I am analysing some of the following stocks in detail as these stock have passed my initial filters

Concor
Balmer Lawrie
GSK Smithline consumer

Disclosure – I have owned Concor and Balmer lawrie for the last few years and currently re-analysing the stocks. So my analysis could be biased. I would be posting the analysis soon.

In addition Mid-caps and some value stocks have now become even cheaper. Some companies now sell for almost or slightly less than cash on the balance sheet. I am now finding quite a few ideas to work on and hoping that the cheap would get cheaper.

In addition I am reading the following books and have found them to be good. I would definitely recommend reading both the books

More than you know by Michael J. Mauboussin
Margin of safety by seth Klarman

33 Comments

  1. VISHNU says:

    Hi Rohit,

    I still think that Indian Market valuation are very high and I couldn’t find any more securities worth buying.

    I was reading Berkshire’s Annual Meeting Notes and have seen Buffet’s valuation method on PetroChina and is too simple and Great. (It took less than 3-4 seconds for him to decide billion dollar investment)

    If you are looking for such kind of valuation and stable company like PetroChina, I dont think you can find it in Indian Market atleast

    Regards
    Vishnu

    Excerpts

    We bought Petro-China a few years ago after I read the company’s annual report. It’s the first Chinese stock we’ve owned, and the last, so far. The company produces 3% of the world’s oil, which is a lot of oil. It is 80% the size of ExxonMobil. Last year Petro-China earned $12 billion. Just 5 companies on the Fortune 500 made that much last year. When we bought the company, it had a market cap of $35 billion, so we ended up paying 3 times what the company earned last year. Petro-China doesn’t have a lot of leverage. It will pay out 45% of what it earns, so based on what we paid for the stock, we’re getting a 15% cash yield on our investment. The Chinese government owns 90% of the stock and we own 1%, so I like to joke that between the two of us, we control the company. Unfortunately, we had to disclose when we owned 10% of the non-government class of shares. We would have bought more, but the share price rose. Management does a good job running the company. Petro-China has 500,000 employees.

  2. Anonymous says:

    Hi Rohit
    where did you get margin of safety book ? becasue it usa it is very hard to find.

  3. Rohit Chauhan says:

    vishnu
    the overall market is definitely high with pockets of insanity. but midcaps and small caps have crashed and are now cheaper than before. so i am finding a few good ideas in that space. ofcourse you have to comfortable to underperform the market for some time

    i read the above explaination from buffett too. Earlier i would have the same feeling too..but lately i have realised that it is buffett’s genius and clarity of thought which makes an investment idea look so deceptively simple and obvious. he is able to focus to the key points and get to the essence of the idea. however i am nowhere close to him, so sometimes i have found some ideas which were simple and obvious, but i was not sure if i was correct.

    past examples of this type were blue star, concor in 2003, pidilite in 2004 etc.

  4. Anonymous says:

    Hi Rohit,

    More than you know is a very nice book and absolutely broadens one’s thinking.

    But I am curious about “Margin of Safety”…where did you buy that from? not ebay at 2000 USD i suppose? then it wouldnt be “value”…if a soft copy…can you share it please…

    Prashant

  5. Rohit Chauhan says:

    Hi prashant

    i got a soft copy from someone ..it is a good book, but if you have read on value investing, then you may not find too many new ideas

    please leave me your email …i would not like to upload it on website as it is copyrighted material

    regards
    rohit

  6. Anonymous says:

    Rohit,

    I would appreciate if you could send me the copy of “Margin of Safety” at dr.vishalsinha@rediffmail.com.

    I agree with you that Buffett often gives the false impression of simlicity. I have heard that when he rescued Salomon Brothers in the 90’s he did the option valuation on a napkin, which in our MBA class of 90 smart brains (excluding mine of course!) took 1.5 hours to decipher.

    Many thanks in advance.

  7. Rohit Chauhan says:

    Hi vishal

    i have heard similar stories on buffett. he is said to be able to do complex valuation in his head which requires others computers and considerable time to complete. he is a genius beyond comparison

    i have emailed you the book.

    regards
    rohit

    regards
    rohit

  8. Anonymous says:

    Hi Rohit,

    Please email me the book at prashant80@gmail.com

    Many thanks in advance and yes, agree with you completely on the fact that WEB makes it look so simple but actually he’s gifted with amazing brain power.

