Tuesday, December 25, 2012
fooled by randomness: Stocks really sell at funny valuations
fooled by randomness: Stocks really sell at funny valuations: As Warren Buffet once said that the thing with stocks is that many a times they do trade at funny valuations and buying such stocks made hi...
fooled by randomness: Indian ecommerce...really sustainable????
fooled by randomness: Indian ecommerce...really sustainable????: While browsing for online books today, suddenly came across infibeam.com... I used to think that flipkart was cheap, who else can offer boo...
fooled by randomness: Why spicejet can be a multibagger
fooled by randomness: Why spicejet can be a multibagger: 1) India needs to fly. Travelling by air is not yet a common practice among many Indian household. Air travel in India is still in its infa...
fooled by randomness: PSU Banks seems like a no brainer
fooled by randomness: PSU Banks seems like a no brainer: Indian public sector banks looks like potential multibaggers. There is too much pessimism in the markets about the asset quality (potential...
PSU Banks seems like a no brainer
Indian public sector banks looks like potential multibaggers. There is too much pessimism in the markets about the asset quality (potential bad loans) of PSU banks which have made their valuation dirt cheap when compared to private banks (many PSU banks like andhra, allahabad trading at PE multiple of 3 while private sector banks like icici, yes bank are trading at PE of 15+). It is definitely true that public sector banks have much worse asset quality when compared to private sector banks; but in a country like Indian there is a zero probability of default for PSU banks as the government is standing behind them. It is ridiculous to think Indian Government which doesn't let a loss making company like air India to go bankrupt will ever let a PSU bank default. Common people right from CEOs to Chaprasi have their money parked in bank and yes mostly in public sector banks as even common man understands that PSUs won't default. The government will probably topple if people loose money due to PSU banks going bankrupt. The PSU banks understands this mentality of indian public and it is evident from the fact that PSU banks deliberately provide a lower rate of interest on deposits and still have a much larger market share of deposits than private banks.
The only possible concern for PSU bank is not defaulting but whether customers can shift their accounts to private banks because of service quality. But this looks like a remote possibility given that PSU banks service quality be it net banking, mobile banking, cash transfer everything is at par with any private bank. (This is something that happened with MTNL (Maharashtra telecom). While it is still free of default probability, its profit went down as people choose not to use its outdated services. Government though can ensure no default for a public entity it can't dictate public /customer about choosing what products /service they want. And so MTNL's profits dwindled and so did the stock price).
Once we understand that PSU banks are not going to default and neither will they go the MTNL way, we should think about triggers for PSU banks stocks to rally. The biggest trigger is of course RBI cutting interest rate. Banks make most profit when interest rates are down as it encourages people/cooperates to take loan and whenever number of loans go up so does the profitability of banks. The other effect of interest rates going down is that PSU banks which have to mandatorily hold huge amount of government bonds will start reporting huge profits on their bond portfolio (in layman terms bond prices go up when interest rates come down).
If even this is not enough to convince any investor about the potential of PSU bank stocks look at the dividend yield. Several PSU banks like Andhra bank, Allahabad bank have dividend yield close to 5.5% and dividend income in India is tax free. If someone puts money in fixes deposits today he is expected to earn 9% at most. If it is taxed at 30%; the final interest available becomes 6.3% (=9*(1-.3)). So, in PSU banks we have risk/ default free interest giving interest/dividend income close to any fixed income product available in the market and on top of that huge scope (probably 2-3 times capital stock appreciation) return in 1-2 years.
The only possible concern for PSU bank is not defaulting but whether customers can shift their accounts to private banks because of service quality. But this looks like a remote possibility given that PSU banks service quality be it net banking, mobile banking, cash transfer everything is at par with any private bank. (This is something that happened with MTNL (Maharashtra telecom). While it is still free of default probability, its profit went down as people choose not to use its outdated services. Government though can ensure no default for a public entity it can't dictate public /customer about choosing what products /service they want. And so MTNL's profits dwindled and so did the stock price).
Once we understand that PSU banks are not going to default and neither will they go the MTNL way, we should think about triggers for PSU banks stocks to rally. The biggest trigger is of course RBI cutting interest rate. Banks make most profit when interest rates are down as it encourages people/cooperates to take loan and whenever number of loans go up so does the profitability of banks. The other effect of interest rates going down is that PSU banks which have to mandatorily hold huge amount of government bonds will start reporting huge profits on their bond portfolio (in layman terms bond prices go up when interest rates come down).
If even this is not enough to convince any investor about the potential of PSU bank stocks look at the dividend yield. Several PSU banks like Andhra bank, Allahabad bank have dividend yield close to 5.5% and dividend income in India is tax free. If someone puts money in fixes deposits today he is expected to earn 9% at most. If it is taxed at 30%; the final interest available becomes 6.3% (=9*(1-.3)). So, in PSU banks we have risk/ default free interest giving interest/dividend income close to any fixed income product available in the market and on top of that huge scope (probably 2-3 times capital stock appreciation) return in 1-2 years.
