Cheviot Company Ltd

Company Website: Cheviot Company Ltd
Company Details: Kotak Securities
Annual Report: Cheviot Company Annual Report 2006

I read about Cheviot on Rohit Chauhan's blog first. Then Prem Sagar talked about it. And since it was on their radar, I had to look at it.

Cheviot is a West Bengal based company into Jute products. It has 100+ years history. 100 years don't guarantee anything. Recently a 1400 year old business succumbed to excess debt.

Company is into two businesses - Jute goods and Captive power generation. Annual Report 2006 says that power generation contributes less than 10% of revenues and hence is not covered in the annual report. Jute goods include Jute Yarn, Sacking Bag and Canvas Bags.

Its products are used extensively in packaging. In India, GOI has made it mandatory to pack sugar and some other food items to be packed in jute bags. However more than 70% of revenues come from exports and even if these regulations are taken away by GOI, there would not be a major impact on earnings.

Since the entire jute industry has been facing losses, small competitors and most of the players in the unorganized sector have been forced to shut shops. Cheviot remains the lowest cost producer and one of the few companies left making money in the industry.

+ives

1.Company deploys excess cash in mutual funds and other companies. Subsequently company is sitting on Rs 212 cash per share (and this is at cost of investments – with market giving 46% return last year, the market value could be much much higher).

2.Current trading price is about 238. With 212 per share in cash, Cheviot can be effectively bought at Rs. 26 per share.

3.Promoter group holds about 73% of outstaying shares – may be a reason for their love of giving out generous dividends! It would have been interesting to know the dividend payout if promotes had only 27% holding in the company.

-ves

1.Jute industry has been given sops by GOI and in absence of these sops, profitability might come down. Most of the revenues come from exports and in case sops for packaging are taken away, Cheviot would still be unaffected.

2.There is no catalyst that might initiate the value unlock process. In case of Venkys, people just had to start eating chicken again. Here there is no such natural catalyst.

3.Labour issues in West Bengal are very sensitive. Strikes happen on whims and fancies of the union and might have some effect on operations of the company.

Inputs

1. Jute – prices and availability of raw jute.
2. Annual report mentions about petroleum prices being an input.

Dividend History
2007 - 80% interim
2006 - 100% final

Numbers as on April 27, 2007

Market Cap: 108 Crores
Current Market Price: 238
Face Value per share: 10

Numbers of shares outstanding: 3007500

52 week low: 214 on 02 April 2007
52 week high: 492 on 04 May 2006

All time low: 10 on 06 Dec 1996
All time high: 492 on 04 May 2006

EPS: 78 (as per 2006 annual report)
PE Ratio: 3 (as Rohit and Prem say ... market is pricing Cheviot for bankruptcy!!)

To be read more

1. Mention of bonus shares in 2006 report. What happened to it?

2. Read about Jute industry, mandatory packaging of food grains in Jute bags in India, products from Bangladesh and China etc.

3. Use of petroleum in manufacturing jute bags.

4. Operational cost margins to be considered. With 58 crores in bank, the real figures of ROE and ROI have to be better.

Please point out mistakes and errors ... !

Investing Checklist - Set of questions to be asked before investing

I am trying to come with a string of questions that I would ask before I am comfortable investing in a company.

Following are the questions ...

1.What is the quality of management? Are they shareholder friendly? Is the company paying taxes? Do the promoters attend shareholder meetings?

2.Why is stock a pick? How did it become a value stock? Is it a special situation? Does it have huge growth potential in future? Does it have hidden value in terms of cash or cash equivalents?

3.What is the potential downside?

4.If it’s a special situation, is there a catalyst that would unlock the value? How much time would it take for the catalyst to unlock value? what happens in absence of the catalyst? Is there a sign of emerging catalyst?

5.If it’s a growth story, has Mr. Market factored in the growth potential already (by reflecting the optimism for future years in the current prices)? In other words does the stock has high PE multiple?

6.What can change the value proposition? Environmental changes? Regulatory changes? Competitive scenario?

7.If the equation might change, how can the company cope with it? What will be the new downside? Will the company still be a value play?

8.How long will the money be kept blocked? Can the money be freed in case of emergency before the stock appreciates to expected levels?

9.What is the expected return?

Right now I don’t have anything that considers competition, prevalent mood of Mr. Market, Interest rates, return from other avenues. I know there are other things also that I have missed.

Also the list is very big. I ideally want to have not more than 5 questions.

I will keep updating this list as and when I learn more. If someone reads this, please point flaws and omissions.

Pseudosocial Stockbook

Pseudosocial Stockbook is another effort towards capturing information and details at one place.

Even though human mind has unlimited potential, but there are limits to even the unlimited. We are mere mortals and Pseudosocial stockbook is is a collection of news, views, thoughts, comments, links etc about companies in one place. This would be our own TOP SECRET file on a particular company.

Some of these views would be positive, some negative and most only a collection of facts. But it's a place where we would store our thoughts in a chronological order and this shall help us revisit these companies as and when scenario changes.

The Great Hargeisa Goat Bubble

Julian Gough came up with this piece about The Great Hargeisa Goat Bubble in one of his novels in 2003.

This is a must read for someone who wants to understand the way markets become irrational. A journey from discovery of a new market to its boom to its subsequent bust. This short 4 pager covers it all. Very highly recommended.

Here is an extract ...

"By this time the goat craze had become a mania. A severe shortage of goats, and infinite demand, led to excesses. The price of goats became ludicrous, and many animals were led to the town market which were loudly proclaimed to be goats but which on closer inspection proved to be dogs, dressed up. They were purchased anyway, the frightful animals, at grotesque prices.

"The sheer length of the boom was now leading to increased confidence. There was a loosening in credit. It seemed madness not to lend to a man who could pay you back handsomely the next day. And as a creditor, once you'd borrowed and repaid with interest a couple of times, the banks began to persuade you to borrow more.

"Soon the shortage of actual goats led to a booming market in goat futures, goat options and increasingly arcane goat derivative products. This trade in young, unborn, and even theoretical goats allowed yet more money into a market whose only bottleneck or brake up to this time had been the physical shortage of actual goats.

Link to Julian Gough's website
Link to The Great Hargeisa Goat Bubble

How to (Actually) Invest Like Warren Buffett… and Charlie Munger

I found this on JoeCit

Some excerpts ...

On WEB

When Buffett claims to understand something, he means he understands it almost 100% and can say with virtual certainty what the company will look like in ten or twenty years. It’s not that Buffett is out of touch and doesn’t know what a computer or a prescription drug is. He may have you think that in jest, but, as Bill Gates has said, he knows their businesses, opportunities, and challenges quite well. Yet, and here’s the key, he does not have any advantage or insight into how the will perform in ten years due to the fickleness of their industries.

On Munger

I personally believe Munger’s influence at Berkshire and on Buffett’s thinking goes, regrettably, unsung. Very unsung. If Munger hadn’t been around, Buffett arguably would not have gained an appreciation of buying great businesses rather than cigar butts. Munger helped make Berkshire’s returns phenomenal, while allowing for scalability that could not have otherwise been achieved. In other words, Berkshire could never have been scaled to its huge size by purchasing cigar butts — there aren’t enough of them, and the returns are not “continuing” (i.e. when they reach fair value, there’s no further upside. You must sell it and move on). Berkshire, therefore, needed to invest in great businesses that it could hold on to.

There is more but the article is best read from the original source (link).

Above passages were copy-pasted from JoeCit.

Revathi Equipment Ltd

Company Website: Revathi Equipment Ltd.
Company Details: Kotak Securities

Revathi Equipment Ltd. is a part of Mr. Abhishek Dalmia's Renaissance Group. Revathi are manufacturers of drilling equipments and accessories for Mining, Construction and Water Well / Exploration Drilling applications.

Revathi Equipment Ltd came into our radar some time September or October 2006. We thought the company is overpriced. But we loved Mr. Dalmia's letters to his shareholders and with our investment, we just wanted to be among the legitimate recipient of his letters.

As Ben said, price changes everything, the price had to be correct. The price was hovering between 600 and 700. It was still out of our comfort zone. But one fine day the company started share buy back. The company was buying it's shares for prices between 600 - 700 with some shares being bought for 699 as well.

We thought we would follow smart money and put our money and faith with Mr. Dalmia. Though our reasons for buying were very rudimentary (no valuations, no price decline, not sure about 52 week lows) but we bought some shares. We just wanted to be with someone who is so much like WEB in his writing and most probably in his thinking.

Talking about the letters, Mr. Abhishek Dalmia issues Letters to the shareholders (FY0304, FY0405, FY0506) annually. These are must read for anyone looking out for words of wisdom. Similarities between Warren Buffet's Letters to shareholders of Berkshire Hathaway can be easily observed.

