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