Fairval

Notes on Indian equities, sectors and economy

Archive for the ‘Stock Ideas’ Category

A new method to calculate relative PE

Posted by fairval on January 17, 2013

When analysts make their price targets, what PE to use (this being the most common metric) is often quite arbitrary. We have used the following method in a recent report. This is a report on Sona, an auto ancillary. About 45% of its sales are to Maruti, so i decided to derive its PE in relation to Maruti.

Sona should clearly trade at a discount to Maruti, but how much? To give a method to this, we compared cumulative profits over last 10 years. This should be a long enough period to arrive at a assessment of relative profit generating (and therefore wealth creation) abilities of the two businesses.

Here is what we got. FY03 is indexed to 100. Adding up profits, Maruti made about 3x the net profit as compared to Sona. (This is not an absolute number, but an indexed number).  It seems fair to say that Maruti’s PE should be 3x Sona. Brokers currently value Maruti at around 18x FY14. Sona could well get 6x FY14.

If this were true, Sona appears a good buy at current price. And with 5% dividend yield currently, downside is protected.

A metric for relative PE calculation

Posted in Auto, Stock Ideas, The Science of Investing, Valuation | Tagged: , , , | Leave a Comment »

TCS vs Infy – a 2 year old post

Posted by fairval on July 18, 2012

After Q1 results, the media has gone ballistic trashing Infy. Most papers wrote about how TCS was the new bellweather, displacing Infy.

Was checking some old posts, and found this written in July’10.

TCS versus Infy, and TCS is winning

from the post — ‘When it comes to large cap Indian IT, the question for investors, particularly large investors, is mainly which stock to own – Infy, or TCS/Wipro. Infy has always been the favorite. But shud it remain to be so?  U may want to ask if u see the above data.’

Posted in Stock Ideas, Technology, Valuation | Leave a Comment »

And we got Zensar right..

Posted by fairval on July 18, 2012

Thankfully, we dont track Infy, otherwise we could have been in the 9 out of 10 bracket.

We did do a report on Zensar on 23 Aug 11, at a price of Rs 127. At that time, we put a target price of Rs 230 for Mar’13, 80% upside in absolute terms. A high target price like this is not the practice in the broking industry. We raised the target price to Rs 275 in Feb’12, when the market price was Rs 168.

The stock hit a high of Rs 279 a few days ago. Just today saw a report by Religare, with a target price of Rs 350 for Marc’13.

So this was a bit of self promotion, but we had the only report on Zensar in 2011. So analysts in the case of Zensar were 100% correct (1 out of 1!)

Posted in Stock Ideas, Technology | Tagged: , , , | Leave a Comment »

Future Ventures — falling, will fall more..

Posted by fairval on May 23, 2011

We had written earlier why this company had no business to exist. The IPO it seems came at par. The company is now trading at about Rs 8, or 20% down in 10 trading sessions.  Must point out the market has been weak in this period. The scrip will go down more. How much? hard to say, but I would imagine it should fall below Rs 5. Hope u didnt invest..

Posted in Stock Ideas, Valuation | Leave a Comment »

The Satyam about Rolta

Posted by fairval on May 13, 2011

Amazing how analysts of large brokerage firms keep putting buys on Rolta. Maybe they have not seen its cash flow statements. This is a company which has not generated free cash flow even once in the last 5 year.

Posted in Stock Ideas, What was that Again? | Leave a Comment »

Future Ventures IPO – DO NOT INVEST

Posted by fairval on April 27, 2011

Kishore Biyani wants to have your cake and eat it too. But if you love your money, you shouldn’t oblige him this time. This IPO is a piece of trash, avoid it. My main reason for saying this is – I don’t get the reason why this company should exist.

A bit about the business- FVL is like a PE fund, it invests in other companies, where it takes any kind of stake, even single digit. It has majority in a few companies. So far, it has invested Rs 820 crore or so of capital, now it wants to raise Rs 750 crore more. That makes it a very large PE fund. The difference from a fund is that there are no LPs, the standard 2:20 kind of commercial terms of the PE business dont apply, so issue managers can say that dont value this company as a % of AUM.

Some specific objections abt the issue:

  • They seem to be stretching their definition of business: They say they will invest in plays on consumption spends. But they also want to set up food parks. Now that is an infra play. Hard to see how that is a consumption play. By that logic u can build roads. They also want to invest in education. Umm..? Just where does the definition of consumption spends end for Future group. Next they will invest in hospitals or two wheelers. Sure education and health are part of PFCE, but then PFCE is 65% of GDP. One group certainly need not try to make a play in the entire lot (tho Tatas, Mahindras etc certainly do that)
  • Related Party Agreements:  There is some seriously objectionable stuff here. The company has agreements with other Future group companies, which get paid for various services.

For ex, Future Capital is to get upto 1% of Adjusted Networth for providing provide services like — research service and recommendations regarding Treasury Assets; support resource mobilization in any of its investee companies; advise on mergers and acquisitions; advice on suitable and efficient exits to be made by the Company from the investee companies and provide progress reports…

Similarly, there is a Mentoring Agreement with Pantaloon Retail. which can also get upto 1%. There is Master License Agreement with Future Ideas.. WHAT ROT

  • No cap on expenses: In a PE fund, there is a cap on expenses – 2%. Here there is none. More than 2% can go to group companies. And the company itself can run up other expenses. If this a fund, then shouldnt there be a cap on expenses?
  • Minority stakes are no good:  How should an investor value the several minority stakes the company has? For ex, 17% in Biba. The comany has buyback clauses for many of its minority investments, which say either an IPO in certain time frame, or buyback. But many of these companies are too small for IPOs. and they wont be able to buyback either. Then what? In investments like ACK, there is no buyback clause
  • Poor disclosure: The RHP says the company has exited 3 investments. Why? and at what price? No disclosure of whether they made a loss, which they must have. Poor, dont know how SEBI let it through. What seems like another bad error–

At one point, the RHP says: In terms of the SHA, In terms of the SHA, ITCPL is required to undertake an IPO within a period of 18 months from December 1, 2008. Both SSA and SHA would automatically terminate on the listing of shares of ITCPL. For the purposes of IPO, the Company will not be regarded as a promoter of ITCPL.Both SSA and SHA would automatically terminate on the listing of shares of ITCPL.

