Author Archives: Craytheon

About Craytheon

We simplify Financial Analysis and Stock Valuation for investors.

Indian Stock Brokerage Account for beginners

This is just a short guide which will explain the different types of brokerage account fees and tell which you stock broker you should sign up for. As a new investor or trader you should not be paying a huge brokerage fees.

There are two types of brokers when it comes to stock market. the first is a full service broker and the other is a discount broker.

The full service broker has a huge offline presence all over the country and they usually give out recommendations on which stocks to buy or sell. e.g. Sharekhan, ICICI, HDFC etc.

Most of the full service brokerage rates are high, they charge upto 0.5% of the transaction.

A discount broker on the other hand does not have branches in each and every city, they typically don’t send any investment advice. Their expenses are low so their brokerage rate is low too around 0.2% of the transaction.

Brokerage account fees

Account Opening – This can range from 0 Rs to 750 Rs.

Annual Fee – Most brokerage accounts don’t charge an annual fee

Demat Account Fee – This can range from 300 Rs to 500 Rs, per annum, this goes to CDSL, NSDL.

Brokerage – 0% to 0.5% of the transaction for delivery and .1% for intraday.

Taxes – STT and Transaction charges, it is 0.1% of the transaction.

A sample transaction

Let say you buy a single share for 1000 Rs you will pay

1000 + 5 (.05% brokerage) + 1.03 (STT, transaction) + 0.75 (service tax 15% on brokerage)

= 1006.78 is the amount you will actually pay.

So the brokerage can add up when you are investing big amounts.

When you open a trading account with the stock broker, the broker also opens a depository account with CDSL or NSDL in your name. Your shares are actually stored in the depository account not your trading account. When you buy or sell shares in your trading account , the actual shares are taken or go to your depository account.

Which stock broker should I go for, our recommendation is Zerodha. No we are not being paid by Zerodha to make this recommendation, their brokerage is 0, their interface is miles ahead of competition. You won’t go wrong with Zerodha.

If you still want to go with some other broker then just remember the brokerage rates are not set in stone, you can easily negotiate them. Just tell the account manager that some other broker is giving you a lower rate and convince him that you will generate lot of trades. Once they hear that they will agree to lower your brokerage. Just make sure they write down the rates in the contract before you sign the contract.

Any questions, ask them in the comments.

The NPA crisis of 2016

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Our last blog was 1 year back that is way too long in the world of internet. Last year in Jan and Feb share prices were dropping down specially in the banking sector because of the NPA crisis. RBI had made the banks to be more transparent and declare the non performing assets on their books. When the banks started doing that, the market panicked.

We said last year in our blog that there are some good companies which are undervalued and it’s a good time to buy them. Let’s talk about that.

We send an email to all our Professional members end of day which gives a list of stocks which are undervalued compared to their intrinsic value.

indian_banks_undervalued

As you can see in the above image there were many banks which were undervalued. All banking stocks had seen huge drops in their share price because of all the negative news about Non Performing Assets on their books. Smart investors should patiently wait for such crisis and buy stocks in fundamentally good companies.

Let’s start with ICICI Bank which was selling at 51% discount. Now if you read our company analysis then you would know that we are not big fans of ICICI Bank because of their aggressive lending policies but it was selling at such a huge discount we had to buy it. In Feb 2017 the stock is up 45%.

The two more banks we bought were Axis Bank and HDFC Bank, if you look at Valuation Screener Email you would see that both of them were available for around 21% discount. If you read our company analysis we like both of them. Both the stocks are up 40%.

There are two more banks in the undervalued list, SBI which is up 60% and Bank of Baroda which is up 20% compared to last year. We have already mentioned in our company analysis about the two banks that investors should be cautious in investing in those two stocks because of Govt meddling and high NPA ratios. We did not invest in them.

One year later you get these fantastic returns of 40 to 45% but are they really good, to check that you should compare your returns with Nifty, if you returns are below Nifty then you did a terrible job. Nifty returns for the same time period were 25% so investors who bought the shares of those 3 banks in Feb 2016 definetly got terrific returns.

That is all you have to do, you patiently have to wait for such opportunities and grab them when they arrive. Last year’s NPA crisis in the banking sector was one such example.

As always please do not call or email us for stock tips or advice.

The stock market is going down, is it a good time to buy

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So the market is falling down again, is it a good time to buy right now or wait for it to fall further. This time we have new problems like Chinese Economy not doing well, Oil price crash. It’s the classic old wine in a new bottle. The Indian/Global economy will always have problems from time to time. What matters is how you take advantage of it. Coming back to the original question of whether it’s a good or bad time to buy or not, well the answer is yes it is a good time to buy.

