About
Tata sponge ltd is a 676 cr sponge iron manufacturer with an annual capacity of 3.42 Lac MT. The company uses iron ore and coal as the raw material, which is used to produce sponge iron. Sponge iron is an important raw material for the manufacture of steel and the price for sponge iron in turn depends on steel demand and pricing.
The company is a part of the Tata group, which holds a 40% stake in the company through Tata steel. Tata steel also supports the company, by supplying iron ore. In addition the company has purchased and is developing coal mines for captive use and to control input costs.

Financials
The company has revenue of 676 crs and has recorded an average growth of 15%+ in the last 10 years. The bottom line is around 105 Crs with a growth of 20%+ in the last 5 years. The key point to note in the performance is that quite a bit of growth in the topline and bottomline has happened in the last 5 years.

The net margin of the company is currently at 17%. However the net margin has fluctuated between 4% and 17% in the last 10 years. These fluctuation are closely linked to the steel demand and pricing and has generally fallen when the overall economy has slowed down.

The company has now become a debt free company and has a cash holding of around 115 crs on its balance sheet.

Positives
The company has a strong balance sheet with excess cash which can be used to fund additional capacity without taking on debt. In addition the company is a part of the Tata group which is known for good corporate governance.

The company also has access to ore supplied by Tata steel which provides some stability to raw material costs. In addition the company has acquired a coal mine and is in process of developing it. This would help the company to control its key inputs costs which is iron ore and coal.

The company has demonstrated good topline and bottom line performance and has a high ROE (15% or higher) at low to moderate levels of debt. Finally the company has always operated at a low or negative working capital.

Risks
The key risk for the company is the nature of the industry in which it operates. The industry is cyclical, with low barriers to entry. In addition, the product is a commodity and hence the profitability of the company is tied to steel prices and the demand supply situation of the same.

The industry and the company are also characterized by large swings in performance depending on the demand and pricing for its product.

Competitive analysis
The industry is characterized by low entry barriers and the only competitive edge a company can have in this industry would be from economies of scale. Companies do not have much control on raw material (coal and iron ore mainly) pricing and the pricing of the final product (sponge iron) is also driven by steel prices. Scrap steel is a substitute for sponge iron and hence the price and availability of scrap steel also has an impact on the price of sponge iron.

Finally the industry faces price based competition, atleast at the local level and most of the companies are price takers. I don’t think any company can demand a premium for their sponge iron.

Management quality checklist

• - Management compensation: Management compensation is fairly low with the MD drawing a compensation in the region of 50-60 lacs
• - Capital allocation record: The management has demonstrated a good capital allocation record. The company has maintained an ROE in excess of 15% even during downturns. The company has also demonstrated an ROE of around 25% on the incremental capital invested in the last 5 years. The only negative has been the low level of dividend payout. The low dividend payout is however understandable due to the lower levels of free cash flows (atleast 20-30% of the earnings is required as maintenance capex).
• - Shareholder communication - Shareholder communication has been good and the management has been transparent about the performance.
• - Accounting practice - looks conservative
• - Conflict of interest - none
• - Performance track record - good in comparison to the industry economics

 
Valuation
The intrinsic value of the company can be taken between 350-400 for a net profit margin of around 11-13% over a business cycle and for a topline growth of around 13-15%. The current margins of around 17% cannot be taken as a base line as the margins have fluctuated between 4 to 24% with an average of 11% for the last 10 yrs. The topline assumption is a bit conservative, but a higher rate of growth will not increase the intrinsic value as much, as a higher growth would require a higher level of re-investment and result in a lower free cash flow.

Scenario analysis
The current price discounts a net margin of 11% and topline growth of 9%. A topline growth of 15% would give an intrinsic value of around 360-400.

Conclusion
The company seems to be undervalued by around 30-35% at best. The company may look undervalued based on the PE, but the correct approach to value a company is to compute its intrinsic value based on a DCF (discounted cash flow) formulae using the free cash flow generated by the company.

A company such as Tata sponge is in a commodity business which requires a higher level of maintenance capex (for understanding maintenance capex, see here). As a result the earnings of such a business consistently overstates the free cash flow. In case of tata sponge, the free cash is around 70-80% of the earnings. Based on the above free cash flow, margin and growth estimates, I would conservatively put the intrinsic value between 350-400.

