October 22, 2008

Question on the graham styled portfolio and an investment idea

I wrote in the previous post that I have changed my portfolio design and split it into two categories. The first group is the core portfolio which contains the long term ideas where the intrinsic value is increasing and I feel strongly about the long term prospects.

The second group called the graham portfolio, named after the dean of value investing – benjamin graham, will contain the statistically cheap stocks. These stocks are cheap by various measures such as PE ratio, Mcap less than net current assets etc.

I received the following question from manish and thought of replying to via a post

Also I will be curious to know your strategies for these two portfolios. Will you be looking for a certain percentage of gain (say 50%) for Graham Style stocks and exit. I believe you will keep holding Core Portfolio forever (until business is intact).

The graham portfolio would be at best 20-25% of my total portfolio. The percentage is not fixed and will depend on the number of attractive ideas I can find.

I will not looking at a percentage gain to exit these stocks. For me the sell decision would be based on two factors – If the stock is selling at or 90% of intrinsic value I will sell the stock. In addition if the fundamentals deteriorate considerably or if the valuation gap does not close in 2-3 years, I may decide to bail out.

The holding period for the core portfolio could be longer as the intrinsic value of the companies is also growing. So unless the stock is grossly overpriced, I may continue holding a stock for some time.

Lesser analysis
In terms of analysis, I spend a considerable amount of time on the stocks in my core portfolio. However for the graham ideas, I am looking at cheap, obviously undervalued stocks and hence the extent of analysis would be less. I would be balancing the risk by diversifying more in the graham portfolio. The graham portfolio is an opportunistic reaction to the market crash.

An idea: HTMT Global
HTMT global is an IT/BPO company. Hinduja TMT (now called Hinduja ventures) demerged their IT/BPO business in 2006 and merged that into HTMT Global from Oct 2006.

Financials
HTMT global had a revenue of around 673 Crs in 2008 and a net profit of around 87.4 Crs. The company had a net profit margin on a consolidated basis of around 13% and an ROE of around 26% on invested capital. The total capital is around 823 Crs and a net cash of around 430 crs on the balance sheet (held in the subsidiary)

HTMT global on standalone basis (excluding subsidiaries) earned 367 Crs and a net profit of around 58.8 Crs. The company had a net margin of around 16% on a standalone basis. The lower margins on a consolidated basis is due to the Subsidiary ‘Affina’, which was turned around during the year.

Growth numbers are not representative as the demerger happened in the middle of 2007, however the company has been growing in excess of 30%.

Positives
The company is doing quite well and has been expanding the scope of its operation in terms of headcount, new clients etc. Athough the numbers are not comparable, the company has shown almost 50% growth per annum for the last 7 years (although from a small base – see pg 6 of annual report). The company has a cash of almost 470 crs (Q1 09) which has been earmarked for accquisitions and should add value to the company
The financials are quite good, with good free cash flow and a good dividend payout of almost 100%.

Finally the valuation is amazing. The company is being priced for less than cash on the books which means that the company worth more dead than alive

Negatives
Hindujas control this company and are not know for corporate governance. In addition the credit crunch and recession could hurt the company’s growth. However in the long term this should increase the offshoring.

Conclusion
Unless you believe that the company is worth less than cash, you cannot justify the valuations. One likely reason for the crash in price is the sell-offs by FII’s.

I am still looking for more negatives on the company, but cannot find any. One has to keep in mind that the stock price is assuming worse than bankruptcy. Personally, I am looking at this stock for my Graham portfolio.

24 comments:

SKN said...

Hi Rohit,
I find your blog very informative and educating. Can you please throw some more light on the composition of your core portfolio?
Sunil

VISHNU said...

Hi Rohit,

Now you know which company I was buying heavily. :)

HTMT is dirt cheap and I am keep buying.

Regards
Vishnu

Manish said...

