Dear All, this study report is part of Monthly Newsletter of this Blog. I am sharing some samples from the report.
One article I have already shared last month at this Blog. Anybody who is
interested in reading the full report may please send an email at the ID of
this blog: oscillationss@yahoo.in
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CONTENTS
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Description
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Page
no.
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A Summary of Stock Valuation under
traditional value investing
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1-2
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Valuation: Intrinsic or Subjective
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3-6
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Business, Growth and Value-The
Holographic universe
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7-16
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Three levels in Business analysis
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12-16
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Stock Ideas:
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Tata Coffee Ltd (CMP 110, TIER 1)
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17-27
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TTK Healthcare Ltd ( CMP
562 TIER 3)
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28-33
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D-Link India Ltd (
CMP 110 TIER 3)
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34-35
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Redington India ( CMP 135 TIER 1)
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36-39
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UTI AMC (CMP 550
TIER 2)
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40-43
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Mahindra EPC (CMP 150 TIER 3)
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44-45
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Sample:
A Summary of Stock
Valuation under traditional value investing
Traditional value investing tries
to calculate the intrinsic value of a stock/business. To calculate the same, it
mainly undertake two approaches- first one is fundamental valuation where
valuation is done purely on the basis of direct cash flows generated by the
business and second approach is relative valuation where valuation is estimated
with reference to valuation and fundamentals of peer companies. First approach
mainly uses Discounted cash flows (DCF) and second one uses
methods such as PE ratio or EBITDA times ratio etc.
Benjamin Graham who is regarded
as father of Value investing used a formula in his famous book “Security
Analysis”. This formula is widely used for calculating intrinsic value of a
stock.
Let me first come to DCF- in
DCF a security or a business is valued based on the present value of its expected
future cash flows. Present value of future cash flows is
calculated by using an appropriate discount rate. Appropriate
discount rate is cost of financing or opportunity cost of any other alternative
investment options available to the investor. I have seen DCF being
adored by many as being superior to any other valuation methods. But I think
this at the most is a good point of reference because I find this one a very
confused attempt to find “intrinsic value”. First indicator of this confusion
is – taking opportunity cost of the Investor (not business) as discount
rate for calculating the present value of future cash flows. DCF proposes to calculate the intrinsic value
of the stock/business but then instead of taking the cost of capital of
business it uses the cost of capital of the potential Investor which
is not at all related to the expected future cash flows of the business. It
fails to understand that just as future cash flows are related to
business/stock similarly cost of capital is also directly related to the
business/stock not to a third party investor. Cost of capital is a feature of
business just like future cash flows.
Similar issues are with the
estimation of future cash flows. Actually DCF concept is taken from the Bond
valuation. Long time back, it was established that value of a bond is a
function of its future cash flows discounted with a rate determined by the riskiness
of the bond issuer (not the bond investor). But bonds are different from
stocks/business and problems faced while valuing bonds are different from the
problems related to business. Like, cash flows are CERTAIN in the case
of bonds (we know the expected cash flows well in advance) but UNCERTAINTY
is related to credit risk of the issuer. And this credit risk of the issuer
impacts the discount rate (expected return keeping in view the credit riskiness
of the issuer). So as we can see, in case of bonds the life span and expected
cash flows are certain and known well in advance. The uncertainty related to
credit worthiness is responsible for increase or decrease in the discount rate
or expected returns.
However in the case of
stocks/business UNCERTAINTY is related to future cash flows and to life span.
Cash flows are highly uncertain but DCF method does not answer as to why they
are uncertain. Whether their uncertainty is random? Without giving any answer, DCF
just provides a solution (quite random) in the form of discount rate. But in
case of bonds, the uncertainty of payment is not random but related to credit
risk of the issuer and hence this risk of payment increases the expected
interest rate. But uncertainty of business cash flows is more random and different
hence the solution can’t be similar to bonds (Impact on discount rate). I think
some other approaches like probabilistic distribution of cash flows (as the
problem may be statistical) are required. (I will be taking this issue in the
coming editions and will try to provide a solution).
