Hindustan Tin Works.............Can it execute properly

I had talked about Hind Tin Works few weeks ago on my blog as an arbitrage play. The value of its stock (approx 44/-) was lower than the book value per share (57/-). After that post the stock has already appreciated more than 10% and is currently trading at 48.75/-. I also did some further research to understand the company's business and have documented the same in the blog below for everybody to review.

The company is in the business of metal cans based packaging for all kinds of FMCG products. Recently they have also added 2 piece beverage can to its product portfolio after tying up with Rexam Plc of UK. Rexam is among the top producers of 2 piece beverage cans globally. The regular tin based metal container business of Hind Tin is nothing to talk about. It is pretty generic and I believe the company does not have any moat in that business.However, the 2 piece beverage can business gives Hind Tin some temporary moat as it is the only manufacturer in India. The nearest competitor is still 12 months away from starting domestic manufacturing. Further details about the company's products, their manufacturing infrastructure, basic financials and recognitions received can be obtained from the website directly.

http://www.hindustantin.biz/about_us.asp

The growth in modern retail and changing consumer demographics in India will further drive the demand for attractive packaging of FMCG products in India. Packaging is the biggest cost component for any FMCG company and increase in consumption will directly increase the overall market for packaging solutions in India. Hind Tin with it's integrated facilities from metal can manufacturing to printing and labeling is in a good position to capitalize on this increasing demand for packaging solutions. The addition of 2 piece beverage can to its product portfolio will be the biggest revenue and margin driver for Hind Tin Works Ltd in future.

Valuation:

The company has grown it's topline at a CAGR of 10.52% and bottomline at approx CAGR of 40% from FY 03 to FY 07. Correspondingly the net margins have been improving steadily from 1.33% t0 3.4%. With the introduction of 2 piece beverage can these figures should improve in FY09. The company already paid 15% dividend on a face value of 10 in FY07. With current share price of 48.75/- the dividend yield comes close to 3%.

The company is trading at a P/E ratio of 8.15 and 14.5% discount to its book value based on FY07 financials. This is cheap when compared to its peers in Indian markets. It is very difficult for me to estimate the future earnings potential of Hind Tin Works since I am not clear how successfully they will be able to execute their future growth plans. However a profitable manufacturer with a niche product can be valued at 1.5 times its book value. That means the value of Hind Tin works should be close to 57 x 1.5 = 85.5/.

Risks:

The biggest risk with Hind Tin Works Ltd lies in the management's ability to execute their plans for future growth. The current market for beverage cans is estimated at 20 crore cans per annum while Hind Tin has a capacity to make 45 crore cans annually. Besides new players will come in market next year which will add another 60 crore cans to the domestic capacity. Oversupply could be an issue if the offtake of cans is not as fast as Hind Tin has anticipated. They also carry significant commodity risks. I am not sure whether Hind Tin is adequately hedging it's commodity risks. I believe there is limited long term moat in Hind Tin's business. It is a pure volume play and margins are pretty low. Any severe downturn in Indian markets will be a true test for their business model. Their 2 piece beverage can project is pretty new. Specific details are not available in public domain to assess the earnings potential of that business. If you come across any specific details in public domain please forward that to me and I will be more than happy to analyze the impact on Hind Tin's business.

In spite of all these risks I found Hind Tin Works current position in Indian markets and share price very attractive and hence added it to my personal portfolio. As I have always said with my previous post; please do your own homework and only buy Hind Tin if you are convinced. If it is not suitable for you please avoid it as there are more than 5000 companies listed on India bourses to choose from. If you have any questions or comments feel free to contact me at secmoney@gmail.com

Regards,
Bargain Hunter

Disclaimer: Investing in stocks is very risky and an individual can loose all the money invested in equity markets. Please consult your financial advisor before investing in any stocks.

Disclosure: I have this stock in my personal portfolio at the time of writing this blog

IS GMR Infra Overvalued ?

Dear Readers,
Is there anybody who feels that GMR Infra is overvalued relative to its current and future earnings. I am not able to decide because GMR Infra does not have long enough history to evaluate its past performance. I want to throw this question in public to see what some of the readers of this blog think.

I know it has lot of projects under construction and will be bidding for more projects in future but the fact is that it will also be draining lot of cash in servicing debts that have been raised to finance these projects. Infrastructure is the momentum sector now but then Information Technology (IT) was the hot sector in 2000 and look what has happened to all the IT bellweathers even though they are still growing at 15 - 20% annually. In the long run I believe stock price always reflects the true value of the business and GMR Infra's stock price may be currently way above the intrinsic value of it's business.

Does anybody shares this thought?

Regards,
Bargain Hunter

DISCLAIMER: I do not have any long or short positions in GMR Infrastructure

SEBI finally permitts Short Selling for everybody.............

