Monday, September 27, 2010

The Gods of the Copybook Headings

The Gods of the Copybook Headings - Rudyard Kipling

Kipling wrote this poem after his son was killed in World War I, a war that many Britons blamed on the greed of the bigwig industrialists whose factories profited from the war effort while in high-flown patriotic prose they promised a glorious victory and a paradisaical future to the men who went off to be slaughtered in the trenches. In this poem Kipling criticizes those who suspended their judgment and common sense and followed suit with idiotic policy because of such rosy promises of prosperity.

How similar is this poem to the present day markets... (Read the link after going through the poem)

AS I PASS through my incarnations in every age and race,
I make my proper prostrations to the Gods of the Market Place.
Peering through reverent fingers I watch them flourish and fall,
And the Gods of the Copybook Headings, I notice, outlast them all.

We were living in trees when they met us. They showed us each in turn
That Water would certainly wet us, as Fire would certainly burn:
But we found them lacking in Uplift, Vision and Breadth of Mind,
So we left them to teach the Gorillas while we followed the March of Mankind.

We moved as the Spirit listed. They never altered their pace,
Being neither cloud nor wind-borne like the Gods of the Market Place,
But they always caught up with our progress, and presently word would come
That a tribe had been wiped off its icefield, or the lights had gone out in Rome.

With the Hopes that our World is built on they were utterly out of touch,
They denied that the Moon was Stilton; they denied she was even Dutch;
They denied that Wishes were Horses; they denied that a Pig had Wings;
So we worshipped the Gods of the Market Who promised these beautiful things.

When the Cambrian measures were forming, They promised perpetual peace.
They swore, if we gave them our weapons, that the wars of the tribes would cease.
But when we disarmed They sold us and delivered us bound to our foe,
And the Gods of the Copybook Headings said: "Stick to the Devil you know."

On the first Feminian Sandstones we were promised the Fuller Life
(Which started by loving our neighbour and ended by loving his wife)
Till our women had no more children and the men lost reason and faith,
And the Gods of the Copybook Headings said: "The Wages of Sin is Death."

In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: "If you don't work you die."

Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
And the Gods of the Copybook Headings limped up to explain it once more.

As it will be in the future, it was at the birth of Man
There are only four things certain since Social Progress began.
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool's bandaged finger goes wabbling back to the Fire;

And that after this is accomplished, and the brave new world begins
When all men are paid for existing and no man must pay for his sins,
As surely as Water will wet us, as surely as Fire will burn,
The Gods of the Copybook Headings with terror and slaughter return!

Some Notes:

“They denied that the Moon was Stilton; they denied she was even Dutch.” Stilton is a British cheese. The Dutch are famous for their cheeses.

“The Cambrian measures” are a part of the ocean off Britain that now separates it from Europe.

“Feminian Sandstones” are a building material used to construct medieval churches and, earlier, pagan temples.

“The Carboniferous Epoch” is an era of geological change that formed many of the mountain ranges of the world.


Friday, September 24, 2010

Parichay Investments - A Misinvestment

I came across a company recently called Parichay Investments as it has been new highs daily. So i got inquisitive as to what the business model is and what doest the company do. Well the first thing that came to my notice was the horrendous P/E of 533.46. I agree to the fact that Investment companies should not be looked on a P/E basis for valuation but on a P/B or market cap of investments. But on checking the balance sheet to my amazement, the company had no investments but all the funds raised were simply in loans and advances. The company still trades at a P/B of 6 which is very very high given the company has no fixed assets and nothing to say in terms of working capital. Now comes the most astonishing part. As of June 2010, the promoter holding was 74.94% out of a total shareholding of 12Lakh shares which would ~9Lakh shares. The promoters Omni Bagadiya has been selling shares in the open market crazily. Every day there is some disclosure on the company stating X no of shares sold. I wonder, why the promoter selling so heavily has not been taken as a negative or bad sign. To put things in perspective Omi Bagadiay had a holding of 8,10,730 shares which is ~67.56%. Now according to the latest disclosure available on BSE, he has only 57580 shares with him which means out of his 67.56% his shareholding is down only to 4.80% and this selling has been across the board with other promoters also selling a chunk of their shares, read as Anurag Agarwal and Ritu Agarwal.

