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