These letters tell a lot about intent and motivation of the Chairman and the probable direction the company would go in.

Parting Notes
We dont have access to annual reports for Revathi. If someones got a copy, please drop in a line.

P.S.: We own Revathi. Even if we try real hard, out views would be biased. Satisficing .... ?

Balmer Lawrie Investment Ltd

Balmer Lawrie Investment Ltd: Special Situation ...?

Company Details: Kotak Securities

Balmer Lawrie Investment (BLI) holds 1,00,64,700 shares of Balmer Lawrie & Company (BL) and is available at 50% discount to market cap.

Some facts to start with...

Balmer Lawrie & Company (BL) Numbers

Total number of shares outstanding: 1,62,86,081
Price per share (as on 03APR07): 405.10
Total Market Cap: 643 crores

SEBI EDIFAR reports that Balmer Lawrie Investment holds 1,00,64,700 shares of Balmer Lawrie & Company (or about 60% of outstanding shares).

60% of 643 crores is roughly 397 crores. Ideally, Balmer Lawrie Investment should be worth 397 crores give or take few crores.

Numbers for Balmer Lawrie Investment Ltd however, show a different picture.

Total number of shares outstanding: 2,21,97,269
Price per share (as on 03APR07): 89.45
Total Market Cap: 196 crores

Put simply, for some reason Mr. Market has decided to price a company worth 397 crores at 196 crores. A whopping 50% discount or 100% potential profit.

Now the obvious question. Should we or should not we?

I would not buy Balmer Lawrie Investments because ...

1. Since it is only a holding company (BLI was created when govt. decided to divest stake in IBP and needed another vehicle to hold BL shares), it is very unlikely that they will liquidate their position in Balmer Lawrie. The value in Balmer Lawrie Investments will stay locked. My money would also get locked in the vehicle.

The annual report says "Your Company is not engaged in any other business activity except to hold the Equity shares of Balmer Lawrie & Co. Ltd. and accordingly matters to be covered under 'Management Discussion and Analysis Report' are not applicable for your Company."

2. The stock price of Balmer Lawrie Investments can move up if Mr. Market suddenly sees opportunity or BLI starts making more investments in other companies. So far neither of the two has happened and I don't know when it would happen in future. I am happy loosing my shirt by betting on probability but I am not happy winning a bet on uncertainty.

Further the annual report says "Your Company as you are aware is prohibited by the Reserve Bank of India to do any sort of non-banking business. Dividend received from Balmer Lawrie & Co. Ltd., is the only major income of your Company. Estimated surplus money instead of keeping in the Current Account is deployed in the Fixed Deposits Schemes of the Banks. As of 31 March 2006 the total amount of deployment in the Fixed Deposit Schemes of the Banks stood at Rs. 733.56 lakhs. Your Company during the financial year ended on 31 March 2006, out of such deployment in Fixed Deposits earned to the tune of Rs. 35.28 lakhs."

3. The business Balmer Lawrie is in (its a govt. company all right) might also go down and subsequently the book value and price of BLI might go down. I don't know if this would happen but this is another aspect that has to be kept under consideration.

4. Then there are other things like low trading quantities that make the stock unattractive.

On the other hand, I would buy Balmer Lawrie Investments because

1. Its trading at close to 52 week low (of course... this is a bad strategy but I have used it earlier and reaped rewards .. am not scared to use it again

2. A lot of mutual funds, institutional investors hold positions in BLI. Proponents of follow-smart-money theory (including me) might argue that they seek safety in crowds and if MFs and FIIs are putting money here, their money is also safe. (assuming that institutional investors ARE smart !!)

3. This is like one of those opportunities where you don't know how long would it take to reward the shareholder. Tomorrow all of a sudden, govt. might announce the merger of two entities, buy back or something else. At this time, we don't know.

More Links
Google Finance Profile for Balmer Lawrie & Company
Kotak Securities Profile for Balmer Lawrie & Company

Thanks to Mohit for idea and numbers!

Averaging Down - Yes or No?

Averaging Down was talked about in Gurufocus here.

Here are my comments.

Hi,

I have a slightly different view.

Averaging down is good. Even I have averaged my stocks down to reduce my holding cost. But there are certain things that one must take care of.

1. The company you have put your money in should be fundamentally a good company and price fall must be irrational (not logical - YES NOT LOGICAL!!!!). In other words if the stock prices of chicken hatcheries is down because of bird flu (irrational reason), makes sense to average the cost down. And if price is down because the industry has been made obsolete (logical reason), don't average down (eg: pagers, CD manufacturers etc.)

I am from India and when Bird Flu struck us last year, all the hatcheries stocks tanked and there was nothing wrong with the business. It made all the sense in the world to get into hatcheries and poultry farm businesses.

2. Once it's made sure that market price is down because of some irrationality, another thing to keep in mind is upside potential. How soon can market realize that it was being irrational? For example bird flu sooner or later has to be cured and people would not stop eating chicken. Return to mean would thus happen in predictable amount of time. If in any case, return to mean takes longer than predictable amount of time, IMHO, averaging might be a bad idea. Personally I would not average down. It would be like putting more weight on a sinking ship (trying my hands at churning out one liners like WEB).

3. Finally averaging down must also consider the biggest cost of all - the opportunity cost. Averaging down is made possible only because market is down or some unrelated thing is affecting investor behavior and confidence (butterfly in New York cooks up a storm in Sahara). In these times, there could be other companies available even cheaper with higher upside potential. Better check out other opportunities before averaging down.

Please point if I am incorrect somewhere.

SRF Ltd.

Company Details: Google Finance, Kotak Securities

Prof. Bakshi posted his views on SRF Ltd. yesterday on his blog.

Shankar asked me to look at SRF. SRF is currently trading at close to its 52 week low (CMP as on 13-MAR-07 is 120 and 52 week low is 110 on 12-MAR-07). For me this is a very important criterion in stock selection. I dont understand PE Ratios and hence I look at historical prices to see if a stock is "cheap" or not. Almost every investor would disagree with me but until I learn about PE and other ratios, I would keep using this.

The stock was cheap in first glance. Prof. Bakshi had talked about it (although it was more negative than positive) and Shankar asked me to look at it. I had to dig in. I smelled another investment opportunity.

Unaudited financial results for Dec 06 are available here and the press release is available here. It said

"SRF Q3 FY2007 revenues up 52% to Rs. 450.36 crores (vs. Q3 FY2006)" and "PAT up 418% to Rs. 70.11 crores; EPS at Rs. 10.33".

Looked like a turnaround story with huge improvements in revenues and margins.

Mr. Arun Bhagat Ram, Chairman, SRF Limited, added:

" ...The revenues and profits improved significantly by 52 % and 418 % respectively in the third quarter. Though there have been pressures on realizations and margins in our businesses, we believe our continued focus on cost efficiencies and improvement in margins will see the current businesses revert to providing healthy returns."

However there is one thing in the financial results that struck me as odd. One of the notes to results said

"The receipt of CERs (Certified Emission Reduction) income is likely to vary and may not recur from Quarter to Quarter."

When I looked at the results, I found out that income from CERs was 122.28 crores (out of total income of 450.36 crores). And this is where I had problems.

If this income of 122 crores was taken out, revenues would fall to 330 crore (compared with previous years' 296.27). Increase in just about 10%. With the economy growing at 9% and inflation at 6%, its less than average. And this income is temporary in nature and might not recur. I might be proved wrong and this income might get even more money for the company but I am not willing to bet my money on a company that doesn't make money from its core business.

Talking about the core business, SRF is majorly into
1. Technical Textiles (input for automobile tyres including aeroplanes, conveyor belts, contributes 65% of revenues before income from CERs starting coming in),
2. Chemical Business (majorly greenhouse gases and other chemicals, contributes 20% to revenues, and according to management, as these are governed by Montreal protocol, there is limited growth) and
3. Packaging Films (currently loss making business, stiff competition from domestic firms, problems with exports because of anti-dumping restrictions by EU).

These core businesses are not making any strong ripples in profitability or revenues or market expansion.

The cash flow from CERs (not permanent), the revenues and hence profitability is expected to be jittery in my opinion. CER income might dry up all of a sudden or it might start churning money - in either case, I would loose my sleep over this stock and this is unacceptable to me.

In the end, I do not have the advantage of making decision by looking into future. In view of current situations and conditions I would not want to invest into this "cheap" company.

I know I would be wrong at a lot of places. Please correct me if you happen to stumble on this post.

HB Stockholdings Ltd

Company Details: Kotak Securities

Few facts to begin with.

Current Market Price (As on March 7, 2007): 26.75
Market Cap: 68.56 Crores

The company is in the business of investing. They try to make money by investing smart. They invest smart all right but they don't always make money (evident from last years result).

