Monday, December 24, 2012

Rash and Reckless acquisitions of Zylog ?

I will try to be brief with one example, because my incentives are inversely correlated to the amount of words I write. Less time to research and relax.

While Zylog continues to fall like a stone, optimists like me expectant of bloodletting stopping at or before 30 Rs levels. It started as a small trading bet which some of you may have squared off, but I decided to consider it as a long term investment.

It is amusing to eavesdrop on sheer imagination of chickenhearted opinions as well, some of it well meaning from survival instincts. While the scam is Proven against 300+ MPs in India, scam against Zylog isn't proven yet !, so let's take a chill pill.

Now for the cold calculated reasoning mind to take over.

Company has grown its consolidated revenues from 0.7 Crores to 2200 Crores between 1998 to 2012. PAT from 0.3 Crores to 205 Crores. (Please notice the decimals). Before we start pointing fingers on the un-accused and innocent-until-proved-guilty promoters, let us recall that company paid 112 Crores of income tax in 2012.

Let us analyse one acquisition, Brainhunter in 2010. I think it has been amazing acquisition for 35 Million $ in 2010. Let us look beyond the revenues of Brainhunter and its employee base. Brainhunter has 40+ employees and it was acquired from bankruptcy proceedings. It broke even next year itself made some profits in 2012. More importantly it gave Zylog a foot in the door at Canadian shores. 

Picture of the Canadian revenues renders as below for Zylog.

2009 Zylog Canada revenues 0
2010 Zylog Canada revenues 103 crores
2012 Zylog Canada revenues 810 crores

Besides being entrenched with its TalentFlow product (, which commands significant intellectual property and recurring licence fees in Canadian Government offices, company has been able to scale up services revenues along the periphery. One of the commendable policy that sets Zylog apart from other mediocre minds is their hands off approach towards subsidiaries and hiring and retaining talented people. Hiring John Mehrmann, for Canadian operations is one such example. Nothing wrong with a boutique consulting firm that lives in shadow of artist promoter who refuses to let go of paint brush but one needs to hire people more talented than oneself, should the desire to scale up has to see light of the day - company passes on this score colorfully. From nowhere to half billion dollar revenues in 14 short years - even though based on acquisitions commands respect. Not everyone makes money by inventing a bulb. Numerous companies thrive on acquisitions and turnarounds.

Canadian operations look delightful in mere two years of operations of the price paid (circa 150 crores).

Specialty products

Company have over six plus 100-200 crore product brands. This is based on my analysis of industry, alternatives, employees in division and Alexa rankings. 

Selling out a division which is profitable is a cinch with 1+ Trillion $ of dry powder waiting in wings, just in coffers of S&P 500. IT companies easily get sold at market cap of 2-5 times annual revenues and FMCG ones at 4-10 times revenues.  Although, there is no need to do that. They just need to hang around and manage the hiring and firing.
Company lives beyond humdrum existence of offshore development and maintenance. Each of products of company such as Field Power, Bank Companion, Silvanus 360 allows company to earn licence fees as Microsoft milks Windows OS. Company earns 17% of its revenues through licence fees of IP based software i.e.374 Crores out of 2200 Crores in Fy12. These product divisions of company can be sold at FMCG valuations i.e. 4-8X revenues.

Company has built proprietary products catering to niche segments which are becoming category leaders. I started analysing one such product for Waste Management which complies to WEEE and RoHS directives of EU, to guage market share of Silvanus 360 vs leader in this category. To my surprise, this product is the leader in its category. 

Cash Flow crisis

Shares pledged with banks have been sold, further accelerating downward spiral. All growth has been funded via acquisitions. Current position of the company is: 900 crore due from companies it renders services to. 1800 Crores will be paid as salaries this year. Cash flow crisis were to scare me if company had high fixed costs. Margins can be improved by letting go the loss and break even projects and increasing off-shoring mix.


I checked a number of other products in Waste management category which showed Alexa ranking in millions. From an outer space vantage point you can compare a business applications company with another business applications company.

Silvanus 360 alone ranks somewhere around RS Software, a 200 crore company, does as a whole

That is just one dimension of analysis. You need to estimate leadership position in an industry as well. Silvanus 360 is leader in Waste Management in EU whereas RS Software is a midget. 

Disc: 5-7% holding and in absence of any scam proven against the company over next 4 months will be comfortable to take up to 15-20%. I obviously expect multibagger returns in 2-2.5 years.

Tuesday, November 20, 2012

Zylog Systems - Worth a second look

At 230 Crores market cap the company deserves attention. Most of the past growth has been purchased by acquisitions, which is more often than not a more damaging and dangerous outcome for investors making an offer.

If one waits and analyzes in threadbare detail, outcome would be indecisiveness.

I believe it is worthy of a small investment on following premise.