    Thanks
    Prashant

  9. paddy says:

    Great reading in this section. However my question to Rohit is not on the book. Can you pl. look at Murudeshwar Ceramics and see whether it is a value buy? Consistent profits, good dividendes, book value – 138 and cMP =75-80. Looks like a value buy. but how do I evaluate and confirm? Pl. help
    thanks
    Venu

  10. Anonymous says:

    Hi rohit, would be great if you could mail me a copy of the book as well, i’ve been trying to get my hands on a copy for a while now.
    My email is oldnunimproved@yahoo.com.

    Also i look forward to your analysis of the mid-caps you’ve mentioned – if you choose to put them up. Personally i’m still finding it hard to find true value – ie. value that doesn’t come purely from a stock being XX% off its recent highs.

    As an aside, buffet has finally agreed to an authorised biography, the book is to be out in August i think and is called “The Snowball”

    I hear amazon is taking advance bookings. It should be worth every rupee, given that its authorised by buffet.

    Rgds

    Mark

  11. Anonymous says:

    Hi Rohit

    Would appreciate if you could email it to me on ninad.kunder@gmail.com

    Cheers

    Ninad

  12. Abhishek says:

    HI Rohit,

    Would be grateful if you could email me the book at abhi2000@gmail.com

    Abhishek.

  13. vkrm says:

    I have found a couple of value bargains and wonder what you think about them. They are both mid-sized IT companies. They are Helios & Matheson, based out of Chennai and Zensar Technologies, based out of Pune. Both companies are selling for much less than one year’s sales – primarily because the whole sector has had lower net margins in FY 2008 due to the Rupee appreciation. But considering that revenues should continue to grow due to lack of competition from any other country, and net margins should stabilize once price increases are fully implemented, I think both these stocks are trading at around 6-7 times normalized earnings. (That is, the earnings they would make over the course of a normal business cycle.) Both companies have good ROEs, ROCEs, etc. Your views?

  14. Abhishek says:

    Sasken Communications is a stock that is quoting below its cash per share of 136. Please share your views.

  15. Rohit Chauhan says:

    abhishek, vkrm

    I am finding value in some of the ideas i have already posted. In addition there some opportunities in auto component and IT (midcaps) as some of you have indicated. I have only cursorily looked at some and not done an indepth analysis. for IT midcaps in addition to the standard measures of valuation and cash i would like to understand the basic business model. It is easy to lose ground in the IT space if you dont have the scale and the competitive advantage.
    On the face of it the IT midcaps offer a lot value, but i need to understand these companies better

  16. Rohit Chauhan says:

    mark
    some of the midcaps are the earlier ideas i have posted. in addition i will post on new ones in the future.

    I generally try not to base my evaluation on an X% drop of price (try to avoid the anchoring effect)

    i came to know about the authorized bio of buffett and would be waiting for it eagerly

  17. Anonymous says:

    Thanks rohit look forward to the posts. Do mail me the seth klarman book when you can.

    Mark

  18. Sujith Marar says:

    hello rohit ,

    good ideas ,

    balmer , gsk – currently are good value buys …

    How we can calculate price to book value . why I am intertested is that this is also a value indicator to buy as graham mentioned. Yes , Buffet also uses value investing to buy .But the kind of companies his firm invests is more into consumer consumption oriented firms or monopolistic ( as u mentioned blue star , concor in urs ) firms . I think he does not use value style fully alone , he uses growth style too as “fischer” . Buffet before investing , visit the companies , countries and hold management meetings etc etc .. But i would like to ask u abt Walter Schloss , a value investor and a graham disciple . this fellow , as i have read , does not attend meetings , other headache stuffs , does not hold discussions etc and has given 25 to 28% returns (CAGR) follows the same graham principle (P/B value) and hold many stocks than buffet and even buffet mentioned in his report and is pbly a slmost close graham principle follower .the other one , John Neff (concentrate on moderate growth , high dividends ). wat do u say ? if u have read abt walter schloss , please discuss? Is it possible for u to send me an email of soft copy abt ” margin of safety ” to my email address ” sujith.marar@gmail.com“.

  19. dpsoftgroup says:

    What is currently available in market in large caps with PE below 3 or 2 regardless of the industry? It is boring to debate again on the same.

