Author Archives: Craytheon

About Craytheon

We simplify Financial Analysis and Stock Valuation for investors.

IL&FS Transportation Networks loan defaults – How to avoid such bad companies?

If you were watching the financial news lately you would have heard about a company called IL&FS Transportation Networks which defaulted on its interest payments. It is an infrastructure company which builds roads and bridges.

You as an investor could have easily known back in 2016 that IL&FS Transport was a bad company and not to invest your money in it with just 5 mins of research.

Building infrastructure needs a lot of money upfront, so the infra companies need to borrow money from banks and other financial institutions and even the general public. The company lets say builds the road and gets the money from govt once its done or the company can collect revenue in form of tolls from public. So money goes out fast while revenue comes in slowly.  Managing such a business model is not easy.

Debt to Equity

IL&FS_Transportation_Networks

Looking at the debt to equity ratio in 2016 it was very high at 3.8 in 2018 its much higher at 6.1. A debt to equity ratio above 1 is not a good sign. A ratio above 1 means the company is taking more loans compared to its equity. Big loans means big interest payments.

Intangible Assets and Goodwill

Another major red flag and a metric to measure the managements honesty is looking at Intangible assets and Goodwill.  Intangible assets and Goodwill are those assets which cannot be given a proper value. e.g If a company has a patent for a product or a good brand name (like Coca Cola), its definitely an asset but there is no formula to come up with an actual value for such assets.

If a company acquires another company for 100 million Rs but the value of its actual factory, machinery, land etc was 800 million Rs yet the company paid 100 million and it needs to balance the balance sheet so allocate 200 million as Goodwill. The goodwill is the premium you are paying for the brandname of the company being acquired which is why you ready to pay 200 million more.

Coming back to IL&FS, in 2016 its goodwill and intangible assets were 207,301 million Rs while its Total Assets were 378,443 million Rs which means around 50% of its assets were intangibles not some actual physical assets.

If you were a member of Craytheon you would seen this red flag in the company analysis section right away back in 2016.

il&fs_goodwill_intangibles

You can save yourself lot of headaches and save your money by not investing in such bad companies by doing some basic research first.

 

P.S – Please do not call us for investment advice or stock tips.

Divis Lab – One year update after the share price crash.

Back in June 2017 we said that Pharma sector was undervalued  because lot Pharma companies had received complaints from US FDA about regulatory, compliance  issues about their manufacturing plants. Some companies like Divis Lab’s share price dropped like a rock.

Now just because the share price crashed does not mean you should buy it but if the company has good financials and if you can figure out if the problem due to which the price crashed is temporary then you should buy the shares.

With the above scenario if you notice insiders buying the shares as well then it confirms your analysis and its another confirmation signal when you buy.

Madhusudana Rao Divi who is a director bought 20,000 shares after the first price crash in late December.

Screen Shot 2018-09-01 at 4.05.39 pm

Raja Divi bought 10,000 more some later after the second price crash.

Screen Shot 2018-09-01 at 5.04.19 pm

Our Professional members get this information in an email which lists the insider buying and selling every day in the evening.

The share price chart gives a good picture when the insiders were buying.

Screen Shot 2018-09-01 at 5.07.48 pm

There were around 6 months when the share price was bouncing around 700 Rs to 545 Rs, we kept on buying during that time with an average share price of 600 Rs. The current market price is 1300 Rs. 100% + return in 15 months.

A good company with some temporary problems with insider buying, all you have to do is buy and wait. The market will reward you eventually.

 

Disclosure – Long Divis Lab

Avoid investing in companies whose shares have been pledged by their promoters.

When promoters pledge their shares, its a sign that the company cannot raise funds from other normal sources because banks are afraid that the company may not pay back the money, so the banks make the promoters pledge their shares to them. In simple words the promoters gives the rights to the bank to sell the shares if in case the company does not payback the loan. If during the loan tenure the share price of the company falls beyond a limit which is set by the lender, it triggers a margin call, the lender can demand that the loan be repaid or more shares to be pledged. If the promoter cannot repay or offer more shares, the bank can invoke the pledged shares aka sell those pledged shares which causes further fall in the stock price.

