Factor 1 : How to evaluate the Promoter quality?

Its a million dollar question! Is there any collective mechanism to ensure promoter quality of a company with cent percent guarantee?  The obvious answer is NO.

That’s why including great investors like Rakesh Jhunjhunwala, Ramesh Damani  and others made mistakes while selecting few odd companies.

So I would like to quote a famous quote from one of the most famous American President, before discussing further.

You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.

Abraham Lincoln

From the above quote, If we can escape from the second group ( i.e. some of the people becoming fools all the time ), our share market success is bound to happen; and eventually we can differentiate between good, average and bad promoters.

In general, we may be able to classify the promoters in to four groups.

All the promoters comes to share market for collecting money from the public, but the inherent reason behind the collection of the money and future dealings will be different for each one. Based on that reasons and actions, I have made these classifications.

	Listing Objective	Profit Distribution	Other Remarks
Group 1	To create / improve a business	Shares equally among all including Public
Group 2	To create / improve a business	Shares only a minor portion with Public
Group 3	To create / improve a business	Swallow all the profit either by diverting it in to unnecessary investments or by showing operational loss by fudging accounts.	They seldom throw few bones to satisfy retailers.
Group 4	Just to collect money by fooling public, by showing a company which only exist in paper, with the help of photoshop and website!	Some time they show profits, only to rig the share price – normally during a bull phase - to ultimately pump and dump!	They continue as a listed entity to make more money by looting more people by applying lot of frauds or joining hands with operators.

In the above groups, group 1 is ideal, but at the same time very rare too. So as an investor, our aim should be to find promoters of Group 1 or at-least better half of group 2.

Note: Promoters are humans and are bound with human nature. So the migration from one group to another is possible over time (or generations) for either good or bad.

The only remedy for us as an investor is to be vigilant and analyze the latest happenings inside a company at-least quarterly. And also be ready to ask few following key questions yourself and try to find the answers in a particular context.

Key Questions

Q.		Whether the company dilutes equity frequently with out any solid reasons?
Q.		Whether the company issues lot of ADR or GDR to dubious foreign parties and later, after converting it as shares, the same is dumped to Indian public?
Q.		Company is showing consistent growth and profit, but how the money is utilized?
Q.		Whether the company invests lot of money in private / unlisted (and dubious) companies?
Q.		What is the dividend distribution ratio while considering the net profit?
Q.		Whether the promoter sells the shares in open market while preaching great future and giving advertisement on media?
Q.		Percentage of pledged shares and possible reasons behind the pledge.
Q.		Whether the company does unnecessary gimmicks like issuing bonus or FaceValue split etc while the share price is quoting reasonably low?
Q.		Trying to get frequent attention by vague or illogical news?
Q.		While all other companies in the same sector show major trend reversal and operational profit; whether this company still shows operational loss?
Q.		Whether the same promoters earlier promoted any dubious companies which eventually winded up?
Q.		Do there exist any cheating /default cases against the promoters?

[These are the few questions I got from my experience. It would be my pleasure to add any number of questions to this list, if needed, if provided in the comment column. ]

If there arise few answers which sheds doubt on promoter quality please stay away, since there is an entire universe of companies (more than 4000), out of which we can select for investing.

Even if we miss 1 or 2 genuine multibaggers (although possibility is very low) due to this vigilance, there is no need to worry at all, as based on the theory that You Can’t Kiss Every Pretty Girl in the world.

To sum up this section I would like to give a quote from our Legendary investor.

“The difference between successful people and very successful people is that very successful people say “no” to almost everything.”

― Warren Buffett

This is part 1 of series in 6 Most important factors to consider while searching for a Multibagger.

6 Most important factors to consider while searching for a Multibagger

Multibagger : This term is used frequently by lot of users and portfolio services, in different contexts. Even while showing just an 80% growth in their recommended stock price, they may use this word! But the actual meaning of the term is multifold appreciation / return in the share price. Like a four bagger means it multiplies the share value by 4 times and like 10 bagger, 50 bagger, 100 bagger so on.

Its more than 8 years since I started my investing career, and during this phase, I had seen lot of shares becoming multibaggers and also lot of shares gone in to dust. Few of the shares invested by me also became multibaggers, but very few are the companies I am still holding, thus effectively reducing my net asset value. So creating long term wealth have two parts, 1. Identifying the right stocks at early stage with multibagger potential, and 2. Having enough conviction to hold long enough to enjoy the multibagger returns.

In this post I am concentrating on first part, ie. How to evaluate a given tip / information about a company from any circle to conduct a detailed analyze and finally decide whether to go for it or not.

Based n my personal experience, I think the following six factors are very important as per the given order in a decreasing importance.

Factor 1: Promoters Quality  [Click HERE for details]

Promoters are the persons manage the company’s activities, and any long term sustainable return will be achieved for retail investors, only if, the promoters are above average r at-least average quality. No ship will reach its destination, if a thief is placed inside itself as a Captain!

