Sintex – A Curious Tale Indeed

Most Indians would have heard of the Sintex name and recall the product it manufactures. They would have encountered its products at sometime or the other. Plastics contribute to about90 % of the company’s revenues.

There is also a textile unit and a subsidary which supplies to both the auto industry and the electrical fixture industry.The company is profitable and is paying dividend every year including the current year.The book value of the company is 88 rupees.The net profit the company is around 250crores.The problem in the company is that it has a debt of Rs 2584 Crores.

A major portion is in US dollars this is 100 crores less than last year when a major foreign exchange debt was closed by diluting equity at Rs 65 and floating an FCCB for $140 million to be converted to equity at Rs 75 a share or repaid. If the price is less the promoters have bought 1.56 Crore shares at Rs 65 a piece and have the option to buy another 1.44 Crore shares at the same value.

There has been dilution of equity by 25%. A possibility of further dilution of equity on conversion of FCCB at Rs 75 a share in 2017.The other negative point is promoter owns only 36% of the company and 12% of that is pledged. The share is trading at 25% of book value and in its category has a strong moat.

Further the second largest brand RETUFF is also owned by this company.The company has remained profitable and consistently paid dividend. With the monsoon being good the company should do well in the second half of the current year. Even assuming no growth book value will grow by Rs 8 a year. One can comfortably expect a price of Rs 75 in a couple of years. This is an exponential growth of five times!

So be patient and let us see how Sintex performs!

The Elections – The Impact on the Economy

The biggest elections that India has ever seen is underway. On May 16 the nation will know who will come to power. With election pundits claiming that no single party will win a clear majority; the focus will shift on the fringe parties who will offer coalition support.

The trade analysts and economists are a worried lot! Whoever comes to power has a lot to do to restore confidence in the market and ensure that inflation figures do not rise beyond control.

‘One product – one price – pan-nation’ is something that the intelligent class want! Let us see what happens!

Bonding big-time with bonds!

A bond is an intriguing product for many people.

Normally bonds are conventionally held till maturity by Indian investors. As retail investors did not have the option to trade in bonds.Bonds are better vehicles for taking trade positions because normally they are secured. Even in case of unsecured bonds bondholders as creditors have higher claim to the companies assets then equity holders.If we hold bonds till maturity we receive only interest which does not cover inflation at most times.However since underlying capital is considered safe the volatility is less then stocks.Bond prices rise and fall with interest rates,normally bonds move in opposite direction to interest rates.

In case of companies the market perception of the ability of the company to pay affects the price. For example a 100 rupee face value bond of LT FINANCE bearing 8% is available at par, if the rate in the market goes up then price of bond will fall so you will be able to buy a 100 rupee bond for 98 rupees the two rupee fall compensates the buyer for the loss of interest in current scenario.If there is fear that l&t will default you will be able to buy the bond even cheaper at 90 rupees to compensate you for the risk.When the tide turns either you can sell the bond close to par which is 100 in our case.

If the process takes one year you will receive 8 rupees interest and a profit of 10 rupees for holding the bond the total money earned is rs 18 a return of 20% for investing in a safe instrument.Open trading of bonds forces discipline on the borrower or the person issuing the bonds.In any market the government is the biggest borrower falling bond prices mean higher interest payment in the future.Argentine bonds are trading at 60 cents to a dollar because of default by the government. Thus any government is sensitive to rising yield or falling bond prices.

If you are careful, have chosen bonds with care and follow the market updates regularly then bonds can be a safe and useful product to secure your wealth!

The Minsky Moment

This post talks about someone who has influenced modern investing and banking to a great deal – Hyman Minsky.

Hyman Minsky was a Jew born in 1919 at Chicago to immigrants from Belarus. He studied in the famous Chicago University and taught economics at the Washington University he died in the year 1996.Like most people who grew in the depression years he was preoccupied with causes of the great depression. Unlike most economies who believed in the equilibrium model where the economy grew steadily under stable conditions. They believed that crisis were caused by external shocks like war or technological innovations like the internet or the railroads .In their model the banks were considered only as pipes that transferred money from avers to borrowers and did not study it much. Minsky disagreed he treated banks as institutions which were there to make profits for their shareholders and therefore had an incentive to lend money.

Minsky’s theory can be explained in three words stability is instability. He correctly summarized that the seeds of the next crisis is sown by the bankers when the times are good. According to him the bankers moved the economy from stability to instability by their lending practices urging profitable customers to borrow more when times are good and progressively getting reckless with the quality of customer as the boom progresses. He concluded that there are three types of customers of the bank .

Namely:

•  A) Hedger,
• B) Speculator,
•  C) PONZI operator.

Hedgers are borrowers from the banks who can repay both principal and interest for the money they have borrowed from the bank and do not require cash flows from the assets that have been purchased using borrowings.