They have a huge portfolio with. Major holdings in Jaiprakash Associates Ltd and IFCI. Apart from these two they have a three page long list of stock under "investments" schedule.

Here is the interesting part. HB holds about 140 crores of Jaiprakash Associates Ltd.

If someone can buy out HB Stock and liquidate JP at current prices (although JP has taken a toll in the recent weeks), the money made would be two times the money put in. Basically its like paying 68 crores to pick up 140 or more crores. This investment has been with them for over a year and hence it's tax-free.

I somehow don't see any catches. May be am turning blind to the risk free short-term profit.

I was told that company is not making any profits and hence not lucrative. In my opinion, since HB is in the business of investments, they can't really make profits. And they shouldn't aim to make any profits at all (The power of compounding !!!!).

All they do is buy stocks and forget about them. After 5,6,7 years they wake up and suddenly realize that their holdings have turned into multibaggers. Reminds me of one Mr. Buffet ... he does essentially the same thing - buys a stock, forgets about it and one day he realizes he’s become a billionaire. And no I am not trying to compare HB to Berkshire Hathaway.

Question at the end of all remains ... Why aren't people like Jhunjhunwala, Prof. Bakshi buying this company out ...? Why cant this company be bought out and all the holdings liquidated ...? There are simply tons of wads of money on the table and its there for the taking.

And no ... I dont have any holding but yes, few friends have HB in thier portfolios.

PseudoSocial@gmail.com

Carnation Nutra

Company Details: Kotak Securities

Prem Sagar posted this about Carnation Nutra on his blog.

I sent it to my group, Sandeep replied ...

Actually have not read much into it but just read an interview of one of the Amul guys somewhere around a week back

he said that this product margarine is more harmful than butter as it contains fatty acids more harmful than butter. Actually both companies will promote there products and will speak in favour of their products.

But the question here is that this company has 60% of market share because none of the other biggies britania and amul are in this market (correct me if i am wrong as i am just speaking from GK, and i am very .... )

If this product becomes a big hit then do you think that these biggies will not jump in the fray (whatever the amul employees may think about it )

views invited

Sandeep A

sorry for spamming

Nalin said...

I would agree with Sandeep (hi!!). For any company to exploit growth opportunity, should establish entry barriers. In this case entry barriers are not obvious. I dont have an informed opinion on this. just a laymans perspective. Furthuremore a large market for the product in US doesnt translate into an immediate opportunity in india.
case in point is cornflakes. breakfast meals are big in us but are only now beginning to get into the indian mind space. and the puny li'l reason was that indian drink hot milk unlike americans who like it cold. ;-). It required a sustained ad campaign over the years by a major like kellogs. I don think carnation nutra has such deep pockets.

At the current valuations it is trading at 14.28x over EBITDA (operating EV) and 20x over EBITDA (entire EV). I doesnt seem to be cheap as well.

Nalin

Prem replied ...

Hi Saurabh,
Thanks for the mails. I enjoyed reading them.
Here is my reply to all your friends, and welcome any more discussions on same.

1. Both butter and margarine have their pros and cons. Butter is more natural (and some would argue more flavorful), is not hydrogenated and, thus does not contain trans-fats. Margarine, on the other hand, is cholesterol free, lower in saturated fats and is increasingly becoming available in trans-fat free varieties. Whichever you choose, experts say moderation is key. Too much of either is definitely a bad thing. Indians are prone to cholesterol related diseases..that is where margarine has an upper hand I believe (not to be taken at face value)

2. As far as the biggies foray is concerned, its a free market, so anything can happen. But taking the cue from Sugar Free, and the fact that its a Cadilla company, I dont see a very huge risk..though that means a mkt share drop. Execution is a different thing. that can only be seen with time... as of now, I am only concerned with the opportunity.. what the co will really do is anybody's guess. for that reason, a scaling up of shares as and when they do well is a good idea. I dont want to take a guess on execution capabilities now! An average purchase on the way up (as execution is proved) should be the key.

3. Kellogs was a great product, but ahead of its time. I think if they had introduced Kellogs in 2005, it would have been a better performer. Back in 90s the health consciousness was poor and the willingness of the Indians to pay for cornflakes was questionable.

4. Its not a question of comparing how well it did in US, but how good it is for any Indian, given our lifestyle. The market is huge in the sense, Indians are getting health conscious.. if Margarine is good for health, or not, is for us to investigate. We need to remember that an average Indian is frugal and cost conscious, and not so health conscious. Educating them will take time.

5. Its too early to do a competitive advantage check. But it has a first mover advantage. Being a single product, and being the product of a co with 0 debt, they can afford to focus on it..and give more advertising focus.. money should not be an issue, though profitabilty will be affected in the early days... again too early to talk abt it.

6. I am not saying its a truly wonderful opportunity. I think this is an area where as a consumer we have a competitive advantage to check things out, a product thats easy to anlayse and review, a compnay thats not complicated with a myriad of things and the like.

Will be eager to receive more comments.

Thanks
Prem

The floor is now open for further discussion. Views and Comments invitied ... !

Venkys (India) Ltd

Chicken Chengezi

Company Details: Google Finance, Kotak Securities

Around the same time last year, bird flu broke out in India and everyone was scared of chicken. They dint want to eat it, they dint want to see it and they dint want to own any chicken stock. In Feburary we had finished our final exams at MDI and everyone was preparing for their respective India tours. Me (aka 04p048) and Utti Singh (aka Ram Singh aka 04p122) along with a guy called hawk (aka Gandhi aka 04p049) and the biggest hogger in MDI called bhai went to have Chicken Chengezi @ Azad Market, New Delhi. Believe me the Chicken Chengezi there is something you should not miss if you have some time to spare in Delhi and savour non-veg food. Bird flu was at its peak in Feb/March and we had to wait for over 20 minutes just to get a seat, leave alone hogging on to the Chengezi. In sharp contrast the hatchery stocks plummeted to their 52 week/lifetime lows.

Venkeys the largest hatchery in the country with a share price of 170 odd was available for a share price of 120 odd which further went down to 90 odd (though only for a couple of days). The market cap of the company today is around 108 crores with the share price at around 112. Consider this with respect to a reported profit after tax of 16 crores for the previous 2 years, 8 crores for 3rd last year and 10 crores before that. For the FY 2006 Q4 the company posted a loss of around 4 crores and a PAT of 11 crores for the whole year.

The company also boasts of R&S of 104 crores compared with a market cap of 108 crores. About 4 months ago, the promoters bought back around 5% stake at around 120 bucks per share. I have not stopped eating chicken though have considerably reduced it for the love of fish and mutton. But I am sure Utti, Bhai and Hawk are still very much at it and hopefully so are millions of others. The company has a total debt of 83 crores which is or can be a cause of concern. The company also has a book value of 120 bucks per share and is trading at a P/E multiple of 9.

Well really don't know why someone should pay more for a company which makes some excellent frozen foods, read chicken keema, my staple diet on so many Saturday mornings in Pune, after bunking the DSGT (discrete structures and graph theory) classes. I think staying in the class rather than cooking keema, would have saved me from loosing some money behind hens and saved people from the painful exercise of reading this (assumption you are still reading).

Prof. Sanjay Bakshi - Introduction

A professor, a philosopher, an inspiration, a way of life, a dream and ... a reality. Prof. Sanjay Bakshi.

Presenting Prof. Bakshi ...

-----Original Message-----
From: Sanjay [mailto:(####)]
Sent: Thu 11/18/2004 12:41 PM
To:
Cc:
Subject: My Own Story
Some time ago, Kumar Saurabh sent me a mail in which he asked me some personal questions that got me to reflect on my life. I then wrote a long mail to KS in which I tried to give answers to his questions. Subsequently, with KS's permission, our mail exchanges were posted on my yahoo group.

I am now posting the same exchange between KS and me over here. Read KS' mail first which is at the bottom and then my reply.

Some minor mistakes relating to dates were subsequently found but I have chosen not to make any changes.

SB



From: Sanjay
Date: 10/04/04 00:12:20
To: [####]
Subject: Re: Not Urgent

Hi Kumar:

I wonder if you know about feedback theory? In a negative feedback loop, like a thermostat geyser, suppose the maximum level of temperature is set to 90 degrees. Assume that the geyser is on and the water is getting heated. Soon enough the temperature will rise to 90 degrees and the sensor in the thermostat will sense this and will act by cutting off the circuit. The water will now stop getting heated and will slowly but surely cool. Sooner or later it will reach the minimum level of set temperature, say 60 degrees - whereupon the sensor in the thermostat will sense this and will re-connect the circuit and the process will start all over again. Negative feedbacks loops like this one are stable i.e. they restore stability. A whole lot of things around inside us are negative feedback loops - stuff like our own body temperatures, our digestive system, our, respiratory systems. In fact negative feedback loops are visible all around in nature as well.