Each of the factors I am going to discuss may require a lot of details, and I think it’s better to post separate articles for each of these factors later, in detail.

[Please note, there may be cases of multibagger return with unethical promoters managed companies also, but sustainability of the same is the question? For details see the link HERE ]

Factor 2: Business opportunity, scalability and sustainability

The second important factor t consider after evaluating the promoter is the business perspective of the company’s operation and it's niche.

Factor 3: Market Capital

The present market cap of the company should be evaluated. Few may raise their eyebrows after seeing this point. But I think it’s very essential, since an already large cap may not be able to grow at a greater rate in long term.

[Example: In-order to get a 10 bagger in 10 years and a 100 bagger in 20 years, we require a 26% CAGR. And I bet, TCS won’t be an 10 bagger in next 10 years nor 100 bagger in next 20 years, since it’s market cap is already 5 Lakh Crore – at best it may give market related return 14 – 18 % only, making it 3 to 5 bageer in 10 years and 13 to 27 bagger in 20 years]

Factor 4: Valuation

The next point is to get in to the ship at an reasonable level. Once the valuation becomes too stretched and along with the market cap also reaches threshold levels, and we may need to consider different parameters and situations.

Factor 5: Growth in quarterly results and debt levels

Check the overall debt level and their increase; along with the performance and results on a quarterly basis giving importance in that order.

Factor 6: Share Holding Pattern

The number of share holders and their distribution is also important. An already popular stock will be having mutual funds and others in it as investors. Where, a true multibagger return will be only possible if the stock is less popular. Also check for the promoters and retailers portions in the holdings, and number of retailers etc.

Each of these points mentioned require a detailed coverage, and few other factors also (dividend, bonus, FV split etc) required to discuss with these already mentioned major points. It will be posted one by one in the above order.

Happy investing.

Planning to post a List of stocks that must be Avoided.

Hi Friends, 

This is an appeal to all genuine long term investors...

I strongly believe that it's not just time to find next multibagger, but also to trace / identify all potential multibeggers inorder to help new comers who want to invest long term in fundamentally good madcap / smallcap companies.

We are moving in bull run and lot of crap stocks (majority are penny stocks)  are moving like anything. Lot of them (promoter / operator) are fooling retail investors (some of them publishing extra ordinary results but not providing a penny as dividend!! but increasing their pledge etc..) and lot of new comers fall prey to these market frauds.

  

"Only when the tide goes out do you discover who's been swimming naked." - Warren Buffett

And I strongly feel that its the duty of us to warn about a company, if we see all the read flags.

Sure we can see / categories companies to minimum three classes / cases.

Case 1. We are sure about it - fundamentally strong companies.

Case 2. We are not sure about it - ( may be a genuine company, but not sure).

Case 3. We are again sure about it but this time it’s a fraud company, and must be avoided.

And my aim is t make a list of Case 3 companies.

Any willing person can contribute to the comments by naming the company with 1 or 2 line reason behind categorizing them to this list. Later, I will finally publish and manage a list of these types of companies.

  

 My sample list of companies, as examples.

1.     FCS Software

Reason:- Lot of frauds, mainly fraud with issuing warrants to doubtful foreign parties, and they sell later it to Indian retailers!

2.     Kappac Farma

Still trading with a value more than 600 Cr MCap, with no sales and promoter holding!

I request all my readers to give any name of such company which you believe is a crap / fraud one.  

PS: The list will be published later after my study and once I get a sizable number.

Also note these companies share price may appreciate (short to medium term) due to other reasons but not related to fundamentals!!

Unitech : Present and future

We have just seen the past of Unitech (Link Here). Now, I am trying to analyze the present and future of Unitech.

Present:

As a real estate company Unitech is facing major effects from the slow down in economy along with high interest rate. Earlier during the bull phase they aggressively tried to expand with over dependence on debt, than cash flow.

But, if we consider the present indications, the company gradually reduced its debt (From 8000+ Crs to odd 2700 Crs (standalone)), and in process of trying to reduce the 6300+ Cr consolidated debt step by step selling of non core assets .

Valuations

At today’s CMP (Rs 21/-) the stock is valued at 31 PE. But considering the next financial cycle we cannot term it as expensive.

Future : What lies ahead ?

Barring the uncertainties, and neglecting few management issues, Unitech gives ample opportunities for a long term bargain hunter.  Can be added to portfolio with a 5 to 7 year view in SIP at Rs. 24/- or below.   

Logic behind the call

Unitech have on going projects of more than 38 million sq ft. At the prevailing low sales value it self per sq ft, they are selling more than Rs. 7000/- per sq ft. That will be having more value than 27000 Crs. At economic peak, company achieved a NP margin around 40%. If we assume in next bull phase, even if company achieves a NP margin around 30 %, that will translate in to 8000 Crs! (Caution: But some part of the projects might have already sold,so we can consider another alternative calculation)

In another angle: In last bull phase company increased it's sales from 250 Crs to 4000  Crs. (16 times). Taking half of the sale increase in next time will give us 8 times. Present sales are around 1700 Crs. So in the next cycle peak sales may be around 13000 Crs. And taking a very conservative net profit of 20 % alone also will give us a NP of 2600 Crs. If we assume a nominal PE this time (only 15), then also the total MCap will be 39000 Crs, and which is 7 times higher than the present MCap. Literally translate the target price to Rs. 140+ in the long term (May be in next 4 to 7 years).

