August 3, 2010

Quarterly result review – Some standouts

The quarterly result for most companies are out and I have been reviewing the results of the companies in my portfolio. In most of the cases the results were as expected, but in some cases there have been some unexpected changes – in some cases good and a few not so good.

Cheviot Company – Now this is a company most of you would wonder, why the hell even invest in it? Cheviot is in the business of jute manufacturing and is located in West Bengal. I have written about company here and continue to hold a small position. This company operates in an unattractive industry in a business unfriendly state. The company workers go on a strike every alternate year and the compensation costs are now in excess of 15%.

If the above is not enough, the export market of the company has stagnated in the last few years due to the recession. So why hold this stock?

The company sells for less than cash on books, has been able to earn more than 15% on invested capital and pays out a fair dividend. The company is now focusing on the local market and has started growing again. However, all said and done, it is not the best of my picks although I have not lost money on it and I will exit in due course now.

Facor alloys – I wrote about this company recently here. The current quarter numbers are very good. If one excludes the one time power related charges, the company has earned almost 14 Crs in the quarter which is almost equal to the entire profit of the previous year.
This is a very cyclical business and one should not extrapolate the quarter numbers. However I think the company should do fine over a business cycle and is still selling cheap.

Lakshmi machine works – The company came out with decent numbers as expected. The key news on the company is that company has initiated a buyback which is good way of utilizing capital. I think the company could have done this earlier when the stock was cheaper, but it is quite likely that the management was conserving cash during the recession.

Gujarat gas – I have discussed the company here. The company came out with good topline and bottom line numbers(20% growth) The company continues to do well and is a well managed company. I personally think that once the company ties up more long term supply sources, it should be able to do even better and think that the fair value will keep increasing at a good rate.

The tech companies (Infosys, NIIT tech etc) – Infosys has come out with average numbers (10% sales growth, profit de-growth) in terms of growth. The company continues to generate a high return on capital, but the growth is now muted due varying factors such as recession in the US, exchange rates and rising costs in India. The valuations are still much higher and assume higher growth in the future. That may very well happen, though I am not betting my money on it – I have reduced my holding by a substantial amount already.

NIIT tech has had miserable performance in the last few years ( have written here about the company). The topline growth was non-existent and the silly foreign currency hedges kept biting the company. Those hedges are now being worked out and hopefully the management would not repeat the same mistake (of putting a multi-year currency hedge). The company has had a good topline and bottom line growth due to increased business in India (some of it is one time). I think the company should continue to give high single digit growth in the next few years.

The stock is not undervalued by a large margin and as a result I have reduced my position substantially.

The quarterly circus
Quarterly earnings are a big drama in the US. It is almost a ritual and every time a company misses its quarterly estimates, the stock gets punished severely. In India, the market was immune from this disease, that is till now. I have been noticing that in the last few quarters, any small slowdown or drop in growth is being punished severely and conversely, upside surprises are being rewarded.

A lot of participants may attribute this to higher efficiency and greater volumes etc. This may very well work for traders and in some cases for long time investors too. However I think it is bad for the companies and investors as a whole. A focus on quarterly numbers can cause management to take short sighted decisions which ends up destroying than creating value for the shareholders (remember Enron ?).

The focus of market on short term earnings may be or may be a good thing from varying points of view, but it is here to stay. In such a scenario, it can work for a long term shareholder if you can look past the temporary disappointment and buy the beaten up stock where the company will continue to do well in the future.


Lucky said...

Hi Rohit,

Thanks for the updates. I am with you on Infy and NIITEC (don't track others).

I think the quarterly results were always taken into account even in India. At least, for Infy, I have seen people buying and selling in big chunks every quarter.

Of course, this is not a very good strategy and is also detrimental to the industry as a whole.

Have you evaluated Maruti recently? I feel it is still not within the margin of safety but have initiated a tiny position.

VISHNU said...


At the moment , there is opportunity exist in companies which are showing accounting loss (But actually accumulating cash) and priced below NCAV...

But we can not do concentrated bet here since there are lot of risk..

Nassim's barbell strategy fits here..(Strangely Graham also says same thing in overheated market)


rayhaan said...

hey rohit pls answer these q s
q1. could u pls underline the governance issues which proved to be a turn off for u because i consder the company to be pretty attractive at these levels?
q2.what are ur views on teesta agro which is selling below its cash ?
q3.recently i observed a few psu banks selling below their deposits(or as i saw below cash and cash equivalents in the cashflow statement).do u think they might present investment oppurtunities?
eagerly awaiting ur response,rayhaan

Vic said...

Hi Rohit,

thanks for the update.

Are you planning to increase your holding in Facor based on latest results? I recall you had a starter position in it.

Stock price hasn't gone anywhere during last few months.



Rohit Chauhan said...

hi lucky
yes, i am tracking maruti. not yet cheap enough ..need to see their results though


Rohit Chauhan said...

hi vishnu
can you name some companies ..have not found too many decent companies which are selling below NCAV ..most which i have found have problems in their core biz


Rohit Chauhan said...

sandesh has invested in real estate in the past and is just hoarding cash. i dont like that

have never looked at teesta agro ..will let you know when i get a chance to do that

cash flow statements are not as relevant in case of banks. deposits are liabilities in case of bank and is not a useful measure to value a bank. price to book is a much better measure


Rohit Chauhan said...

hi vic
no i have increased my position. one qtrs results are not too representative. will want to watch a few more quarters