Company can fire 35% of employees thus reduce wage bill significantly and all fixed costs can be shaved fast which can provide a base of 100-200 Crores+ FCF per annum
300 odd crores will be received at a minimum out of outstanding 900 crores from debtors reducing debt by half
Debtors amount outstanding albiet high, is around 30% of turnover (800 crores / 2200 Crores). Infosy FY 12 had 20-25% outstanding on 31000 Crores.

Although a low end IT company with 10% PAT margin, product revenues account for 37% of revenues, this stream can continue to grow and is more stable.

Top 10 customers account for 30% of revenues

This is trusting the published books of accounts. At a minimum they appear to have 3500 employee if not 5000 as per AR 12.

Disclosure: Started buying this evolving story @ 71

Monday, September 10, 2012

Few Microcaps

hi amit,
you recently said you had 10 microcaps on your radar (few of them barely having any liquidity). Could you share a few of those ideas.

I would encourage you to pursue your own research such as,

1. Emailing the company
2. Calling up company secretary by phone

without anyone's support and arrive at your conclusions about these microcaps.

Paramount Cosmetics
Leader of "Bindis" Shilpa Brand, declining buggy whip industry but trying to establish Instinct de odourant brand etc, debt is concern.


Go though Annual Reports 2010 - 2012 ( Issue 7 of magazine at Glen Raven website ( and Strata India website ( Understand Geosynthetic Industry.

Bharat Fertilizer

Sale of apartments and agri culture play. Back on dividend list and fertiliser outsourcing. Can't lose money but long term growth is uncertain.

What I can tell you is that they don't deserve more than 1-2% weight of portfolio if considering them for long term just yet.

Sunday, September 9, 2012

Do we need millions of Warren Buffetts ?

In a business book I read recently, Wisdom of the Bees (What the Hive Can Teach Business about Leadership, Efficiency and Growth -, what I found most fascinating was
honey bees' dance used for communicating distance, quality, direction of flowers/pollen. Karl von Frisch won a Nobel prize for deciphering this dance.

It may sound astounding, a Nobel prize for this. Now compare a Fund that manages 100 Billion$ worth of assets. Other than the culture, respect and harmony that
exists in the company, the sum total value for society for sloshing money to and fro is absolutely Zero. In my opinion Funds contribution to society is less than contribution from a single genuine teacher who moulds the minds of others. Or even a researcher who give back a newer, disease resistant species of potato back to the world.

Thus, in a nutshell the value that I, CNBC, all fund managers are providing to society is actually Negative. Except for energy of money and what direction one could channel it in. It would be too presumptuous to presume that "we are providing risk capital to budding enterpreneurs" argument. Its vain and self serving. "Apne man ko behlaney ka khayaal acha hai".

US is paying for this crime of virtual and non-existent wealth. Also, the world does not need 10 million Warren Buffetts / 10 million Curators of Museums of companies. Therefore, at best trading in stocks is source of income by eating into other persons granary as Munger laments, and at worst a gambling addiction.
What I am suggesting is that Warren Buffett as each one of us wants to be has Zero value to society, imagine 30 crore Warren Buffetts in India sitting at home holding share certificates. Real hero does something else and creates another type of wealth via financial wealth. That is my understanding.

Tuesday, August 28, 2012

Japanese Companies | Panasonic Carbon ?

Japanese companies are poor pay masters for employees and even worse care takers for investors.

I had identified Ricoh as a potential candidate few years back with ambitious plans for India, but saw through their intentions as they spawned privately listed companies in India. Not far later they have recently decided to de-list.

Investors are victims of their make-believe, looking for a Sylvester Stallone in mirror, where none exists, even spending a million on the mirror and make up. Just because consumer stocks are flavour of the day, does not imply every company in the industry would reward from Kanchan International Ltd to Panasonic Applicances Ltd.

Barring a few exceptions in mainstream stocks easy returns can be made in stocks which do not feature in any news, article or magazine.

Sorry for the arrogance but I don't even like playing for 30% gain or loss. It has to be a minimum doubler, which means I have to lose out on many opportunities of lesser quantum of gain, even with higher certainty. Once such possible opportunity is Panasonic Carbon  India Ltd which is debt free, with 54 crores in Bank Account fetching 5 crores in annual interest. Their products have been well accepted in export market and this year the turnover should be 40% greater than previous year. Markets will be fooled into assuming this growth as 'new normal' and propel price upwards of 160Rs from 130Rs today. 7 Rs dividend goes a step further in captivating a value investor, should one dive in ?

Disclosure: Not invested

Saturday, July 7, 2012

Thangamayil - Multibagger

A great sage once wrote, “Great prophets like Christ and Krishna come to earth for a specific and spectacular purpose; they depart as soon as it is accomplished. Other avatars, like Babaji, undertake work which is concerned more with the slow evolutionary progress of man during the centuries than with any one outstanding event of history. Such masters always veil themselves from the gross public gaze, and have the power to become invisible at will. For these reasons, and because they generally instruct their disciples to maintain silence about them, a number of towering spiritual figures remain world-unknown.”
Manish Dave, my friend is one such investor who is more seasoned yet humble than other famous fund managers we see at Smartmoney, MorningStar or Gurufocus or who saturate CNBC with noise all day.