Now think of a positive feedback loop. Suppose that the sensor instead of stopping the heat from getting hotter, when the temperature reaches 90% starts to send even more heat energy in the water. This will ensure that the process of heating accelerates. Of course, in this case, the heating cannot accelerate indefinitely because it will break some laws of physics if it did but there are many other feedback loops which can last for a long long time.

Your reference to the profit multiplier model reminded me of this theory. If you really think about it, all business successes have an element of positive feedback loop in them. My own success has followed a positive feedback loop. But I didn't design it like that. I just worked out that way. Its only now that I am recognizing these patterns in success that you are also recognising and given that you are much younger than me, you are way ahead of me in thinking along the right track . . .

I'd like to tell you my story which is quite fascinating. I was not very good in my studies in school. The only subject I really liked was math and even there I had terrible teachers. So school (DPS, Mathura Road) was a disappointment. In 1983, I entered Kirori Mal college to do my B.Com and started liking the subjects I was studying - accounting, economics, law etc. My interest in academics started to increase. I also got myself a girlfriend, who was also my first student (she studied accounting from me in college) so you can understand why I got attracted to teaching! After we finished college, in which did I extremely well, I joined Price Waterhouse as an articled clerk in 1986 and my girlfriend joined some other local CA firm to pursue the same profession as me but she found she hated it, so she moved on to do a Masters in Finance and Control in University of Delhi. I started to love accounting and auditing and learned a lot about how businesses perform, or d o not perform, by going to audit many clients over the three years I spent at PW.

Because my love of the subject like accounting, economics, law, finance, auditing had grown quite a bit by then, I did well. I passed both my CA exams - the intermediate and the final in the first attempt (which is quite a feat) and in the minimum possible time. Even before I completed my statutory article period of 3 years, I got a job offer from American Express. At that time Amex was the place to get work for CAs. Giving into social proof, I took the plunge and joined Amex sometime in June 1999. By December I had quit my job with no other job in hand. Obviously, this will give you an idea of my nature. Whenever I have made the big decisions in my life by deciding to do something or to run away from something, I have never really had a plan B. In case of Amex, I just knew I had to quit (Big decision # 1). The job was quite rotten, and I came out of it swearing that I will never work for anyone ever again. So, in a sense, I have much to thank Amex fo r!

I went back to my favourite partner at PW and told her that I'd like to go abroad to study and until I got a chance could I come back to PW? She said, sure, why not. And so I found myself back in PW as an audit officer. By then, of course, I had been applying to many colleges including the LSE. Also, by then, seven years had gone since I had got this girlfriend towards whom I was much devoted, and since I had a job, we now decided to get married. That's when all hell broke loose as often happens with young couples who want to get married without the consent of their parents. In our case, the problem was with my parents. Well, again I knew I was taking the right decision. (Big Decision # 2).

After a lot of agony, I finally got married in Feb 1990. For a while I thought my troubles were now over, but little did I know that they had just begun! My house became an Ekta Kapoor TV serial. Soon, I moved out of my parents' house with my wife and took an apartment on rent in the far end of east Delhi. We had no money. We slept on the floor. No bed, no chair, no furniture, no fridge, no TV, no AC but plenty of love to share. Life was still hell, though.With both of us working hard, often reaching home at 10:30 PM- the stress of family tension, poverty, and a whole lot of factors made life pretty miserable.

Then, one fine day, I got a letter from the LSE telling me that not only had I got admission for an MSc course in Information systems, but also had I been granted a scholarship to pay for my fee. There was no scholarship offered for living expenses. By now, you can probably guess as to what decision I would take. I just knew I had to go to London - living expenses or no living expenses. (Big Decision # 3)

So, in September of 1990, a few months after I was married, with no money, I arrived in cold London with my wife and plunged into my studies. But what about my living expenses, you should now ask? My scholarship only paid for my fee and I had to pay rent and we also had to eat. We had no savings.

My wife took up a job as a tiller girl in a grocery store. A Masters in Finance from University of Delhi found herself scanning groceries for customers and packing their shopping for them. If she ever complained, I never heard it.

Both of us also took part time jobs working in Burger King. Yes, I and my wife made burgers earning the minimum wage of 4 pounds an hour less deductions. And, oh, the burger making part was the best part. There was the other part like cleaning the toilets, sweeping floors, clearing tables, listening patiently to screaming customers and many similar activities which made making burgers seem like heaven!

One year went by and I finished my course at LSE. Incidentally, I never actually studied much of Information systems. I went and sat in the finance classes where I encountered, unsurprisingly the efficient market theory. Then on one of the most important days of my life, although I do not now remember what day it was, I read in the Financial Times, an article about a strange fellow called Warren Buffett who made money in the stock market by keeping away from the market. The positive feedback loop had just begun.

Within a few days of reading about Buffett, I knew that I had found a meaning in my life. (Big decision # 4). I simply knew that his ideas were learnable and that they would work in India. But I also knew that I hardly knew anything about investing using Buffett's philosophy. And so, I went berserk about learning everything I could about this fellow. I read and read and read. I wrote to him asking him to send me his annual reports (there was no Berkshire website in those days). His reports arrived in four days. It was as if he was waiting for my request. He could, perhaps, almost hear me shout, "Teach me, what you know" and he responded by sending me those reports. I still have them with me, of course, and if you see them you'll find every page has been underlined, highlighted, with extensive notes questions etc written pencilled in the columns. And the more I read about Buffett, the more sense he made to me. Of course, when you read Buffett, you eventually discover Graham and once you discover Graham, he can keep you busy for a couple of years. I now knew my education was woefully incomplete so I decided to stay back in London to learn everything I could about value investing. I took up a part-time job as a research assistant with an academic publishing company. This job came with certain privileges - such as a photocopying machine with unlimited paper, and toner, and access to the best libraries in London. I furiously copied all the books on value investing that I could get my hands on. The money I earned was sufficient to keep us alive and that was all I wanted anyway at that time. We stayed in London for a total of three and a half years. Then, suddenly, one fine day, I told my wife that we're going back to India. She was shocked. How did I decide to come back? I just knew I was now ready to come back to India. (Big decision # 5).

And so about 10 years ago, we returned to India, with Rs 3 lacs as our total savings, lots of wisdom, and a daughter. And what did I do when I returned? Take up a job? No, the pain from the Amex experience will take many decades to go away, so a job was out of the question. So, despite the advice from parents and my best friends, I decided to float a company. I approached my closest friends and relatives and asked them to invest in it. I think they invested more out of pity than for having any confidence in me. Remember, I had no track record. I didn't surprise them. By 1996, the money had shrunk by 40%. And that of course is the most wonderful thing to happen to someone who wants to make a career out of value investing - losing your friends' and your relatives' money. Believe me, its the best lesson in getting a risk averse nature. I had to start all over again. I corrected my mistakes and remade the portfolio following Graham's advice. And I have never looked back since t hen.

As mentioned earlier, when I returned to India 10 years ago, my total savings were Rs 3 lacs. Today, I can say with confidence that I am financially independent. To use Robert Kayosaki's (author of Rich Dad Poor Dad) words I no longer work for money. Rather, I find myself in a position where money works for me. I have given up all my clients. The money I get from MDI is not even 1% of what I now earn in a year.

It wasn't like this a few years ago. In 1996 when I went to IMI, I needed to find some way to feed my family while I was practicing value investing. Teaching was the last thing on my mind. I had already started writing columns for the Investor's Guide in the Economic Times. One day, one reader of my column, who was teaching at IMI made the effort of calling ET, got my phone number, and called me up. He asked me to come and see him. I went to see this person and he convinced me to come teach one class. I must confess here that till then I had never spoken a word in my life while standing on a stage - not in school, not in college, not in PW or LSE or anywhere. I am by nature an introvert. I hate going to parties. I probably go to less than 3 parties in a year. The whole idea of doing public speaking was so scary that I don't know how I said yes to this person. He must have used some weapon of influence - I don't remember anymore. Incredibly, I also don't remem ber who this person was. His memory has faded away.

Anyway, I prepared many days for that one lecture, and went and delivered it in a total state of panic. In those days we had to use transparencies instead of powerpoint, and that was useful because one could actually talk without having the need to look at the audience, which to me was less preferable than to go alone in a graveyard at night. The lecture was well-received, and I was now on my way to becoming a part academic, part value investor - following the footsteps of Graham. So, after all this, Kumar, I have now provided you with the answer to your first question.

Over the next few years I taught at IMI, Fore School, and ICFAI Business School. There were days when I would teach 3 hours in Chattarpur branch of ICFAI and then go to Kirti Nagar branch and deliver the same lecture another 3 hours. Talking for six hours and driving 120 kms in June in Delhi in a car which had no AC, and doing it twice a week was some feat, I guess. When you have to find a way to feed your family and you don't want to compromise your cherished ideas (in this case of not working for anyone but myself), life makes you hard enough to endure pretty much anything.

