India's Fantastic Four Stocks: DLF

These four stocks are probably most widely held by retail/HNI investors from the days of previous Bull Run in anticipation that they will at least come back to the price at which they have invested in them. However, I strongly believe that given their extremely weak fundamentals the chances of them coming back to their 2007 highs are quite remote and market offers better investment opportunity than holding on to these Fantastic Fours (pun intended).

They also suffer a phenomenon called BASE EFFECT. DLF was around Rs. 1000 in January 2008 and now is at Rs 225, thus it’s a fall of around 77.5% in value. However, if I assume DLF to go back to the levels of Rs. 1000, then it has to rise by over 350% and given its fundamentals and valuations the chances of DLF rising by over 350% even in 3-4 years time frame is quite remote.

Moreover, these four stocks are most talked about 90% of analysts on all TV Channels and there exists a support and resistance theory at every Rs 20-30 just trapping investors at every fall and compelling them to average more and more.

DLF is the first of the 4 stocks in my series of India’s Fantastic Four Stocks.

Why DLF is a Fantastic Stock?

• · Consolidated Sales have fallen from around Rs 14,500 crores in FY08 to Rs 7500 crores in FY10

• · PAT has fallen from around Rs. 7,800 crs in FY08 to Rs. 1800 crs in FY10

• · Despite Rs 7500 crs of Sales and Rs 1800 crs of PAT there has being a net cash outflow of Rs. 260 crores in FY10

• · Total Debt has increased from Rs. 12000 crs to Rs. 21,000 crs

• · Total Share Capital has increased from around Rs. 1300 crs in FY08 to Rs. 6300 crs in FY10 despite an IPO in FY2008

o Rs. 5000 crs of new share capital have being given to preference share holders thus, further reducing the rights of common equity holders

o Investments have gone up from Rs 900 crs to Rs 5000 crs of which around Rs 4000 crores is invested in money market and other mutual funds

o Loans and advances to subsidiaries and associates have increased substantially

• · A BUY back announced in falling markets @ the price of Rs.500/share in falling markets to support the stock price followed by a QIP 3-4 months later

· Over 215 subsidiaries spread across India and high number of inter company transactions (including capital and borrowings) and a regional auditor

• · Stock Price Down from over Rs 1000/share in January 2008, to current levels of Rs 225/share and even below its IPO price

• · A sluggish real estate market in India both in terms of pricing and volume

• · Higher interest rates would hurt the margins further and also impact the real estate demand in India

• · A trailing twelve months P/E of around 23 with sluggish growth and increasing debt

In this Fantastic Four series you already know the first one i.e. DLF. Check out this space regularly to know the other 3 members of this team of Fantastic Four.

Happy Investing...!!!

China: Tax on Purchase of Second Home

In order to cool the over heated Chinese economy in general and property prices in specific the Chinese Government has levied a property tax applicable to local residents for the purchase of a second home or more, and also non‐local residents for any new home purchase, starting with the cities of Chongqing and Shanghai.

The tax structure in Chongqing for homes with selling price 2‐3 times higher than the city average, the tax rate will be 0.5% and will increase to 1% for homes with price between 3‐4 times the city average, and further to 1.2% for homes with price above 4 times the city average.

The taxable value will initially be based on the purchase price, and may switch to be based on appraisal value in 3‐5 years' time. The property tax will also be applied to existing and newly purchased villas.

This move by the Chinese authorities which may also follow to the other cities in China has a dual implication on the global markets.

On one hand it sells a strong signal that the China is in a desperate situation to control its housing bubble and prevent a US like situation and will introduce further such measures as well as rate hikes in near future to cool down its economy. This could have serious implications for the global commodity and metal markets and could lead to a correction in the shares of Indian metal and mining companies.

On other hand the optimists could take this move as a good long term safeguard for the economy despite having negative short term implications. This would mean that China will not burst like US as a bubble because if this happens then the implications for the global economy could be much severe compared to the US burst. This will send signals to the commodity and real estate speculators in China regarding the government's stance against rising prices and hence would give a breather to the already high Chinese Inflation and hence result in slower rise in the interest rates in China.

Thus, I would take this move as a positive one for the Chinese economy and hence for the global commodity and capital markets.

Happy Investing...!!!

Rate Hike Likely in Q3 RBI Policy

IMF Yesterday in a statement said that the RBI must increase its key policy rates in order to control inflation which is rising beyond its control. The food price inflation released yesterday was at its year high of around 18.3% and way above RBI’s comfort zone.