Manish Dave's management meet and research notes below. 

Thangamayil sells jewellery, and as a stock it is a GEM too. 
Management is god loving, not god fearing and very ethical. This is my first concern as an investor for any company. Even when they were small not a milligram of gold sale was left unreported. This was told by people other than in their management.
Employees admire, not fear, their bosses. I could see employees extremely friendly with customers and extremely friendly with me as an investor. They were very open to any of my questions and there was nothing to hide.
TMJL's operation at existing stores is like a well oiled machine.
Management is very much focused on Jewellery business. They don't have any other business and they don't want to do anything else. I could see their passion for gold and jewellery. On top of that, tuning amongst family members is good. So management bandwidth for growth is there. One of MD's sons is planning to study gemology and not engineering is a good sign which shows that they are committed to the business.
They have barely covered 50% of TN and many pockets even in the covered area are available. So for their growth, sky is the limit. After TN they can go to other states. They will be able to grow as far as the eye can see. Compared to other retailers who spread out at far places, logistics is easier and less expensive for TJML. Plus marketing is also cost effective.
Their main business is gold and it going to remain that way. Diamond in small towns will not replace gold. Cultures don't change that easily and TMJL understands that.
Company management is traditional, yet open to new ideas. They are making full use of technology weather it is alarm system, video conferencing or IT. Security systems are robust. Management is very open to new ideas and I saw no hint of ego to accept new ideas. I suggested few things, they liked them and MD immediately asked relevant employees to implement them.
Stores are spacious and full of choices. I think the best part for the customer is wide variety and value for money. Thangamayil is a well recognized and trusted brand for them.
For future growth TMJL keeps on training managers at existing locations. TMJL has also tied up for the fund and have identified locations at different town. So all the ingredients required for growth are present.
TMJL management is willing to share profit with its investors. Compared to other jewellery companies, their dividend is good even when they are growing at 50% and there is huge expansion plan ahead.
100% of their business is retail. No wholesale. (Margins are obviously better in retail.)
Cost of fund is on decline and will keep on declining with RBI will cut the rate sooner rather than later. That will be icing on the cake.
TMJL is also planning to start online sales in 3-4 months. That is non-fund activity as they don’t need to keep additional inventory. Only extra cost will be marketing, which is not much as it also creates awareness and gets footfall into stores.
Where do you get a company which is growing at 50% and is available at trailing p/e of 4 when even dividend is growing? TBZ is quoting at p/e of about 12. Why should TMJL not quote at par or above TBZ? TBZ declared dividend of 7.5% while TMJL declared 70%!! TMJL is due for re-rating once investors recognize this GEM. Difference between TBZ and TMJL is that former is the known brand in Mumbai and Gujarat where investor communities live, while TMJL is the known brand in Tamil Nadu not in Mumbai/Gujarat. So it is like a hidden gem.

·       High debt: Since the company is growing fast with internal accruals, they are using debt. But debt is mostly in liquid inventory - gold. I had mentioned to the management about the risk of the decline in gold prices. They are aware to that risk and are increasing gold loan portion to reduce that risk. Once that risk is covered, I am not concerned about the debt as it is totally liquid and their business is retail.
·       Opportunity: The opportunities are huge. IMO they need to increase brand awareness in cities like Coimbatore, Salem, and Tuticorin with help of more advertisement and involvement of outside agencies in marketing. This can increase sales and brand awareness substantially in newer cities.
There is an opportunity in creating other brand as they have infrastructure for the rest of the operation. For example Hindustan Lever has Lifebuoy for 'Tandurusti ki raksha' and they have Lux for "Saundarya". So they can add smaller stores in big cities with more push of diamond/platinum/gems etc.
In the future they can add loans against gold in the existing stores. This division will run on zero additional cost. As all the expenses for location, electricity, security, employees, marketing are already in place.

Overall I was extremely satisfied with my visit. TMJL will certainly get recognition with investor communities by their sheer performance. Floating stock is only 9% according to my calculation. My price target for next 2-3 years is 700. If market sentiment gets better, it can go even higher. The logic is quite simple. Company plans to grow 50% CAGR. Even at 40% CAGR the profit will double in two years. Even after two years there will be visibility for growth. So even at extremely conservative valuation company can easily get p/e of 8-9. You cannot go wrong with TMJL. So be right and sit tight.

Disclosure: Manish and I are invested in TMJL.

Friday, May 18, 2012

Investor is the King

I am aware its not quite the case yet. Over time marketers and companies have been forced to shift from haughty to service attitude as consumer has become the King, not by coercion but market forces alone, so I thought, why not investor.