Hi Rohit,

You may also like to look at Gitanjali Gems. The company has free cash reserve of 16,977 Cr and current market cap is 924 Cr (at CMP of Rs 108). The company is growing at decent rate (41% for last 3 years), debt level is not bad (D/E = 0.58) and available at P/E of 6.86

Regards,
Manish

VISHNU said...

Hi,

Do you know anything about Selling Puts (which buffet is doing recently on Burlington Northern Santa Fe). I am hearing that this is alternative to buying stocks directly for long term.

Regards
Vishnu

Anonymous said...

Hi Rohit,

HTMT may use that cash for an acquisition http://www.thehindubusinessline.com/2008/06/26/stories/2008062652470400.htm

and shareholders may not get much of that..

Raj

Rohit Chauhan said...

Hi skn
i will be publishing my portfolio details soon.

manish - i will look at gitanjali gems and let you know

vishnu - buffett has done that for stocks which he wants to buy. he has done it for cocacola earlier. by selling puts, he is able reduce his cost basis. it is win-win for him. if the stock drops he will buy the stock at the strike price which he is any way planning to. if the price does not drop, he pockets the premium and reduces his cost basis

raj - the cash on the books is really not excess cash and above idea is not based on that. however mcap is below that cash. in the future if the company makes accquisitions it should add value to the shareholder. i am more inclined to believe it will as they have been managing their current accquisition of affina well. ofcourse if they blow off the money, then its a different story

regards
rohit

Rohit Chauhan said...

manish
i am not excited by what i saw for gitanjali gems. free cash flow is poor ..actually not there. net marggins low growth is erratic, debtors too high and the company is raising capital.
i am not excited by it ..however this is a 2 min view ..so i will not bias u with it

regards
rohit

Ravi said...

I think the corporate governance point is the key. Do you trust the management to actually reward shareholders? Why is it undervalued? Probably market perception of the management plays a key part. The risk is that the valuations do not reach the intrinsic value and may always lag behind.

- Ravi

Anonymous said...

Hi Rohit,

Do you like Swaraj company namely PUNJAB TRACTORS LIMITED and SWARAJ ENGINES. They have reported good results this time. Would appreciate your views.

Thanks
Nitin

Neerav said...

Tata motors is also trading very close to its book value and at a PE of around 6. Knowing the aggresive growth plans this seems like a good value for now.

Looking at other stocks also within nifty - Mahindra, Suzlon, Maruti are others I have filtered based on PE - will check the book value

SKN said...

Hi Rohit,
What is your source of annual reports? I have been trying to get my hands on these and have only found some useful ones on indiaearnings.moneycontrol. Any input on that is highly appreciated.
SKN

Anonymous said...

Rohit, Can you have look at Manugraph India Ltd., I think it could be a candiadte for your "Graham style portfolio"
---Rai

Vic said...

Hey Rohit,

Where are you man?

We're eagerly waiting to hear more about your two portfolios.:-)

Market is looking good..Diwali discounts are getiing better...:-)

Thanks,

Vikas

Rohit Chauhan said...

ravi
agree ..corporate governance could be an issue. i am fine if it does not reach intrinsic ..even if reaches 70% of intrinsic ..one can good money

nirav - maruti i have analysed on the blog. tata motors is too complex for me and hence have avoided it - too many moving parts. others i have not seen. i however hold ashok leyland

regards
rohit

Rohit Chauhan said...

nitin - i have not seen swaraj engines ..punjab tractors a long time back ..but not recently.

skn - i get my annual reports from the company's website or else from the edifar website. finally if not available anywhere then i buy it off this location - http://www.business-beacon.com/

regards
rohit

Rohit Chauhan said...

rai
manugraph is insanely cheap. however they never publish consolidated results and their US accquisition dgm was dragging their profits last year. currently there is no visibility on how bad it is doing. so without visibility i have not made more than a token investment

regards
rohit

Rohit Chauhan said...

vic my man ..most of the stocks in both the portfolio have been listed on this blog. no top secret ideas i am hiding

these days you need cash and balls of steel to buy ..nothing more ..pick any good company whose fundamentals are good and it is more than likely to be undervalued ..ofcourse i wont say the same for real estate companies or maybe some banks

anyway i will publish my list soon and believe me it will not be a surprising list

i am busy these days looking at companies and loading up and not getting much time to blog
regards
rohit

Neerav said...