(Disclaimer: These information’s are taken from latest Annual Report, and no guarantee for the genuineness of these figures. And above calculations are made considering these facts/values.) 

Disclosure : Not yet invested.

Arrow Coated Products: Results Update

At the initial scanning, the recent standalone quarterly result may look like almost ordinary with a (Quarter on previous year Quarter) net profits increase by a nominal 17%

(1.97 Cr from 1.68 Cr), although having a better sales increase of 33% (5.85 Cr from 4.39 Cr).

But the most important factor I am seeing after this result is the revenue increase from patent income (standalone). Below is given the company disclosed patent income in previous quarters.

Previous Quarters Income from assigning of Patent marketing Rights:

Qtr	Jun 12	Sep 12	Dec 12	Jun 13	Sep 13	Dec 13	Jun 14	Sep 14
Rs (Lakh)	43.45	43.38	43.85	129.88	278.44	150.68	239.29	436.34

Qtr to previous Qtr Growth in patent revenues                                 : 82 %

Qtr to Qtr (yearly basis) Growth in patent revenues                       : 57 %

Both these figures are very impressive. If the company can generate growth in patent revenue at this pace, going forward (both in standalone and consolidated), it won’t be a distant dream for us to see the trading terminals showing ACP in four digits!

Failed Shares like a Failed Rocket: Series - 3

The third and the final one on this series, I would like to pen about a company which made majority of the investors (particularly investors after 2006) in deep loss, mainly because of the valuations investors paid for the shares.

Real estate was the King in the previous Bull Run (2003 – 2008), and the share I am discussing is none another, but UNITECH.  Majority of the investor community might be familiar with the name. There are more than 6 Lakh retail investors shown in their latest share holding pattern by the company.

12 Year Chart of UNITECH

There may be mainly two types of reasons for people remembering UNITECH. Those who made a killing, by finding it early, and others who went like a flock to become the prey.

The obvious reason you may assume now is the company is bad. But company as such or their intentions were not that much negative. They too struck with the overall sluggishness and slowdown.

But what made the investors loosing their hard earned money up to a great extent? We will look in to the details and the level of loss happened to investors shortly. But before that we can look in to the details of those who made a killing by entering early and exiting at appropriate time.

Those who made a Killing

In the entire Indian share market, you can show only very few that increased the value with a very limited time. In the case of Unitech, with in a time period of less than 5 years, the share price amplified from Rs 45/- [Jan 2003] to Rs 71000/- ( Ofcourse adjusted for split and bonus, [Rs. 546 * 130 Share in Jan 2008]).

A Rs. 10,000 invested in 2003 might have become Rs. 1.57 Crore that too with in 5 years!!

A detailed chart showing the growth

What happened next?

By the time everybody was numbing about the Real estate sector, the reverse trajectory started. And an investor who put money in the peak might have lost more than 95% of the capital till on today’s market price.

The Reason

Year	2002 - 03	2003 - 04	2004 - 05	2005 - 06	2006 - 07		2007 - 08
Sales (All figures in Crores)	239	373	509	653	2503		4140
Net Profit (NP)	11.6	14	29.9	69.6	983		1661
Total Debt	132	131	323	686	3605		8117
Share Price	43	103	349	6346	427		546*
Total shares (in Crores )	1.24	1.24	1.24	1.24	81.16		162.3
MCap	53.3	127.7	432.7	7869	34655		88615
MCap/ NP ratio	4.6	9	14	113	35		53
Remarks	At all of these valuations, it was an attractive value buy.			Gradually beginning to be risky		Assigning a 50+ PE for a company with almost 1 Lakh Crore MCap ?   Along with a steady increase in debt level (that too increasing more than the total sales) Ridiculous!!

The above table simply shows how much ridiculous the valuations were at that time. Surely at initial growth time, companies may a command higher PE’s and increase debt, but assuming a 50+ earnings to valuation was too much for a company trading with a MCap of around 1 Lakh Crore! along with alarmingly increasing debt levels; but people were very much positive or literally blind at that times.

So while investing your hard earned money, always try to find the comfort zone based on valuation view. In market there are enough opportunities for every patient investor, so it doesn't matter even if you miss few companies.

PS : This is just for fun, while Unitech was trading around its peak (ie at Rs 70000  [or actually at Rs 500 level, after the split and bonus]), in one popular investment magazine query column, there was a question from an investor asking when Unitech will hit Rs 5000? (ie 10 times from peak = almost 9 Lakh Crore MCap), and surprisingly the reply was, it will hit the target for sure in near future, but we cannot give a time frame! 

I hope atleast few readers might have gone through that query and answer :)

Happy Investing!