Business,
growth and Value-The Holographic universe
Once I was sitting with some of
my friends. One fellow, who was a friend of one of my friend, was discussing
something about aim of life. He was some sort of religious preacher and claimed
to put people on right path. One friend asked him about the aim of life as my
friend was really getting eager to understand something of this life process
and he was greatly impressed by that fellow. The preacher fellow told them that
the aim of life is to help and serve the poor needy people; people who are in
grief, saddened by the troubles of life, no food no shelter. He told that this
is the principle message of his religion and he made a strong emotional pitch
about helping the poor people and many of my friends visualized themselves
helping poor people and obviously they felt great.
But I asked him that his
perceived purpose of life (to help the poor and sad) would make things very
complex for the Almighty because in order to fulfill your (many more like him)
purpose of life you would always need poor and miserable people so in a way you
are praying for the people to be poor and saddened. For them to fulfill the
purpose of their lives, they would always require poverty, pain and grief. But
empathy and compassion are not the purpose but they are the manifestation of an
enlightened person. Just like a Brave fellow saving the modesty of a girl; his
bravery is not his purpose of life but it is the manifestation of fearlessness
of his being which is one of the signs of an enlightened person. So a
Brave/fearless person does not want girls to be molested in order to fulfill
the purpose of his life…his bravery is just a manifestation of his being in
time and space. I told the preacher fellow that he is just making a political
statement but luckily enlightenment is very personal and individual and there
is no such thing as collective enlightenment.
Inefficiencies of others can’t
make me an efficient person…I can’t strive for the supreme by following the
imperfection. Life principles are not made upon inefficient acts of others.
Path to the supreme (value) is not directed by mistakes of others. Ignorant
explorers can leave diamonds on road taking them as stones/glass but wise men
do not follow these ignorant explorers in the hope that they will throw away
more such diamonds because they know that by drawing a MAP to follow these
ignorant fellows will only result in them losing the path/direction where vast
quantum of valuable diamonds are trapped under earth. So they draw a MAP for
places where there are Kimberlitic rocks (for diamonds)…their hunt for the
VALUE is not dictated by the mistakes of foolish explorers but devising a plan
for hunting the valuable gems.
Sometimes I feel, Value investing
in essence tries to follow the ignorant explorers and in this quest of checking
stones thrown by them it leaves some of the most valuable diamonds because it
has not drawn a plan to hunt for these precious diamonds. It does need to
understand that the value is not created by the mistakes of ignorant fellows
but the wisdom, strategy and efficient decision making of the businessmen. So
value investing is about finding the Kimberlite rocks- a business with vast
scope of scale and a businessman with wisdom and vision for creating value. A
true value investor looks for the kimberlite rock where diamond is not shining
on the surface but it is hidden inside and rough. He knows that maximum value
is created by finding these rough diamonds because a large crowd is following
and looking for the final cut diamonds on the roadside which are far and few.
In its present avatar, Value
investing finds stocks like ITC, ICICI bank, HCL, Dabur, Godrej Consumer or
Titan in 2014-15 and these stocks have also given good returns after this
period (Hindalco is a value buy for the last 15 years and ITC for the last 10
years). But this Value Investing misses stocks like Tata Elxsi (40 bagger),
Avanti feeds (200 bagger), Borosil renewables (30 bagger), Biocon (15 bagger),
KRBL (40 bagger), Cera (40 bagger), Garware technical (50 bagger), Info edge
(15 bagger) and many more. I remember when I was buying Borosil Re (earlier Gujarat
Borosil) in 2015 there was skepticism about its business plan- about the
chinese import threats or no demand for solar power. But I was of the opinion
that Indian solar story couldn’t happen on imports; it has to be local and
solar glass is going to have regional markets (Full study of Borosil Re is at
my blog). So I started buying from 10 (adjusted for Borosil consumer stocks
after recent merger/demerger) and made last entry this June at 35. I sent another
buy call for Borosil Re at 40 in the Blog post related to Value investing in
July-2020. And it just blasted after that rising to 300 in no time.
