July 7, 2008

Rapid fire analysis of multiple stocks

In the previous post, I was asked to give an opinion on several stocks. I have fairly broad filters when selecting stocks. As a result I drop companies pretty quickly. Once they make through my filters, I spend quite a bit of time analysing and mulling over them. Frankly I don’t need more than 10-12 stocks to build a decent portfolio, so I don’t spend time on companies which don’t catch my attention, either due to the fundamentals or due to valuations

So here is my opionion on the stocks listed in the comments (please note the word opinion as I have really not done a detailed analysis on them)

Please note that for a stock to excite me, the fundamentals have to be good and the stock has to be fairly undervalued (selling at 50% of intrinsic value). So you may find that I am not too enthusiatic of some stocks if they don’t appear to be undervalued to me even if the fundamentals are good.

Following stocks are from mumbai jurno

Punj Lloyd – The net profits have grown by 30 times in the last 4 years. The company has a debt equity ratio of more than 1 which is on the higher side for my comfort. The market has recognized the rapid growth and inspite of the recent drop, the company is valued at 30 times its recent earnings. I personally will not invest in this stock for two reasons – I am not confident if the company can continue this level of growth and the valuation are on the higher side for me.

Voltas – I was invested in bluestar from 2003 to 2006 (see here). I exited blue star last year as I found the valuations to be on the higher side. The company has shown a high profit growth ( 5 times in last 5 years) and has a high ROE of almost 50%. The company has very low debt. Though the valuation (PE of around 20) is a bit on the higher side, I would personally put the company on my watch list and analyse it a bit further to make a decision.

Amararaja Batteries – This is the auto components industry. Overall I am not too excited by the economics of this industry. If the auto industry is under price pressure, it is bound to pass on those cost pressures to their suppliers. As a result auto component companies over a business cycle do not enjoy high profits. Most the companies in the industry do not have a high competitive advantage due buyer power, poor pricing strenght etc. I had analysed exide some time back, but never pulled the trigger. This is from memory – I think exide enjoys more than 50% market share in the industry. In such an industry a distant no.2 such as amaraja may not have very high pricing strength and may see its profits dip when the cycle turns downwards. So although the stock appears undervalued, I would be careful jumping into it. Looking into the rear view mirror (last year’s profit) may not be the smart thing to do in this stock. It is critical to figure out how the company will do going forward.

Venus Remedies – Company appears undervalued and has shown very high growth in the last few years. I would have to analyse if the growth is sustainable or not to make a decision.
Kamat Hotels – 2007 Debt equity ratio is 2:1, with the company carrying a debt of 270 Crs in 2007 (have not seen 2008 numbers). This debt is almost 10 times 2007 net profit numbers. This stock would fail to pass my fundamental filters and I generally end up passing on companies with this level of debt

ICSA (India) – This company like Punj lloyd and amaraja has shown phenomenal growth in the last 5 years. On a personal level such growth makes me nervous (although the market gets all excited by it). Before I touch this stock I would want to analyse the reason behind the growth and the sustainability of this growth. Basic numbers do not give the complete story. So I will need to research far more to make a decision on the company. A high growth in the last few years is good thing, but I would not extrapolate that growth blindly and buy the stock.

Axis Bank – Fundamentally a good bank. The P/B ratio is around 3 and the ROE has been dropping for the last few years. ROE is now at 12% which could be due to the additional capital raised by the bank. The bank is doing very well and growing rapidly too. I would personally track the stock, but the price is not cheap enough for me.

Yes Bank – This stock is current sweetheart of a lot of people. If I say something bad, some of you will beat me up :) . The bank has good fundamentals. However at the current P/B of 4-5, the valuation is still too high for me.

From hardtoget

Alok – 2007 AR shows a debt of 3300 Crs (Debt equity ratio of 4). Unless 2008 is drastically different, this company is not for me. A debt equity ratio of more than 1 is generally a no go decision for me. I am not comfortable at all with such a high debt equity ratio, especially in cyclical industry

From vivek

Balmer Lawrie – I hold this stock. See analysis

Berger Paints – I worked in asian paints and have seen how berger operates fairly closely. If there is one company other than asian paints which is aggressive and does a good job, it is berger. The company has a fantastic sales organisation. The fundamentals of the company are good and the valuation looks attractive too. If I was not as baised towards asian paints ( I hold this stock), I would invest in Berger paints.

Tata Tea – The company seems to have good fundamentals, good brands and decent valuation. I will be analysing the stock further.

Glaxo Consumer – I hold this stock. See analysis here

Castrol – The company has great brands, a good distribution network, very high ROE and great fundamentals. The valuation seems to be a bit on the higher side for me to pull the trigger. My key concerns are management quality and impact of oil pricing on the company’s profits. A few years back, I think the management tried to buy out the domestic shareholders at a low price. As a result I am not too comfortable with the management. In addition need to see if their margins will be impacted drastically by the oil price changes.

Hindustan Sanitaryware – Fundamentals look good, although the 2007 debt is a bit on the higher side. The valuations are quite attractive. I think the company is worth a closer look.


Mahendra Naik said...

Great work, Rohit. On ICSA, I am optimistic that it can sustain its growth momentum. I have given a brief analysis of its prospects on my blog here. You might want to check it out. One problem I foresee is its over reliance on SEB' for payments. This could affect cashflows given the precarious financial condition of SEB'. I personally hold the stock. I am also interested in Canara Bank and Aurobindo Pharma from a long term perspective.

Shiv Kumar said...

Hi Rohit,

A few points on Punj Lloyd: the company's consolidated EPS for 07-08 is Rs 12.65 giving it a P/E ratio of 18.66. PL's standalone EPS was Rs 7.3. I think you have been calculating EPS on the basis of info on moneycontrol.com which is flawed.

So what do you make of this company in the light of the higher EPS?

hardtoget said...

thanks rohit

Vic said...

Hi Rohit,

Great post.. as usual!!

Did you post a detailed analysis of Berger Paints in this Blog? as I see this the only Best Buy from your list.

Any comments on LIC home finance, BPCL, HPCL and Wockhardt Pharma?



Rohit Chauhan said...

Hi mahendra
cannot really comment more on ICSA as i have analysed for around 10 min. will definitely look at your analysis.

shiv kumar - my mistake. I saw only the standalone numbers in livemint. on a consolidated basis, i will not dismiss PL completely, but would still to get more comfortable with the growth.PL is in a cyclical business, hence at the top of the cycle such businesses appear undervalued.

vikas - in addition to berger, i am optimistic about balmer lawrie, glaxo and need to work more on castrol, tata tea, voltas and hindustan sanitaryware. i have rejected these other stock, just need to study them more to take a call.

i have written on HPCL in earlier post. will post on the other companies later

hardtoget - glad to be of help


Anonymous said...


Good short analysis. Seems like you have a ready spreadsheet which is used to filter stocks.
Here is one more if you care. Hawkins Cookers- low p/e ,decent growth, high ROE, low debt, consistent growing dividend.
Does it pass your filters?


Bose said...

I am really happy that you have listed a set of stocks which offer both value and growth. Thanks a lot. Awaiting more such analyses.

sandy said...

hi rohit,

wat do u think abt precision pipes and profiles company ltd and hawkins cookers?
how can one say whether a business is cyclical or not?
i believe precision pipes is a cyclical business becoz of its heavy dependence on auto sector

Raghu said...

I like your take on most of the stocks. I posted my view on ICSA at investnprofit.blogspot.com

It would be interesting to know your views on Reliance Power and Ranbaxy.