In the past it has bothered me - as to how to prevent ingrate promoters - beggars who pleaded for money during IPO - from taking advantage of small investors. How to counteract an ordinary micro investor being taken for a ride by well heeled promoters. Depending on how hot headed one is, an investors funded forum could get drone planes from Israel, remotely monitored from another continent, with poisonous darts and video/gps relay to selectively eliminate miscreants or follow the relatively more peaceful democratic approach. ( Drone planes may better be utilised for Indian politicians instead - is likely to do greater good for bigger numbers).

While I am a non-vegetarian so far, I know that there are animal rights activists and even I have had thoughts in the past to prevent slaughter of animals by opening a non-profit cooperative fund which is funded by sale of milk/eggs of same animals/birds and their own work and income during younger years, so they could die respectfully, and live of pension from same fund during older years. To do that, it would take decades of work and thousands of motivated individuals.

Those assumptions can become redundant in a flash by a new idea or discovery. Few months back I came across a game changing idea, in which artificial meat could be produced by stem cells in the lab by Dr Mark Post ('-mark-post/ Guys, that shatters my neanderthal idea as shamelessly uncommercial, and it is scores on many other counts, no animals required, frees up land, no methane etc.

Similarly, last night when a friend of mine informed me that he recently sold a share at a loss due to slickness of nefarious promoters, I thought of what could we do short of slaying or suing them. An idea that occurred to me yesterday was Investor Rating Agency.

Investor Rating

Companies, listed or unlisted, need to get rated under Basel norms by one of the rating agencies for access to bank funding. SEBI has shallow reporting requirements for equity investor complaints.

How about an independent investor rating agency, which tracks score of equity investors in any listed company. While I am calling it an agency, it is essentially only a couple of people with software hosted on web. If SEBI does not buy the idea, too bad for them. The idea needs to be sold to either CSDL or NSDL. As a fundamental step, any shareholder should be able to vote online with Demat Account details, this can be verified with actual demat holding with NSDL/CSDL. For a minimalist start, an algorithm can compute ratings on a scale of A through F depending on aggregate score of investors in a listed enterprise (Promoter Rating will not count). I feel it can be a very light software with just an integration requirement, or two factor authentication, can be written by one or two persons in a couple of months.

Banks need to contemplate whether promoters who rank an F rating on Investor Score, and promoters having fixation to steal the money of equity investors - are not exposed to same risks of losing their funds to bandit gene pool. Would merely ratings by faceless credit rating agencies who have no money in the game suffice ? Isn't the predicament of banks similar to minority investors ? It would at least encourage transparency and candour if not significantly increase dividend payment across the whole market. That day shall come drone plane or no plane.

Tuesday, May 8, 2012

Short Term Trade - Cochin Minerals & Rutile

I could write a 20 page research report or you could help me write a para or two while you make sense of rest of material at leisure yourself. Importantly my analysis will not bias you.

Nearly all industries go through cyclical pattern of under and over investment. In the past ten years rare mineral mining companies scrounged through their existence, barely able to make ends meet. That changed in 2011 where under investment lagged many years behind required demand. Consequence was explosion in price of rare earth minerals such as rutile.

India ranks amongst top four countries including Australia, South Africa, United States for rare earth minerals. Investor are sitting at the edge of their seats to figure if this is a lasting trend.

What I do make out it - both miners, processors and ultimate producers are a very consolidated group. Less than 50 global players in each segment. In India only Indian Rare Earth ltd ( is engaged in mining. Less than five players including Cochin Minerals and Rutile are involved in processing. Ultimate users like Ceramics, Paint, Ink are also a small group like DuPont.

Biggest processing company in world is ILUKA from Australia with 30% market share. Number two player is Cristil Global.

Draw your conclusions from the following links, if you go through all links you would not need anyone's help, so fish it out brothers:

TTP enjoyed a monopoly in the market until the KMML was set up in 1985.

Disclosure: Invested yesterday and today for trading with expectations of some sustenance into next few quarters knowing that Mining cannot start next month or the month after to cover demand.

Saturday, April 7, 2012

Blind Spots, Brands

Investing is fraught with traps of low returns, especially in asset plays in India. Whilst it is risky to bat for earnings than assets, market pays abundantly only for growth, hence the calculated daredevilry of buying for earning.

Lots of equities I do or do not own have also grown 50 - 100% in the past three months, eg: Gujarat Reclaim, Cravatex, Ajanta Pharma, Wockhardt, VST Industries etc. I don't own the latter three. Takes five years of twiddling thumbs to earn those returns via Fixed Deposits.

Is it a good time to stay invested ? How can we avoid losing money ? There aren't any simple answers unfortunately.

A few guidelines are of help:

- Avoid Big Mistakes - That means a lot of things, over concentration, over diversification. We can extend portfolio concentration argument a step further, by intensifying our imagination and playing only for gains above 400%+ returns, over next 4-5 years, that way we may avoid value traps.

- Avoid Big Mistakes - It also implies getting around hard problems, instead of solving them - at least in investing if not your spiritual goals. So, let us not predict the next cloud computing winning company.

