wing posts with label Rejected investment ideas.

Show all posts

JUNE 4, 2007

Searching for investment candidates - I

Recently I shortlisted a few stocks which passed through the basic filters and did a quick 15-20 min
analysis to sort them into two buckets the go bucket and No go bucket. The no go bucket are
the rejected stocks on which I will not be spending any more time for further analysis. I may have
rejected some stocks which may turn out to be good ideas later, but I prefer the sin of ommision than
commision. The Go bucket has stocks which have to go through more detailed analysis before I
commit money to them.
No Go bucket
Torrent pharma A profitable pharma company into bulk drugs and formulations. Growing well and
has a clean balancesheet. Have not looked into detail, but the valuation seems to be around 15-16
times latest earnings. Have scanned the financials very briefly and cannot find anything wrong.
However it is in the No go bucket as the valuations are not too cheap. May come back later after I
run out of ideas.
Diamines and chemicals - This is a very small company with turnover of 20-25 Crs and Net profit in
the current year of 6-7 Crs. It sells for a market cap of 35 Crs and so it seems to be very cheap at a
PE of around 6. The company had a negative networth till 2003 and seems to have turn around
since then. Has a high Debt equity ratio of almost 0.7. Although looks cheap, I am not comfortable
due to the small size of the company and inconsistent operating history. No further analysis on this
company.

Go bucket
Poly medicure A health care company into health care disposables. Currently growing in double
digits with this years topline likely to be around 80-85 Crs and net profit to be between 7-8 Crs. The
ROE is 20% plus range and the entire company is selling at around 75 Crs, with a PE of around 8.
Had a brief look at their website and was unimpressed. No annual report or financial available on the
company website. Worth further investigation for the time being
Ultramarine and pigments A small company into dyes and pigments with an annual turnover of
around 60-70 Crs which has been stagnant for the last 4-5 years. Net profits have zoomed from 4 Cr
to almost 18 Crs (expected) for the current year. Capital invested in the business has come down in
the meantime with investments on the balance sheet of around 25 Crs (FY 2005) and low debt of
around 5 Crs. Capital requirements in the business seem to be low and hence the business seems
to have good free cash flow and a return on invested capital of almost 50%. Definitely worth a closer
look.
next post : i would be listing more ideas in both the buckets
ps : Please see my disclaimer. I would not want anyone to lose money based on my analysis

1 comments Posted by Rohit Chauhan Labels: Investment ideas, Rejected investment

ideas

MAY 25, 2007

Red flags Aftek infosys

Aftek infosys appeared on my stock screens a few days back. I also had a comment from prem
sagar on the company. The company seems to be extremely undervalued. It seems to have almost
400 Crs of cash on the books with a market cap of just around 650-700 Crs. With the last year profits
of 98 crs, the company seems to be selling at a PE of 2-3. On the face of it the company seems to
be an investors wish come true. My initial scan showed nothing wrong, so I decided to dig deeper
and came up with a can of worms.
- the companys management was penalized by SEBI for participating with Ketan parekh in various
behind the scene deals during the 2000 bull market (see here)
- The company had an investment of almost 46 Crs in a company called Arexera. They have
accquired this company this year (the balance portion) for a sum of 56 crs. One would consider this
accquisition to be significant. The positives of the acquisition are mentioned all over the report.
However the valuation of the deal is not mentioned. The company had a net profit of 1 Crs last year
(see page 100 of the annual report). The company was acquired at a valuation of 100 Crs ( PE =
100 !!!). The management has not discussed the valuation anywhere in the report and why they paid
so much for it. Finally surprise , surprise this company was accquired from the promoters !!! . See
the cash flow statement on page 83. There is an entry for 54.8 Crs which was paid to promoters to
acquire this company. So the management accquires this company and has a related party
transaction and does not mention this in the complete report??
- The company has issued 3.96 lac warrants to the promoters. They have received 10% of the price
now and the rest can paid by the promoters within 18 months. Why have these warrants been issued
if the company is swimming in cash, had some FCCB still open and is making almost 100 Crs per
year ?
- Promoter holding is only 12%.
- FCCB issue in the last few years to raise capital. This capital is being used to accquire companies
like Arexera from promoters.
The stock may do well (had a jump of 10 % recently). However I have bad feel of the whole thing. All
the red flags I have pointed above dont give me any confidence in the management. I still think the
business will do well and the company should make money. But I am not sure if the shareholders will
benefit or the promoters would. Their past and current actions dont give me any confidence. I am
definitely giving the stock a pass although there could be some trading gains to be made.

15 comments Posted by Rohit Chauhan Labels: Rejected investment ideas

MARCH 9, 2007

A rejected idea tube investments

Tube investments is an idea which passed through my initial filter. I initiated the next step of
analysing the companys annual report. The analysis summary is below
Summary
The company has several businesses such as cycles, precision steel tubes and other tube products,
chains, metal forming and financial services.
The company has had good return on capital of 20%+. It has a net margin of 5-6% . Its debt equity
ratio has been between 0.4 to 0.6. The company has shown low growth with the topline increasing
by 50% in the last 5 years. The net profit has tripled in that period (net of one time gain on

investments)
The company has a net investment on the balance sheet of 500 Cr (net of debt). If I knock off the
investment value of 28 Rs per share, then the valuation comes to around 5 PE based on the current
market price. The stock seems to be a compelling buy.
Reason for rejection
On analysing the consolidated balance sheet, I discovered that the company has an additional debt
of 500 Crs on its books due to a JV. The company has converted Cholamandalam investment and
finance co. (CIFCL) into a JV with DBS bank. As a result the JV debts is now on the books. The
company has however not provided any details further on this event. I think the event is important
enough for the company to provide more details and give an assesment on the risks.
The above reason may seem small, but the debt and corresponding risk changes the profile of the
company. The D/E ratio is now 1.3:1 and the company has not even provided enough details of the
new JV. As a result I have decided to give the company a pass for the time being.

0 comments Posted by Rohit Chauhan Labels: Rejected investment ideas

MARCH 6, 2007

Rejected investment ideas

I generally run screens once a week and try to filter out companies with low PE (<15),> 12). Using
this list as a starting point, I generally do a quick analysis of the balance sheet, P&L account and the
financial ratios.
Companies which check out, move into the further analysis pile. The rest landup in two further piles.
One pile consists of companies which are fundamentally weak and not worth investing at any price.
The other pile is of companies which are good, but not at the right valuation. I park these companies
in a separate list and review this list once in a while to check if the price is within my valuation target.
Going forward, I would posting on the rejected companies so that I can refer back to these
companies, to analyse if I was incorrect in rejecting these companies in the first place.
One deep value idea which I am looking at is cheviot company In addition the following companies
are on my watch list
tube investments
India Nippon Electricals
teledata infomatics
revathi CP
novartis
MRO-TEK
EID Parry (India) Ltd.
Investment and Precision Casting
Mothersons
rane(madras)
I would be posting an analysis of the above companies on my blog soon.