  20. Rohit Chauhan says:

    Hi sujith

    i have read on walter schloss and john neff’s book too. They are closer to the classic graham style of investing than buffett. I think and buffett has said in as many words, that you can use classic graham approach with small sums of money. when you work with larger sums of money, you have to look at consumer franchises and other ideas where the intrinsic value will also expand

    personally i follow both approaches. earlier it was possible to find great companies at throw away price. lately good companies are available at decent (not mouth watering prices) and then there are graham type stocks available too like cheviot and kothari products.

    i do not base my decision on measure such as P/B alone. book value was more important in 50s and 60s. It is continously losing relevance now

    dpsoftgroup
    not sure if i understand your comment ..i dont think there are large caps available at that valuation ..but then why restrict ourselves to large caps alone ?

  21. Rohit Chauhan says:

    all
    the book is 11 mb and is bouncing back via email. i am trying to figure out how i can send it.

    however i would not be posting this book on my website or any public domain

    regards
    rohit

  22. Anonymous says:

    rohit, you could upload the file on rapidshare/megashare or other file upload sites and just send us the link, we can download it from there.

    Should work.

    Rgds
    Mark

  23. Anonymous says:

    To Anonymous who posted the book,

    Thanks a lot . I really appreciate it. I believe I have a fair collection of ebooks. Pls let me know at varenya123@yahoo.com if I could be of any help.

    Thanks

  24. Abhi says:

    Hi Rohit,

    I was trying to do a discount cash flow analysis for Balmer. Its net profit for last year was 70.22 crores. Is it prudent to take net profit as the free cash flow for this calculation. If not, then how one should determine the free cash flow from the net profit figure.

    For the calculations, I am also assuming growth of 15% for next 5 years and 5% thereafter and a discount rate of 9%.

    Please let me know whether my assumptions are reasonable.

    Thanks & Regards,
    Abhishek.

  25. Rohit Chauhan says:

    Hi abhishek
    in case of balmer lawrie, you can take net profit as free cash flow. however that is not always true.

    judging that is a bit mathematical and a bit of judgemental call. see the past capex (5 years) for the company and compare with depreciation. if the company has grown by 10% or higher and capex is almost equal to depreciation or a bit higher then you can make that assumption.

    the dcf assumptions seem to be reasonable..though the 5% assumption is a bit conservative. with a 5% inflation, any volume growth could give the company a 8-10% growth. but you assumptions seem to be conservative enough.

    important thing for balmer lawrie it to consider the JV and associate companies in the valuation

  26. Abhi says:

    Thanks Rohit for your response.
    But how to consider ths JV and associate companies into account for the DCF?

    Should I calculate the intrinsic value using DCF and then add proper value for JV, etc to that value? Can you explain it with some example as I am a novice in using the DCF approach.

    Abhishek.

  27. Rohit Chauhan says:

    Hi abhishek
    you can value the parent and the JV independently and sum the parts, or just look at the consolidated numbers (including JV and associate) and use those numbers to arrive at the value.

    A more accurate approach would be to value each business and JV in case of balmer lawrie independently as the economic characterisitics of each business is different

    regards
    rohit

  28. karthik says:

    Hi Rohit,
    Iam a novice in Value based investing. Iam a big fan of yours.
    Applying the principles of value based investing I found Balmer very interesting. I cound not find anything fundamentally wrong with the stock. The intrensic value {after 50% safety margin} comes to 338.What is your opinion?

  29. Rohit Chauhan says:

    Hi karthik
    Balmer lawrie is a big holding for me. I will be posting on the company soon. the company is doing well and shedding non profitable businesses.

    however it is not a glamorous company and will require quite some patience

    regards
    rohit

  30. karthik says:

    Thanks Rohit.I am looking for long term.As per my calculation the Intrinsic value for Balmer comes to 678. So it is trading around 40%
    discount.Is my calculation way off target?.Also Int Value for concor comes to 1814 {at 15%EPSGR}. Is the calculation atleast close enough?. Torrent cable also looks good.

  31. Rohit Chauhan says:

    Hi karthik
    my estimate for balmer are higher .. have you considered the JV and other associate companies too ?

    concor seems to close enough ..my estimate are a bit higher …but i think that is due to a long CAP period i have taken ..1800-1850 looks ok

    regards
    rohit

  32. karthik says:

    Hi Rohit, I used a simpler method{Future value calc} to calculate the intrinsic value for Balmer. Today I tried using DCF using your sheet in google group. {Guj gas analysis}. I got a ridiculously low value as IV. So obviously I have made some big mistake in my calculation.I would really appreciate if you can share your DCF calculation for Balmer with me.

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