- Invest in Long Shelf Life products - Ditto for ideas. Ideas that last more than months and years as opposed to playing on budget news. Hey, if budget or summer temperature news works for you, thumbs up !

- Products: Product that touch a lot of lives as opposed to niche offer more certainty of multi-fold growth ,eg: Apple Inc.

- Consumer Advertised Brands over Consumer Brands and Business Brands: While IBM and Intel are amongst top ten most valuable brands, makes sense to partner with Louis Vuitton and Nike as an investor, that don't make it to top 10. While marketing and brand cognoscenti would proffer detailed definitions and fine grained jargon of brand identity, image, equity, value, roadmap, strategy, architecture etc. but in simple terms :  NIKE is better than Tanishq.

Why? To take out from the book of marketing - Brands take time to build, viewing an Advertisement more than X number of times a month re-inforces and sinks the brand in our mind, watching it twice does not count. Simply watching a LOGO / icon / image automatically causes respect and recognition in our mind. This implies, if we watch a certain icon dozens of times a day, its value increases and we are unconsciously likely to favour it amongst alternatives in our next purchase decision.

By this account, even LOTTO or FILA is better than Marico, Dabur not because former are leaders but simply because the wearer of brand is advertising to 100s of others unconsciously and subtly in their next purchase decision, every single day. While an expensive jewellery does not have a logo emblazoned on it for advertisement, nor can I see the brand of moisturiser / hair oil you have donned. The lifespan of company behind ultimate-user-advertised consumer brands ought to be longer than non-advertised as in Shoes vs Deodorant.

- Venture into non Fund stocks : Stocks that are not talked about, spoken about or owned by funds. Be the first land grabber in Gurgaon of 1980s.

Friday, February 24, 2012

SWeT Effect™

I had cooked up a term little while ago for a stock whose price performance does not correlate at all with broader market indices as Quantum Stock™  usually a micro or small cap. While this world does not quite suffer from paucity of acronyms, I thought of contributing some to the field of neologism, just because I can.

Time for definition:

SWeT Effect™ represents a business group dynamic where in due to lack of corporate governance or strong family ties one notices Stealth Wealth Transfer from relatively wealthier entity to less wealthy in its many forms, Preference Shares, Loans, Property Purchase, Outsource part of business etc.  Just as heat transfers from hot region to cold, the group companies under same management, sometimes, if not always, experience drainage of wealth. While investors at large would moan and groan, rather than spending energies on things we cannot change, an investor needs to get away from such an organisation diverting its wealth.

SWeT also acts as a homophone of Sweat which repels others individuals (with well tuned olfactory system) from the one experiencing Sweat. In short SWeT or Sweat are both repulsive. However, there is another opportunity available, which is to side with party/cold entity receiving bread crumbs or leftovers. This can offer some speculative profits.

A few examples that come to mind are Indiabulls Real Estate investing in StoreOne, or Navin Fluorine loaning in Mafatlal group companies.

Friday, February 17, 2012

Cheap or Expensive

I am sinfully invested in my personal capacity in equities since I fortunately have source of income other than stock market as yet. 

It is amusing to notice biases that affect others but harder to detect that pervade within us. Neither too proud of my own mistakes or biases, nor dwelling on them, it would be worth sharing a few anecdotes. 

An analyst long on Hawkins Cooker expects that promise of heavenly bliss would launch PE from 25 current to 45. For all I know it might well go, Gillette is at 70+ PE ratio, it wont be heavenly though. Another one proving the stickiness nature of business expounded that 8 whistles of TTK prestige cooker are not same as that of Hawkins cooker. It has been about 10 years and Hawkins Cookers has not grown its Sales numbers even once by 25%. 
That kind of analysis into bells of Cookers is like too microscopic a study, trying to extrapolate meaning out of everything not likely to yield results. Fortunately, until now my broad line of thinking saved me in the past 15 months, that if Hawkins does not think beyond cookers - 82% of their revenues - and extend its brand to other products, then it will deceive innocents into lures of consumer business while under the garb, its a non-repeat use engineering business likely to disappoint  like a cyclical and croak like a monsoon frog. A cooker lasts 30 years.

The problem of Hawkins Cooker or Gillette India, Dabur etc is the focus on not-losing-money, makes complete sense for those who have too much to lose, it could be best accomplished by TIPS.

You may find RS Software sub par investment due to client concentration risk or average quality of management. I went through last 10 years of results and annual reports of RS Software. I feel their expansion in Asia will bear fruits  - already 10% of revenues accrue from this geography from 0% in 2008 - and focus on Payment Card domain has made them stronger. Debt has been retired in the past 5 years leaving balance sheet squeaky clean. Only 6-7 other players in India match the size and depth in this domain.

Its consolidated PE ratio is 2. Debt is nil. Dividends are likely to increase providing a floor of 45 or so to the price. What remains is concentration risk, which we don't have to assume by allocating 1-1.5% max of portfolio. Other cost is opportunity lost, which is decreasing with rise in general market. This fine business boat of 40%+ ROE does not burden the oarsman. 6-7 PE ratio may come without divine  intervention leaving you with some happiness if not eternal joy to walk away with a 3 bagger !  

