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Showing posts with label Fundamental Analysis. Show all posts
Showing posts with label Fundamental Analysis. Show all posts

Tuesday, November 1, 2022

Rajratan Global Wire - Our 24-Bagger Stock in 5 Years

Dear Reader,

We are pleased to inform you that our Hidden Gem stock of Oct'17 - Rajratan Global Wire Ltd (BSE Code: 517522) is a 24-Bagger stock for our Hidden Gems members within period of 5 years. 

Our team suggested Buy on Rajratan Global Wire Ltd at price of Rs. 54.77 on 30 Nov 2017 (stock split and bonus issue adjusted price, actual recommended price was Rs. 639 with target of Rs. 1250). The company rewarded shareholders by issuing bonus share in the ratio of 4:3 in 2019 and later did a stock split of 1 shares into 5 shares (face value of Rs. 10 to Rs 2 per share) in March 2022. Hence, every 3 shares held by our members have increased to 35 shares. Rajratan Global stock price made all time high of Rs. 1410 and closed at Rs. 997 on Friday giving absolute returns of 1720% i.e. more than 18 times within 5 years against double digit returns of Sensex & Nifty in the same period.

We advised partial profit booking in Rajratan Global Wires to our Hidden Gems members recently at Rs. 1300, booking returns of 2270% (almost 24X) within period of 5 years. Rajratan Global Wires has delivered CAGR of more than 90% to our Hidden Gems members.

Below is the summary of Rajratan Global Wires Ltd shared by our team under Hidden Gem stock - Oct'17 report released on 30 Nov 2017.

1. Company Background

Multibagger Stock Rajratan Global Wire
Established in 1988 by Mr Sunil Chordia, Rajratan Global Wire Ltd (Rajratan Global) is a market leader in supply of tyre bead wire in India. The company along with its subsidiary Rajratan Thai Wire Company (Rajratan Thailand) has around 40% share of the Indian tyre bead wire market. The company earlier entered into the Joint Venture with Gustav Wolf (Germany) for gaining technical know-how, later in 2003 shareholding held by Gustov Wolf was bought back by the promoters. The company commenced international operations in 2008 by setting up a plant in Thailand through a wholly owned subsidiary Rajratan Thai Wire Company. The company is second largest manufacturer (by capacity) of automotive tyre bead wire in India and only player manufacturing tyre bead wire in Thailand. Along with tyre bead wire, the company also manufactures other specialized steel wires (black wires) like rope wires, spring wires, auto cable outer etc. Steel wire rods is the primary raw material used for manufacturing by the company.

Rajratan Global has 2 manufacturing facilities, one in India and another in Thailand.
Rajratan Global Wire Capacity

Rajratan Global is a long term supplier for almost all major tyre manufacturers in India and is the market leader in the automotive tyre segment since 2012. The company has long term standing relationship with marquee clients.

Rajratan Global Clients:
Rajratan Global Wire Cients

Products Description:

i) Tyre Bead Wire 

Tyre bead wire is high carbon bronze coated steel wire used in all kinds of automobile tyres, tyres of earth moving equipments and aircrafts. The main function of bead wire is to hold the tyre on the rim and to resist the action of the inflated pressure which constantly tries to force it off. The bead is the crucial link through which the vehicle load is transferred from rim to the tyre. It significantly affects the safety, strength and the durability of tyres.

Bead wire is a drawn steel wire, which is manufactured from quality wire rods with high carbon content. Bead wire’s surface is coated with copper or bronze which ensures proper adhesion with the used rubber compound. 

Bead wire being a crucial component in any kind of tyre manufacturing, the company always ensure that not only the best of raw-material goes into its manufacturing, but that it also goes through toughest of quality tests. The company specializes in bead wire of customized tensile grades as per the requirements of its clients. Besides bead wire, it also produces high carbon steel wire and uncoated wires of varying specifications for different applications. 

2) High Carbon Steel Wire 

High carbon steel wire is popularly known as black wire. It is a drawn steel wire which is manufactured from quality wire rods with high carbon content. With a wide range of usage, black wire plays a vital role in many industries from automobile and construction to engineering industries. The company manufactures high carbon steel wire in its stateof-the-art plants and employ world-class patented heat treatment processes.

The high carbon steel wire manufactured by the company are of two Grades: 
1. Spring / Rope grade confirming to Grade I, II & III. 
2. Rolling quality / flattening quality grade.

2. Recent Development (30 Nov'17)

i) India’s Tyre Market to witness a CAGR of over 9% during 2016-2021 

India’s tyre market is forecast to witness a CAGR of over 9% during 2016-2021, according to the report of Research and Markets, a leading international market research agency. As per the report, titled “India Tyre Market Forecast & Opportunities, 2021, India ranks among one of the largest tyre markets in the world. Growing automobile sales coupled with expanding automobile fleet are the major factors boosting demand for tyres in the country. 

Though the replacement tyre demand had majority share in 2015, the OEM tyre demand is expected to outpace replacement tyre demand during 2016-2021 with more than 60 tyre manufacturing plants spread across the country. 

Moreover, with favorable inflationary scenario, expanding middle class population and increasing national disposable income, tyre sales across all the automobile segments are expected to grow in the coming years. As per report, presence of major automotive OEMs such as Ford, Hyundai, Honda, Mahindra, Maruti Suzuki, TATA, BMW, etc. has been hugely contributing to the sales of tyres in India. 

Two-wheeler tire segment, which accounts for a volume share of over 50% in the country’s tyre market is also expected to maintain its position as the largest tyre segment over the next five years, adds the report. 

ii) India imposes Anti-Dumping Duty on select Tyres from China 

In Sept 2017, India has imposed an anti-dumping duty on a certain types of unused radial tyre for trucks and buses for the next five years in an attempt to protect the domestic tyre industry from low-cost Chinese imports.