So, my decision to teach was driven by the need to feed my family. Of course, once I started to teach, I started to really enjoy it. Remember my experience of teaching back in Kirori Mal College. I guess I was cut out to be a teacher, after all. Over the years, I found that there was a great deal of synergy in what I was teaching and what I was practicing. Teaching makes me focus better on my work and my work provides me with cases to discuss in class. In other words, a positive feedback loop is in operation.

How did I shift to MDI? Well over the years I became better and more confident, and one day a friend told me that he knows a professor at MDI (now retired). I had heard about MDI, and I knew that it has a lovely campus, and I enjoyed driving. Now I know this sounds silly, but the desire to drive to MDI was one important reason for my approaching it in the first place! I love cars. And since I work from home, I hardly get a chance to drive long distances. So, incredibly as it may sound Kumar, its is true that you and I met probably because of my desire to drive!

Of course, my experience of teaching at MDI was great from the very beginning. But, over the years, as I look at the course outlines and the slides I displayed, I can see how I have become better and better. There's nothing unusual here. One should get better and better over time in any activity that requires brain power. I found that my professional experience grew, I could use them as cases in my class and the process of preparing for my classes forced me to study which generated more ideas. The positive feedback at work again. Indeed, some ideas started coming from the students themselves. In 2001, one student, using the ideas of identifying cheap stocks taught by me, submitted a project report on Trent as a cash bargain. I instantly recognised the value of the idea and implemented it by buying the stock. What was I to do? I teach the subject. I teach how to recognise opportunities. If someone brought one to me, should I ignore it? Does the fact that its a student project report make it worthless? And if I ignore it, am I being smart or foolish? Well, I decided not to ignore it. I went and bought 1.5% of the company at Rs 65 per share. And, of course, I made a killing.

The Trent experience made me realise two things: (1) security analysis is learnable; (2) there are huge synergies in teaching it well and and practicing it. The experience, however, made me a bit uncomfortable. Was I using my students to generate ideas for personal gain? It was a problem which was difficult to solve. There were only two solutions: (1) ignore good ideas generated in class but talk about good ideas generated out of class, which to me looked rather foolish; or (2) give public recognition to the person who floated the idea with the effect that he/she will get confidence about his/her own abilities and can also be used as a role model for other students. I chose (2) and it seems to have worked. There are several ex-students, including you, who feel that my approach of practicing security analysis is workable and learnable. Indeed my adoption of (2) has, in my view, accelerated the positive feedback loop.

And then, Lollapalooza happened. As you may know, the idea was not mine at all. It was all Sumit Khanna's idea. After passing out from MDI, he sent me a mail in which he said that he had created a yahoo group in which all the SABV students of last year were members and he wanted me to be a member. Instantly recognising the value of Sumit's idea, I agreed. But, within two days, I felt, why are we limiting to only those who just passed out? And why are we limiting to only MDI? If I was the common thing in the group, then surely the presence of many other people who were my ex-students, and who, by now had valuable experience, might be interested in becoming part of Sumit's group. They may have something to offer. I wrote a mail to Sumit telling him what I felt. In that mail I suggested that we create a new yahoo group in which we invite only my students including past students from MDI and other places. Because the group was to include non-MDI students, I suggested we have a diffe rent name (the earlier group was called wowmdi). Sumit readily agreed and suggested a list which, of course, had the name, Lollapalooza. So, this is how Lollapalooza was born. It wasn't planned by me or anything. It just happened, pretty much like everything else in my life happened, as described above.

I want to mention here the role of a very dear friend and colleague of mine in my ability to instantly recognise the potential of Lollapalooza. This friend is a deep value investor like me and is probably the smartest man I ever met. Incidentally he's a school dropout and has learnt to survive and prosper pretty much as I have. In 1998, this friend, who was then unknown to me approached me after reading some of my articles. He came and met me and gave me the annual reports of three companies - Kirloskar Oil Engines, Unichem Labs, and IVR Infrastructure (the name of this company was different then). He owned stocks in all the three companies and he wanted my advice on his investments. He also wanted to know what I found attractive in my own portfolio. When he went away I thought along the following lines:

"This fellow is a school drop out. What the hell does he know. I am a CA, a MSc from LSE and I am an expert on investing as my ET articles vouch. Investment ideas are intellectual property. They are extremely valuable. Why the hell should I share my ideas with him? And if I am not sharing my ideas with him, I also see no point in looking at these annual reports." Well, that mistake cost me tons of money because each of those stocks became multi-baggers.

But I didn't know this fellow well enough. He kept on calling me. Then he started to advice me. He told me in 2000 to keep away from IT sector. After the great crash I realised that I had made a terrible mistake by ignoring him and I apologised to him, and he forgave me. He told me one sentence that I'll never forget: He said:

"Bakshi, always remember, that knowledge grows through sharing."

By now I has also learnt how utterly simple this friend is. He's now probably worth more than Rs 50 cr. He lives in a middle-class apartment in Chennai. He drives a Honda City. I can continue writing about him for hours, but maybe on another day. Right now, I just want you to know the most important thing that he patiently taught me was that knowledge grows through sharing. I now spend at least an hour a day with him sharing ideas.

It really changed my view of the world and my view of myself. I realised that I had been a total fool in thinking that I was the master of the universe. I changed. I started talking about my investment ideas with other like-minded people. The process continued until I reached a stage in my life when I was creating like-minded people in the classroom. So, when Lollapalooza arrived, I instantly knew that knowledge shared selflessly will increase. And, in my view, it has.

I learnt one more lesson from my friend. He taught me that if you do good things, you get them back with interest. And if you do bad things, you get them back with interest too. God had, in effect, an yield curve with an interest rate implied from deeds we do and the rewards/punishments we get. And that advice has worked for me in life. I have found this over and over again that some people who only want to take but never give suffer while those who give, also receive, and with interest. And that pretty much explains part of the reason as to why I go and teach security analysis. I am often asked by friends who have seen my track record as to why am I telling others how to do it? Well, I guess, you got my reason now. The other reason, of course, is that I simply love it and I feel obligated to give back to society from which I have taken so much.

As of now, I don't know whether Lollapalooza was my big idea # 6. (In fact, it wasn't even my idea.) Time will tell, but it has the common elements that was present in all of the previous ideas - it was not deliberately planned by me. But when it arrived, I instantly knew I had to do it. I am reminded of a wonderful passage in the autobiography of Herb Simon, which I reproduce below:

"I have encountered many branches in the maze of life's path, where I have followed now the left fork, now the right. . . .In describing my life as mazelike, I do not mean that I have a large number of deliberate, wrenching decisions to go off in one direction or another. On the contrary, I have made very few. Obvious responses to opportunities and circumstances, rather than studied decisions, have put me on the particular roads I have followed"

So, as you can see, Kumar (if you are still awake that is), my life has largely followed the above Simon quote. So that was my story so far, You can seek answers to your questions from what I have written above, or you can look elsewhere, or both. It's obviously, up to you.

Regards

Sanjay Bakshi
http://www.sanjbak.com/
-------Original Message-------

From: Kumar Saurabh
Date: 10/01/04 12:49:01
To: [####]
Subject: Not Urgent

Sir,

I was recently reading a book on profit models and I found one that fit your profile. It talks about using one skill to make it big, its called the profit multiplier. I realized that it roughly fits you, you make money for yourself by investing your own savings, also manage other people's money which yields fees, teach at MDI, which would net you some more money.

Finally, you have pieced together a research unit with ZERO cost (or minimal). This essentially means that now you have a skill, which you can use in decreasing quantities since now you have a larger body of
similar thinking individuals. I assume at least 10% of the ideas generated from the e-groups would be worthwhile for you. So now you earn even more with the added advantage of having the option to work
less (very Bertrand Russell like) or the chance to increase your gains further by maintaining your work schedule.

I truly see the mastery in what you do. Now I have a few questions. Please do not be offended, that is not my intent, I am simply evaluating a few aspects of a professional life, which will form the very core of my philosophy for life.

Q1. Was the decision to teach at IMI taken with the consideration of multiplying your profit or for the sheer exhilaration that comes with teaching? If neither what was the factor that drove you to teach first at IMI then at MDI?

Q2. How did you get an idea to start the business you run now and what were some of the things that formed the basis of your decision?

The second question will probably take a little time to answer, let me explain why I'm asking this particular question.