Finally, the industry and the company is in a commodity industry with low to non-existent competitive advantages. As a result, it would be sensible to take the intrinsic value on the conservative side

Disclosure: I don’t hold the stock as it is not cheap enough for me. However I may not disclose it on my blog, when I decide to initiate a position in the stock. As always, please read the disclaimer

Lets go over what the typical investor was thinking over the last 18 months, from the peak to the current recovery phase.

Jan 2008 - Whopee, I am getting rich. Just need to keep buying and selling and trading and I can retire! I am a genius!!!

March 2008 - I knew the market was overvalued, but then I am long term investor. So I am going hold onto my stocks during the this drop, maybe even buy more

Aug 2008 - The market is climbing again!! the bear market is over.

Nov 2008 - What happened ?!! oh boy, why did not sell in august. I have lost too much money. No point in selling

Feb 2008 - This is getting bad. Let me salvage whatever I can and move to fixed deposits. Even the CNBC guys are saying that

April 2008 - The market has risen a bit, but I am not worried. The market will drop once the election results are announced

May 2008 - The results were a surprise and missed the rally. I should have bought in Feb when the market was cheap. Let me wait

Jun 2008 - let me wait for the market to drop

July 2008 - Let me wait for the market to drop
….and the mental circus continues

I know I am exaggerating, but I know there are a lot of investors who went through the above mental roller coaster and will learn all the wrong things like

-        The market is a casino and one has to be able to predict the market in advance to make money
-        I should take more risk and should trade more frantically to make money
-        One needs to be glued to the TV to make money
-        All the losses are not my fault, though the gains were due to my brilliance

I have myself gone through some of the above emotions in the past. There is nothing wrong in experiencing all kinds of conflicting emotions during such volatile times. It will however not do an investor any good, if he or she does not learn the right lessons. Let me state a few things I learnt from bear markets in the past

-        There is only one person to blame for your losses - you
-        There is never a good or a bad time to buy stocks. If you can find a good company, which is undervalued, buying is a smarter decision than guessing what the market will do.
-        Prepare in advance - I have been guilty of being timid in the previous bear market. During 2001-2003 bear market, I lacked the self confidence of investing a meaningful amount of money even though I realized that the market and stocks were cheap. The reaction is understandable if you are new to the market and have suffered losses. After the bear market ended, I realized my mistake and make a mental plan of how much capital I would commit when the inevitable downturn came. During the current downturn, I was prepared psychologically to go ‘all in’ when the valuations became cheap.
-        Stop listening to markets forecast and silly predictions. They will cost you money in the long run
-        Learn continuously. You may make money by luck in the stock market, but will not keep it.
-        Stop looking backwards - I should have or would have done this is not relevant. The question is - knowing what I know now, what do I plan to do?

For the second week running a Buy recommendation on Satyam has emerged as the community’s top stock pick, while the IT sector as a whole remains the most recommended sector, both amongst our 5-Star analysts and the wider community. Bharti Airtel has also been a popular stock this week, although mainly in the wider community and not amongst our top analysts.

Energy, Infrastructure and Banking stocks have the most commonly sold and the proportion of stock picks in these sectors which are to Buy rather than Sell, remain below historical avarages. Despite this phenomenon, IDFC remains one of the most favoured companies, illustrating a somewhat divided opinion on individual stocks within the Banking sector.

The average length of Buy picks continues to fall, demonstrating the community’s improved sentiment towards the medium term (6-12 month) outlook. However, we are still well above the historical average as the moneyvidya.com community is increasingly looking beyond 6 months to extract value from the market.

The proportion of picks which are to Buy a stock (rather than Sell one) continues to rise, and is now approaching a historical high as sentiment seems increasingly optimistic.

Maruti suzuki
I have written about maruti suzuki earlier here and here. Maruti recently announced great results, atleast on the face of it.

The results are good, though not spectacular. The company has shown an 18% year on year growth in volume and 25% growth in profit. The QoQ growth is -4% , mainly due to the seasonality of the sales. The company has been able to manage the costs well on yoy basis and reduce them from the previous quarter. The main reduction has been on material costs and elimination of the exchange variation losses.

So I should be doing handsprings and cartwheels ..right ? not exactly. I have written  earlier on anchoring and my failure to build a full position in maruti suzuki. So a 200%+ price increase is a simultenaous reason for me to smile and beat myself

Bharat electronics
I have writen about BEL earlier here . BEL recently announced Q1 results and reported 180%+ growth in net profits and a 10 fold increase in profits.

I am happy about the results, but not for the reasons you would expect. Let me explain – My key concern with BEL has been that the company has been booking majority of its sales in Q4 and a result was making almost 60-70% of its profit in the same quarter.