Looking at how we are bottoming out so fast I have increased my research. My stockpicking process was as follows
1.I used a filter of PE<10 to create big list
2. Explored stocks in the list which - I have heard being discussed on blogs like yours or which i have explored in past or companies which i understand
3. looked at consistent earnings growth for 3-4 years (and not just during last 2 years)
4. Stayed away from industries i feel are not easy to understand like metals,banks,IT, real estate
5. Looked at Price to book value and Debt/Equity ratios.
6. Finally I have also seen RONW though i need to understand how this measure is calculated.

I have identified Indraprastha Gas, TTK Prestige, Grindwell Norton, havells, SKF, ABG Shipyard, balmer lawrie, voltamp transformers, vesuvius ltd.

Some have been studied through your leads. Have you studied any of the above apart from Indraprastha gas and Balmer Lawries which you have already covered

SKN said...

Hi Rohit,
Great job man. Keep going. Yours is one of the most informative and unbiased blogs on indian stock market.
Cant wait to have a look at your portfolio!!!

Vic said...

Hi Rohit,

I agree, the list won't be a surprise and many stocks would have already been discussed on this blog but to get the best bang for the buck, timing is also important (though not much fo Value Investing). You see how the markets are getting more attractive within a very short period of time. Of course, it can fall another 30%..which is fine. But For me, Nifty 2800-3500 range has been ideal for building long term portfolio.

I have plenty of cash..which I want to deploy. This week, I built OK positions in Lakshmi Machines, BL and Nifty BeES. I want to build more in these and in others too. So your list will come handy..:-) though I have been tracking many of these stocks for a while.

I understand the opportunities are many but I want to pick the best of best. I have been following your blog (and others) for months and I like your analysis the best.

So I want to get the summarized view of your portfolio and updated numbers on them if possible..just to be sure that I'm on track.

I don't know about balls of steel but do have strong ones..I guess..:-) The equity part of my Ex-India portfolio (Mostly in Index Funds covering all asset classes) is down 40% YTD. Guess what, I'm DCAing 100% in stock indexes now instead of 70/30 (Stocks/Bonds) whilst everybody here..in the US and Europe are bearish and keep dumping more and more stocks.
I'm very happy the markets are this way because I don't need this money for another 10-20 years. These opportunities don't come often.

Thanks again for a wonderful job that you're doing.

Vikas

Rohit Chauhan said...

hi neerav
grindwell is part of my holdings. i have analysed skf some time back, but did not invest as the valuations were not attractive then. make relook now. i have not analysed other companies

regards
rohit

Rohit Chauhan said...

skn - thanks for comment

vikas - i have published the details on the portfolio. i am not planning any more details except some updates if and when possible

regards
rohit

Neerav said...

Hi Rohit,

Thanks for the information. I took a look at Praj Industries based on your post on Rakesh Jhunjhunwala. I like the overall numbers (consistent growth, high RONW,No Debt)and also the the business that the company is in. Seems like a good long term bet. The business model however is complex.

Anonymous said...

Hello Neerav
I have been following your couple of nice comments on this blog hence curious to know about your views on Praj Industries. I have Praj in my core portfolio and i am planning continuously accumulating it below Rs.69
my Parameters for Praj
1) RONW = Consistently above 25% for last 5 yrs.
2) Zero Debt Company
3) P/E below 10
4) AVG ROCE above 25%

I calculated it's future earnings with 10% growth and Discounted back. With this i got Intrinsic value of Rs. 138, with 50% margin of Safety I would buy Praj at or below 69.

I have done this calculation loosely based on Rohit's calculation methods.

Rohit: Please correct me if i am wrong in Praj's Calculation. Also would like to know your views on Praj Industries.

rgds
Ani