In a landmark day for Indian markets; SEBI (Stock Exchange Board of India) once again permitted short selling on stocks in Indian markets by all participants including FII and DII after banning the practise in 2001 following the KP meltdown. The detailed piece of news can be read from Business Standard's website below:

http://www.business-standard.com/common/storypage_c_online.php?leftnm=10&bKeyFlag=IN&autono=31557

I am not going to repeat the press release her but one important point I would like to mention is that this is a very positive news for Indian markets. This will now create what we call as "Sell side" in Indian stock markets. It will create a true counter balance for all the bulls in India. Till now the bears were handicapped as they could only play in the F&O segment. But after an appropriate Stock Lending and Borrowing (SLB) mechanism is put in place the playing field would be even for both bulls and bears. That will help us in true price discovery for each stock. To start with.......short selling will only be allowed in F&O stocks but I believe at a later date it could be allowed in all the stocks listed on the bourses like any other advanced market in the world. Also this could potentially give rise to new financial products like a long - short funds, pure short funds, etc. Considering the bull run in India for last 4 years and the potential of a slowdown over the next 2 years I believe there will be lot of potential opportunities to short overvalued stocks.

If anybody shares my toughts, disagrees with it or have any questions feel free to contact me at secmoney@gmail.com

Regards,
Bargain Hunter

ANG Auto Ltd...........Trading below its buyback price of 215/-

During these high interest regimes most of the interest rate sensitive stocks have taken a beating. Some of the biggest losers have been in the auto ancillary sectors where stock prices have been cut in half. Few months ago I wrote about Sundram Fasteners in my blog as an attractive candidate for long term holding. After writing about it on my blog the stock has appreciated more than 10% and was trading around 56/- yesterday with good volumes.

Introduction:

Another good company in the auto ancillary sector is ANG Auto Ltd (previously called as ANG Exports Ltd) It is a Delhi based company involved in manufacturing of various components and sub assemblies for braking, suspension and transmission systems for commercial vehicles. It also has a unit in Sitarganj which manufactures Trailers that can be attached behind a tractor trailer to haul 24 and 30T loads. Detail information about the company can be obtained from its website

http://www.anggroup.biz/

Positive Factors:

Currently most commercial vehicles in India are fitted with manual slack adjusters. One of its key product called automatic slack adjuster has also got an Indian patent on it. Currently most commercial vehicles in India are fitted with manual slack adjusters. Very soon due to changing laws and advanced automotive designs these manual slack adjusters will be replaced by the automatic versions. This will positively benefit ANG Auto due to its existing relationships with manufacturers like Ashok Leyland.

The biggest revenue and margin driver for the company going forward will be the trailer segment. The company has a current capacity to manufacture 500 trailers a month and claims to be the only organized player in India. Rough estimates put trailer demand in India upwards of 1,000 units a month which means the company currently has a capacity to satisfy 50% market demand in India. Improving road infrastructure and supreme court's ban on overloading is bound to increase the sales of trailers because the cost / kg / km for trailer is approximately 30 - 40% lower than in typical trucks. Also increased containerization of domestic cargo will further strengthen the demand for trailers.

Even in the current slowdown in auto ancillary industry the company is able to maintain its operating and net margins in double digits and better than most of its competitors.

Negative Factors:

1) ANG Auto derives significant amount of its revenue from export market which makes it susceptible to currency fluctuations
2) Domestic demand is highly sensitive to interest rate and strength of the overall economy
3) Material cost Inflation is always a risk for commodity intensive business like ANG Auto.
4) Sales to Ashok Leyland did not materialize as projected while constructing the Sitarganj unit

Near Term Catalyst for Stock:

The company announced that it would buy back shares upto 25% of its capital below 215/- about a month ago. What does that tells you is that the company thinks it shares are highly undervalued and is willing to commit its own money to provide better returns to its shareholders. I think the shares should be trading around atleast 215/- levels...........if not more. As per data from corpfiling (http://www.corpfiling.co.in/home/homePage.aspx) insiders also have been buying decent amount of stocks since the buyback was announced.

Valuation:

The stock trades at a P/E ratio of 9.08 and a P/B ratio of 2.7/- with FY2007 eps of 17.51 as per (http://www.moneycontrol.com/). The auto ancillary sector is expected to grow at a CAGR of 15% till 2015 as per ACMA (Automotive Component Manufacturers Association). If we assume that to be true and also assume that the company will atleast grow at the rate of overall sector growth then the stock should atleast attract a P/E multiple of 15 from the market. This will give us a value = 15 x 17.51 = Rs.262/- Of course we are making an additional assumption that there will be no further dillution in equity. I think due to the buyback arrangement the equity of the company will go down in near term which will make the stock look even cheaper.

I feel there is a decent probability to make money in ANG Auto and hence bought it for my personal portfolio. If you are not convinced about the ANG story give it a pass.......I promise you will get lot of other good companies to invest in India. As always if you have any questions feel free to contact me at secmoney@gmail.com or drop a comment at the blog itself

Regards,
Bargain Hunter

Disclaimer: Investing in stocks is very risky and an individual can loose all the money invested in equity markets. Please consult your financial advisor before investing in any stocks

Disclosure: I have this stock in my personal portfolio at the time of writing this blog

Arbitrage opportunities............