The duty slapped on “new/unused pneumatic radial tyres with or without tubes and/or flap of rubber (including tubeless tyres) having nominal rim dia code above 16 (inch),” ranges between $245.35 to $452.33 per tonne, according to a notification by the Central Board of Excise and Customs.

Earlier, the Directorate General of Anti-dumping and Allied Duties had suggested such as levy on Chinese imports which are dumped in India for a cost below normal value. While the duty does not ban the import of these goods, it is meant as a tool that levels the field between the foreign and domestic industry.

This is a positive development as tyre industry gets nearly 55 percent of its revenue from trucks and buses radial tyre.

3. Financial Performance (30 Nov'17)

Rajratan Global Wire consolidated net profit rises 30.61% in the Sept 2017 quarter

Net profit of Rajratan Global Wire rose 30.61% to Rs 5.76 crore in the quarter ended September 2017 as against Rs 4.41 crore during the previous quarter ended September 2016. Sales rose 24.54% to Rs 90.44 crore in the quarter ended September 2017 as against Rs 72.62 crore during the previous quarter ended September 2016. 

Rajratan Global Wire consolidated net profit declines 43.26% in the June 2017 quarter

Net profit of Rajratan Global Wire declined 43.26% to Rs 3.58 crore in the quarter ended June 2017 as against Rs 6.31 crore during the previous quarter ended June 2016. Sales rose 5.92% to Rs 71.08 crore in the quarter ended June 2017 as against Rs 67.11 crore during the previous quarter ended June 2016.

Rajratan Global Wire Financial Performance

The company performance in Jun’17 quarter was subdued mainly on account of increase in input cost and lower offtake due to GST. However, it managed to post better Sept’17 quarter results by increasing its product prices due to rise in of raw material cost.


4. Peer Group Comparison (30 Nov'17)
Rajratan Global Wire Peer Group Comparison

5. Key Concerns / Risks (30 Nov'17)

i) Steel wire rods is the primary raw material used for manufacturing by the company. Increase in steel prices can adversely impact the operating margins of the company. As per management, the company passes on 60-100 percent of the higher raw material prices to its customers.

ii) Sluggishness in automobile demand globally can impact tyre industry, this can have a direct impact on revenue growth of the company.

iii) Steel wire Industry is highly fragmented and competitive. Any adverse development in market conditions, trade or government policies, foreign exchange fluctuations may impact company’s performance.

6. Saral Gyan Recommendation (30 Nov'17)

i) The growth outlook for Indian tyre industry looks promising with imposing of antidumping duty on a certain types of unused radial tyre for trucks and buses for the next five years and expected rise in domestic automobile sales going forward. This will augur well for the company being a market leader in India with 40% market share in automotive tyre bead wire segment and preferred supplier of more than 15 major tyre manufacturers in India and abroad. Moreover, growth momentum is expected to sustain in Thailand with addition of new clients like Bridgestone. 

ii) With rise in demand, Rajratan Global expanded its Thailand plant capacity from 24,000 MT to 26,400 MT last year. The company has planned further expansion of 9,600 MT over next 2 to 3 years to meet the growing demand for the company’s product. Moreover, the company has also invested in a new warehousing facility which is expected to help Rajratan Thailand to maintain sufficient inventory levels. Increase in minimum stock volume is being prioritized which will ensure efficient delivery performance.

iii) The company’s Thailand operations are in sweet spot. The company is sole manufacturer of tyre bead wire in Thailand and enjoys significant logistic benefits as major tyre manufacturers are located in close proximity. Thailand is one of the largest producers of natural rubber making it a market of choice for global tyre manufacturers. Presently there are around 20 tyre manufacturers in Thailand out of which 5 are Japanese and Taiwanese, providing good opportunity for Rajratan. The company is preferred supplier of Global OEM’s, major Japanese clients includes Sumitomo, Bridgestone and Yokohama. Recently, the company gets into agreement with Bridgestone and expect good revenue growth with rise in orders in coming quarters.

iv) The company continue to target 100% share of business in Thailand, it’s a sole supplier to companies such as Otani Radial, ND Rubber, Siam Rubber, Hihero, Union, BKF & Camel. Moreover, the company is continuously growing its exports market, it’s a largest supplier to the Sri Lanka tyre market with strong foot hold in other South East Asian countries like Vietnam and Malaysia.

v) Rajratan Global has registered sales CAGR of 2.8% and profit CAGR of 45.2% with ROE of 12.9% over last 5 years. The company has reduced its debt significantly over last couple of years with increase in operating margins.
Rajratan Global Wire Key Financial Ratio

vi) Rajratan Global has experienced core management team with strong Industry connect. Mr. Sunil Chordia is the Founder and MD of the company. He steered Rajratan Global towards significant growth in the tyre bead wire business and helped the company receive international approvals in short span of time. He possess over 27 years of experience and holds BSc, DCMA and MBA (finance) degrees. Mr. Yashovardhan Chordia looks after Thailand operations. He has worked as consultant for 3 years at Levers for change, he has experience in working on turn around projects for various sectors like Steel, Refinery, Refractory and Plastic.

vii) As of Sept’17, promoter’s shareholding in the company is at 63% out of which 16.41% shares is pledged. Promoters increased their shareholding by 0.72% in Sept’17 quarter, promoter’s shareholding in Jun’17 quarter was at 62.28%. Institution shareholding in the company is at 7.86%.

viii) The company is paying regular dividend since 2007. The company has paid dividend even during the years when it was in losses. The dividend yield is at 0.23%. 

ix) As per our estimates, Rajratan Global can deliver PAT of 21.71 crores in FY17-18 and Rs. 27.98 crores in FY18-19 with annualized EPS of Rs 49.89 and Rs. 64.32 respectively. At current price of 639, stock is available at forward P/E multiple of 9.9X based on FY18-19 earnings. Company’s valuation looks attractive considering strong earning visibility on account of planned expansion & robust growth outlook for tyre industry.

x) On equity of Rs. 4.35 crore, the estimated annualized EPS for FY18-19 works out to Rs. 64.32 and the Book Value per share is Rs. 244. At current market price of Rs. 639, stock price to book value is 2.62. 