We always recommend that investors should avoid companies which have high debt, high debt companies not surprisingly are the ones whose promoters have to pledge their shares. Let us compare the stock price performance of some companies which have pledged their shares.

Suzlon has 20% of their shares pledged, that is a significant number.

suzlon_pledged_shares

Suzlon’s share price has not done so well over the years.

suzlon_share_price

 

GMR Infra have 48% shares pledged, that is huge.

gmr_infra_pledged_shares

As expected, the stock performance has been very poor.

gmr_infra_share_price

 

For the last example we will look at PARSVNATH Developers which has 59% shares pledged, that is just crazy.

Parsvnath_pledged_shares

Any guess how its share price performed over the years?

Parsvnath_share_price

We can give many such example but hope you get the point.

As you can see from the above charts, there is no good reason to invest in companies which have pledged their shares, these companies have a tough time paying back their interest payments because overall the company is not doing so good which ultimately reflects on the stock price. Just by looking at the shareholding chart in the Insiders Page you can make the decision in less than a minute whether to invest or not. You can save your time, money and stress by ignoring such bad companies.

Vakrangee Share Price Crash

Vakrangee has been in the spotlight for all the wrong reasons. It’s share price crashed more than 50% in the last few days because there was a report in Mumbai Mirror that SEBI was investigating Vakrangee for share price manipulation. Such share price manipulation usually involves circular trading.

vakrangee_share_price

Vakrangee Share Price Chart

Now before we talk about Vakrangee, we will quickly explain what is circular trading. Circular trading is trading where the promoter or entities directly or indirectly related to the promoter buy and sell the shares for weeks or months. The shares are exchanged between these parties and the share price is slowly incremented. Normal retail investors or even institutional investors are not aware about this circular trading between insiders they just see that the share price is increasing and so even they are charmed by such share price rise and start buying shares. With all this buying by new investors the share price shoots up more. This goes on for a while and once the share price reaches the target set by the the promoter, the insiders start unloading their shares at high values and the insiders make a huge profit. The share price eventually drops and the retail investors are left holding the loss.

Now of course we don’t know if this actually happened with the Vakrangee but we searched the SEBI archives and found something interesting. Back in 2001 SEBI had conducted an investigation against Vakrangee because there were allegations of creation of artificial market and manipulation of the price in this scrip. The price of the scrip had moved from Rs.10/- to Rs.600/- during September 1999 to March 2000. Some brokers who were involved were banned from trading for 6 months.

In 2014 SEBI had imposed a penalty on one Vakrangee senior executive Prem Meiwal for delay in making disclosures to the stock exchanges with regard to change in his shareholding many times. Prem Meiwal was a VP of corporate affairs but he was also given the additional charge of assisting the company’s finance dept which is a bit fishy.

On Jan 25 2018, Vakrangee bought 20 lakh (2 million) shares of PC Jewellers. Vakrangee claims they had lot of money in the bank so instead of investing in debt or equity funds they decided to invest directly in PC Jewellers. This is not a good sign instead of using the extra funds to grow the company directly or returning the money to Vakrangee’s shareholders by issuing dividends, the company wants to be in the business of buying jewellery company.

 

Vakrangee has around 40,000 + kendra but what is a bit fishy is that all the kendra’s have the same phone numbers.

vakrangee_kendras

The current share price is down more than 50%, now it is your job as an investor to decide whether Vakrangee with such management is a good company to invest or not?

 

Sources

https://www.sebi.gov.in/sebi_data/commondocs/ar0102a_p.pdf

https://www.sebi.gov.in/sebi_data/commondocs/part-2_p.pdf

https://www.sebi.gov.in/sebi_data/attachdocs/1292328722714.pdf

Three peaks of Nifty PE

If you look at the long term Nifty PE chart right from 1999 to 2018 you will notice three distinct peaks at Nifty PE level of 27. During the last two peaks in 2000 and 2008 Nifty PE went a bit above 27 and then there was a dramatic fall for a year or two. In Jan 2018 the Nifty PE went a bit above 27 and it looks like it has started to fall down in the last couple of days.