Sometimes the best way to make money with minimal risk is trade on arbitrage opportunities. One such arbitrage play is to buy stocks trading below their book value and then sell them when they reach closer to their book value. The assumption is that over the period of time the market will realize that it is not worth selling any company below the book value and hence will raise the share price to bring it closer to the book value. Of course like any other investment activity we need to have caution with this approach also. However, we need to make sure that there is no potential risk of erosion of book value otherwise the virtual profits that we assumed before buying the stock could vaporize very easily. Some of these stocks that I came across recently in Indian markets are
(Book value and share price for all these companies have been obtained from www.livemint.com on 6/12/2007)

1) Hindustan Tin Works Ltd:-

Current share price = Rs. 44.65/-
Book value per share = Rs. 57.95/-
Discount in share price as compared to book value = 23%

2) Vardhaman Textiles Ltd:-

Current share price = Rs. 151.05/-
Book value per share = Rs. 189.03/-
Discount in share price as compared to book value = 20.10%

While analyzing a company's book value please make sure that you are calculating the tangible book value. Remove all the intangibles and goodwill to get the cash value of a companies asset. Also make sure you understand the company's business and quantify any erosion in book value due to future risks. These things will help you understand whether there is a real arbitrage opportunity or not.

As I have always recommended in my previous post please do your own homework before you make a buy or sell decision on any stock. If you cannot understand a company and it's business it is always better to give it a pass. There are more than 15,000 listed companies to choose between Indian and USA markets.Feel free to drop me any questions or comments on Regards,

Bargain Hunter

FULL DISCLOSURE:- I own shares of Hindustan Tin Works Ltd in my personal portfolio and have recommended Vardhaman Textiles to friends and family.

DISCLAIMER:- Investment in equity and equity related instruments is extremely risky and there is every possibility you will loose all the money that you invest. Please consult your financial advisor before making any investment decisions.

Simpson Manufacturing...........Is there a potential opportunity

Due to the current downturn in housing industry most of the companies associated with it have been badly affected and their stocks have plunged. Investors have turned so bearish on building materials sector that some good companies have been trading well below their intrinsic value. One such company is Simpson Manufacturing, Inc (NYSE: SSD)

INTRODUCTION:



SSD is in the business of manufacturing Stainless Steel Fasteners, Heating Furnace vents and continuous shear walls for commercial and residential buildings. Majority of their sales are generated from USA, Canada and Europe. In fact their international sales have been growing at a faster pace and now constitute almost 20% of their revenue. More details about their products can be obtained from their website http://www.simpsonmfg.com/


VALUATION:


When I ran the DCF analysis on Simpson Manufacturing for a 10 year period (Assuming FCF = $78 million for year # 1, growth in FCF = 17%, discount rate = 15%, net shareholders equity excluding goodwill = $650 million, number of shares = 48 million) I got the intrinsic value close to $45/- per share. Now I am definitely not Warren Buffet who can accurately judge the intrinsic value of a company. However at today's current price of approx $29/- per share my Margin of Safety (MOS) is approx 35%. That means I can be off 35% in my calculations and still do fine. Please note that I am not assuming any dillutive effect due to increase in share count over the 10 year period and I am also assuming that at the end of 10 years the business can be sold for 10 times FCF. I have pulled all my number from Q2, 2007 quarterly report & http://www.morningstar.com/


MOAT:


What is the moat around Simpson's business? I don't really understand that at this moment and hence currently I am doing more research to learn about this? This is one of the reason I have not bought SSD yet.


FINANCIAL STATISTICS:


1) According to http://www.morningstar.com/ SSD's average Return on Equity (ROE) from 1997 to 2006 is 18.43% while average Return on Assets (ROA) over the same period is 15.83 %. ...................Pretty strong performance.............However current ROE and ROA have been around 13 % and 11% respectively.


2) Return on Invested Capital (ROIC) have been consistently above the cost of capital. In recent quarters when the market has been really bad for building materials sector; Simpson's ROIC has been around approx 19%.............I would say that's a Darn Good Performance........


3) Operating margins and EBT margins have averaged around 17.91% and 18.25% respectively for the time period from 1996 to 2006. Since SSD has never worked with a net debt situation from 1996 to 2006 they have always earned interest income as compared to paying interest. As a result the EBT margins are higher than operating margins.


4) Shareholder equity has grown at a CAGR of approx 19.75% excluding intangibles from 1996 to 2006.............


5) Current dividend yield of approx 1.4%


RISKS :


1) SSD's profitability is very much dependent on the cost of stainless steel. There has been a tremendous boom in steel industry which has been hurting SSD's margins. If the prices of this commodity continue their upward trend SSD's profitability may suffer.