Imposition of anti-dumping duty for 5 years and robust growth outlook of automobiles is expected to augur well for Indian tyre manufacturers in medium to long term. Considering company’s leadership position in domestic tyre bead wire market, continuity in growth momentum in its Thailand business with addition of new clients, planned expansion over 3 years to meet growing demand and attractive valuations of the company with comfortable debt level, Saral Gyan team recommends “Buy” on Rajratan Global Wire Ltd at current market price of Rs. 639 for target of Rs. 1250 over a period of 12 to 24 months. 

Buying Strategy:
  • 70% at current market price of 639 
  • 30% at price range of 520 - 550 (in case of correction in stock price in near term) 
Portfolio Allocation: 3% of your equity portfolio.

To Read / Download Saral Gyan Hidden Gem - Oct'17 Research Report - Click Here

Rajratan Global Wire Ltd is 1 out of those 65 multibagger stocks which have given returns in the range of more 200% to 9900% returns to our subscribers in period of 3 to 10 years. Team of equity analysts at Saral Gyan put lot of efforts & smart work to identify Hidden Gems (Unexplored Multibagger Small Cap Stocks) and Value Picks (Mid Caps with Plenty of Upside Potential) which not only grow your capital at a healthy rate but also ensures protection of your capital during market downturn.

Also Read : Hidden Gems SIP Returns of 395% Vs Small Cap Index returns of 181%

Through Hidden Gems and Value Picks, we are providing you opportunities to invest in such small / mid cap stocks today. Infosys, Pantaloon, Dabur, Glenmark were the small cap stocks in past and today are the well known companies falling under mid and large cap space.

The stocks we reveal through Hidden Gems & Value Picks are companies that are either under-researched or not covered by other brokers and research firms. We keep on updating our subscribers on our past recommendations suggesting them whether to hold / buy or sell stocks on the basis of company's performance and future growth outlook.

Time has shown that smart investors have made their fortune by investing in equities in long term. None other asset class can match giving you such extra ordinary returns. Yes, its important for you to invest in right set of companies at right price with medium to long term perspective. If you think to invest in stocks for period of 6 to 12 months, we suggest you to stay out of stock market because you are not investing, you are betting on volatility of stock market which could be risky. Subscribe to Hidden Gems & Value Picks and start investing systematically keeping a real long term view.

Do write to us at info@saralgyan.in in case of any queries, we will be delighted to assist you.

Team - Saral Gyan

Tuesday, October 18, 2022

Why Share Price is Not Important while Buying Stocks?

Dear Reader,

Why is a stock that cost Rs. 50 cheaper than another stock priced at Rs. 10?

This question opens a point that often confuses beginning investors: The per-share price of a stock is thought to convey some sense of value relative to other stocks. Nothing could be farther from the truth.

In fact, except for its use in some calculations, the per-share price is virtually meaningless to investors doing fundamental analysis. If you follow the technical analysis route to stock selection, it’s a different story, but for now let’s stick with fundamental analysis.

The reason we aren’t concerned with per-share price is that it is always changing and, since each company has a different number of outstanding shares, it doesn’t give us a clue to the value of the company. For that number, we need the market capitalization or market cap number.

The market cap is found by multiplying the per-share price times the total number of outstanding shares. This number gives you the total value of the company or stated another way, what it would cost to buy the whole company on the open market.

Here’s an example:

Stock price: Rs. 50

Outstanding shares: 5 Crores 

Market cap: Rs. 50 x 50,000,000 = Rs. 250 Crores

To prove our opening sentence, look at this second example:

Stock price: Rs. 10

Outstanding shares: 30 Crores 

Market cap: Rs. 10 x 300,000,000 = Rs. 300 Crores

This is how you should look at these two companies for evaluation purposes. Their per-share prices tell you nothing by themselves.

What does market cap tell you?

First, it gives you a starting place for evaluation. When looking a stock, it should always be in a context. How does the company compare to others of a similar size in the same industry?

The market generally classifies stocks into three categories:

• Small Cap under Rs. 1000 Crores 

• Mid Cap Rs. 1000 - Rs. 10000 Crores

• Large Cap above Rs. 10000 Crores

Some analysts use different numbers and others add micro caps and mega caps, however the important point is to understand the value of comparing companies of similar size during your evaluation. You will also use market cap in your screens when looking for a certain size company to balance your portfolio. Don’t get hung up on the per-share price of a stock when making your evaluation. It really doesn't tell you much. Focus instead on the market cap to get a picture of the company’s value in the market place.

IMP Note: This article is written to safe-guard our readers who are new to stock market, and make them understand about the actual facts. We keep on receiving mails from our readers regarding the price range of stocks we covers under our Hidden Gems or Value Picks service. The misconception in mind of new investors is regarding the stock price, majority of them believe that if stock price is less, like below Rs. 50 or even below Rs. 10, changes of stock price appreciation is very high and they can buy more no. of shares rather than buying a limited no. of shares of high priced stock. 