Mind you thats a big achievement, TTK Prestige with its scorching growth is NOT likely to become a 3 bagger now for atleat 4+ years ! i.e. 12000 by 2016.

Discussing Stocks: Its great to discuss about stocks and seek others' valuable experience and knowledge and I email my fellow investors for their opinion but I reflect and decide on my own. Arguments for their own sake become a forum for spleen-venting. There is diminishing utility of discussion as the years roll by. Its amazing what can be accomplished by sitting alone for years and thinking in right direction  in a room, some men found God - a topic not easily understood by faculties of reasoning mind - let alone discussed, and others discovered theory of relativity in closed doors.

Economy: While the experts cannot agree themselves on future of the world, our best bet with limited time is to stick to good businesses. As voiced by a wise man, investment in terrible industry is as rewarding as struggling in quicksand. 

Compounding: "Marrying for money is a bad idea under all circumstances, but madness if you are already rich". It can be construed in various ways - today I would adapt it as "Knowledge that long term compounding will make you rich any way, why risk un-nessarily over enthusiastically for a few percentage points". 1 Lac Rs invested per annum for 30 years compounds to 16 Crores at 20% compounding and 139 Crores at 30% compounding. Blessed are those who invest in equities so long as they diversify adequately.

Be Rich and Stay So

Friday, January 27, 2012

The Long and Short of 2012

Hello Happy Souls

By short I don't mean shorting stock, I imply buying stocks for short term.

For the long term, 3+ years:

- Titan Industries

- Wim Plast, no nonsense silent work horse management with decent brand image

- Page Industries

- Cravatex - I cant advertise and promote enough shamelessly, even though Batra's should be doing it instead of me

- Cera Sanitaryware

- Globus Spirits - repeat order business, govt. enforced oligopoly in Delhi, Haryana with 20-30% market share

- J&K Bank

Following can be considered for short term trading  3 - 9 months:

- Infinite Computer Solutions - 27 Rs consolidated EPS and 4-5 Rs dividend expected, no debt by end of year

- Falcon Tyres, lots of debt but expansion coming

- Eclerx

- Technofab Engineering

By the way my luck has been sucking all this week, so please do your own diligence have already spilled milk on carpet and burnt food beyond recognition.

Saturday, January 21, 2012

Moat of Buffett's Colourful Coterie explained

In the past I have tried to understand rationale and logic of Buffett's acquisition, both public and privately held companies. While there are abundant books on Buffett, none of them analyse all the privately held entities, most of this information is scattered or not well organised. I collated information on a handful of companies under Berkshire's flank and posted here.

When Buffett makes a bet on IBM, it makes news. However, for individual investors it makes immense sense to understand what Buffett was doing when he had less money. All the companies Berkshire has acquired in the past, which are privately held and not written about are great in their own right and people don't realise it. Fortunately there is a new book "MOATS : The Competitive Advantages of 70 Buffett and Munger Businesses"  by Bud Labitan, author and a value investor, and his associates which nicely stacks up 70 of Buffett's businesses. It unravels MOATS as conceived and applied by Buffett during his lifetime.

I communicated with Dr. Maulik Suthar of Gujarat, India who contributed in this book and Bud Labitan of Northwest Indiana, US to get some insight into MOATS book writing project. Please find Q&A with Bud Labitan and Dr. Maulik Suthar ending with a few questions from myself:

Maulik: What motivated you to write this book?

Bud Labitan: Maulik, I was in Omaha last May, and I attended Bob Miles Value Investor Conference, the book author’s event, and the 2011 Berkshire Hathaway annual Meeting. At the Value Investor Conference, I met with Bob Miles and Pat Dorsey. Everyone had a great time sharing stories and learning from the guest speakers. And, as you may know Pat Dorsey was formerly Morningstar's Director of Stock Analysis who wrote about moats of different companies that they would review. As I looked around Mammel Hall and the impressive new building of the University of Nebraska at Omaha - College of Business Administration, it occurred to me that no person had tried to study and document the competitive advantages of Berkshire Hathaway's businesses.

Maulik: Why did you focus on these 70 Berkshire Hathaway businesses?

Bud Labitan: It occured to me that the general public does not realize how great these businesses are. I took the names of the businesses listed on Berkshire Hathaway’s website... the link to major subsidiaries. Then I added a few of their largest stock investments... The chapters in MOATS are arranged alphabetically. My intent was to study the economic moats, learn more about them, and see which ones are growing and which ones are shrinking. I figured that this would help make me a better manager and a better investor... A part of me wanted to get Warren and Charlie's attention, and get a job working for Berkshire Hathaway. After Todd Combs and Ted Weschler were hired to help with investments, I figured that my chances might be better on the operations/competition side of the business... As a big fan of the Chicago Bears American football team, I tend to think in terms of Offense, Defense, and Special Teams... and, if you don't get picked for the Offense or Defense, sometimes you can make a name for yourself like Devin Hester running the ball back on Special Teams.

