Indians still have – I think it’s got to do with the Aryans and/or the Turks and Muslims that invaded the dark land and established control. Color easily identified the servant from the master. Since in Hindu mythology, the gods were dark. Rama & Krishna – i.e. Vishnu were dark and so was Shiva. Check out the brilliant comic post on the brilliant blog Fly, You Fools on this phenomenon. I’ve lifted the image on the right from there. 

Companies have cashed in to this phenomenon. Recova, Garnier, Avon (VIP Fairness Cream), Fair Ever, Shahnaaz Hussain’s Fair One, Nivea’s Whitening Moisturizer & Multi-White Whitening Facial Foam, Vaseline are some of the brands and companies active in this industry which was @ 25% of Rs. 800 crores (men’s products pack in only a quarter of the Indian fairness pancake yet) but the slice of the manly pie is growing @ 20% per annum over the last 4 – 5 years (according to ORG – MARG). There was some news of even Wipro planning to enter the mens’ grooming market. Actually their FMCG unit (Santoor et al) – but some “soft”ware this must be! Even Clarins and Shiseido are offering their wares to Indian men. Thank God, the’ve left the kids out of this for now – else you’d have had a very wholesome family experience shopping at the Mac cosmetics store in a mall near you. Despite the fact that some of the confusing ads  – like Unilever’s logically puzling promise of “Gorepan se Kahin jyada saaf gorapan” – I like these companies, they are making their shareholders richer – whether some of them want to be fairer as well, is besides the point. I’ve myself creamed off a bit from the Emami counter in the past…I am strictly referring to the moolah here, not the loofah.

But a reality check is in order. It’s a myth that fairness creams can make you fair. Skin whitening creams are effective only if your pigment (which gives your skin the colour which your parents gave you) is in the epidermis – i.e. if your beauty is skin deep. If it unfortunately is not, then this alabaster ambition will remain an albatross. Thus, fairness creams can help remove a tan or discoloration in the top layer of the skin – they cannot make a dark person fair. And speaking of inheritance, if you cross a dark person with a fairer one, the resulting offspring is statistically more likely to be dark. This is simply because nature seems to make a better choice – and unfortunately does not look at ads appearing on television.

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