I recently came across this article which highlighted some stocks which have jumped more than 100% in the last one month. Out of curiosity, I decided to do a quick analysis of some of these stocks to see if I may have picked any of these stocks based on the fundamentals and valuation. The analysis which follows has not been done in depth and is usually the quick check I do to reject or continue further research on the stock.
The statement I check first is usually the balance sheet. Essar oil has a debt of almost 10000 Crores with a debt equity ratio of 1:5. In addition, the company has had losses in the last 3 of 5 years. The management also does not inspire confidence in this company. In a nutshell, the company and its fundamentals are too speculative for me.
The company has a very low debt level and seems to have raised considerable equity, to the tune of 2000 odd crs to fund the SEZ and real estate initiatives . Due to this high level of liquid cash, the company has considerable other income too. The income statement, net of this non core income, shows a profit margin of 6-7% (fy 2009).
Based on an expected turnover of around 400 Crs, the core operating profit after tax could be in the range of 25-30 Crs. Based on the above numbers, the company seems to be selling at a PE of around 40 (after netting cash from market cap and considering only the operating income).
The market is clearly pricing some of the new initiatives in the current price. It is quite possible the new initiative would do well and the current price could be a bargain. However evaluating SEZ and real estate initiatives is beyond my circle of competence and hence I avoid such types of ideas.
The company looks very cheap based on fundamentals selling at around 3-4 PE (based on Enterprise value). However I started with the analysis of the balance sheet and saw warrants being issued to promoters and some strategic investors at a price of around 351 when the market price was in excess of 400. The dilution was around 10-11% due to the warrants. In addition the company has also raised some usd 22 million through Foreign Currency Convertible Bonds.
My analysis of this company ends here. I am not interested in companies where the minority shareholder is diluted by preferentail allotment of warrants at prices lower than market price. If you think warrants in themselves are free, then by that logic call options which are similar to warrants should be free too. Have you seen any call options available for free in the stock market (especially with a strike price below current price?)
If the company needs capital, when why not have rights issue where all the existing shareholders get an equal opportunity ?
Selection criteria too strict ?
Should it be otherwise ? I typically hold 12-15 stocks in my core portfolio. A new idea should be of equal quality and better valuation for me to replace an existing one.
The above analysis was done in matter of a few hours. Unfortunately (or maybe fortunately) for me all the stars and planets and the rest of the stuff has to line up for me to start investigating the stock further. Even with all due diligence, I manage to get it wrong several times. I am definitely not stepping into those ideas where there are red flags or the company itself is out of my circle of competence.