We have a subscriber base covering almost all major states in India and from 20 other countries across globe. During the last 10 years we have interacted with several investors seeking multibagger return from stocks. 

It was 17th Dec 2011, we recommended Cera Sanitaryware as Hidden Gem stock of the month at price of Rs 157, later it went up to Rs. 450 in period of 15 months. Based on strong quarterly numbers, attractive valuations and consistent performance, we recommended buy again in the range of 400-450 which was taken as a surprise by our members as we received several queries and feedback.

Below are some of the common queries of our subscribers which often lead them to opportunity losses.

1. How come a stock priced at Rs 450 can generate Multibagger returns?
2. Cera is almost 3 times moving from 170 to 450, why are you suggesting buy again?
3. Where is the room to generate Multibagger return from this level?
4. I don’t like such high-priced stock, please give me stocks priced below Rs. 100.
5. I want to buy more no. of shares, hence please recommend low price stocks below Rs. 10.

Cera Sanitaryware touched its life time high of Rs 6450 last year and currently trading around Rs. 5500, Cera is a 40-Bagger stock in 11 years from our initial recommendation and is a 12X stock from our reiterated buy at Rs. 450, which was not liked by our subscribers.

The story does not end here, there is a long way to go. Our suggested stocks is with a view-point of 1-3 years at least and not just 6-9 months. If fundamentals of the company are intact, we would not suggest our members to do profit booking or exit. Investors who stayed away just because of high price simply missed yet another opportunity. We held Cera for long term and suggested complete profit booking to our members in the stock around 3500 - 4000 levels in 2017.

There is a general misconception among the investors that high priced stocks can't generate multibagger returns. They often think that high-priced stocks are overvalued. In terms of valuation, a 50 rupees stock may not be cheaper than that of a 1000 rupees stock. There is no co-relation between the valuation and market price of a stock. To understand whether a company is small or large, you must look at market capital of the company and not at stock price. To judge valuation you must have to look at Price to earning ratio, Price to book ratio, Price to sales ratio etc.

Lets try to understand this with an example, Rajratan Global Wires share price was Rs. 54.77 on 30 Nov 2017 (stock split and bonus issue adjusted price, actual price was 639). Today the stock price is at Rs. 1225 giving absolute returns of 2137% i.e. more than 22 times within 5 years against double digit return of Sensex in the same period. 

We suggested Buy on Rajratan Global Wires at price of Rs. 639 under Hidden Gems service on 30 Nov 2017 and if any of our subscribers have not invested in the company thinking he/she can get only 15 shares by investing Rs. 10,000 has made a big mistake. Today those 15 shares have increased to 175 shares on account of bonus shares issued by the company in the ratio of 4:3 in 2019 and later stock split of 1 shares into 5 shares (face value of Rs. 10 to Rs 2 per share) in March 2022. And the current share price of Rs. 1225 is still very high for those who looks at low price stock. We advised partial profit booking in Rajratan Global Wires to our Hidden Gems recently at Rs. 1300, booking returns of 2270% (almost 24X) in period of 5 years.

There are many examples like above by which we can illustrate that there’s nothing called high price. Multibagger returns is not dependent on the current market price of a stock, so don't be afraid of investing in high priced stock. You need to look at fundamentals like future growth prospects of the company, PE ratio, PB ratio, ROE, ROCE, debt on books, cash reserves along with other parameters to judge a stock whether it is undervalued or overvalued. We agree with you that judging valuation is not an easy task. So, take expert’s advise when ever required.

Another misconception among investors is to buy more no. of shares. They often think that its better to buy more no. of shares of a low price scrip (ranging below Rs. 10 or say below Rs. 50) instead of buying less no. of shares of high priced stocks. They often think that low price stocks can generate multibagger return quickly. During last 5 years, we have reviewed existing portfolio of our members under our Wealth-Builder (an offline portfolio management service) subscription, we have noticed that many of their portfolio is filled with such low-priced stocks and most of those are in great loss because of poor fundamentals. You may think that a two rupees stock can easily generate multibagger returns even if it touch to Rs. 5 or 6. At the same time don’t forget that the same can even come down to Rs. 0 levels which can evaporate all your investment giving you 100% loss! In terms of valuation a two thousand rupees stock may not be expensive than that of a two rupees stock.

Lets try to understand this also with a simple example, Lanco Infratech was a well-known company from Infrastructure sector. At the beginning of 2010 the stock was around Rs 55. After 10 years, it was hovering at just Rs 1.30 and today its not operational any more. Those who purchased the stock during 2010 are in 100% loss! Rs. 1 lakh invested in Lanco Infratech in Jan 2010 was valued at merely Rs. 2,000 in 2020, a complete wealth-destroyer! Isn't it? Those who bought this stock at levels of Rs. 30 and later again at Rs. 10 or Rs. 5 to average out thinking that stock has came down from all time highs of Rs. 85 are still waiting to get their buying price back. There are many such stocks like Suzlon Energy, GMR Infra, GVK Power and Infrastructure etc which have continuously destroyed wealth of investors over a period of last 5 to 10 years.

We do not state that all low price stocks are wealth-destroyers, it all depends on the fundamentals of the company. So, do ensure that you check out the fundamentals and valuations while investing in stocks instead of looking at stock price. Please get out of the misconception that low priced stocks will fly high faster giving you extra-ordinary returns. Always remember that stock price is just a barometer, actual valuations of a company can be determined by its fundamentals.

If you wish to invest in fundamentally strong micro, small and mid cap companies which can give you far superior returns compared to major indices like Sensex or Nifty in long term and help you creating wealth, you can join our services like Hidden GemsValue Picks & Wealth-Builder.