2) A severe downturn in commercial and residential housing industry in USA for a prolonged period of time will deteriorate profitability and affect margins severely.


3) Slowdown in international markets for residential and commercial construction will affect SSD negatively.


4) Business risks are not adequately diversified across industry and geography.


5) Competition from low cost countries like China and India in fastening and building material markets will put pressure on SSD's financials in a deteriorating market.


I cannot think of any other risks at this moment. If any of you come across other risks associated with SSD or the moat around its business please let me know. I am very interested in learning about them . You can leave your comment at the blog itself or drop me an email at secmoney@gmail.com


As I have always said in the past...........Do your own homework and buy Simpson stock only if you are comfortable........otherwise just avoid it.........There will be lot more opportunities in future.


Regards,
Bargain Hunter

FULL DISCLOSURE:- I do not own Simpson Manufacturing's share at this point of time but I may buy that at some future date.

DISCLAIMER:- Investment in equity and equity related instruments is extremely risky and there is every possibility you will loose all the money that you invest. Please consult your financial advisor before making any investment decisions.

Indowind Energy........Is it a buy or sell candidate

Wind energy companies have been getting lot of buzz after the mega successful IPO of Suzlon. One such counter that is smoking hot in Indian markets is Indowind Energy. In just 2 months since its listing the stock has gone from 65/- to 186/- . Close to 300% gain............Can't beat that..............There is a mad frenzy to get in this stock at whatever price available. However, my view is that people should curb their enthusiasm and analyze the business potential before really getting into this stock at current levels.

Before starting my research I surfed the web to see if somebody else has already done the research that I need. Sometimes you can find good articles on the web which may eliminate the need for you to do your own research. I mean there is no point in duplicating efforts. Two such articles on Indowind energy have been listed below for your reading.

http://ipoanalysis.blogspot.com/2007/08/indowind-energy-ipo-note.html

http://sify.com/finance/fullstory.php?id=14512634

One thing was quite clear to me that no promoter would try to list his IPO below the market price in the current bull market. If Indowind energy was truly worth 186/- the promoter of Indowind would not have asked for an IPO price of 65/-. That itself was a warning signal for me to not buy this stock at current levels. Friends.........you don't need a great deal of financial knowledge to understand the value of stocks.............just a little bit of common sense, business acumen and basic mathematics is quite sufficient to avoid losses in the markets.

One more important thing that we need to understand is that wind energy is currently very inefficient for commercial production. I read somewhere that efficiency of wind farms is only 35% as compared to 60% plus for conventional power plants. Wind technology has to advance to a level where it can start achieving the efficiencies of conventional power plants.

Carbon credits (CER) is one reason why Indowind is getting all the hype. I saw that Indowind has 12.3 MW certified by United Nations Framework For Climatic Convention (UNFCCC) for generating Carbon Emission Reductions (CERs). There is a 15MW wind farm project in Rajasthan which generates approximately 1,00,000 CERs annually. Using this logic I have made an attempt to value Indowind's shares. Please check the source of my information below.

http://www.ecofys.nl/nl/publicaties/documents/Ecofys_CCD_EN_Mrch2006.pdf

Back of the Hand Valuation:

The value of CER can vary from 7/- to 15/- euros depending on market conditions for carbon credits. Assuming the most optimistic scenario; potential revenue for Indowind energy from carbon credits at today's exchange rate could be approx 1,00,000 x 15 x 56 = 8.4 crores annually.

Adding 6.5 crores of net profit from FY07 to 8.4 crores; potential net income for Indowind could be 14.9 crores when benefits of carbon credits are fully realized. On a 6 crore equity base that would translate into an EPS of 14.9 / 6 = 2.48/-. With a P/E ratio of 50 the value of Indowind stock could be 2.48 x 50 = 124/-

Mind you that I used some very optimistic numbers to arrive at this valuation. Please do your own homework and decide whether you want to buy Indowind Energy at 186/- 0r not. I believe my money is safe with some other stock and hence decided to give Indowind a pass for the time being.

If you have any questions or comments feel free to contact me on secmoney@gmail.com or leave a comment at this blog.

Regards,

Bargain Hunter

!! Have a look at Walmart !!

Readers.......Now that USA markets are open to Indian investors; please read this blog if you are inerested in investing in USA markets. I have been in USA for last 5 years and have been investing over here for more than 2 years now. Time - to - Time I love to invest in companies that are very profitable but extremely hated by the larger community due to several reasons. As a result their stock prices are depressed and sell at a significant discount to the company's intrinsic value. One such company in USA is Walmart. The company is hated by analysts and mutual funds because their same store sales growth is flat, labor unions and politicians have created lot of negative publicity for the company,etc ,etc.......

However; if you can clear the rhetoric and focus on its business and balance sheet it is a true hidden giant (.......I cannot call it a hidden gem because it is too big to be called a gem). Their business model is as robust as it was a decade ago, the profitability and cash flow generation is awesome and the company is still growing in low double digits inspite of the fact that it has 300+ billion dollars in revenue last fiscal.............Mind Blowing...........