Now the company operates in a project kind of business and hence could be booking revenue based on percentage of completion method during Q4. As a result of the skew, the company had built up high recievables and hence higher working capital.

The company seems to be moving away from the above (need to confirm from the annual report) skew which is good as it would help in improving the cash flow and reduce work capital requirements. So the results are good, not due to the growth, but due to the reduction in the skew in the quarter by quarter revenue.

On an overall basis, the core business of the company is fairly immune from the recession and the company should continue to do well.

CRISIL
I have written about CRISIL earlier here. CRISIL reported its quartely results and reported a 17% increase in topline and 12% increase in the bottom line. The offshore research business continued to show growth inspite of the chaos in the international markets.

I am pretty happy with the results in view of the macro conditions in which these results were achieved. In addition the company reported a dividend of 25Rs/ share which amounts to a 50% payout. The company management is not hoarding the capital, which is a good thing.

CRISIL is one of the few companies with enormous competitive advantages. I have always wanted to buy this company, but was put off by the steep valuations. During the downturn, I was reading an article on buffett and was struck by a comment – buffett tends to read about companies even if he has no plans to buy the stock. If he likes the company, he mentally files it and waits for the right time when the price is right.

The above comment got me thinking and on going through my notes found my analysis of maruti and CRISIL. After a  quick analysis, I decided to pull the trigger.

Moral of the story (for me) – be prepared in advance. You never know when opportunity strikes !

MoneyVidya.com’s unique rating system identifies the top stock pickers from all our members. Here is what our top investors are saying today;

Short Term:
itrade4profit (5/5 stars) – BUY Hyderabad Industries for 1 month with target of 312

Medium Term:
Sheels (5/5 stars) – BUY Rohit Ferro Tech for 1 year with a target of 80

Long Term:
p4hbai (5/5 stars) – BUY Bang Overseas 18 months with a target of 110

Check out more free stock picks and become a 5 star analyst yourself on MoneyVidya.com!

As markets have rallied over the last week, due to positive global cues, sentiment on moneyvidya.com seems to have followed suit. Buy picks have been the order of the day and a look at the % of picks which have been to Buy stocks clearly tells this story,

Consistent with the increasing appetite to Buy stocks we have seen a shortening of Timeframes on Buy recommendations. This is another sign of increasing optimism and is most acutely seen in the IT and Energy & Infrastructure sectors, which are typically amongst the most active on the site.

The most popular stocks this week have been Satyam Computer Services and Geodesic Information Services and this is part of a wider trend towards the IT sector, which has been the clear favourite this week.

IT stocks have generated almost 30% of all Buy picks with not a single sell recommendation being made. The majority of these picks are for less than 3 months and probably result from increased optimism regarding the overseas earnings potential of Indian IT firms, as developed economies show signs of improvement.

A long position in the IT sector with a 1-3 month timeframe seems to be the current community recommendation.

MoneyVidya.com’s unique rating system identifies the top stock pickers from all our members. Here is what our top investors are saying today;

Short Term:
ashlypradhan (5/5 stars) – BUY Unitech for 1 week with target of 90

Medium Term:
bharatu (5/5 stars) – BUY Glory Polyfilms for 6 months with a target of 46
Varunjain2000 (5/5 stars) – BUY Lakshmi Energy and Foods for 1 year

Long Term:
Anurag (5/5 stars) – BUY Sintex Industries for 2 years with a target of 250

Check out more free stock picks and become a 5 star analyst yourself on MoneyVidya.com!

A review of Stock Picks made on moneyvidya.com over the over the last week shows a tendency for the community to pick IT, Energy and Infrastructure stocks as long term Buys while recommending selling banking stocks in the short term.

IT and Technology stocks have received the most positive attention of late with 18% of all Buy picks made this week being made on stocks in this sector. Not a single sell recommendation has being made on a technology stock.

Energy and infrastructure has also been a popular sector for Buy picks over 6 months in timeframe, although less so in the short term.

Banking and Financial Services stocks, traditionally one of our most active sectors, have witnessed a downturn in popularity since the budget with the majority of picks with a timeframe less than a month being Sell recommendations. This is the first time we have seen a short term selling consensus in this sector.

MoneyVidya.com’s unique rating system identifies the top stock pickers from all our members. Here is what our top performers are saying today.