The stocks we reveal through Hidden Gems & Value Picks are companies that either under-researched or not covered by other stock brokers and research firms. We keep on updating our members on our past recommendation suggesting them whether to hold / buy or sell stocks on the basis of company's performance and future outlook.

At Saral Gyan, team of equity analysts keep on evaluating small and mid cap stocks to explore the best Hidden Gems and Value Picks of stock market. Saral Gyan - Nano Champs, Hidden Gems and Value Picks are the micro, small and mid cap stocks with high probability to become multi-bagger stocks in future and a path for our investors to create wealth through equity investments in a long run.

Please write to us at sales@saralgyan.in / info@saralgyan.in in case of any queries.

Regards,
Team - Saral Gyan

Wednesday, July 21, 2021

How to Explore Multibagger Stocks for Investment?

Below are the 6 Important Steps to Explore Best Stocks for Investment

Step-1: Find out how the company makes money
Step-2: Do a Sector Analysis of the Company
Step-3: Examine the recent & historical performance of the Stock
Step-4: Perform competitive analysis of the firm with its Competitors
Step-5: Read and evaluate company’s Financial statements
Step-6: Buy or Sell

Step-1: Find out how the company makes money

Before you decide to invest in a company’s stock, find out how the company makes money. This is probably the easiest of all the steps. Read company’s annual and quarterly reports, newspapers and business magazines to understand the various revenue streams of the firm. Stock price reflects the firm’s ability to generate consistent or above expectation profits/earnings from its ongoing/core operations. Any income from unrelated activities should not affect the stock price. Investors will pay for its earnings from its core operations, which is its strength and stable operation, and not from unrelated activities. Thus, you need to find out which operations of the firm are generating revenues and profits. If you do not know that you are bound to get a hit in future.

Warren Buffet once said that “if you do not understand how a company makes money, do not buy its stock- you will always end up loosing money”. He never invested even a single penny in technology stocks and yet made billions and billions of dollars both during tech bubble and bust.

Step-2: Do a Sector Analysis of the Company

First is to figure out which sector the stock is in. Then, figure out what all factors affect the performance of the sector. For example, Infosys is in IT services sector, NTPC is in Power sector and DLF is in Real Estate sector. Half of what a stock does is totally dependent on its sector. Simple rule-Good factors help stocks while bad factors hurt stocks.

Let’s take an example of airlines industry. The factors that affect it are fuel prices, growth in air traffic and competition. If fuel prices are high, tickets would be expensive and hence fewer people will fly. This will hurt the airlines sectors and firms equally. This would make the sector less attractive because there would be less scope for growth of the firms.

The idea is to find out the good and bad factors for the sectors and figure out how much they will affect the stock and how. What we are really looking at are reasons that will make stock price good or bad or a company look more or less valuable, even though nothing about the company changes. This will give you a broader view whether the stocks will do well or poorly in the future.

Step-3: Examine the recent & historical performance of the Stock

By performance we mean both operational and financial performance of the company. Take out some time to find out how the company has done in its business over the years. Were there issues with its operations such as labor strike, frequent breakdowns, higher attrition or lagging deadlines? If any company has a history of serious problems, it does not make a good buy because chances are high it may have similar problems again. History is a good predictor of future! It is also extremely important to find out the historical financial performance of the company – growth in revenues, profits (earnings), profit margins, stock price movements etc.

Step-4: Perform competitive analysis of the firm with its Competitors

This is most important step in analyzing a stock. Unfortunately, most of the retail investors do not bother to do this. It takes time to do this step but it worth trying if you don’t want to loose your money. Many investors buy a stock because they have heard about the company or used the products or think companies have excellent technologies. However, if you do not evaluate or compare those features of the company with other similar firms, how will you figure out whether the firm is utilizing them effectively or is better/worse than others? We also need to find out whether company is growing rapidly or slowly or has no growth. We would like to cover couple of financial ratios here in brief and explain how to use them to figure out a good stock.

P/E: Price-to-earnings ratio is the most widely used ratio in stock valuation. It means how much investors are paying more for each unit of income. It is calculated as Market Price of Stock / Earnings per share. A stock with a high P/E ratio suggests that investors are expecting higher earnings growth in the future compared to the overall market, as investors are paying more for today's earnings in anticipation of future earnings growth. Hence, as a generalization, stocks with this characteristic are considered to be growth stocks. However, P/E alone may not tell you the whole story as you see it varies from one company to another because of different growth rates. Hence, another ratio, PEG (P/E divided by Earnings Growth rate) gives a better comparative understanding of the stock.

PEG = Stocks P/E / Growth Rate
We do not want to go into the calculation part as values for P/E are available on internet for most of the companies.
A PEG of less than 1 makes an excellent buy if the company is fundamentally strong. If it is above 2, it is a sell. If PEG for all the stocks are not very different, one with lowest P/E value would be a great BUY.

Step-5: Read and evaluate company’s Financial statements

This is the most difficult part of this process. It is generally used by sophisticated finance professionals, mostly fund managers who can understand different financial statements. However, there are few things that even you should keep in mind. There are three different financial statement- balance sheet, income statement and cash flow statement. You should focus only on balance sheet and cash flow statement.

Balance Sheet: It summarizes a company’s assets, liabilities (debt) and shareholders’ equity at a specific point in time. A typical Indian firm’s balance sheet has following line items:

• Gross block
• Capital work in progress
• Investments
• Inventory
• Other current assets
• Equity Share capital
• Reserves
• Total debt

Gross block: Gross block is the sum total of all assets of the company valued at their cost of acquisition. This is inclusive of the depreciation that is to be charged on each asset.

Net block is the gross block less accumulated depreciation on assets. Net block is actually what the asset is worth to the company.