I am not going to explain about the valuation technique in this blog. Joe Ponzio had explained it very nicely in his blog mentioned below.

http://www.fwallstreet.com/blog/44.htm

I follow his blog regularly and I can tell you that Joe is an excellent writer. If you are interested in learning about value investing I recommend that you read his blog from time to time.....It is refreshing

Two (2) things Indian Investors need to keep in mind before they try to invest overseas.......

1) The dollar has been loosing ground against rupee. Goldman Sachs estimates that India's currency could appreciate approximately 281% against the dollar by 2050. That means on an average the rupee will appreciate against dollar annually at 2 - 3% over the next 43 years which will automatically reduce the value of your investment by that amount. Review Goldman Sachs BRICS report below

http://www2.goldmansachs.com/insight/research/reports/report32.html

The report is presented on the right hand side under the title "The BRICs Dream:Web Tour". Slide # 10 talks about the exchange rate for India which I have mentioned above.

2) The growth rates in mature markets is much less than that in emerging markets. Hence, it is very unlikely that we will see the kind of spectacular returns in slow growth companies like Walmart as we are used to seeing in Indian stock markets.

However..........if you have a very large portfolio and you want to diversify your risk it does make sense to invest in stable and profitable companies overseas especially when all the emerging markets are so much overheated. Walmart's fair value is estimated at approx $56/- with 15% discount value. At today's price of $44/- Walmart is approx trading at 20% discount to it's fair value. If Joe's assumptions are right and Walmart continues to grow at 15% then the negative impact of currency can be easily mitigated by the 2% dividend yield that Walmart gives today. This dividend yield is increasing at a rapid pace and I believe there is a good potential that an investor from India can end up with more than 15% returns in the next 3 -5 years by buying Walmart. As Mohnish Pabrai says in his book "The Dhando Investor"................Heads I win; Tails I don't loose much.........

I would like to mention again that do your own homework and buy only if you are convinced. If you are not comfortable with Walmart give it a pass as more opportunities will come in future.

If you need information for researching US stocks please review my previous blog in this month. If you have any questions feel free to drop me an email at secmoney@gmail.com

Regards,

Bargain Hunter

FULL DISCLOSURE:- I have this stock in my personal portfolio before posting this blog and may also plan to buy more in future

DISCLAIMER:- Investment in equity and equity related instruments is extremely risky and there is every possibility you will loose all the money that you invest. Please consult your financial advisor before making any investment decisions.

My Take on Mutual Funds...... Stay away from most of them

Everybody thinks that equity based mutual fund is a great instrument to build wealth over a long period of time. I don't disagree with it. This is specially true for retail investors who don't have a business acumen and who don't have time to thoroughly research investment ideas. However, I have seen over the years that most of the mutual funds are not worth the money you pay them. Over a long period (>10 years) you will see that most actively managed equity funds do not outperform Sensex or Nifty Indices. If you don't trust me just check out the returns of various mutual funds over last 10 - 15 years in comparison to Bse Sensex or Nse Nifty. You can find that data readily available with Dhiren Kumar's website at http://www.valueresearchonline.com/ If you still have to invest in mutual funds it is always better to go with low cost index funds........Warren Buffet has discussed this in his letters to the shareholders of Berkshire Hathway. With their low cost and fees most index funds can give better returns than actively managed equity funds over a longer holding period (approx 10 years). Some points to keep in mind before investing in any mutual fund are :

1. Invest in a fund that has a history of 7 to 10 years and has been able to produce cumulative returns in excess of Bse Sensex or Nse Nifty over this time period.

2. Make sure that the fund has survived through atleast one bull and one bear cycle. This will give a fair idea of the funds ability to survive in bear markets.

3. Invest in funds with low management fees and expense ratios. Most actively managed funds in India have annual fees and expenses in excess of 2% of assets under management (AUM). Ideally......I would like to invest in funds with less than 2% expense ratio. Over a longer period this 0.5% or 1% you save in fees and expenses can really do wonders to your portfolio. Fees and expenses of mutual funds in USA have gone below 1%.

4. Be prepared to stay invested for atleast 5 years in a fund to get decent return if you are investing through Systematic Investment Planning (SIP) route.

5. Track whether the funds performance has been due to a particular fund manager. If the manager quits the fund may not be able to generate similar returns in future.

6. Invest in lowest cost index funds unless you find a compelling equity oriented mutual fund that has beaten Nifty or Sensex by a good margins over 7 to 10 years.

7. Check the performance of other schemes from the fund house before buying the mutual funds. Some of the good fund houses in India are Reliance Mutual Fund, HDFC Mutual Fund, Franklin Templeton, etc.

Before buying any fund you can review the quality of that fund from http://www.valueresearchonline.com/ Funds with good returns and low risk are awarded 5 stars and they can be analyzed further for one's own investment purposes

If you have any questions feel free to contact me on secmoney@gmail.com

Regards,
Bargain Hunter

Buy Sundaram Fasteners below 50/- and enjoy the ride !!