18 months ended in May 2010.

  • High Valuations paid: They seem to have paid too much for some of their investments. For ex, they have a  small stake in ACK Media, and they have invested at around Rs 100 crore valuation. Thats too much for ACK, which has abt Rs 10 crore of sales. 10x sales..

Posted in Consumer / Retail, Stock Ideas, Valuation | 1 Comment »

Atul doubles, still a Buy

Posted by fairval on October 5, 2010

We had recommended Atul in Feb at a price of Rs 82. The scrip hit Rs 165. Retain a Buy, more to go

To see the coverage, click here

Posted in Stock Ideas | Leave a Comment »

TN Newsprint still cheap

Posted by fairval on August 2, 2010

Tamilnadu Newsprint is up 40% since our first reco on the stock in February 10. From a price of Rs 82, it has now hit Rs 120. Tho, still fairly cheap with a potential 4% dividend yield. Check the note on TN Newsprint

Posted in Stock Ideas | Leave a Comment »

TCS versus Infy, and TCS is winning

Posted by fairval on July 16, 2010

TCS versus Infy in recent quarters

(the columns in the middle are yoy change in %)

When it comes to large cap Indian IT, the question for investors, particularly large investors, is mainly which stock to own – Infy, or TCS/Wipro. Infy has always been the favorite. But shud it remain to be so?  U may want to ask if u see the above data.

This quarter TCS has overtaken in operating margins as well. Why is this happening? Dont have the explanation myself. What i hear from TCS is strong focus on costs, particularly since the new ceo has come in. Why are Infy margins plummeting tho?

Posted in Data, Stock Ideas, Technology | 1 Comment »

Wisdomsmith on Bharti

Posted by fairval on July 10, 2010

An old Wisdomsmith post:

Markets over reacting on Bharti – Buy    

17.02.2010    

Wisdomsmith recommendation to investors:

Price Action
>Rs  350 Book Profit
Rs 280 to 350 Hold
Rs 280 Buy

Source: www.wisdomsmith.com

The likely Zain deal has seen Bharti fall from Rs 330 levels to Rs 280 levels, a fall of 15 percent. We think this is an over reaction.

Before the deal was announced, Bharti had an market cap (mcap) of Rs 125000 crore (~28bn), and an EV of about Rs 130,000 crore (~$29n). A 15% correction meant that the mcap and entity value (EV) have fallen by about Rs 18000 crore. This is more than 2x what the market felt Bharti had overpaid for Zain.

Bharti valued Zain (the African part of it) at an EV of about $10.7bn. This was at an EV/EBITDA of 9.4x. At this time, Bhart was getting valued at about 8x.

 Pre Deal Bharti Zen
EV (Rs Cr) 130,000 49000
EBITDA (Rs Cr) 16,000 5200
EV/EBITDA (x) 8.1 9.4

So the view was Bharti overpaid by 15 percent (9.4 divided by 8x), which is about $1.6bn or about Rs 7500 crore. So a simple view can be that the EV has fallen by Rs 10,500 crore more than it should have.

Let’s look at it from another level. After the announcement, Bharti has seen its EV come down to Rs 111,000 crore (EV/EBITA of 6.9x). Now we add to this Zain’s proposed EV by Bharti of Rs 49000 crore. This leads to a total EV of Rs 160,000 crore. We also add the two EBITDAs from the first table, to get total EBITDA of Rs 21,200 crore. So what is the EV/EBITDA now?

 Pre Deal Bharti Bharti+Zain
EV (Rs Cr) 111,000 160,000
EBITDA (Rs Cr) 16,000 21,200
EV/EBITDA (x) 6.9 7.5

We get 7.5x.

Our question is this – Should the EV/EBITDA of Bharti fall post the acquisition? We don’t see why.

  1. If Bharti had taken an undue financial risk, we would have agreed with the fall. But even if the entire deal was financed by debt, D/E rises to 1x, from 0.2 earlier. Bharti may dilute by about 15-20%, in which case D/E would 0.5x at best.
  2. Look at Bharti’s business pre deal and post deal. The deal will clearly enhance addressable market, and growth rate for the combined entity. So if growth rate was going up, wouldn’t you want to bid up the valuations, rather than down?
  3. The logic of Bharti overpaying uses current EBITDA. Zain’s EBITDA margin is 34 percent, much less than Bharti’s 40-41%. Bharti may be able to get it up to say 37-38%, or say 10% more than current levels.

These three factors can result in an upside of 25 percent from current prices, or about Rs 70 more from these levels. The downside is low. Even in Mar09, Bharti’s low was Rs 230, or about Rs 50 less than these levels. No reason to believe Bharti is headed that low. So more upside than downside.

Returns will be muted though, the upside could take 2 years to materialise. Bharti is too large to bust the charts now.

Posted in Stock Ideas, Telecom | Leave a Comment »