Short Term:
Karan (5/5 stars) – BUY Bombay Dyeing & Manufacturing Co. for one week with target of 300
Karan (5/5 stars) – BUY TV18 India Co. for one month with target of 97.10

Medium Term:
Ajay99 (4/5 stars) – BUY Axis Bank for on year with a target of 900

Long Term:
Anurag (5/5 stars) – BUY Coromandal Fertilizers for two years with a target of 240
Check out more free stock picks and become a 5 star analyst yourself on MoneyVidya.com!

MoneyVidya.com’s unique rating system identifies the top stock pickers from all our members. Here is what our top performers are saying today.

Short Term:
warren_buffet (5/5 stars) - Sell Nifty Benchmark ETF for one month

Medium Term:
Vijay57 (4/5 stars) – BUY Reliance Infrastructure one year with a target of 1500

Long Term:
Sheels (5/5 stars) – BUY Sobha Developers for two years with a target of 300
P4bhai (5/5 stars) – BUY Videocon Industries for two years with a target of 210

Check out more free stock picks and become a 5 star analyst yourself on MoneyVidya.com!

MoneyVidya.com’s unique rating system identifies the top stock pickers from all our members. Here is what our top performers are saying today.

Short Term:
Ajay99 (5/5 stars) - Sell ICICI Bank for one week
Karan (5/5 stars) - BUY Amtec India for 10 days  with a target of 37

Medium Term:

Anurag (5/5 stars) – BUY TVR for one year with a target of 140
Long Term:
Ouneet144 (5/5 stars) – BUY Indian Bank for two years

Check out more free stock picks and become a 5 star analyst yourself on MoneyVidya.com!

Standard & Poor’s is a US based provider of financial market intelligence which includes ratings, investment research, risk evaluation and data, and various types of indices. Among multiple different indices with different focus areas, one index is the dividend aristocrat index.

The Dividend Aristocrats is an index which consists of S&P500 companies that have been raising dividends continuously for 25 years or more. That is, every year, the dividend per share keeps on increasing. If any company that reduces or cuts the dividend in any given year, it is removed from the index. Now this is the characteristics that can be viewed in multiple ways, but TIPBlog is about Indian investments. Therefore, I will not go into detailed discussion. But it gives the context for this posts further discussion.

In markets of Asia or other parts of the world, it has been difficult to find a single company that has consistently raised their dividends year after year. Outside United States, there has been lack of consistency in the way the corporate’s managed dividend strategy, or the way the government policies taxed dividends to companies and common shareholders.

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MoneyVidya.com’s unique rating system identifies the top stock pickers from all our members. Here is what our top performers are saying today.

Short Term:

bkgala (5/5 stars) - BUY JSW Steel for one month with a target of 660

niftyjaduger (5/5 stars) - BUY Max India for three months with a target of 250

Medium Term:

niftyjaduger (5/5 stars) – BUY Tulip Telecom for six months with a target price of 1150

sheels (5/5 stars) – BUY Igarashi Motors India for one year with a target of 30

Long Term:

shrivallbha (5/5 stars) – BUY Indowind Energy for two years with a target of 88

Check out more free stock picks and become a 5 star analyst yourself on MoneyVidya.com!

In the previous article of this series we had discussed the Price Earning Ratio and how to use it to filter stocks. I got a few very searching questions in the comments section. So I would request readers to go through those too.

We now take the second step forward and one which could be a major stumbling stock for many an aspiring portfolio picks. If a stock fails this test, I would need towering logic to overrule it. All business is margin and it is the bottom line - the profit margin. The last word in the financial statement analysis and hence a major filter for us. Profit margins are of three types.

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Why do I say this? Markets “Calls” are least important things in Stock markets (i believe) , and you only get that least important information from TV experts . What you don’t get is vital things like psychology to trade , Money management rules, Discipline to follow every time you take the trade . Those calls are in isolation , They are not generated by a consistent rule , you can get calls from here and there and all of them will be kind of random to you . Other problem can be that you don’t know the time frame of the call . If you don’t understand all this what I just told , the easy way to understand is to answer this

• “If listening to TV experts was really worth , Why am I not making money”
• “How many people do you know who make living or earn exceptional returns by trading what experts tell them”

At last , the point is not that there calls and advice works or not ? They may work , but not for you. There is lot more than getting calls and acting on them . Another important thing why you should stay way or listen less to them is because most of their calls are for “forcing you to trade more” , which will eventually generate more brokerage and commissions for trading companies , Read this article from Shyam Pattabi to understand more on this.