Speculators are borrowers who leverage banks to borrow more assets but are in a position to pay interest alone from present cash flows but need the banks to rollover the principal and reissue the loan to them.

Ponzi operators are the third category of borrowers who depend upon the price of the purchased assets to continuously to rise to enable them to pay both interest and principal. The moment the price of the asset purchased stagnates or falls they will default as their margin evaporates quickly.

At the beginning of as the economy grows the bankers are very prudent and only lend to hedgers as the economy grows and the competition intensifies and everyone scrambles for a profit the quality of the borrower deteriorates till it reaches the point where people with no income proof get loans and everyone thinks they can earn money by flipping assets.

Till the moment arrives when the asset prices take a pause and begin to decline and defaults begin by the Ponzi  operators  and the contagion spreads as the banker refuse to rollover principal for the speculators and finally the Hedger find it difficult to borrow. This moment when asset prices begin to unravel was named as Minsky moment by economists who followed him.

Minsky believed that the central bank playing the lender of the last resort would restore stability to the system. Subsequent events have shown that the central bank s sow the seeds of the crisis by keeping interest rates artificially low for too long a period. The 2008 housing crisis fits the Minsky hypothesis perfectly. The cure prescribed by the Federal Reserve has created an artificial boom in Wall Street. The intelligent investors await the coming of the next Minsky moment.

Is Raghuram Rajan the honourable Reserve Bank of India Governor listening?

Aadhar – Will Sanity Prevail?

The Aadhar or UIDAI project is one of the most ambitious projects undertaken by the government of India. With numerous problems logistically and the linking to the LPG domestic connection and the bank account and now the Supreme Court stating that the card cannot be made mandatory – all this is a sheer mockery of the tax-payers money!

Will sanity prevail?

 

The Beginner’s Guide to Value Investing

After some basic posts – we begin with a longer post that examines the idea of ‘value investing’!

What is value investing?

Value investing is the concept of buying an asset at a price which is at a discount to fair value. When this concept is applied to buying equities in the stock market the problem arises of figuring out the fair value. The normal small investor uses the profit to earnings metrics to calculate to make a decision to buy the stock or not. A low profit to earnings ratio by itself does not mean that the stock is an attractive buying option. If there is bad news about the sector or the particular company the market would have already discounted the price to a dud stock level. A low profit to earnings ratio is only the starting point of investigating why the market is discounting the price of a stock.

The gullible retail investor who has some knowledge of the stock market normally gets entrapped in the above described scenario when he buys a previously high flying stock on the downside; such an attempt   is like attempting to catch a falling knife as the market keeps punishing the stock much below the price at which the investor entered the stock examples of this are Suzlon, Renuka Sugars and more recently financial technologies and MCX exchange which are trading 50% below their recent market highs. Their promoter has been declared unfit to run a exchange and needs to   be replaced by another promoter the very future of the company’s existence is in doubt. There is a possibility that investors entering such stocks may be trapped for a long time and in most cases like Punj Lloyd will be forced to book a big loss.

Who is a value investor?

A value investor is one who examines both qualitative and quantitative factors affecting the underlying business represented by the stock and makes a judgment on whether the market is grossly undervaluing a stock. The reasons of the undervaluation maybe twofold first at times of panic because of fear and utter chaos most of the participants are in a hurry to exit the market for the safety of cash. At that time when high quality stocks are going for a song the only thing that the value investor must summon is the nerve to buy stocks as the price drops like a stone and may continue to drop below the purchase price and he must continue to buy as the price drops because if he waits for a rebound the prices will recover quickly once the selling abates. The skill required at this instance is more psychological than any acumen.

In the second instance because of special circumstances surrounding either the sector or the particular company the price of the stock trades at a substantial discount to fair price in such situations the value investor is able to buy the stock in a slow and staggered manner as the stock will remain out of favour with the market participants for a considerable period of time allowing the savvy investor to accumulate considerable positions over a period of time before the market wakes up to the situation in the particular stock.

Margin of safety

The price differential between the buying price of a stock by the value investor and the current market price is called as margin of safety. The greater the current market price greater the margin of safety for the investor. Over a period of time the margin of safety for an investor who has bought a great business at highly undervalued prices keeps on increasing as the business keeps on spewing free cash flow which is either reinvested  in the business or returned to the shareholder as dividend.

More posts to follow soon! 

The Next Step

Hello folks!

So the next post is up here,

The first post wast about signing up for a demat and trading account.

With multiple banking institutions offering this service – pick a service provider you like!

What is it that we are going to talk about next?

Over the course of the next few weeks we will be providing pointers on “Why you should trade in shares?” and the importance of building an alternative income-generating option for a better tomorrow!

 

The First Step – A New Beginning

Stock market, shares, bulls and bears – scams, does all this worry you?

No worries we are here to guide you!

Step-by-step let us look at this systematically.

First step – assuming you have a PAN card go ahead and apply for a trading and demat account!