Tuesday, May 16, 2006

Google equity research

Recently I stumbled upon Google Trends while browsing through the Google website. I thought the tool was rather interesting as it can provide an insight into the surfing habits of millions of netizens. As usual, I then started thinking as to how this tool can be used for researching stocks/ companies.

While the tool can be used to find out how much a particular stock/company is googled, I don't think it will result in meaningful results across all stocks. For example the average buyer of cement or steel will most likely not turn to Google to make his purchase. Clothes and apparel might be items that consumers would want to look at online but then again I don't think many of us actually purchase clothes, watches etc. online. I believe we like going to a store, try out the stuff and only then making a purchase.
However, one thing that we seem to be doing very regularly nowadays is booking tickets online. In fact I remember hearing somewhere that the Indian Railway ticket booking site, http://www.irctc.co.in/, is the largest e-commerce site in India in terms of revenue.
Since the Indian Railways is not a listed entity the other type of ticket booking done frequently is airline ticket booking. Unlike the railways we have a few listed airlines and some others where listing is in the offing. Jet Airways and Spicejet are already listed. Air Deccan is already out with an IPO and Kingfisher Airlines is expected to follow soon.

A search on Google Trends could therefore reveal how often the names of these airlines were searched. This is what the output of the search looks like:

Legend: Orange: Jet Airways, Red: Air Deccan, Green: Kingfisher Airlines, Blue: Spicejet

The graph reveals that searches for Air Deccan and Jet Airways are almost equal at the moment. In fact in 2004 Air Deccan was quite a way behind Jet but then starting from early 2004 it has caught up rapidly. Kingfisher Airlines comes third followed by Spicejet.
I googled the airlines individually in order to find out the cities from which the maximum searches arose. The results were:
Spicejet- Top 5 cities
  1. Ahmedabad
  2. Delhi
  3. Noida
  4. Surat
  5. Pune

Jet Airways- Top 5 cities

  1. Pune
  2. Mumbai
  3. Bangalore
  4. Calcutta
  5. Ahmedabad
Air Deccan - Top 5 cities
  1. Bangalore
  2. Pune
  3. Noida
  4. Mumbai
  5. Delhi

Kingfisher Airlines - Top 5 cities

  1. Bangalore
  2. Noida
  3. Mumbai
  4. Delhi
  5. Surat

Without more detailed data it is difficult to come to precise conclusions but based on the results there are a few things which can be investigated further.

  1. The absence of cities in the four southern states. Chennai and Hyderabad did feature in the top 10 cities but they were in the lower half of the top 10. This could either indicate that the markets down south have much more headroom for growth or that consumers purchase their airline tickets by some other mode which they find easier than online purchase.
  2. A similar lack of cities in the eastern part of the country. Calcutta featured in the top 5 only for Jet Airways. In the other searches it featured in 8th or 9th place. Cities like Cuttak or Bhuvaneshwar did not feature at all. Same conclusions as point 1?
  3. The presence of Pune in the top 5 cities in 3 of the 4 airlines. This is strange because there are only a few flights out of Pune. I checked the flight schedules of the airlines in question and even cities like Guwahati and Srinagar seem to have more daily flights. Does this mean that there is a huge demand that airlines are missing out on?
  4. The presence of Surat in searches. Now Surat does not have a proper airport and the only airline that flies out of Surat is Air Deccan. The presence of Pune and Surat probably indicates a healthy and growing demand for air travel from non-metro cities.

In conclusion, I feel that although Google Trends cannot act as a definitive equity research tool it can be used to gain an insight into consumer behavior. This insight can then be used to analyze companies in industries such as consumer goods,retail,travel and tourism etc.