Nifty PE Chart

Nifty PE Chart

Ofcourse we cannot definitely say that the overall market will fall in the next coming days but the probability of that happening is higher if you look at the previous behaviour when PE was at 27.

If the market does indeed fall dramatically then yes your returns will go down but it will give a much needed opportunity to buy good companies at a fair value. Such downturns are always good news for long term investors. Valuation Screener will help you identify which stocks are undervalued.

Buy when there is blood on the streets.

In Feb 2016 we made a post about the stock market is going down, it’s a good time to buy and said that we were buying an auto ancillary stock. The stock we were talking about was Motherson Sumi.

In July 2015 the Volkswagen scandal broke out, the company was caught cheating emissions tests. The software in some of their diesel cars could figure out when the car was being used in emission test(aka laboratory conditions) and change the engine performance to emit low nitrogen oxide pollutants and overall lower the performance. So it passed all the emission tests. Once the car was on the road, the software disabled the cheating module and the engine would emit 40 times the permissible amount of nitrogen oxide. A couple of researchers who were testing Volkswagen cars found out the cheating mechanism and broke the story, Volkswagen shares went into a free fall.

So what does all of this have to do with Motherson Sumi. Motherson is a key supplier of wiring harness to the Volkswagen group, the group has different companies under its umbrella like Audi, Porsche, Volkswagen and others. 40% of the revenue came from Volkswagen group, so investors who panicked started selling their Motherson shares and it went into a free fall as well.

Intelligent investors on the other hand instead of panicking welcome such opportunities. Although 40% of revenues come from Volkswagen group, the scandal affected only the diesel cars of Volkswagen company (not the rest of car companies of the group). Motherson chairman said that around 15% of the revenue came from Volkswagen company, the stock price meanwhile fell from 357 Rs to a low of 158 a massive 55% loss. Was a 55% decline in the share price justified when the scandal affected 15% of the revenue and it’s not like there was a permanent loss of that 15% revenue, Volkswagen obviously would fix the issue and orders for wiring harness would continue for years to come.

 

Motherson Sumi Share Price

Motherson Sumi share price drop and rise.

So this was a low risk high reward opportunity, investors who bought Motherson shares then would have been rewarded with more than 100% share price growth now.

PS – There is a similar opportunity in one company in the Pharma Sector right now which will we post soon. You probably will know the name if you check the Valuation Screener or if you get our Valuation Report emails.

Disclosure – We hold long position in Motherson.

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

Pharma companies are undervalued.

The stock market is near peak bubble territory. Check the long term NSE PE Ratio chart to see what happened when the PE ratio touched 25. Of course this does not mean there will be crash soon, nobody can predict that but if you look at history then it would make sense not to invest right now.

nifty-pe-ratio
The share price of most companies is overvalued right now finding good investment opportunities has become difficult but there is hope. Look at the NSE Sectoral Performance for the last 3 months.

nse-sector-performance

Most of the sectors have given good returns except IT and Pharma. The companies in the Pharma sector have been facing tough times. Such adverse conditions are good news for patient value investors because investing in companies who have taken a beating gives enormous returns down the line. The only condition is you have to analyse which stocks to invest in that sector.

Companies like Sun Pharma, Lupin, Divis Lab, Dr Reddy’s which were once the darlings of Pharma sector have taken a significant beating. Most of Pharma companies faced the wrath of US FDA due to tighter regulations.

Despite the short term bad news, Pharma companies are not going anywhere, they have promised to fix all the regulatory issues. We believe it’s a good time to invest in the Pharma sector. Of Course there is always a possibility that the share price of Pharma companies can fall even more, if that happens you will get to buy them cheaper. You can check our charts, valuation models of the individual pharma companies to see which ones are fundamentally good or bad. If you don’t have the tenacity to do the research you can invest in a Pharma mutual fund.

So even though the market is overvalued there are some hidden gems provided you know where to find them.