Short Term Debt Market Fund

Hello,

I propose the following as the first trade for the ValueMonk (VM) portfolio.

PURCHASE OF A SHORT TERM DEBT FUND

The idea is that we would like to seek alpha in the markets through our value investing approaches. But that alpha must come over time. Till that happens, we can safely earn high interest through a short term bond market fund.

Investment Thesis
The interest rates in India are at an all time high. RBI will probably take another 100 bps hike (maximum) over the next 6 months. However, if the corporate earnings and growth indicators show signs of slowing down - RBI may halt the same. The idea is that if we can lock in receiving interest at these high rates, then once the rates come off - the yields will drop and the price of bonds or debt mutual funds will rally.

I have shortlisted the following three funds based on Sharpe Ration and Expense Ratio:

• HDFC High Interest S/T Growth
• Templeton India S/T Income Growth
• Reliance S/T Growth

Please revert back with your comments of this idea. I will later call for votes once the idea has been discussed. Let us participate whole heatedly in these dicussions guys to have any meaning to this initiative.

SRF

SRF - I have no clue why they named the company this acronym. If I ask you guys to not read further or use google and try to guess the business of this company, what would that be!! (Plz post ur answers :))

It is difficult and this ambiguity makes the stock very interesting. I have always been attracted to stocks that have weird names like Manappuram, Muthoot, Shree Ganesh and So on. The economic reason is that such stocks stay out of the media radar and creat comfortable value arbitrages.

Introdcution
SRF has been started by Mr.Shri Ram and Dr.Bharat Ram - the promoters of Lady Shri Ram College in Delhi. The family has a legacy of 100 years and SRF is a proud recipient of Deming prize for quality.The company is primarily in the business of Chemical Intermediates - Chemicals, Technical Textiles, Engg Plastics and packaging Films - how boring ( but bloody profitable).

Company has its plants in 4 countries and exports to 75 countries. It did Rs.3672 cr in FY 11.

Investment Thesis

• The company is as close to a market monopoly as you can get in a commoditized business - It is Global No 2 in belting fabrics (conveyor belts), global No 2 in Nylon Tyre Fabrics, domestic No 1 in Tyre Cord, domestic No 1 in refrigerants, domestic No 1 in nets and tarpaulins and domestic no 2 in films.
• Sales CAGR = 27%, EBITDA CAGR = 58% and NP CAGR = 73%
• The company has a D/E = 0.6
• Company has been constantly researching (0.88% of Sales) to innovate. Presently holds patent for HFC 32 and has 12 more patents filed.

This image summarises how this company touches our lives every day

Valuation

The company is available at PE of 3.5 and a dividend yield of 4.9. Take a good look at this business. I will soon post my comments on the Valuation.

ITC

"Nobody got fired for buying IBM" == "Nobody lost money buying ITC"

This post is about another one of my darling portfolio holdings - ITC. The stock has been one of the top performers throughout the year. Maybe because most money managers are rushing for safer a.k.a less volatile businesses. ITC is the bluest of the blue chip in one of the most non-volatile sectors - FMCG.

Introduction
ITC is a conglomerate ranging from cigarettes to hotels to consumer goods. The company has completed 100 years in 2010 and over these years has built great businesses and amazing brands. Wills, Classic Milds, ITC Hotels, Fiama De Willis, SunFeast, Bingo, Classmate and PaperKraft - to name a few. It is no doubt that this company touches our lives each day and hence a worthy business to look at.

Investment Thesis
It is difficult to value ITC under any one sector. One approach would be to use a SOTP analysis on separate business divisions. This would be difficult for a lack of data. the other approach would be to apply model on consolidated statements since all the subsidiaries of ITC are 100% owned with minuscule minority interest.

The cigarette business has deep consumer preferences and an amazing brand equity. People willingly buy their favorite sticks never switching because of prices going up. ITC has raised prices of cigarettes each year since 2007 and still there are shortages in the market.

ITC has already captured the second post in the organised biscuits market with its SunFeast brand and the numero uno spot in the chips segment through Bingo.

The agriculture business has been consistently reducing losses on an operating level and will most likely turn profitable in the next fiscal.

The consumer goods business is the only bleeding spot and ITC is finding it difficult to compete against the bell weathers like HUL and P&G. However, ITC has still not thrown in the towel.

ITC hotels report the best margins in the industry and with tourism looking up hotel business would reap in big profits.

The Question
Therefore, on a qualitative front there is nothing wrong in this business. It is a stock that Warren Buffett would kill for. The question is - "Will you buy it at 203 per share" - ah that is the question.

Manappuram Finance

The present market crash has given me lot of time to analyse my existing holdings and re-visit their investment attractiveness. This post is about a stock that I had kept touting throughout ISB - Manappuram Finance ( erstwhile known as Manappuram Leasing).

Introduction
The company is into the business of providing retail loans against gold jewellery. It also engages in other enterprises like remittances, lockers and so on but 99% of the revenues are derived from lending against gold. The company is a family run business headquartered in Kerela.