Recently a friend, who works at Wipro, informed me that their head, a Vivek Paul or somesuch earns Rs 5 crore annually. This really got me thinking, if the man who understands business better than most, is
exceptionally intelligent, a great people person among many other qualities he would have to possess to be at such a position was paid what seems like not all that great a sum. Is it really worthwhile to
stay in a job knowing that I will perhaps never be as good as him and hence would never earn even a fraction of that amount of money?

In this case does it not make sense finding out what I'm good at or finding out what people are good at and using their skills to multiply my profits through a business run by me?

This is not a very urgent query; please take your time in answering them. I also understand that you may not want to answer some questions, so please feel free to strike either or both of them off the list.

Inquisitively,
Kumar S.


PS: The Russell reference is to an essay, 'in praise of idleness', a must read if you haven't come across it.

Comments? PseudoSocial@gmail.com

Blue Dart Express Limited - Delisting

BDEL was to be dislisted from exchanges and they decided on a reverse book building for the same. We had talked about it here.


The demand graph for delisting looks like this.

If I am not wrong, 950 is the discovered price in the reverse book building. As on today, 10th November 2006, BDEL was trading at 605 (link). A whopping 86% above the offer price of 550 and 57% above todays closing price. As always, few questions...

There are two things that can happen.
1. BDEL can refuse to accept this price. Now two things can happen - now that we know that Mr. Market thinks that right price for BDEL is 900+ (*) and stock can shoot up and second since there is no more delisting offer from BDEL, the price will fall down.
2. BDEL can accept the discovered price. Again two things might happen - price will shoot up in the open market (people would want to buy more so that they can make a quick buck) or price would come down (very very unlikely that price would come down).

* may be certain section of market - the FIIs and MFs have offered their shares at this price and right price is not 900+?

Questions
1. Will BDEL accept the offer?
2. What happens if BDEL does not accept the offer?
3. Who offered their shares at 950? QIB? FII? Who?

My boss once told me that there is a 33% probability of a change being better than the status quo. Lesson to be learnt is that probability is indeed right sometimes (although I strongly belive that probability hates me - there is a higher probability of me being on the wrong side of probability).

P.S.: This is a personal post and this does not come from Pseudosocial.

Charlie Munger on Psychology of Human Misjudgement

For anyone who wants to start investing, this has to be the first thing.

Charlie Munger talks about a set of psychological biases that enable or rather disable to take appropriate decisions. Needless to say, because of these biases, we (wanna investors like us) end up loosing a lot of money. Very very highly recommended article.

Charlie Munger talks about 24 "mental models" that affect us on a cognitive level and we end up making some real bad decisions. These bad decisions could be in personal life, in investing, in dealing with people and what not. Of these 24, following are a few favorite ones...

1. The Superpower of Incentives:

Well you can say, "Everybody knows that." Well I think I've been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I've underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther.

2. Pavlovian Association:

And all these psychological tendencies work largely or entirely on a subconscious level, which makes them very insidious. Now you've got Persian messenger syndrome. The Persians really did kill the messenger who brought the bad news.

3. Reciprocation:

Cialdini demonstrated this by running around a campus, and he asked people to take juvenile delinquents to the zoo. And it was a campus, and so one in six actually agreed to do it. And after he'd accumulated a statistical output he went around on the same campus and he asked other people, he said, "Gee, would you devote two afternoons a week to taking juvenile delinquents somewhere and suffering greatly yourself to help them," and there he got 100% of the people to say no. But after he'd made the first request, he backed up a little, and he said, "Would you at least take them to the zoo one afternoon?" He raised the compliance rate from a third to a half. He got three times the success by just going through the little ask-for-a-lot-and-back-off.

4. Envy/Jealousy:

I've heard Warren say a half a dozen times, "It's not greed that drives the world, but envy."

5. Social Proofing:

... everybody looked at everybody else and nobody else was doing anything, and so there's automatic social proof that the right thing to do is nothing.

I have listed just 5 of the 24. The article is must read for everyone. Complete Text is available here (and its free unlike a lot of things).

Warren E. Buffett - The Hamburger Quiz

WEB in Letter to Shareholders - Feburary 27, 1998

A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.

But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

Blue Dart Express Limited

Prof. Bakshi sent an email to his students in which he talked about an arbitrage oppurtunity with Blue Dart Express Limited. He asked us to read about it and come up with an analysis. We were asked to read the following documents...

1. Press Release by Blue Dart Exoress Limited on 17th August
2. The Blue Dart delisting proposal
3. Delisting guidelines on SEBI website
4. This link on Rediff.com
5. This link on Financial Express
6. This link on IndiaTogether

After we have read these documents, we were asked to come up with an analysis (both financial and analytical). After reading the documents, these were the observations.

There was a jump of about 20 odd percent on Aug 15 and 16. It was followed byt a 4% drop right after the announcement. May be the price is low as compared to expectations of the market? After that, the price has been following the index (no major gains and no major losses).

At the time this was posted, BDEL was trading at 590 odd. Just wondering if the memory of Mr. Market so short term that it has forgotten the news of buyback and taken the price to 590, above the magic number of 550? or may be Mr. Market is shouting at us that the offer price of 550 is utterly stupid and should be ignored. This could also mean that a lot of shareholders would bid above 550 in the RBB and these would ultimately be unacceptable to the company.

The concept of RBB is interesting in its own manner. Reminds of Vickery auctions. They accept the price at which maximum investors bid. Logic says everyone would want to get most from his or her investments. In a geographically spread world, we don’t know what the exact price could be ... comes into the picture the 550 figure (and the physical display of bids received). They have provided a ready reference point (grounding effect) at 550. People might be tempted.

If I buy at more than 550 and company does not accept anything above 550 in RBB, the open market price might come down and I might loose money. I might also bid abnormally high, something like 1000. What if I was a MF with about 4% interest and I decide to offer all my 4% at 1000. Now the maximum number has to be at this 4% because the general public holds 5% in total and all of them wont tender at 550. What happens in this scenario...? Eventually we could be looking at target price much more than 550. How much more is the question? How much more is difficult to answer, but again it can be anything but 550.

Its a classical heads I win tails you loose situation! If I buy above 550, I can’t win in this game if I am a small guy. !! And on top of everything else, the company making the offer knows this too. They know people would not want to make losses. I have no clue what they are trying to achieve from all this. I cant see them delisting the company if it was their objective and I cant see them getting more than a handful of those 18.57% shares they are after. If we look at the action of peer companies (TNT and Fedex), all these carriers are planning to take back the Indian operations into their direct control. They probably do not want to report a few things an Indian partner would have to report.

One of the websites said "Under current SEBI rules, there is no downside to DHL not proceeding with the Reverse Book Building process if the offered price is unacceptable, as we are not under any regulatory compulsion to either delist Blue Dart or reduce our shareholding from the current levels. DHL is very happy to remain as an 81.03% shareholder in the Company if the delisting process is not completed," quotes Greg Tanner (one of the directors in DHL and in BDEL). - is he saying that even if certain number of shareholders dint tender their shares, the company might not be delisted from exchanges? The same has been mentioned in the bid document as well.

Finally the company has to work in India. There is no way they can wind up Indian operations. All the logistics companies have identified India and china as growth avenues. They must be getting real desperate over this new bill and they must have thought about something in case the bill actually comes into affect. What happens to the shareholders then.. ?

And in the end, all we said was a lot of summary with little or no opinon of our own and lots of questions ...

Other important links
Google Finance, Kotak Research, BSE Reverse Book Building

After the analysis, when the interesting aspects of the industry were further googled, following two links came up
1. Fedex buying its Indian partner for cash
2. TNT buying its Indian partner

And the open ended question now is "In wake of new bill that would cause an hinderance to these international players, why are they buying their Indian partners?"

Other opinions on Blue Dart delisting
1. Hindu Businessline

Further the open was to open on 6th November 2006 (today) and last time I checked, Blue Dart was trading at 600. Live status of the reverse bookbuilding process of Blue Dart Express Limited can be seen on the here (BSE website).

Comments? PseudoSocial@gmail.com

Abbott India Limited - Buyback of shares

Company Details: Google Finance, Kotak Research

Abbott India announced a share buyback on 09 October 2006. In brief, Abbott India plans to buyback 25% of paid up equity capital (around 8,00,000 shares) at 650 each for cash. More details are on the link.

We have always been taught share buyback might present a value unlocking oppurtunity and hence the interest. Here is the conversation we had on this company and decision on buyback. As always there are no buy or sell or hold recommendations.

P.S.: Thanks to Arpan, Ashish, Mayank (in alphabetical order)

Mayank wanted to put some money into Abbott India and make some money by buying at CMP (which was much less than 650) and offering the shares for buyback (and make money from the arbitrage).

Arpan came up with following ...