Thus I strongly believe that in its Q3 policy review RBI is most likely to increase its key rates to tame the inflation which would be negative for the banking and real estate sector in particular and overall markets in general because of an increase cost of funds.

Moreover, most of the banks are also increasing their deposit rates which will lead to a higher base rate and eventually a higher borrowing costs for India Inc. leading to a hurt in their bottom line.

The rising crude and commodity prices (especially copper) are already hurting the profits which with increase in borrowing costs will make things only worse.

Any new long position in the markets if taken should be after 14^th or 15^th of February to join the budget expectation rally, till then chances of a near term upside remains extremely unlikely, however one can take short positions in Nifty with a stop loss above 6050 with a target of around 5700.

BUY What has NOT Fallen

After hitting its year highs in November, the markets have corrected by almost 8% with the Mid-Cap index falling over by 10% and above.

The key reasons behind this fall could be:

• Concerns regarding sovereign default in Europe
• Rising inflation and a tightening monetary condition in China
• Corruption charges on government agencies which brings down the attractiveness of India as an investment destination, and
• Sell of in the mid-cap space because of SEBI's allegation on many companies for insider trading

A lot of people whom I know including even market participants asked me to suggest them few stocks that were beaten down in the down turn. Then someone also suggested me as to why should you bother about the stocks which have fallen and BUY them just because they are cheap and why not focus on very few stock in the mid-cap space which despite this turmoil have not corrected.

The Idea I am trying to say is that "There is no Smoke Without Fire" there has to be some reason because of which most of the mid-caps had fallen and so why not focus on the good quality ones which stood firm in the sell off or on the ones in which you see absolutely no reason for a sell off, but have still fallen in the markets. Picking the latter one requires more analytical and reasoning skills compared to the former.

So to hunt for some good stocks I took NSE Mid-Cap index as my sample base and out of 100 stocks there are only 10 stocks which have not fallen from there highs of early November and of them some of the really good ones which I believe have a good business, good track record of operational performance and strong management areand should be given a thought are Indraprastha Gas, Glenmark Pharma, Exide Industries, Educomp Solutions and Areva T&D.

Its just like when you go to see a horse race you never bet on the loosing horse but on the winning one and so I believe the same logic should be applied in the Equity Space and the looser should not be chased as they will be the first ones to be hammered in the next leg of mid-cap selling.

Crest Animation... A BUY in the SELL OFF

I Believe that in the current sell off one of the stocks that investors should consider buying with a long term perspective is Crest Animation Studios at the current market price of around Rs. 69. The key rationale I believe are:

• One of the only animation company in India who instead of only being an outsourced animation content provider, also is a partner in the movies it provides animation for

• JV with Lions Gate Entertainment of US, one of the biggest production houses for providing animation to their movies and having a profit share in the same

• 1^st movie Alpha and Omega released in September 2010 and have already done a business of over $40 million and is poised for a world wide release in 2D and 3D space, moreover the movie is in Oscar eligibility list, the 1^st animation movie from India in this category

• On an average an animation movie produced by major production houses of US makes around $ 100 mn in profit

• I believe Crest’s Alpha and Omega to do 50% below average, which gives a profit of around $50 million

• Here Crest’s Share being 25% of profit, gives it a value of around $12.5 million

• Which is around INR 56 cr of profit, given total number of shares, comes to EPS of around Rs. 25/share, which it would book over FY11 and FY12 (normal practice in movie industry)

• Thus given the current market price of around Rs. 68 gives it a forward P/E of around 5.7 in a high growth animation industry where peers like Prime Focus, Tata Elexsi and DQ Entertainment trade at a P/E of over 20 times their forward earnings

• Even taking the worst case scenario of a forward P/E of around 10 (50% below the industry average) the fair price comes to around Rs 150, which is double from the current levels

• This EPS expansion or growth will continue because it is slated to release one more movie in tie-up with Lions Gate in 2012 titled “Norms of North” then in 2013 titled “Ribit” and from then on a movie each year

• De Shaw holds over 15% of the company and Deutsche Bank holds around 7%

The only risk with the company I see at the current point in time is that its still loss making and the first set of earnings will start coming from the quarter ending March 2011.

Happy Investing...!!!