Investment Thesis
In a lending business, the key to success depends on the following factors:

• NIM: Net Interest Margin is the difference between the lending and borrowing rate for a company. Manappuram's NIM have always been north of 9%. For long it has enjoyed the lower cost of capital because "gold lending" was considered a priority sector. This has now been reversed.
• Quality of Loan Book: 90% of the loans are disbursed to individuals with maximum ticket sizes capped. Loans exceeding Rs 50,000 are closely monitored. Secondly, Manappuram only lends against gold jewellery. This provides twin benefits - borrower has an emotional connect with the pawned jewelery and the company gets the highest quality collateral.
• Funding: As per RBI norms, any lending institution needs to ober certain liquidity requirements. This implies that a firm cannot blindly grow without augmenting its equity base. Manappuram has consistently done that since 2007. It has done 3 QIP - the latest being done in 2010 with which it raised Rs. 10 bn.

In a nutshell, it is a wonderful business to own with high barriers to entry - like capital, brand equity and trust of the customers coupled with distribution and reach. Manappuram scores high on all these counts.

Valuation

I have finished my valuation but before I publish the same, I would invite the authors and readers (if any) to explore this business and discuss the same under this post.

 

Guidelines

The purpose of this blog is to together uncover great value investments. We do not know if we can duplicate any success of the past value investors but it sure is worth a genuine try. To keep things in order, here are a few guidelines.

• Any author can start a new post that plans to discuss a particular sector or a specific stock. Once the thread is started, other authors must keep their stock/sector specific comments to this thread. We must avoid having multiple posts on the same topic. This shall create a storyboard for each stock that we cover.
• Any author can start a new post on different topics pertaining to investing philosophy, discussion of a valuation or financial concept, and so on. Care must be taken to start such topics with a generic theme so that maximum participation can be captured.
• The philosophy about sector/stock view will be democratic. Each author is free to comment and critique the analysis published and help in all benefiting from a clearer picture.
• The blog in no sense would publicize a buy or sell recommendation. The spirit would be of discussion with the final decision to be arrived through a vote. We would maintain a "Value Monk Portfolio" and monitor its performance over time.
• The "Value Monk portfolio" will consist of all stocks/asset classes whose buy and sell decisions have been arrived at through a democratic majority. Each author is free to replicate the same or choose scrips based on his individual reasoning for their personal and real portfolios.
• The "Value Monk Portfolio" will have a cash component and hence a starting capital. I propose we start with a notional amount of INR 2000 mn. This is needed if we have to do any meaningful analysis since the value investor needs to decide on relative weights in different stocks/asset classes.
• Therefore, for a "Value Monk Portfolio" buy call will include the name of the stock, date of purchase, price paid, capital committed, the scrip replaced if needed and so on.

Let the journey begin!!!

Making sense of the US Debt

The media has been rampant about the S&P downgrade of US credit rating. The speculations from the economists tout the end of the world for the richest nation and the beginning of a new world order. But before we jump to conclusions, I think we must try to understand how it all came about. This shall help us understand the issue and take an informed decision.

Imagine there are two countries - East and West. At the start of time, both nations are identical in terms of resources. People produce same goods and are completely self sufficient. There is no trade happening.

In due course, East citizens increase their production levels - either through better technology or just plain working for more hours. This helped them produce surplus goods that they can't consume. So they approach the West with a proposition.

"You guys buy our surplus goods and have more time to enjoy life than slog in the fields."

West readily accepts this and their citizens now have lots of free time. They would get their requirements imported from East and pay for them in Westro (Western currency/bonds). Over the next decade, East accumulates large amount of Westro and began to feel nervous if West would be able to ever pay them back. After all, Westros are nothing but claims against future production of West which already is declining.

So East citizens try out a different scheme.

They trade back the Westros for fixed assets in West.

This saves the East from the risk of holding a paper that has no value if West decides to dishonor its committments. The fixed assets would still  retain their value.

Now, West realises the problem -

They not only have to work to service their outsanding Westros but also need to pay rent for the fixed assets that are now owned by East. 

In a nutshell, they have practically sold their country to East without a bullet getting fired.

What do you think can West now do to bail them out? If you can find the answer, you pretty much hold tomorrow's newspaper in your hands.

Inspired from Berkshire Hathway 2010 Annual Report

Welcome

Hey Fellas,

Let us start on our voyage towards wealth creation. They famously say that only in the footsteps of war does prosperity walk....

Couldn't come up with a better fitting line to kick off this initiative. The global markets have nose dived into the abyss. People from Asset Management class must recall George Soros' theory of reflectivity.

"The prices and fundamentals move together in a two way feedback loop, each shaping the reality of the other".

The Indian companies have come out with modest if not outstanding Q1 results, shouldering higher interest rates, higher commodity prices and an insane policy climate. But, the sell off surely produces a great opportunity for the value investing aficionados -

THE VALUE MONKS!!!