Monday, May 15, 2006

A terribly depressed Mr Market

The Intelligent Investor by Benjamin Graham is widely acknowledged to be one of the best books on investing in the stock markets ever written. On a day when the BSE Sensex has has shed over 460 points while the NSE has fallen by 148 points, it might be useful to look back at how Graham looked viewed the stock markets.
In his book Graham says that investing in the stock markets was like being in business with a temperamental partner called Mr. Market. Now Mr. Market usually swings between estremes. On some days he will be wildly exuberant and will be willing to buy out your share of the business for MUCH more than it's truly worth. And then there will be days when Mr. Market will be terribly depressed. He will be begging you to take away his share of the booty for much less than it's worth.
This is exactly how the markets behave. During certain days/ periods investors are willing to pay ANYTHING to acquire a stock. Take the case of Reliance Natural Resources (BSE Id: RNRL). It reported earning of Rs 0.02 in the quarter ended Dec 2005. Even if you assume that the EPS doubles every quarter for the next 4 quarters the company will have an EPS of Rs 0.6. It is currently quoting at Rs 28.90 which is about 98 times its forward earnings!
However after having seen an exuberant Mr. Market for almost the whole of this year, the last few days have seen him coming in a bit of a bad mood. But what does this mean to the to the common investor?
My advice is to take a look at your portfolio. Sell stocks about which you know nothing of and have acquired just because your friend's brother-in-laws broker said that it will surely double. But then you don't need to sell off everything you own and sit on cash.
Keep those stocks which are fundamentally sound. Remember that daily price movements on the stock exchanges mean precious little. Just because the markets fell by 4% today doesn't mean that the economy has gone into a recessionary phase. The business models of the companies haven't changed today either. They are just as profitable or unprofitable as they were on Friday.
So chill out and don't worry too much about Mr. Market. In fact if you find him offering you something at throw-away prices grab the opportunity. Take advantage of the terribly depressed Mr. Market.

Monday, May 08, 2006

Does Ms Prasad know something we don't?

I scan through the "corporate announcements" section on the BSE and NSE regularly. Sometimes these announcements lead to interesting investment ideas. One general trend that I've been noticing in these announcements oflate is that insiders i.e. promoters/ directors etc. have been sellers in this bull run. I would say that 8 out of every 10 disclosures to the exchange are of insiders selling.
However, over the last few days I noticed that Ms. Anurradha Prasad, the Managing Director of a company called B.A.G. Films (BSE Id: BAG) had picked up 0.48 million shares (0.32% of total share capital). Going through the list of corporate announcements for the company I noticed that from Oct 2005 till date, Ms. Prasad has increased her shareholding by 1.11%.
So why is this of any importance? The management of the company is ususally the first to notice changes in the companies fortunes. Typically, promoters/employees/directors increase their shareholding when they percieve good times ahead. Using that logic, there might be something brewing at B.A.G. Films to warrant such sustained buying by Ms. Prasad at almost all prices.
I know that the company is into producing TV programs and has recently bagged the rights to operate radio stations in a number of cities. I think this stock warrants a closer look.

Friday, April 28, 2006

Read the fine print

This is a post about a company which is in the FMCG, pharma, auto, steel, chemicals, electrical and engineering sector. However, despite catering to so many industries we often miss the contribution that this company makes to the abovementioned industries.
Look out for this company the next time to buy a bottle of coke or pepsi, open a pack of wafers or pop in some medicine. On the bottle/pack/package will be written crucial details such as MRP, date of manufacture, expiry date etc. And chances are that these details have been printed using specialized printers supplied by Control Print (India) Ltd (BSE code: CONTROLP).
I came across this company while going through the company databank published in the Dalal Street magazine. What attracted me to the stock was that it seemed to enjoy good operating margins (18% operating margins), net profits in the current year had risen sharply (by 63% as compared to similar period last year) and that the stock apeared to be reasonably valued (trading at trailing PE multiple of 11).
Sadly the company has a website which provides very little information. In fact the website doesn't even have a link which provides basic investor information like the latest annual report. However, India Infoline covered this stock in July 2005 and this report has been the source of most of my information about the company and the stock.
Based on what i read in the India Infoline report and after a preliminary analysis of the financial data available on the website, here is my red hat (my gut feeling as per De Bono's Six Thinking Hat Technique)
  1. The company operates in a niche segment. It has substantial market share in the printing segment and a wide servicing network
  2. Very impressive client list which includes Coco Cola, Pepsi, Godrej Consumer Care, Cipla, TISCO, SAIL, BOSCH etc.
  3. Steadily improving sales and operating margins over the last 16 quarters.
  4. The company has setup a plant which will broaden it's market and will enhance revenues. The stock price of the company does not appear to discount this.