Maulik: So, MOATS is like one big application and cover letter? How did you start and organize this project, and how did you motivate the researchers to get involved?

Bud Labitan: Sort of... The project may or may not yield dual benefits. Either way, writing and editing MOATS has been a great learning experience. While much of my research was already compiled from notes and previous book projects, I needed to test my ideas about economic moats against someone else... sort of like checks and balances... I started to feel like the size of this project might be too big. So, I needed to simplify the process, stick to 2 main questions, and have research contributors to bounce ideas with. This testing of ideas yielded additional information that is new and valuable. It resulted in a bigger book of 358 pages, but I think it is a better book... The research contributors who contacted me took a chance that they might become part of a book with lasting value. I promised them that their name would appear along side mine on the chapter or chapters that they worked on.

Maulik: ...and finding the researchers and editors?

Bud Labitan: I posted an offer on the web, and I wrote to Professors at the University of Nebraska at Omaha's College of Business Administration. I posed the 2 questions this way: (1.) Name the business' competitive advantages and (2.) Are the advantages sustainable for the next 10 years? Cost Advantages and/or Differentiation(Brand)Advantages?

Maulik: Did you get many volunteers?

Bud Labitan: At first I would get one or two a week. Then, I got lucky with some of the summer MBA students of Professor Phani Tej Adidam, Ph.D. who is the Chair of their Department of Marketing and Management. Tej Adidam was willing to give some extra credit points for participants. And, as you know, if your grade is somewhere between a B+ and an A-, the extra points help. Professor Adidam's MBA students of 2011 have contributed valuable ideas to many of these chapters. Also, Richard Konrad, CFA, of Value Architects Asset Management was quite helpful with the financial and insurance businesses.
And, of course you, Dr. Maulik Suthar of Gujarat. You and Scott Thompson, MBA of Minneapolis, Minnesota were also enthusiastic supporters and a big help in discussing topics back and forth. We also have a few enthusiastic international volunteers like Beryl Chavez Li and Stephen Chan, students at the University of Manchester, UK.  

Bud Labitan: I learned that some of these Buffett and Munger investments for Berkshire Hathaway have double and triple moats.

Maulik: Before we go into that, could you explain a moat for our readers?

Bud Labitan: Sure, Moats are barriers. They are competitive advantages. One of the oldest moats surrounded the ancient Egyptian settlement of Buhen, on the West bank of the Nile River. And, during the medieval period, the kings of Europe would build wide and deep trenches filled with water around their castles. These moats were built as single or double protective barriers against invading armies. In business, we think of moats as economic barriers to invading

Maulik: and the double and triple moats?

Bud Labitan: Take a look the Coca-Cola Company. One moat is the efficiency reflected in the amount of FCF generated for every sale. Since Coca-Cola has a combination of a special brand advantage, large scale cost of production advantage, and a global network distribution advantage, we could say that it has three moats around its economic castle. Charlie Munger also said that "The muscle power of Wal-Mart and Costco has increased dramatically.” Some of their
housing related businesses have had to make cuts during the recession, but they are now adding to their moats by buying up worthy competitors. 

Maulik: Do you think the macro economy is going to grow any time soon?

Bud Labitan: I am not sure. However, I can tell you that these 70 businesses are fundamentally strong, and they will prosper better than many when the general economy resumes reasonable growth.

Maulik: Is there a common theme to their competitive advantages or moats?

Bud Labitan: Generally speaking, they either have a cost advantage or something special. In academia, they use the fancy word differentiation. In my writing of Moats, I wanted this book to be understandable by high school students. So, I tried to eliminate big words and fancy terms. At first, it was funny how some of the student contributors would say that a business was strong because of financial backing from Buffett and Munger and Berkshire. I would say something like "yes, you are partly right. However, these businesses were building up a moat or two before Buffett and Munger invested in them." This is how I got some of them to focus on cost, special, or a bit of both.

Maulik: Are moats invented or acquired?

Bud Labitan: That is a good question. In these 70 businesses, somewhere in their history, a founder or manager built an advantage into their business model. Then, as they grew, some would acquire competitors and enhance their business model by learning as they grew. The one that comes to mind is Clayton Homes. Clayton Homes right now has diminished sales because of the general macro housing market. However, in the last down cycle before this one, they acquired
competitors and they have innovated better building processes into their product. So, when the economic cycle moves up again, Clayton will be an even stronger competitor.

I think the answer to your question is all of the above. Moats are invented, expanded, contracted, and acquired with bolt-on acquisitions. Moats must be maintained. And, in some industries like the newspaper businesses, moats are contracting because of media substitutes like cable TV and internet websites. In the Washington Post chapter, you will see how WPO is adapting to these changes while growing in educational services.