Capital work in progress: Capital work in progress sometimes at the end of the financial year, there is some construction or installation going on in the company, which is not complete, such installation is recorded in the books as capital work in progress because it is asset for the business.

Investments: If the company has made some investments out of its free cash, it is recorded under it.

Inventory: Inventory is the stock of goods that a company has at any point of time.

Receivables include the debtors of the company, i.e., it includes all those accounts which are to give money back to the company.

Other current assets: Other current assets include all the assets, which can be converted into cash within a very short period of time like cash in bank etc.

Equity Share capital: Equity Share capital is the owner\'s equity. It is the most permanent source of finance for the company.

Reserves: Reserves include the free reserves of the company which are built out of the genuine profits of the company. Together they are known as net worth of the company.

Total debt: Total debt includes the long term and the short debt of the company. Long term is for a longer duration, usually for a period more than 3 years like debentures. Short term debt is for a lesser duration, usually for less than a year like bank finance for working capital.

One need to ask-How much debt does the company have? How much debt does it have the current year? Find out debt to equity ratio. If this ratio is greater than 2, the company has a high risk of default on the interest payments. Also, find out whether the firm is generating enough cash to pay for its working capital or debt. If total liabilities are greater than total assets, sell the stock as the firm is heading for disaster. This debt to equity ratio is extremely important for a company to survive in bad economy. What is happening now-a-days should make this extremely important. Companies having higher debt ratio have got hammered in the stock market. Look at real estate companies- their stocks are down by almost 90% from all time highs made in 2007 - 2008. This is because they have high debt level which means higher interest payments. In case of liquidity crisis and global slowdown, it would be extremely difficult for such companies to survive. Remember, a weak balance sheet makes a company vulnerable to bankruptcy!

Step-6: Buy or Sell

Follow all the steps from 1 to 5 religiously. It will take time but worth doing it. If you do it, you won’t have to see a situation where you loose more than 50% of stock value in a week! Buying or selling will depend on how your stock(s) perform on the above analysis.

Wish you happy & safe Investing. 

Regards, 
Team - Saral Gyan

Thursday, September 10, 2020

Check Fundamentals & Not Share Price while Buying Stocks

Dear Reader,

Why is a stock that cost Rs. 50 cheaper than another stock priced at Rs. 10?

This question opens a point that often confuses beginning investors: The per-share price of a stock is thought to convey some sense of value relative to other stocks. Nothing could be farther from the truth.

In fact, except for its use in some calculations, the per-share price is virtually meaningless to investors doing fundamental analysis. If you follow the technical analysis route to stock selection, it’s a different story, but for now let’s stick with fundamental analysis.

The reason we aren’t concerned with per-share price is that it is always changing and, since each company has a different number of outstanding shares, it doesn’t give us a clue to the value of the company. For that number, we need the market capitalization or market cap number.

The market cap is found by multiplying the per-share price times the total number of outstanding shares. This number gives you the total value of the company or stated another way, what it would cost to buy the whole company on the open market.

Here’s an example:

Stock price: Rs. 50

Outstanding shares: 5 Crores 

Market cap: Rs. 50 x 50,000,000 = Rs. 250 Crores

To prove our opening sentence, look at this second example:

Stock price: Rs. 10

Outstanding shares: 30 Crores 

Market cap: Rs. 10 x 300,000,000 = Rs. 300 Crores

This is how you should look at these two companies for evaluation purposes. Their per-share prices tell you nothing by themselves.

What does market cap tell you?

First, it gives you a starting place for evaluation. When looking a stock, it should always be in a context. How does the company compare to others of a similar size in the same industry?

The market generally classifies stocks into three categories:

• Small Cap under Rs. 1000 Crores 

• Mid Cap Rs. 1000 - Rs. 10000 Crores

• Large Cap above Rs. 10000 Crores

Some analysts use different numbers and others add micro caps and mega caps, however the important point is to understand the value of comparing companies of similar size during your evaluation. You will also use market cap in your screens when looking for a certain size company to balance your portfolio. Don’t get hung up on the per-share price of a stock when making your evaluation. It really doesn't tell you much. Focus instead on the market cap to get a picture of the company’s value in the market place.

IMP Note: This article is written to safe-guard our readers who are new to stock market, and make them understand about the actual facts. We keep on receiving mails from our readers regarding the price range of stocks we covers under our Hidden Gems or Value Picks service. The misconception in mind of new investors is regarding the stock price, majority of them believe that if stock price is less, like below Rs. 50 or even below Rs. 10, changes of stock price appreciation is very high and they can buy more no. of shares rather than buying a limited no. of shares of high priced stock. 

We started Hidden Gems annual subscription in late 2010 followed by other services like Value Picks, 15% @ 90 Days and Wealth-Builder, today we have a strong subscriber base covering almost all major states in India and from 20 other countries across globe. During the last 8 years we have interacted with several investors seeking multibagger return from stocks. 

It was 17th Dec 2011, we recommended Cera Sanitaryware as Hidden Gem stock of the month at price of Rs 157, later it went up to Rs. 450 in period of 15 months. Based on strong quarterly numbers, attractive valuations and consistent performance, we recommended buy again in the range of 400-450 which was taken as a surprise by our members as we received several queries and feedback.

Below are some of the common queries of our subscribers which often lead them to opportunity losses.

1. How come a stock priced at Rs 450 can generate Multibagger returns?
2. Cera is almost 3 times moving from 170 to 450, why are you suggesting buy again?
3. Where is the room to generate Multibagger return from this level?
4. I don’t like such high-priced stock, please give me stocks priced below Rs. 100.
5. I want to buy more no. of shares, hence please recommend low price stocks below Rs. 10.