Tuesday, August 7, 2012
Stocks really sell at funny valuations
As Warren Buffet once said that the thing with stocks is that many a times they do trade at funny valuations and buying such stocks made him rich. One such stock I recently came across is Career Point. This company provides coaching for IIT JEE and other engineering entrance exam. It is a debt free company trading at a PE of 8. Anything less than a PE of 10 is undervalued. Being an IITian myself I know how much demand for IIT coaching is there in India and Career point does have an excellent brand name. In fact Career point has a cash of Rs40 per share on its books and if we subtract this from the current market price of 150, the stock trades at a PE of 7.
I did a lot of browsing to see if there is anything fundamentally wrong with this company. The only reason I could find is that the company has a negative free cash flow which is due to the huge capital expenditure it is making in opening engineering and MBA colleges of its own. In doing so career point is moving away from its core strength of entrance exam coaching but after talking to a friend who is teaching at career point, I found that the university business of the company is actually doing well with classes scheduled to start from FY13 running at full capacity. If this really happens career point revenue should actually double within a year as current valuation of the company does not have any contribution from the university business.
To me, Career point fell all the way from 700 to 150 more in sympathy with the other education stocks like educomp. But whereas the smart /computerized classrooms provided by Educomp is a luxury, the coaching service provided by career point is a necessity.
Also in betting on the future of career point we are betting on the famous Indian consumerism which can be evident form the fact that all the consumer based stocks like BATA, Titan, ITC are currently trading at PE of over 30 inspite of the economy not doing well and it is only a matter of time before market realizes the true potential of career point
I did a lot of browsing to see if there is anything fundamentally wrong with this company. The only reason I could find is that the company has a negative free cash flow which is due to the huge capital expenditure it is making in opening engineering and MBA colleges of its own. In doing so career point is moving away from its core strength of entrance exam coaching but after talking to a friend who is teaching at career point, I found that the university business of the company is actually doing well with classes scheduled to start from FY13 running at full capacity. If this really happens career point revenue should actually double within a year as current valuation of the company does not have any contribution from the university business.
To me, Career point fell all the way from 700 to 150 more in sympathy with the other education stocks like educomp. But whereas the smart /computerized classrooms provided by Educomp is a luxury, the coaching service provided by career point is a necessity.
Also in betting on the future of career point we are betting on the famous Indian consumerism which can be evident form the fact that all the consumer based stocks like BATA, Titan, ITC are currently trading at PE of over 30 inspite of the economy not doing well and it is only a matter of time before market realizes the true potential of career point
Thursday, June 28, 2012
Indian ecommerce...really sustainable????
While browsing for online books today, suddenly came across infibeam.com... I used to think that flipkart was cheap, who else can offer books at 40% discount. And due to my mistaken notion, never thought of checking other ecommerce websites. But lola....enter infibeam.com and Homeshop18.com giving books the same books as flipkart at 50% discount. This makes me ponder if the buyers like were actually buying overpriced products before these ecommerce buzz set in or are flipkart and infibeam are fighting themselves to death. After a little search found an interesting blog
http://www.firstpost.com/business/flip-side-of-flipkart-red-ink-for-e-tailers-rip-book-shops-185400.html
Can't agree more with the writer of the above blog. A little search showed me that Amazon the world's largest ecommerce site has 14% expense for (in finance terms selling and administrative expense) running their operations. Now on a rs500 book on flipkart, there is usually a 40% discount. Add to that the courier charges of free shipping of rs20 by a conservative estimate plus say a 8% operational expense (assuming india is a low cost country and a 14% expense can be brought down to 8% in india); the total discount on the book amount to 500*.4+500*.08+20=260 (more than 50%). Lol, looks unsustainable by all measures.
These online portals will become ideal short sell once they get listed.....hope they survive long enough to get listed :)
http://www.firstpost.com/business/flip-side-of-flipkart-red-ink-for-e-tailers-rip-book-shops-185400.html
Can't agree more with the writer of the above blog. A little search showed me that Amazon the world's largest ecommerce site has 14% expense for (in finance terms selling and administrative expense) running their operations. Now on a rs500 book on flipkart, there is usually a 40% discount. Add to that the courier charges of free shipping of rs20 by a conservative estimate plus say a 8% operational expense (assuming india is a low cost country and a 14% expense can be brought down to 8% in india); the total discount on the book amount to 500*.4+500*.08+20=260 (more than 50%). Lol, looks unsustainable by all measures.
These online portals will become ideal short sell once they get listed.....hope they survive long enough to get listed :)
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