I still need to analyze the company further but my initial reaction is that this could be a very good buy.

Thursday, April 27, 2006

Can you cook???

Continued from previous post

Okay lets have a spot quiz.

Question 1: Does your mum know how to cook(and i mean cook up a 3-4 course meal. Making tea/cheese sandwich/maggi doesn't count as cooking)? I think the answer will be overwhelmingly YES!

Question 2: Do you know how to cook?

Question 3: Does your girlfriend/wife/sister/cousin know how to cook?

The answers to questions 2 and 3 are not so clear. That's because many of us either don't know how to cook or simply don't have the time to cook.

Well there is a company which is set to take advantage of this inability/ laziness on your part. I heard of the company while watching NDTV the other day. There was a news report which said that Satnam Overseas Ltd. (SATNAM) has received orders from Wal-Mart and the soon to be launched Reliance Retail chain to supply retail outlets with it's branded food packs.

Satnam Overseas started out as a rice trading company but is now gradually moving into the branded foods segment. Currently it is primarily in the branded rice segment but the management also has plans to move into other branded foods such as ready to eat

I believe that Indian branded foods companies will grow rapidly over the coming years for 3 main reasons.

  1. Rapid urbanization has lead to changes in our food habits. Think about it, even five years back there were hardly any branded packaged foodstuff available in stores. Today even the neighborhood kinara shop stores ready to eat foodstuff. In fact how many young professionals come back home and put the rice in the pressure cooker, chop vegetables, grind spices and cook up a meal? How many of us consider making tea as our only culinary achievement? Eating out or cooking packaged foods is a way of life now.
  2. The number of Indians working abroad is increasingly exponentially. This has generated so much demand for Indian goods that you now have shops in a number of cities across the world which caters specifically to the nees of the Indian Diaspora. One of the ways expats deal with homesickness is to the food of their cherished motherland. So there is a big export market for Indian readymade meals.
  3. Indian food is gaining popularity as a cuisine across the world. British politician Robin Cook once described chicken tikka masala as “a true British national dish”. Need I say more? Once again this opens up the export market for Indian foods.

So where does Satnam fit into all this? Satnam currently sells basmati rice under the Kohinoor brand name. It is a popular and well established brand so any new products introduced will be able to piggyback on the goodwill of the brand. The company has already introduced rice based convenience food products such as pr-cooked basmati rice, curries, combo meals etc. The company has already set up a frozen foods plant in Haryana from where they plan to churn out gourmet foods, Indian breads like rotis, paranthas and snacks like samosas, idlis etc.

Satnam appears to be a company which is moving up the value chain. Branded foods have higher margins and the financials of the company reflect this. Operating margins moved up by around 1% (from 7% to 8%) in FY 04-05 as compared to the last 4 financial years. During the current financial year margins have improved further to around 10%. With the frozen foods plant going on-stream margins might improve further.

Few concerns that I have about the company and the industry in general are:

  1. If I remember my geography lessons in school correctly, rice cultivation is very water intensive. Therefore the Satnam’s main product i.e. rice is subject to risk of poor monsoons.
  2. The presence of large FMCG companies such as HLL and ITC means that as the market grows the competition will get stiffer. HLL is already in the branded rice segment. Currently HLL caters only to the export market but it is rumored that it is set to launch the brand in India soon.

The stock is currently trading at around Rs 94 on the BSE and my first impression is that it looks undervalued at current levels taking into account the growth potential. However, I need to analyze the stock comprehensively in order to come to a buy/watch/pass over decision.