Some Strange Statistics and Deja vu

I was going through the morning report published by Kredent Advisors and some very strange numbers I have come across which I would want to highlight. These numbers conflict each other to great extent and does not highlight to true recovery or may be highlights that the recovery is hollow.

• Over the year the crude oil prices have risen by 2.93%, however YTD the gas prices have fallen by over 40%. The crude oil and the gas are more of less substitutes and this weird movement in their prices I believe could be because of the reason that crude gets more media attention and hence in order to show to the world that recovery is genuine the crude have being kept at a higher level compared to gas

• The Baltic dry index have fallen by over 17% (YTD) whereas the price of copper have risen by over 14% and that of other base metals like zinc or nickel or aluminium have also risen by a decent amount. Now Baltic dry index measures the freight charges that the shipping companies around the world charge to ship dry substance around the globe, the higher the real demand for metals is, the higher are the freight charges and hence the higher Baltic dry index. The reverse movement in to two I believe that could be because of a lower real demand for the metals, however the speculative demand in the futures market resulted in their price rise

• Gold and Silver YTD is up by 24% and 44% respectively, whereas the US equities is up by around 6% and the USD is only down by around 4% for the same period. This trio-logy also denies the correlation between the three assets. If the world is so bullish about the equities, with emerging markets like India being up by over 16% ytd, then why are they buying gold. They may say that they are loosing the confidence in the paper money, but then they should sell the USD which is also not down significantly. What has happened that in the first half of the year the gold rose because of EU crisis and people buying gold as a safe heaven and in the second half it rose because of a weakening dollar. Whatever reason they may say to speculate on gold, I believe that GOLD and Equity and Currency can not and will not move in the same direction for longer

With Indian rupee also gaining strength hurting the export oriented sectors, lack luster Q2 earnings perform and no upward revision in Sexsex's FY12 earning by broking houses and on top of that BIG TICKET IPOs and people borrowing DPIDs and buying Coal India IPO application, all highlights the same kind of scenario as in 2008 beginning. So my advice is please be cautious.

It all appears like a Deja vu...!!!

Why Compact Disc will Not be a Multi bagger...?

Couple of days back I came across a brilliant company. Its one of th biggest animations players in South Asia (claims to be).

Here are some of the key factors which at the face gave me an impression that I have come across yet another multibagger:

• A compounding growth rate in profit of over 75% in the last 3 years and that of over 60% in sales
• Part of a very fast growing animation content outsourcing segment in India
• ROE of whopping 52% and ROCE of around 43%
• Almost debt free (D/E of 0.22)
• Operating margins have been continuously expanding
• Couple of movies lined up to be releases in the next one year one "Eternal Love" based on the story of Taj Mahal and other a foot ball based movie based on Pele, this would further expand the margins and gives revenue visibility
• Part of 200 companies list that the FORBES magazine recently came up with, best under a billion dollar companies in Asia and growing further

Over and above all this, available at a throw away valuations. A trailing P/E of only around 1.3 and a Dividend yield of around 3.1%.

This, kind of story is a dream for any fundamental value stock picker, even the likes of Peter Lynch and Buffets of the world would want to look into this kind of company at this cheap a valuations.

However, as an analyst what I have learned over the years from my experience and reading these veterans that whenever something like this sounds too good to be true, there has to some catch (on 8 out of 10 occasions and on remaining 2 you actually find a MULTI BAGGER). So, the catch with this company is its management.

The actions of management is highly susceptible and that is why market is not rewarding the stock.

• Over the years despite the company showing such a record growth, the management shareholding has fallen from around 40-45% to around 20%
• The shareholding pattern of the company (for June 2010) shows 75% of the shares as being held by the public. My guess is that a large chunk of these are ‘benami’ holdings of insiders who offload shares once the price takes off
• That is why the company every now and then comes up with big ticket rumors like acquiring some company in UK, new movie tie ups and later no such action actually takes place
• The biggest problem is that the company is promoted by the infamous Seengal group and its one of the Directors Rashmee Seengal also belongs to the same group.
• The Seengal group in the past has faced SEBI and also CBI probes for floating several bogus companies and raising money via IPO and announced various projects which never happened to see the light of day. These included an LPG-related business, a hotel company and at least three more ventures.

Thus,the market which now is smart enough to see and realize these things are not giving any premium to the company which at the face of it looks exceedingly brilliant and even though valuations are cheap and business is great. It wold be difficult for the stock to generate any returns.

Happy Investing...!!!