Cera Sanitaryware touched its life time high of Rs 3918 in January 2018, post severe correction in small and mid cap stocks over last 15 months, stock is down by -28% and is at Rs. 2809 today. Even after such a correction in stock price, Cera Sanitaryware is a 18-Bagger stock giving as on date returns of 1690% in 7 years from our initial recommendation and 525% return from our reiterated buy at Rs. 450, which was not liked by our subscribers.

The story does not end here, there is a long way to go. Our suggested stocks is with a view-point of 1-3 years at least and not just 6-9 months. If fundamentals of the company are intact, we would not suggest our members to do profit booking or exit. Investors who stayed away just because of high price simply missed yet another opportunity. We continuously recommended Cera during last couple of years to our members at much higher levels.

There is a general misconception among the investors that high priced stocks can't generate multibagger returns. They often think that high-priced stocks are overvalued. In terms of valuation, a 50 rupees stock may not be cheaper than that of a 1000 rupees stock. There is no co-relation between the valuation and market price of a stock. To understand whether a company is small or large, you must look at market capital of the company and not at stock price. To judge valuation you must have to look at Price to earning ratio, Price to book ratio, Price to sales ratio etc.

Lets try to understand this with an example, Tide Water Oil share price was Rs. 1450 on 1st Jan'12 (stock split and bonus issue adjusted price, actual price was 5800). Today the stock price is at Rs. 5051 giving absolute returns of 248% i.e. 3.5 times in 7 years against double digit return of Sensex in the same period. We suggested Buy on Tide Water Oil and many of our subscribers might not have invested in it thinking that they can buy hardly 2 shares by investing Rs. 12,000 but now those 2 shares are actually 8 shares post stock split and issue of bonus share and share price is near the recommended price.

There are many examples like above by which we can illustrate that there’s nothing called high price. Multibagger returns is not dependent on the current market price of a stock, so don't be afraid of investing in high priced stock. You need to look at fundamentals like future growth prospects of the company, PE ratio, PB ratio, ROE, ROCE, debt on books, cash reserves along with other parameters to judge a stock whether it is undervalued or overvalued. We agree with you that judging valuation is not an easy task. So, take expert’s advise when ever required.

Another misconception among investors is to buy more no. of shares. They often think that its better to buy more no. of shares of a low price scrip (ranging below Rs. 10 or say below Rs. 50) instead of buying less no. of shares of high priced stocks. They often think that low price stocks can generate multibagger return quickly. During last 5 years, we have reviewed existing portfolio of our members under our Wealth-Builder (an offline portfolio management service) subscription, we have noticed that many of their portfolio is filled with such low-priced stocks and most of those are in great loss because of poor fundamentals. You may think that a two rupees stock can easily generate multibagger returns even if it touch to Rs. 5 or 6. At the same time don’t forget that the same can even come down to Rs. 0 levels which can evaporate all your investment giving you 100% loss! In terms of valuation a two thousand rupees stock may not be expensive than that of a two rupees stock.

Lets try to understand this also with a simple example, Lanco Infratech was a well-known company from Infrastructure sector. At the beginning of 2010 the stock was around Rs 55. Now it is hovering at just Rs 0.42 and trading is suspended in the stock. Those who purchased the stock during 2010 are in 99% loss! Rs. 1 lakh invested in Lanco Infratech in Jan 2010 is valued at merely Rs. 1,000 today, a complete wealth-destroyer! Isn't it? Those who bought this stock at levels of Rs. 30 and later again at Rs. 10 or Rs. 5 to average out thinking that stock has came down from all time highs of Rs. 85 are still waiting to get their buying price back. There are many such stocks like Suzlon Energy, GMR Infra, GVK Power and Infrastructure etc which have continuously destroyed wealth of investors over a period of last 6 to 9 years.

We do not state that all low price stocks are wealth-destroyers, it all depends on the fundamentals of the company. So, do ensure that you check out the fundamentals and valuations while investing in stocks instead of looking at stock price. Please get out of the misconception that low priced stocks will fly high faster giving you extra-ordinary returns. Always remember that stock price is just a barometer, actual valuations of a company can be determined by its fundamentals.

Wish you happy & safe Investing. 

Regards, 
Team - Saral Gyan

Wednesday, June 19, 2019

Are you Fearful of Market Crash? Its time to be Greedy!

Dear Reader,

Since Jan 2018, broader markets i.e. Small Cap and Mid Cap indices are in bear phase. Over last few weeks, we have seen small & mid cap stocks getting butchered with fall in stock prices on almost daily basis. At current scenario, when Small & Mid Cap Index is down by 31% and 21% respectively from their peak made in January last year and significantly underperformed Sensex & Nifty, no body want to touch this space. Most of the liquidity in small & mid caps has dried up and found its way to large caps over last 16 months. At this juncture, large caps looks fairly valued or expensive in terms of valuations, however small & mid cap companies look attractive and can reward long term investors in big way. In fact, some of the worst times to get into the market turned out to be the best times for long term investors and same seems to be applicable now for small & mid caps.

Its always wise to be greedy when others are fearful. Fall in stock prices of small and mid cap companies by 40% to 60% from their peaks use to happen during panic times, if a particular company delivers 3x to 5x or even 10x type of returns on your investments in period of 3 to 7 years, it can easily fall by 40% to 60% or even more from its 52 week high during tough times which arises due to profit / loss booking, series of negative events / news flows and severe sell off due to panic across markets. Below are some of the major reasons of severe fall in stocks prices of small & mid cap stocks since beginning of 2018:

i) Rejig in Portfolio by Mutual Funds to meet guidelines defined by SEBI
ii) Introduction of Additional Surveillance Measures by SEBI to curb volatility
iii) Auditors exit from various companies on fear of stringent action from authorities
iv) Unfavourable macros with increasing crude oil prices and depreciating rupee
v) Trade war fears between US and China, rising interest rates, continuous selling by FIIs
vi) Panic in market due to IL&FS default on debt repayments
vii) Concerns in market due to severe sell off in large caps stocks like Zee, Tata Motors
viii) India’s economy registering lowest growth of 5.8% in the Q4 FY19 in last 5 years
ix) Contagion risk arising due to recent default of Rs 1,000 crore by DHFL
x) Ongoing NBFC sector crisis due to credit squeeze, over-leveraging, excessive concentration and massive mismatch between assets and liabilities.