Disclaimer: As of 27th April 2006 I do not own any shares of Satnam Overseas Ltd.

Wednesday, April 26, 2006

Three Rocks

The legendary fund manager Peter Lynch had once remarked “The person who turns over the most rocks wins the game”. What he meant was that as an investor one must cast a wide net and continuously read about and research a wide range of stocks. In my attempt to turn over the numerous rocks on the Bombay Stock Exchange, I chanced upon three interesting stories(Cupid Ltd., Satnam Overseas Ltd and Control Print Ltd.

The first stock which I'm looking to investigate further is Cupid Ltd. (CUPID). This company, with a rather romantic sounding name, manufactures condoms. Although the recent financial performance of the company has been rather patchy, it has received three large orders worth Rs 154.27 million from the Government of India for supply of condoms. The company's sales over the last four quarters amounted to Rs 99.49 million so one can see that they are sitting on a sizable order book.

Logic says that the guys in the condom industry should not be too worried about GDP, infrastructure spending, interest rates or any other such weighty issues. I would imagine that the carnal desires of man remain the same regardless of how the economy is doing. The fact that we have a population in excess of 1 billion also proves that that procreation is quite a popular pastime in this country. So I guess there will always be a demand for the product.

However, while doing some intial research on the industry in general I came across a fact which possibly warrants a post on the blog http://only-in-india.blogspot.com/. It seems that only 25% of the total condoms sold in India are used for sex. Apparently most of the condoms are used in the manufacture of sarees, toys and slippers!!!

Here are some other interesting facts about condoms and the condom industry that i dug up on the net.

1. The total size of the global condom industry is about $300 million. The EU commands a global market share of 40%, while Thailand has 15%. Other major condom exporters include the United States, India and Malaysia. (Source: Asia Times Online)

2. Condoms are also used:
- By villagers use them to carry water when working in fields
- For waterproofing ceilings: condoms are spread under the cement-concrete mortar
- To give a smooth finish to roads by mixing with tar and concrete
- By the army to protect guns in desert sandstorms by placing them over the ends of guns
(Source: BBC)

3. Natural rubber is a key raw material in the manufacture of condoms

4. India is self-sufficient in condoms. In fact we have surplus production! The demand for condoms is 1,300 million pieces annually while the domestic manufacturers can churn out 2,000 million pieces. (Source: Frontline)

Coming back to Cupid, it looks like an interesting company in a niche segment. TTK Healthcare (TTKHE) and Polar Pharma (POLARPH) are the two other listed companies I know of that are involved in manufacturing condoms. Comparing Cupid to these companies will provide a picture of the relative valuation.

In my subsequent posts I will discuss the other two stocks and also follow-up on Cupid.
Disclaimer: As on 26th April 2006 I do not hold shares of Cupid Ltd.

Tuesday, April 25, 2006

Pick up that loose change

In a market which seems to be swinging a hundred points each day it is tough to dig up stocks which are truly undervalued. However, in my endeavor to dig up such undervalued stocks i chanced upon an opportunity which is akin to picking up loose change lying on the street.

The opportunity arises from the buy-back offer by Infomedia India Ltd (INFOMEDIA). Infomedia, a publishing company, has said that it wants to buy back 14% of its share capital @ Rs 245 per share. The fine print of the buy-back offer states that all shareholders who hold less than 50 shares will have the option of tendering in all their shares.

The stock is currently trading at about 200 bucks on the BSE. This means that if someone buys 49 shares this price his total investment will amount to around 9,800 bucks. Now the buy-back arrangement has already been approved by the High Court and the shareholders. I'm assuming that even if the process moves really slowly from hereon it should not take more than 3 months.
Therefore at the end of 3 months an investor stands to gain approximately Rs 2,200 i.e. a return of about 22.5%. The amount of profit might not be much in absolute terms but then the return is almost riskless and in this market that's a rarity!
Disclaimer: I hold shares of Infomedia purchased @ Rs 199