I had promised to write about international stocks in my current blog, but I found a really compelling investment opportunity thus I decide to postpone the blog on international investment. A friend and colleague of mine Santosh Patro drew my attention to Sundram Fasteners. He wanted to invest in this stock and asked me to evaluate the company for long term investment (approx 3 years holding time period). After reviewing its balance sheet, annual reports, newspaper articles and industry reports; I am coming to a conclusion that Sundram Fasteners is a compelling investment opportunity, which has the potential to double in 3 years time frame if you buy it below 50/-. First let's talk about the broad industry trends. Since the fortune of the company is closely tied to the automotive industry please read the report below from Automotive Component Manufacturers Association for some general background.

http://acmainfo.com/docmgr/Status_of_Auto_Industry/Status_Indian_Auto_Industry.pdf
Let me explain my back of the hand calculations for investing in Sundram Fasteners.

GROWTH:

Average middle class population (people earning above 5,000 USD @exchange rate of 45) in India by 2010 = 350 million
Average members per family = 5
Hence total middle class households in India by 2010 = 350 / 5 = 70 million

Now let's assume that only 10% of this middle class population will be able to afford cars. Hence total number of household's able to afford car = 7 million

Assuming 50% of this demand will be met by new cars and other 50% by used cars; total market size for new cars in 2010-11 in terms of number of units = 7 /2 = 3.5 million
Total cars produced in India annually as per SIAM = 1.5 million
That means in 3 years the automotive market can grow from 1.5 million to 3.5 million units. Since these are assumptions I am introducing a variance factor of 33%. What I am saying is that my numbers are not accurate and they may be off by 33%. Hence according to my calculations in worst case situation; the automotive market may still be = 3.5 x .67 = 2.345 million. This translates into a CAGR of approximately 16%.

VALUATION:

Good companies like Sundram Fasteners can continue to grow their earnings at industry rate in worst case situation. That means its EPS in 2010-11 could potential be around 6.24/- (assuming EPS of 4/- for FY08 and 16% CAGR). Giving a P/E multiple of 16 (same as its earnings growth rate) the value of Sundram Fasteners could be 16 x 6.24 = 99.84/-

Of course.........There are some risks associate with Sundram Fasteners; which every investor should understand before investing in this stock

1) These companies do not have pricing power with automotive companies. When the cost of material goes up we have observed from annual reports that the company has not been able to pass the cost to their customer. This could depress their margins

2) There is still significant debt on its balance sheet which translates into interest payment risk when the interest rates are high

3) Currency valuation affects their export revenue. More than 25% of its revenue comes from export business and any major change in valuation of Indian rupee versus international currencies like USD and Euro will have downward pressure on the earnings.

4) Elimination or change in tax breaks on SEZ , exports, etc can depress its margins

5) Managing international subsidiaries can be quite challenging. Currently all international subsidiaries are making losses.

6) Revenue is dependent purely on automotive sector which is interest rate sensitive. Any negative trends in automotive industry will directly affect this company.

7) Competition from unorganized sector in aftermarket segment is very high as barriers to entry are low. This means in an industry downtrend there is no cushion for Sundram's revenue to stop it from deteriorating.

All said I still feel at the current price (50/-) the risk / reward ratio is more in favor of investors. If you are interested enough by now, please do your own analysis and decide whether you want to buy Sundram Fasteners. If you are not convinced then give it a pass. There will be lot more opportunities in future.

For any questions of Sundram Fasteners feel free to contact me at secmoney@gmail.com com

Regards,
Bargain Hunter

Disclaimer: Investing in stocks is very risky and an individual can loose all the money invested in equity markets. Please consult your financial advisor before investing in any stocks

Disclosure: I have this stock in my personal portfolio at the time of writing this blog

!! Landmark day for Indian Investors (09/10/2007) !!

ICICIDirect announced today about its services for Indian investors who are interested in investing in US stock markets. I think it is a landmark day since people who want to diversify their risk into other markets now truly have an opportunity to do so. Indian investors can now invest in stocks listed on NYSE, Nasdaq and AMEX exchange through ICICIDirect. US markets are one of the most liquid markets in the world and offer an opportunity to invest in world class companies like Coco - Cola, Pepsi, Walmart, Microsoft, General Electric, Medtronic, Google, etc. Not only that. People can also invest in ADRs of good companies from all around the world including China Medical, Barclays Bank, BHP Biliton, etc

Please review the news article from Livemint for further details.

http://www.livemint.com/2007/10/09012552/ICICI-Securities-opens-up-US-s.html

Investors interested in investing in USA markets can also continue to read this blog. This author is based in USA and had been actively investing in both Indian as well as USA markets. My next blog article will be on Walmart and the investing rational to purchase Walmart stock. In the meanwhile interested investors can get more indepth knowledge about USA markets and US listed stocks by reading various free articles or subscribing to the paid service of independent research websites like

http://www.morningstar.com/
http://www.fool.com/
http://www.investors.com/
http://www.thestreet.com/

You can get more general information from websites like

http://finance.google.com/finance
http://www.kiplinger.com/
http://finance.yahoo.com/

Before investing in USA stocks please do not forget to visit Securities and Exchange comissions online database at

http://www.edgar-online.com/

You don't need to subsribe to the paid version of this database. Free version provides all the information. The disclosure laws in USA are very strict and scanning the database for useful information before investing in a specific stock can be very helpful.