There are some good companies which are currently undervalued as per the Valuation screener, there many bad ones as well which are selling cheap. We have been buying shares of quite a few companies. (Long term members can easily guess the names of two of those companies). Some of the companies we are buying are in Banking, IT, Pharma and Auto Ancillaries sectors. We stay away from Infra and real estate sectors.

The follow up question is always will the market fall down further and to be honest with you, we don’t know but what we do know is that the companies which we are buying right now at undervalued valuations we will get a good return long term.

So what should you do, if you have the tenacity then start looking at the financial charts and valuation models and start buying the good ones. If you want the easy way out just buy the Nifty Bees ETF or a good mutual fund.

If you think that you should wait because you “know” that the market will go down in the next few weeks then you are free to wait but then just remember you are speculating not investing.

PS – Please do not call/email us for personal financial advice or stock tips.

What is Life Insurance Corporation of India doing with Axis Bank?

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We wrote about Axis Bank back in Sep 2013 and Jan 2014 where we said that the whole stock market specially the banking sector was undervalued. We had purchased Axis Bank and Oriental Bank of Commerce for our own portfolio, we sold Oriental Bank with good profits because we were not comfortable holding it for long term.

As you can see in the image that we missed the short sharp rally after we sold our position but that is okay since we are not greedy. Look how the stock performed after the rally, the price dropped. So our decision to sell was infact right.

Coming back to the main topic of Axis Bank. We still have not sold our position but we do monitor it every now and then. Take a look at the Insider Trading activity for Axis. You can see that institutional investors like Life Insurance Corporation Of India, United Insurance have been selling the stock in huge quantities in the month of Jan 2015 and Feb 2015. We could not figure out why they were selling since we didnt think anything fundamentally had changed with the company. So we ignored those sell transactions and held our position.

Two days back LIC bought Axis Bank shares again and we suspect they will buy more in the coming weeks. So we ask the question to our readers, do you know why LIC dumped the shares two months back and started buying again. We think LIC made a mistake in selling Axis shares, even they realized the mistake and so started buying the stock again. Axis is a good bank to invest for long term.

Axis Bank Stock Performance, note the price drop after we bought. Intelligent investors should not panic if the price drops after you buy the shares. If your analysis about the company is right, the price would rise again, slowly but surely.

How to analyse a Bank in 5 minutes – Case Study Karnataka Bank

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Most members are complaining that they are not able to find good bargains because of the current stock market rally. We disagree there are couple of bargains available right now, check out the Valuation Screener to find them. There is one stock which is available at a huge discount right now but today we are going to tell why you should definitely avoid this stock. Karnataka Bank is currently under valued as per the valuation screener. Its intrinsic fair value is more than the current market price but that does not mean that you should buy it blindly.

Does it make sense to buy Karnataka Bank just because it is cheap right now? First of all never invest in any company just because the share price is cheap. We have to look at the financial charts of the company to see if the company is fundamentally good or not.

Lets look at the Net Interest Margin chart, NIM is the most important ratio when it comes to evaluating banks. It is the difference between the interest income generated and the interest expense paid, divided by total assets. An ideal bank should have NIM above 3%. If you look at Karnataka Bank’s NIM chart for the last 9 years you will see that its NIM never went above 3%. That is not a good sign.

Karnataka Bank NIM

Next we will look at the Non Performing Assets Ratio. NPA Ratio is used to measure asset quality of the bank’s loans. NPA are those assets for which interest is overdue for more than 3 months. If you stop paying your home loan EMI for more than 3 months then your loan account is considered to be a non performing asset.

Another important thing about banks is that you have to figure out if the management at the top is good or not. Big investors like Buffett and managers of mutual funds can directly talk to the managers of the bank. Investors like us cannot. So how do you figure out if the management of the bank is good and efficient. We look at the NPA Ratio chart, it acts like a proxy for the management. If the NPA Ratio is less than 1%, it means the bank’s loan book is healthy, above 1% is not healthy. If the NPA ratio is less than 1% for the last 10 years then that is a sign of a good bank with a terrific management.

Just look at Karnataka Bank’s NPA Ratio chart. It is atrocious.

Karnataka NPA Ratio

On the other hand if you look at HDFC bank’s NPA chart, its NPA ratio has never gone above 1% in the last 10 years. That is a sign of well managed bank.

So Karnataka bank has bad NIM and a very bad NPA Ratio, its not being managed well, its not a good long term investment. You should avoid investing in Karnataka bank even if the share price is cheap.

You don’t even have to look at the Summary Page to know that its a bad investment.

Karnataka Bank Summary Report

How to make intelligent Stock decisions in 5 minutes.