How close eyed can the person buying the shares be. I would not blame the management as the person buying the shares is neglecting all the information available to him and betting on something totally virtual. When the capital gets eroded which certainly would, he would justify his stance by saying "The management were frauds and cheaters" but never will he say " I was blind", well that is how the human brain works, External Locus of Control. We tend to attribute things outside our own control as the reason for our problems.

Note: Instead of saying the investor I have used the word "Person buying the share" primarily because a person buying these shares is clearly neglecting the three requesite qualities for a purchase to classify as an investment and him as an investor, as highlighted by Mr. Graham
1. Thorough Analysis
2. Safety of principle
3. Guaranteed return

As is said, "Return of capital" is more important than "Return on Capital"

Tuesday, September 14, 2010

Cenlub Industries

Its been sometime since I posted something on the blog. Recently I came across this company called Cenlub industries.I will give some of the quick financials about the company over the period FY06-10
  1. The company's revenue has grown by 17% CAGR over the time period, PAT at a CAGR of 14.59%, EBITDA at a CAGR of 18.92%. 
  2. The margins were 12% in FY06 and now stand at 14% in FY10.
  3. The PAT margins have remained almost flat at 7% over the period. 
  4. The RoE of the company has also remained stable at 13-14% with the decrease in asset turnover being compensated by the leverage. 
  5. The D/E ratio of the company stands at 44%. The leverage has increased from 1.1 to 1.4.
  6. The company has reduced its working capital cycle from 2.6months to 1.9 months
  7. Now a thing that strikes when we see the working capital cycle going down, PAT increasing, leverage increasing is why has the return on equity remained stable. The only reason being that the equity is not being deployed in business or part of the equity deployed, is not in productive resources as the business itself. A closer look at the balance sheet reveals the same. The % of assets in cash and bank balance, investments and loans and advances has increased from 25% in FY06 to 49% in FY10. 
  8. The book value has grown from 1.31 in FY06 to 5.38 in FY10, registering a CAGR of 42% while the total assets has grown by 22% over the same period.The per share book value has increased from 13.18 in FY06 to 23.05 in FY10.
  9. Over the past one year i.e over June 2009 to June 2010, the promoters have increased their shareholding from 31.09% to 35.45% and the promoters have purchased the shares at a price range of Rs. 19-21.
Valuation Parameters
  1. The EV/EBITDA for the company stands at 4.72 at the market price of Rs. 27/share. 
  2. The cash on books per share is Rs. 7.3 and including some listed and unlisted investments the value per share of cash and investments comes to Rs. 10.78/share.
  3. The TTM P/E of the company stands at 9.55
Ok financial data is fine!! what does the company do? Its all in the name, Cenlub - central lubrication systems i.e exactly what the company does. As the plants and machines become more sophisticated and automatic to attain wider performance and better efficiency, it becomes absolutely necessary to go  for central lubrication system. These lubrication systems are supplied to power plants, steel plants and refineries. The company has also bagged good amount of order from public sector like BHEL and other private sector making turbines.

On the day I am writing this there is one more announcement, the promoters have bought another 4000 shares. As Mr. Lynch says.. promoters buying is always a good sign but promoter selling is not always a bad sign. The reason i got excited was not only because of the promoter interest, very good valuations but the fact that this company operates in the capital good space supplying its products to the power sector and has tremendous opportunity to grow given the massive power generation capacities that India plans to add over the next years.

Disclaimer: I have investment in the company.

Sunday, September 5, 2010

Warren Buffett Second letter to Investors

The second letter from Warren Buffett.