Investors also need to be aware of the risk associated with investing abroad. The biggest would be currency risk; specially USA. Other risk could be high transaction charges and comparatively low returns on most blue chip stocks when compared to India. For example a blue chip like GE has barely returned 10% this year.

Will keep posting more information on USA markets in next articles. For any question on investing in US stock markets feel free to contact me on secmoney@gmail.com

Regards,

Bargain Hunter

Buy City Union Bank for long term hold (> 3 years) below 190/- before split

I had been waiting to write about this for a long time but just didn't had the time. I bought this stock in the first week of January @174/- levels before the stock split was announced. Finally after a lot of hectic traveling I am getting time to write something about it. The moment you see the financials of this stock it jumps out as one of those that is screaming to be bought. Everybody knows about the general prospects of banking industry in India. It is a long term secular growth story. Hence in this post I am going to talk very specifically about the reasons to buy this stock and some of the risks associated with this stock.

1) Private bank with origins in rural TamilNadu. Was previously called as The Kumbakonam City Union Bank.

2) More than 100 years old.

3) Operates in agriculturally most progressive states like Gujarat, Maharashtra, Karnataka, TamilNadu, Andhra Pradesh, etc

4) Focuses primarily on tier 2 or tier 3 cities to open branches. A lot of initial business came from lending in Agriculture sector. Govt of India's recent focus on agriculture growth is a positive for this bank which has strong presence in rural areas of agriculturally preogrssive states

5) Will be operating more than 150 branches in India by the end of Dec-07 and all of them are connected by core banking solution (CBS) from TCS. Heavy focus on technology means lower operating costs.

6) Focus on generating fee based business from bancassurance (distributor of LIC policies) . Also tied - up with ICICI Bank for its online money remittance service for its clients. Reduced dependence on interest income in future will make it somewhat immune to interest rate fluctuation.

7) Return on assets (ROA) for FY2007 is approx 1.57 %. Not many banks in India can boast of such ROAs. This indicates higher operating efficiency which will help to sustain profits in lean times.

8) Agressive reduction in net NPAs

9)The banks deposit growth has been more than loan disbursements. This means to me that the bank is doing a better job than most of its competitors in generating low cost funds and also that it is probably lending responsibly. I maybe wrong on this but I have a feeling in today's credit environment where most of the banks are running short of cash to lend; this bank has more cash than it can lend. This could only be because the bank employs sound lending principles.

10) Enjoys a net interest margin of 3.74% in latest quarter. With possible reduction in lending rate from RBI in near future the NIM would go further up which means more profits for the bank.

11) Achieved a balance sheet growth of more than 29% in recent quarter. Impressive performance !!!!

Negative Factors Affecting Growth

1) If growth in Tier 2 and Tier 3 cities comes below expectations it can affect the profitability of the bank.

2) In recent past the bank had been opening a new branch practically every week. This can mean upfront cost in operationalizing these branches which could depress profits in near future.

3) Inability to get permission from RBI for opening more branches can affect the growth of this bank

4) Push from major banks like ICICI into tier 2 and tier 3 cities and rural India means increased competition for CUB.

5) Too much reliance on customers from agrarian background can be negative if there is a drop in agricultural activity

6) Inability to manage rapid expansion can dampen prospects of this stock

7) Quality of loans is not clear to me. If the quality of loans are not good it can affect the bank's balance sheet if there is softening in Indian economy

8) Lack of a diversified revenue stream is a big issue for CUB if there is softening in Indian economy

9) I have saved this one for the last as I believe it will have the biggest impact on the valuation of the bank. The bank is trying to raise additional capital to increase its net worth by dilluting the equity base. This will have a negative effect on the EPS which will affect the valuation of stock. Currently the bank is planning to sell approx 68 lacs shares to various investors to raise capital. This will dillute its equity base by 25% which means the EPS has to be adjusted accordingly and hence the share price. This is the biggest risk to existing shareholders.

If you are interested enough by now, please do your own analysis and decide whether you want to buy City Union Bank. If you are not convinced then give it a pass. There will be lot more opportunities in future.