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We recently added ACC to our database. When we add any new company to the database we avoid looking at the share price. We add the data and then look at the performance, growth pages and then make a decision whether it is a good company to invest or not.

If you look at the profit margins and ROE charts you will immediately see that all of them are dropping down consistently for many years. Most of members do check these charts but we have seen from our website logs that most members don’t look at the Growth page. So we just want to point out how the Growth page can help you make the decision.

The above information tells you that ACC does not have a good Revenue growth for all these years. The next two lines tell you (this is very crucial) that all the sales ACC does, it has a tough time converting those sales into profits (Net Income) and ultimately pass on those profits to the shareholders (EPS). So either ACC is operating in a bad sector or the company is not being managed properly.

To see if ACC is operating in a bad sector, let us look at another cement stock, UltraTech Cement

UltraTech Cement’s revenue growth is much better than ACC. It was able to lower its expenses which is why the Net Income growth is better than Revenue growth. The EPS growth rate lower than the Net Income growth rate because UltraTech issued new stock for an acquisition.

By comparing these figures from two companies you should be able to figure out that the cement sector is not a bad sector to invest. Its just that ACC is not being managed well. It makes sense to invest in UltraTech Cement(not at current valuation though) instead of ACC.

Now and only now you can look at the company’s stock price to see if our analysis was right and to see how the market has valued ACC historically.

If you look at ACC’s share price from 31-March 2006 till 16-Jan-2015, its compound growth rate was 8.6%, which is not good. If you look at UltraTech Cement’s stock performance for the similar period, its growth rate was 22% which is fantastic. So our analysis about ACC was correct. The market agrees with our analysis, even rest of the market thinks that ACC is not a good company to invest which is why it has given such poor returns compared to UltraTech which has given fantastic returns.

In the long run the share price performance matches the company’s performance. We hope by now our members would understand why it so crucial to look at a company’s long term growth rates. You simply cannot ignore it.

We make spectacular mistakes too.

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Since we have been talking about our own portfolio in the previous emails specially aboutAxis Bank and Oriental Bank of Commerce where we had some terrific returns some members emailed us with lots of praises for our stock picking ability. So to prove that the praise is not justified and why we are not experts when it comes to stock picking, we will talk about one of our investment which we made couple of years back.

Persistent which specializes in IT products and services off shoring listed on NSE in April 2010 at around 400 Rs. Fast forward to June 2011 most of the world stock markets were spiralling downwards, the “experts” gave the usual reasons like inflation, Quantitative Easing, problems in middle east etc. Almost all Indian stocks got hammered but Persistent took a more significant hit. It crashed to around 290 Rs because “experts” believed that it wont be able to compete with the other IT biggies like TCS, Infosys, Wipro. So most of the brokerage houses gave a SELL recommendation. When others start selling that is the time we get active.

We quickly added Persistent to our database. What we saw was that Persistent was having good profit margins with Net Profit Margin above 15%, good ROE above 15%, positive free cash flow ( old members by now should know that we are big fans of companies with positive FCF), high current ratio, no debt, net income as well as Cash flow from operations positive with CFO higher than net income (which is a sign of good management), above 30% revenue growth in the last 5 years(2009 was an exception).

There was one drawback though, the company was issuing more shares, as we have said on the website, issuing more shares can be beneficial only if the company is able to increase shareholder value in the long run, most companies are not able to do that.

The valuation models gave a fair value around 425 Rs.

A quick look at the annual report and we did not find any negatives there. So Persistent was a fundamentally good company, selling cheap. There was really no justification for the claim that it would not be able to compete with companies like Wipro, TCS in the future when it was successfully competing for the last 5 years.

So we bought the stock at around 300 Rs. in Aug 2011 and we sold it in Sep 2012 around 425 Rs, the fair value at that time was 440 Rs as per the valuation models. A return of 42% in almost one year. We were quite satisfied with the return and invested the money in some other stock. So what was our spectacular mistake. Check Persistent’s current share price, its 1333 Rs. We would have made a spectacular return if we had not sold the stock. There was really no reason to sell the stock, we sold it just because the share price was near its fair value. The company was still doing great fundamentally.

What can you learn from this, dont sell shares of good companies. Dont sell just because the share price is near the fair value and dont sell because the “experts” on TV are shouting to sell. From 2011 till 2014 you must have heard all the bad news on TV like, problems in Ukraine, problems in US, problems in middle east but you can ignore all these news if you have invested in a good company.

A quick note to all the new members, we occasionally talk about our own portfolio to educate our members, please do not email/call us for investment advice. We do not provide investment advice.

Why you should not invest in mutual funds.