1. Promoters hold 62% and assumption that they would not offer their shares for buyback.
2. Fund flow from the buyback would take two months. Effectively the money would be locked in for two months. The investment is locked in for 107 days from Oct 16.
3. Assumed that MP would be atleast 550 post buyback.
4. Assumed that 35% of remaining 38% people would offer their shares for buyback.
5. If you buy 100 shares, based on above numbers, you can expect 16 shares to be accepted.
6. Annualized returns of 5.76%

Someone added following

1. What is the probability that the company would actually buy the shares back? What happens if they go back on the buy back?
2. Is this just one of the ploys for the company to jack up their stock prices before annoucements of some negative news (bad results etc.) so that the stock price is not badly hit?
3. Finally what is the rationale of having the price as 650? Why not 620 or 670 or 649? Is it, One the rounded figure looks attractive, Two the management might think it is fair value of stock or Three P/E and P/BV and god knows what all ratios are in play?

Arpan replied

1. as to ur point that we have to also consider that the comp might go back on buy back, well the prob is too low to be a concern (better not do a taleb on this )..there are factors that ensure that fallouts of any such action will be drastically negative on teh company...

2. also when announcing the buyback the company has to deposit the 'funds for buyback' in an escrow account with a bank, from which it cannot just withdraw money as and when it wishes...

3. your second point has a major underlying assumption that buybacks are forthrightly a positive sign which might have contrary intentions, but there is another school of thought that does not take buyback as positive at all but...as negative...the logic for the above argument runs like this, company primarily buys back its shares when it is quiet rich with funds (and also when the shares prices are low...), but the company had the alternative of dividends. thus when a company buys back instead of paying dividend, one might have a thought that the company is not sure about the future earnings, ie. its earnigs(funds flush) might be temporary and wants a temporary payout mechanism instead of dividends, which are of a more consistent nature...try reducing the dividend rate and there the price dives southward...

4. as to ur concern that buybacks might be a 'smoke cover' for other negative news, market participants are quiet knowledgeable and have particularly good memories when hit below the belt, thus it is a one time weapon with little upside and huge downside, with all its future announcements being suspicious... thus unless the mgmt is extremely stupide (possible though that is....), this should not happen...

5. as to ur argument that why 650....why not 650??? .... :)

And that was the end of it. Comments? PseudoSocial@gmail.com

03-NOV-2006: Abbott India puts buyback on hold ... ! Source: Yahoo

Pseudosocial - W5H

What
PseudoSocial is an effort to put forth personal views and opinions on decision making, investing and common wisdom.

When
Pseudosocial was started in August 2006. 04p048 started investing about 3 years back and 04p050 started about six months back. Even though both of them talk about a lot of things (including investment ideas), they manage their portfolios independently and pseudodependently.

Where
Online, Offline, anywhere .. :)

Who
Pseudosocial is about two people (04p048 and 04p050). Both of us share a few common interests (Prof Bakshi, cricket, biking, investing, writing, reading) and wanted to have a platform to meet other people who are enthusiastic about investing and decision-making and worldly wisdom.

Why
Ever since we completed Prof Bakshi’s course, there were yearnings to use whatever was learnt from the interactions. As stated earlier, our objective is to interact with, learn from and possibly meet people who share our interests.

How
We intend to talk about companies, sectors, industries that we like and dislike. We intend to analyze them as prospective shareholding. We would talk about follies people make while making investment decisions. We would talk about lessons we have learnt from mistakes. We would talk about how to avoid mistakes. We would NOT recommend any stocks, industries, sectors, buy calls, sell calls, hold calls.

Pseudosocial moved ...

Pseudosocial was ported from old blogger to new Blogger Beta. We lost comments from original authors but they have been added (with due credits).

Words of Wisdom from Warren Buffett

I got this as an email. The source is unknown.

Tuesday, January 25, 2005

I spent 6 hours last week in Omaha with Warren Buffett. As I walked into the meeting I was pleasantly surprised to find Mr. Buffett dressed more like a scroungy sophomore chemistry student than the greatest investor of all time. It was an open Q&A session with some of my colleagues and me for about 3 hours.

Going into the meeting, I was thinking that I would receive a great deal of advice about investing and how to quantify intrinsic value. I figured he'd tell us all about "Mr. Market" and how his favorite holding period is forever. Then I figured we'd get around to his bet on the Euro or his belief that the market is irrational and inefficient. Or perhaps the second richest man in the world would, I don't know, talk about money?

Total time spent talking about any of the above: Zero. Zilch. Nada.

Let's get to what he DID talk about. As a big fan of "Top" lists, I've compiled the "Top 5" things (prioritized) I learned from Warren Buffett that day:

1. Be Grateful
There are roughly 6 Billion people in the world. Imagine the worlds biggest lottery where every one of those 6 Billion people was required to draw a ticket. Printed on each ticket were the circumstances in which they would be required to live for the rest of their lives.

Printed on each ticket were the following items:
- Sex
- Race
- Place of Birth (Country, State, City, etc.)
- Type of Government
- Parents names, income levels & occupations
- IQ (a normal distribution, with a 66% chance of your IQ being 100 & a standard deviation of 20)
- Weight, height, eye color, hair color, etc.
- Personality traits, temperament, wit, sense of humor
- Health risks
If you are reading this blog right now, I'm guessing the ticket you drew when you were born wasn't too bad. The probability of you drawing a ticket that has the favorable circumstances you are in right now is incredibly small (say, 1 in 6 billion). The probability of you being born as your preferable sex, in the United States, with an average IQ, good health and supportive parents is miniscule.

Warren spent about an hour talking about how grateful we should all be for the circumstances we were born into and for the generous ticket we've been offered in life. He said that we should not take it for granted or think that it is the product of something we did - we just drew a lucky ticket. (He also pointed out that his skill of "allocating capital" would be useless if he would have been born in poverty in Bangladesh.)

2. Be Ethical & Fair
Continuing on the analogy above, consider this scenario:
Imagine that you were selected as the one person (out of 6 Billion) to create the systems of the world. This includes the type of government, social programs, tax systems, military systems, job markets, laws, regulations, etc.

The only catch was this: You had to come up with systems that you believed were fair and that you wanted to live with, before you were allowed to look at your ticket.

When Warren talked about this it made me reconsider the definition of ethical behavior - what type of system would you create if you didn't know what ticket you had drawn? Would you take a different position on some of the programs you are for or against if you were surrounded by a different set of circumstances?

3. Be Trustworthy
This may be a minor point that Mr. Buffett was trying to make, but he told a simple story that affected me greatly. He told of the Founder of the Nebraska Furniture Mart, one of his companies, and how she came from a poor Jewish family and couldn't read, write or speak English. She was had survived the Holocaust, spent 16 years bringing her family to the U.S. (at $50 per person), and grew the Nebraska Furniture Mart from a $500 initial investment to do $350 Million annually from a single location in Omaha.

She told Warren at one point that the way she evaluated people was simple: She simply asked herself, "Would they hide me?" What a great way to judge your instincts about whether to trust someone or not.

4. Invest in Your Circle of Competence
Warren talked at length about investing within your circle of competence. This applies as much to entrepreneurship as it does to investing in public securities. One thing that continually amazes me is how much discipline Warren has in never letting himself get excited about a deal that he doesn't understand. He understands his weaknesses, limitations, and the types of businesses that he gets.

He said that it is crucial that people clearly recognize what they don't understand, and place their effort and energy on businesses or career paths that allow them to bet big on themselves doing something that they do understand. He said that it's "not so important how big the circle is, but it's important that you know where the perimeter is, and when you're outside of it."

5. Do What You Love
Perhaps the reason that we've heard this a million times is that it's true. Warren talked at length about how excited he is to wake up in the morning and to do what he loves. He talked about how important it is to have the freedom in your life to paint your own canvas any way that you like. He said that many people talk about how they are going to just work at a high-paying job "for a little while" and then go do what they love - he equated that to "saving up sex for old age." He said to "never do something that doesn't excite you or that you dislike."

Not the advice you'd expect from somebody worth over $40 Billion?

I only hope that as I gain success throughout my career that I can mirror the image of humility, charity, intelligence, optimism and justice that Warren Buffett represents.

If someone knows the source of this writeup, please inform us. We would remove this.

United Western Bank Ltd.

Company Details: Kotak Research

Much has been said, written, talked about UWB but here are my two cents on the entire issue. Uwbankindia.com talks about "affectionate people !". I was touched by their affection when I made 42% returns in less than a month "speculating" on the stock.

02-SEP-2006
The RBI places UWB under moratorium till December 1 2006 since UWB's net non-performing assets were 5.66% (as compared to peer group figure of 1.97%).

In one of the statements, the RBI said, "During this (moratorium) period, RBI will consider various options, including amalgamation of United Western Bank with any other bank and finalize the plans in public interest with a view to ensure that the public deposits are protected...".