Maulik: I read that Berkshire Hathaway recently bought 64 million shares of IBM at a cost of $10.7 billion. What is the story on IBM and technology?

Bud Labitan: For me, this investment reflects Buffett and Munger's continuous learning philosophy and flexible mindset. Charlie Munger has often says "Opportunity comes to the prepared mind.” Warren Buffett has read the IBM annual report every year for 50 years. That is one heck of a preparation period!
In 2011, he got a different slant on it. He said, “I read it through a different lens… just like I did with the railroads… I don't think there's any company that's—that I can think of, big company, that's done a better job of laying out where they're going to go and then having gone there.”

Maulik: Was there a moat at IBM or did they just recently invent one in the past few years.

Bud Labitan: Maulik that is another good question. I think there were several factors at work here. First, even with its periods of ups and downs, IBM as a team had built up a well respected brand in IT services around the world. Next, guys like Lour Gerstner and Sam Palmisano led IBM to be less reliant on big hardware, and more towards services. The IBM mix is operations under five segments: Global Technology Services (GTS), Global Business Services (GBS), Software, Systems and Technology, and Global Financing. I think this mix of factors as well as managerial focus on building shareholder intrinsic value per share... the moat became apparent in Warren Buffett's mind. At some point, these factors came to play in his mind: “Understandable first-class businesses, with enduring competitive advantages, accompanied by able and trustworthy managers, available at a bargain price.”

Maulik: Bud, this reminds me of your other book Decision Framing. Do you think it is intentional or intuitive?
Bud Labitan: Hum... it may not really matter (intentional or intuitive)... if we prepare our minds with continuous learning, like Charlie Munger suggests... and we pin our decisions on the four filters of 1. Understandable first-class businesses, with 2. enduring competitive advantages, accompanied by 3. able and trustworthy managers, and 4. available at a bargain price... I think our goal is to experience such moments of understanding.

Amit Arora : Which businesses (two or three) do you feel strongly about on the long side - out of the seventy written about in the book and reasons for the same ?

Bud Labitan: Personally, of the publicly traded Berkshire Hathaway holdings covered in the Moats book, I like IBM, JNJ, and KFT. Although I am disappointed that Kraft's management feels that they need to split into 2 companies. After all, Berkshire Hathaway seems to do fine with over 75 companies under one umbrella.

With this I would like to thank Dr Maulik and Bud for their contribution to field of investing and for their time. For more detail visit - you can access five chapter sample and also an audio version from selected chapters.


Monday, January 2, 2012

Samrat Pharmachem - A Microcap in Commodity Industry

At the start I would like to insist that I am neither recommending a buy nor sell for this microcap, nor am I invested in it as yet. I would briefly mention this commodity stock for your later research.

Fortunes turn about-face as the change of weather on shore side with commodities. I have never believed in any metal including Gold, its utility to me is only in times of war, to carry something precious in pockets when a country is ravaged. Despite out performance of this metal in past decade the odds are completely stacked against this non-thinking, nor productive asset, last two hundred year of results stand up for even TIPS and vouch the superiority of equities.

Just one of the many possibilities of finding more Gold

Essentially there is no shortage of material in Universe

A commodity nevertheless, backed by able men has distinct advantage over bare metal. Hence the openness to invest in commodity miners and manufacturers. A microcap such as this, or Sandur Manganese, SELAN etc are infinitely superior investments to investing in rarest of rarest metals like Platinum, Rhodium etc. I firmly believe there will be no money left to make in coming decades in any commodity, only technology will be the saviour. Majority of resources including metals, iron, crude oil etc. will all be over in any case by the end of the century at humble 1-2% growth rate assumption. Iodine is a 15,000 tonne industry globally out of which 2.5 - 3% of Global output is contributed by Samrat Pharmachem. Recent out performance is a consequence of global turnaround. Other players that produce Iodine and its derivatives in India are:

G. Amphray Laboratories, Calibre Chemicals Pvt Limited, Salvi Chemical Industries,      Vishal Laboratories, Champa Purie-Chem Industries, Shree Bhavani Iodates, Adani Pharmachem Pvt Limited, Canton Laboratories Pvt Limited, Micron Laboratories,     Prachi Pharmaceuticals Pvt Limited, Omkar Speciality Chemicals Pvt Limited, Samrat Remedies Limited, Triveni Chemicals and IRIS Pharmachem - quite a few one would say.

Global Leaders in this domain include:

Deepwater Chemical Inc
Troy Corporation
Cosayach - Chile
Atacama - Chile
Ise Chemicals - Japan
Godo Shigen Sangyo - Japan

World reserves exceed 15 million tonnes, i.e 1000 years worth of supply, hence there is no shortfall. In addition to above reserves, Iodine can be extracted from sea weeds which contain 0.05 PPM or at current sea weed stockpile 34 million tonnes. Recent demand of Iodine was propelled by LCD display and X-Ray contrast media. Like any cyclical stock, this will reward or misbehave with your money, hinges on how correctly cycle is timed.