For details on City Union Bank please visit their website on http://www.cityunionbank.com/

For questions or comments please email me at secmoney@gmail.com

Regards,
Bargain Hunter

FULL DISCLOSURE: I may have this stock in my personal portfolio before writing this blog or may plan to add it to my portfolio in future

DISCLAIMER: Investing in stocks is very risky. It may very well happen that you may loose all the money that you invest in stocks. Please consult your financial advisor before investing in any stocks

Gateway Distriparks Limited..............Buy for Long Term(>3 years) below Rs. 140/-

I have been searching for investment ideas for long term holdings (>3 years) in Indian market that can provide me with approx 20% year - on - year (y-o-y) returns for the next 3 - 5 years. After scanning a gazillion pages from newspapers, investment websites, blogs, research reports........ I decided to buy Gateway Distriparks Ltd @192/- before bonus issue in July 2007. I think this is a good growth story with medium risk over the next 3 - 5 years. My dominant logic for purchase is explained below. For questions or detailed information on my personal research data please email me at secmoney@gmail.com

Positive factors affecting GDL:

1) Container traffic expected to grow at CAGR of 15.57% till 2013 - 2014. Please review the attached link for more information.

2) Currently only 14% of port traffic is containerised in India which is much lower than ports in developed countries. Increase in share of containerized cargo at Indian ports will result into more business for GDL as well as its subsidiary Gateway Rail Freight.

3) Retail boom will provide a push for rail based containerized cargo in domestic market.

4) Retail boom will also provide a push for cold chain logistics in India. Here Snowman acquisition will come handy as it is the largest player in Indian market for cold chain logistics.

5) Operates Container Freight Stations (CFS) at important ports in like JNPT, Vishakapatnam and Chennai. In future GDL plans to build a CFS at Kochi thus covering all the major ports in India handling Exim traffic and allowing it to capture a major share of EXIM traffic. As per FY07 annual report GDL has grown it TEU throughput by a CAGR of 26.85% in last 4 years.

6) Started Rail based movement of containerized cargo on Mumbai - Delhi route this year which is the busiest freight corridor in India. Future developments also include building Inland Container Depots (ICD) at industrial belts in Northern India like Ludhiana. Early mover advantage can help it to capture significant rail based traffic on Mumbai - Delhi route.

7) Private ports like Pipava, Mundhra and Rewas on western coast will provide future opportunities of growth to GDL due to its heavy presence on this route.

Valuation and reasoning for investments

1) Net margins are in the range of 40 - 50% which is twice that of CONCOR (largest player in the segment)

2) GDL stock at Rs. 135.4/- is trading at a P/E ratio of 20 with dilluted earnings of 6.736/- per share in FY07 ex-bonus. If the earning continue to grow at an industry average of 15% for the next 5 years.........assuming a P/E ratio of 20 means the stock will be at = 20 x 13.55 = Rs. 270.91/- Assuming that you buy the stock at todays price of 135.4/- your compounded returns in 5 years will be 14.88%. Plus whatever dividends you earn every year is added bonus. At Rs. 2.8/- per share in annual dividends (ex-bonus) you will make 2.8 / 135.4 = 2.06% extra every year. Thus with dividends; total returns can be approximately in the range of 16.94% which means you can double your money in 4.5 years. This is the most conservative scenario.

Considering the growth in Indian economy if the company grows it's earnings at an average of 20% for the next 5 years the stock could be worth Rs. 335.22/- using the same logic as mentioned above. That means compounded returns could be in the range of 19.88%. If you add dividend yield to the above returns the total returns could be approximately 19.88 + 2.06 = 21.94%. This means an investor can double his money by investing in GDL shares in approximately 3.5 years. Heck of a performance by any standards.

Some risks associated with investing in GDL:

1) If ports are not rapidly developed to handle the cargo there will be less business for GDL.

2) Container penetration in India is much below the world penetration level due to inadequate multi-modal transport facility on the back of poor port-rail-road interfaces. 80% of exim traffic is not containerized. If there is a delay in developing this back - end infrastructure it can restrict growth and profits at GDL

3) Management's capabilty to expand their business in new regions and execute successfully are a big risk to the GDL stock. Till now the management has executed well but in future if they are not able to execute; it will affect the share price of GDL

4) Recession or slow down in Indian economy is a significant risk to GDL since success of its operations are tied to manufacturing growth in India.

5) Reduction in EXIM trade can also affect GDL stock negatively.

6) Competition from established players like Container Corporation of India (CONCOR) can be a formidable challenge for GDL.

If you are interested enough by now, please do your own analysis and decide whether you want to buy Gateway Distriparks (GDL). If you are not convinced then give it a pass. There will be lot more opportunities in future.

For details in on GDL please visit their website on
http://www.gateway-distriparks.com/

For questions or comments please email me at secmoney@gmail.com

Regards,
Bargain Hunter

FULL DISCLOSURE:- I have this share in my personal portfolio before posting this blog and may also plan to buy more in future

DISCLAIMER:- Investment in equity and equity related instruments is extremely risky and there is every possibility you will loose all the money that you invest. Please consult your financial advisor before making any investment decisions.