RBI further said, the depositors could withdraw upto Rs. 10,000 from any of the ATMs. Bank had 75 ATMs spread over Maharashtra. (Reminds me of few keywords: Denial, Scarcity, Authority, Social Proof, Negative Feedback Loop and last but not the least Lollapalooza)

04-SEP-2006
2 Sep was a Saturday. There was a gap of almost two days before the markets would open again and trading would start. People got into a mad-rush and started thinking. The issue augmented when they thought a bit too much. There were scenes of people standing anxiously outside UWB ATMs and trying to withdraw cash. Many ATMs were reported to be out of cash. Things stared getting ugly when every news channel was talking of nothing but UWB and problems faced by the depositors and the shareholders. News channels invited specialists and experts in the studios for their opinions and what shareholders should do when the markets open on Monday. As expected, the experts opined that it should be sold off to cut on the loss that investors would make. None of the experts however pointed that moratorium was will December only and after that things can and shall return to normal.

UWB closed at 22.7 on 01-SEP-06. As expected it opened 13.2% down at 19.7. Went down to 5.25 (76% down from previous close). Finally it closed at 16.15 (down 48%). Before I rant further, I have a question. I thought there was a concept of circuit and it's generally 10 to 20% change. Why didn't UWB hit the lower circuit on 04-SEP-06?

All of a sudden there was some news that ICICI was having a board meeting to mull over the amalgamation of UWB. And then there were more people interested in buying it out - Canara Bank, Maharashtra Govt with HDFC, IDFC, Andhra Bank to name a few. Ideally this should have helped the stock price retain a decent level but it did not. And in the next few days, there were more organization of all kinds (public banks, private banks, NBFCs, Govt bodies, individual investors) who stated showing interest in UWB. Pradeep Bhavnani, One of the members of the National Stock Exchange actually picked up about 15% stake in the bank and said that he was doing this because, "(I) want to protect and bail out the shareholders and deposit holders".

The Climax
I have lost track of timelines but in the end, there were about 17 different parties in fray for the bank, each trying to out smart each other. RBI awarded the prized possession to IDBI. IDBI further said they would buy the outstanding shares of UWB @ 28. The price according to me is bound to reach 28 and might just go above it (with people over-expecting). The order book for UWB started getting skewed with all the buy orders and no sell orders.

I caught this news a bit late. It was trading at 5.25 for only a short amount of time (frankly you cannot expect to get the timing right). I bought it at 17.5. I discussed with few other people but everyone thought I was being rash and speculative. I agree it was speculative but if the returns are guaranteed with minimal or zero risk, would I still be called speculative ...? I sold my shares at 25.50. I could have waited for it to reach 28 but then I decided even if I leave some money on the table, in the end I would have gained. I did not like the look of things (call it sixth sense) but I decided I would sell.

And after everything IDBI can happily munch on their latest prize, depositors can now rest in peace and most importantly I can enjoy the 42.86% ROI (excluding taxes and brokerage) I made.

Comments? PseudoSocial@gmail.com

PVR Ltd. - The Moats Around Castles

Company Details: Google Finance, Kotak Research
Company Website: http://www.pvrcinemas.com

The Moats Around Castles
If noblemen were asked key characterestics of a good castle, they would say it should first of all serve the county it is in, it should then be able to provide food and shelter to the occupants, then it should be secure enough with thick walls and moats built around it, then it should have a regular supply or stock of essential things (food, water, toilet paper, internet connection ...) and finally it should have a good leader in command to run the place.

PVR Ltd is a company that in my humble opinion has big wide moats built around it castle. It is operating in an industry that is growing leaps and bounds (the castle has enough meat to not allow the occupants - shareholders die of starvation). They have the pricing power (the walls around the castle are huge and rock solid). The customers are loyal (there are people bringing in bread and butter in the castle without fail everyday). The purchasing power of the customers is increasing and more than that they are coming out in open andd beginning to spend it (every one is bringing larger potions). The brand is impeccable (people are voluntarily giving meat and they would not go anywhere else). And most critical of them all - they have the negotiating power with the suppliers. If they decide not to screen any movie, nationwide collections for that movie hit the rock bottom. The producers and the financers come literally begging on the doors of Bijlis (the county that this castle was supposed to serve - the film industry, is instead serving this castle).

Management
Management is as good as it gets. Initially a family run business with Ajjay (with two Js) Bijli managing things. The promotors own more than 40% shares in the company. They have very very high incentives and punishments to work hard to increase the shareholder value.

Growth Story
In past few years they have grown from a one-screen theatre (Priya) to the largest number of screens in the country with presence in all major metros. Future plans include foray into film production, small one-screen theatres in category B and C cities, use of technology to enhance the movie-watching experience, use of technology to cut costs among other things. The only thing that remains to be seen before an investment decision is made is the price. If we buy, we would be part owners in a good company and good business and good growth industry but we would not have made a good investment decision. Buying a good business at high price is like packing loads and loads of money into gunny bags and forgetting it for years. The same money when unpacked after years would not be as useful as it would have been when it was packed (remember our dear friend called Inflation ..?).

The Financials
Before picking up a partnership in this company, the only thing now left worth consideration is the price. It should be cheap (we should get more value for investment). Please note cheap does not mean a low P/E or low P/BV. It has more to it. For example if someone read the reports published by PVR, few things stand out. The most striking thing is the "Film Distributor's Share" accounts for as much as 33% (and increasing) of the total expenditure of the company. We would assume FDS as raw material for PVR Ltd. Second, "Rent" is also very high. It accounts for 14% (and increasing) of expenditure.

Certainly worth spending some time on PVR and identifying the reason to buy.


"Just another person" posted the following comment ...

Hi,

I read ur post and found it quite interesting..
but i have a few comments/questions
1. a little bit deeper analysis would show that the seat occupany/load factore for PVR is only healthy on weekends..On weekdays u can get a ticket at the 12th hour also and u find 30-40% of the theatre empty. How sustainable is the revnue of this company???
2.how can u guys forget about the indirect competitors like Home theatres who will be eating into the share of this compay. A person who can afford a ticket of 560(180*4) for his family can also afford to buy a home theatre. Lets assume currently only 10% of people of this kindaa are available. but in India where showoff is a must and junta will buy home theatres just to make "Neighbour's Envy" will slowly move to watching movies at home.
3. I don't have numbers to support this but there has been few movies that actually make good profits. Most of them are just above break even.Beyond this whatever profit the movie makes, the major share is taken by smebody else and very little comes in the kitty of the theatre (u ave already covered this point)

So I m not very sure f the MOAT around this castle.

And here is our reply to the same ...

Hi,

Thanks for the comments. Without wasting words, here are my views ...

1. The point you raised about occupancy is very valid. In fact we completely ignored that aspect. We focused only on increasing number of seats and how market share is going to tilt towards PVR in the long run. You have mentioned that on the weekdays almost half the theater is empty. True. But in my opinion (and I might be wrong), the cost for the company (PVR) is only the cost of the master-print. From what I understand, they buy a master copy and then negotiate the prices for number of screens and then they just duplicate the number of copies. Yes the costs are there but this also gives them negotiating power. Recently for the launch of Lage Raho Munnabhai, the multiplexes did not agree to the prices quoted by distributors and hence there was a delay. That's why the moat. I still don't know a lot of things about movie screening business. If you know, please share ... it would be of great help.

2. Again a very valid point. Indirect competition is there. You mentioned about Home Theatre Systems. Then there are things like DTH, dramatics etc. In fact when I first thought about PVR, I thought of it as a player in entire entertainment industry (indirect competition includes things like books, television, radio etc - basically what people do for killing spare time). But when I talked to a few people who actually go to movie halls (I don’t watch movies – last movie I saw in theatre was in 2005), I realized the experience of watching movie in a hall is something that can't be replicated by even best of systems. I would thus agree to disagree to what you have said. The number of people watching movies would NOT come down. (I am open to debate on this .. :)).

3. Finally the last point is also very valid. May be less than half of the movies do break even, but I think even if a movie is a flop, the screening can be profitable. May be the collections are not high enough to compensate the cost incurred in making the film but if a certain percentage of the hall is occupied, the cinema hall might recover operating cost (if not the capex). There are two different parties involved here – film producer and the screener (PVR). Again I don’t have data to support this argument ... so can be fallacious.

And you gave me a bonus point by saying that I covered the fact that most of the profits are taken by someone else not the screener – I don't think I covered it :). You seem interested in entertainment; can you please tell me your opinion on PVR guys entering movie production and distribution business too? What are the scopes and how would it affect the performance of the business.. ? And there is one thing that I have ignored all along. The revenues from the F&B business in the intervals, advertisements in the hall before the movie - all that also contributes to the bottomline .. !!!

Comments? PseudoSocial@gmail.com (Last updated on Sep 23 06 1302 IST)