Small Cap Index has not delivered negative returns for 2 consecutive years in past 16 years

We believe this is a blessing in disguise because for the first time in many years, several small companies having robust business fundamentals are available at attractive valuations. Do you know in last 16 years, small cap index have not given negative returns for 2 consecutive years. In 2018, BSE Small Cap Index has given negative returns of -23.4% and since beginning of this year, index is down by another -5.7%. Below is the table which indicates Small Cap Index returns YoY since 1st April 2003 (the data is available from April 2003 onwards only in BSE).
Whenever, Small Cap Index delivered significantly high negative returns in a particular year during last 16 years, it has delivered double digit positive returns the very next year. While Nifty and Sensex which have given positive returns and are hovering near their life time high made recently, Small & Mid Cap Index have underperformed by wide margin and is down by 31% and 21respectively from their peak made in Jan 2018. The divergence between Sensex / Nifty and Small & Mid Cap Index will not last for long going forward considering valuations gap emerging between large caps in comparison to mid & small cap stocks.

Tide to turn favourable sooner than later for small cap stocks

If you analyse the bear phase of stock markets cycle since 1990, you will find that such bear phase has lasted for maximum period of 15 to 18 months. Small cap index which made high in Jan 2018 with end of its bull run has corrected by -31% from its peak of 20,184 in last 17 months. Taking clues from history, we believe we are close to end of bear cycle in broader market after which stock prices of small and mid-caps will start recovering by going up and further up.

Below is the monthly chart of BSE Small Cap Index since 2005. The chart illustrate that the last decade bull run which started in 2003 made a peak in Jan 2008 and later went into bear phase with continuous fall in stock prices of small caps for next 15 months, i.e. from Jan 2008 to March 2009 and later stock prices of small caps recovered and went through correction and consolidation phase. Similarly, bull run in small caps which started in 2014 made its peak in Jan 2018 and moved into bear territory later. This month i.e. Jun’19 is the 17th month of bear phase experienced by broader markets – small & mid caps. If history of small cap index repeats itself (have very high probability), we are near to end of bear phase after which stock prices of small caps will start moving northward.

With fear of losing capital and dampened sentiments towards broader markets, small cap stocks are falling like nine pins these days. We have observed a lot of hopelessness towards broader market as Investors who started investing in equities during 2017 and 2018 are not willing to invest in this space due to pain of high negative returns in their portfolio and negative sentiments towards broader markets.

Series of negative developments have made Investors taking back seat in terms of investing in broader markets. Yes Bank and DHFL are dumped by Investors due to NPAs and liquidity concerns, followed by severe correction in Essel group stocks like Zee, Dish TV etc due to high debt concerns. Moreover, continuous collapse of ADAG group companies stock prices with lenders started selling collateral shares of these companies spoiled market sentiments. Recent episode of crash in stock prices of Jet Airways, Indiabulls Housing Finance and Jain Irrigation have completely shaken up retail investors. Collapse in stock prices of such well known and bigger companies on daily basis have butchered investors faith and interest towards investing in small and mid cap companies.

Usually bottom is made during these panic times which we are witnessing currently with series of negative news flow. In fact, we believe bottom is already in place for broader market with lows of Feb'19 post Pulwama attack. Once broader market start factoring all these negatives, the focus will shift towards individual company's earnings growth and current valuations which will drive stock prices up in coming quarters.

Greed which was seen in broader market (small & mid caps) in the year 2016 and 2017 has turned to fear these days. Are you also fearful? This is the time to do opposite of the herd, its time to be greedy when others are fearful. If you are not investing in equities during these opportune times and taking the back seat, you are making a bigger mistake. Are you not following the herd mentality? If you have invested in markets during 2016 and 2017 when valuations of companies were significantly higher compared to today’s valuation, why you have stopped investing now?

Remember, in the long run, you do not make decent returns on your investments by following the herd i.e. when everyone is buying stocks; instead you get handsome returns on our investments by investing in stocks at significantly low prices as no one else is buying, and by selling to them when they come back in herd due to greed in future.

If you are not a long-term investor and thinking to make quick bucks by timing the market, it could be risky. Hence, we advise to invest only keeping a longer time horizon, minimum 2 to years or more. In fact, to make enormous wealth from equities, you should have horizon of 10 to 20 years so that you can experience 2 to 3 market cycles and reap maximum reward during bull phase of equity markets. We do not believe in timing the market and hence advise our members to follow a discipline approach, but it’s wise to turn aggressive in terms of equity investing during panic times which we are experiencing now.

“The first rule of investment is ‘buy low and sell high’, but many people fear to buy low because of the fear of the stock dropping even lower. Then you may ask: ‘When is the time to buy low?’ The answer is: When there is maximum pessimism.”
Sir John Templeton

Its important to be a disciplined investor who keep on investing in systematic way irrespective of market conditions and not an emotional investor who usually buy stocks during bull phase when stock prices are moving higher because of greed and sell them in panic during bear phase due to severe fall in stock prices, making mistake of buying high and selling low.

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