Question : Why do experts give more of BUY calls and very less of “SELL” calls My Answer : When some one “SELLS” , he is out of trap , he is out of stock market , he pays commission once . But when Someone “BUYS” , he is trapped in markets , He already paid once and has to pay one more time to get out , so SELL = Commission 1 time and BUY = Commission twice for sure , Ohh.. Did I discover something here

This article was written by Manish Chauhan who blogs at http://www.jagoinvestor.com

I have written on NIIT tech earlier (see here).

NIIT recently announced the Q4 09 results and published the transcript of their investor call. Some thoughts on the call
-        Topline grew by 10% (excluding hedging losses), and operating margins increased to 22.3% from 19% (excluding hedging losses) for the quarter.
-        The topline growth was around 5% for the year and the operating margins held steady. However the bottom line dropped by more than 10% due to the hedging losses.
-        Hedging losses were around 22 Crs. This is the most ridicolous hedge I have ever seen. They had created a hedge for almost 2+ years of revenue at the rate of almost 41.6 Rs. I cannot understand why the management would have taken such a long hedge last year and assume that the currency would only strengthen.
-        The company now has a hedge of around 1 year at the same rate and has mark to market loss of 199 Crs. The underlying earning power of the company is not impacted by this hedge, but some finance guys probably the CFO should be taken to task for such a hedge. The above losses have been booked against the reserves as per the new guidelines.
-        The other key indicators such as new client additions (18 for the year), order intake (312 Mn usd), utilization etc have been healthy.

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MoneyVidya.com’s unique rating system identifies the top stock pickers from all our members. Here is what our top performers are saying today.

Short Term:

itrade4profit (5/5 stars) - BUY CMC for one month with a target price of 960

rameshds (5/5 stars) - BUY Hindustan Machine Tools for one month with a target of 87

Medium Term:

shrivallbha (5/5 stars) – BUY Era Infra Engineering for six months with a target price of 156

shrivallbha (5/5 stars) – BUY Mcleod Russel India for one year with a target price of 175

Long Term:

shrivallbha (5/5 stars) – BUY Sun Pharma Advanced Reasearch Company for two years with a target of 160

shrivallbha (5/5 stars) – BUY Gokaldas Exports for two years with a target of 190

Check out more free stock picks and become a 5 star analyst yourself on MoneyVidya.com!

MoneyVidya.com’s unique rating system identifies the top stock pickers from all our members. Here is what our top performers are saying today.

Short Term:

itrade4profit (5/5 stars) - BUY Core Projects & Technologies for one month with a target of 170

bkgala (5/5 stars) - BUY Reliance Capital for one month with a target of 970

Medium Term:

Giri.d (4/5 stars) – BUY Punj Lloyd for six months with a target price of 330

Long Term:

ansil (4/5 stars) – BUY Bartronics India for two years

Check out more free stock picks and become a 5 star analyst yourself on MoneyVidya.com!

MoneyVidya.com’s unique rating system identifies the top stock pickers from all our members. Here is what our top performers are saying today.

Short Term:

bkgala (5/5 stars) - BUY Kotak Mahindra Bank for one month with a target of 645

bkgala (5/5 stars) - BUY Aptech for three months with a target of 175

Medium Term:

drnifty (5/5 stars) – BUY Agro Tech Foods for twelve months with a target price of 199

rahim1525 (4/5 stars) – BUY Sesa Goa for one year

Long Term:

puneet144 (5/5 stars) – BUY Opto Circuits India for two years

rahim1525 (4/5 stars) – BUY Tata Elxi India for two years

Check out more free stock picks and become a 5 star analyst yourself on MoneyVidya.com!

About
Patni is an IT services company similar to Infosys, WIPRO and other companies in the same industry. The company derieves a major portion of its revenue from the US. The main industry segments in which the company operates are Financial services, insurance, manufacturing and media.

The key feature of the business model is offshoring. Indian IT services company provide a cost advantage to the customer by executing the work in low cost locations such as India.

Financials
The company has been doing fairly well financially for the last couple of years. It has been able to maintain its ROE in excess of 15% over the past 5 years. The calculated ROE is depressed due to high cash on books (running almost 1400 Crs now). The company had a good topline growth till 2005, which slowed down in 2007 and 2008. However it has still been able to pull off a double digit growth for 2008.

The net margins has dropped from around 20% to around 13% levels due to forex losses. The net margins are not as high as the Tier I companies such as infosys, but still at healthy levels.

The net profit growth has been fairly erratic in the last few years due to the forex changes. However the profit has doubled in the last 5 years inspite of the major changes in the market such as recession, flucutations in the Rupee-dollar rates  and increases in the salary etc.

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