In 2015, Borosil Re should have
been discarded by Value investing because it had nothing to prove its worth
against the stringent benchmarks of value investing formula. Same was the case
with Tata Elxsi or Garware or Biocon. But maximum value is created by these
stocks not by the generic value investing stocks. The reason is- these no
metrics stocks are just like Kimberlite rock (raw diamond) which does not shine
in the sunlight. Only a person with experience of ages and having an eye for
details can recognize the hidden diamond in the giant rocks. So in its current
Avatar value investing finds few discarded diamonds but fails to recognize the
large number of rough diamonds. These rough diamonds stocks/businesses create
value just like the real value is created- sheer hard work, wisdom, innovation,
strategy, risk and tough decision making. Value investing thrives on the
irrational choices/decisions made by the incompetent market but what if market
is not irrational? What if market is not ignoring a great stock like TCS by
making it trade at a PE of 10- I fear Value Investing will lost in darkened
corners of the city.
Sample:
Value analysis tries to divide
the whole business into various parts and by evaluating and comparing some of
these parts it tries to find a figure which can be used as a representative of
the “entire” business. So they grade certain parts- Price to book value,
Debt-equity ratio, ROE etc. and assign a figure which they take as a “value of
the business” which it is not. And in its attempt to focus on the body it
misses the soul which in fact is the essence of existence and growth. Business
consciousness is the essence of the existence and growth of a business;
financial figures are just the physical manifestations. Physical manifestations
happen in time and space but consciousness is the truth, the source which is
un-manifested and unobservable by analysis. Some phenomenon can’t be
comprehended by analysis or by breaking them into their finer particles.
Our life and existence is one of them and comprehending business growth is
another one.
Sample:
Value investing appears more like classical
physics which tries to define the growth phenomenon by capturing the “molecular
or Atom level motions”. But just like cosmos, business consciousness follows
Holographic laws and so business growth can beat the barrier of speed of light
(when Financial valuation (Value investing) tries to evaluate Growth motion by
capturing the financial and other external parts). Growth is a sub-atomic
phenomenon and the same can break all the physical boundaries. Business
consciousness operates at sub-atomic level (through strategy, timing and risk)
and is multi-dimensional. It is multi-dimensional because it is
impacted/directed by Industry level, economy level and most importantly firm
level (Business strategy) actions. Financial and mathematical tools are one
dimensional so they are unable to capture the sub-atomic level growth motion of
a business operating under a superior business consciousness. A superior
business consciousness is able to outpacing competitors when Industry and
economy is doing good and it withstands tough times better so it is able to
capture much higher market share beating the industry level growth and that’s
why growth is Multi-dimensional while financial data is one dimensional. Value
investing tries to cut the business into various parts to evaluate the same but
it fails to comprehend the source of all parts of business- Business
consciousness.
Sample:
In my terminology there are three
levels in the Value investing process.
Level 1 (Entry level/Evaluation
of Financial Data and Relative valuation): This level is what our
traditional value investing is all about- to capture, assess and evaluate the
financial data to arrive at meaningful interpretations, inferences and relative
valuation. Here, the analyst primarily is capable of finding the businesses
available at relatively cheaper valuation, margin of safety where firms are
trading at or below the market value of its assets (land and other assets),
investments and cash. His perceived valuation gap is primarily due to these
historical material aspects (not futuristic qualitative aspects). This as we
can see involves simplest calculations and evaluations…level of insights and
decision making involved is not very complex but very straight forward.
Level 2 (
Intermediate/Industry level Insights and forecasts):
Level 3 (Advanced/Company
management decision assessment):
(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your own Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. Reach me at oscillationss@yahoo.in).
