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"

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.

Warren Buffett Second letter to Investors

The second letter from Warren Buffett.

Gas price computation

Quotes

Globally, coal began to supply more than 5% of all fuel energies around 1840, more than 10% in the early 1850s, more than a quarter of the total by the late 1870s, and one half by the beginning of the twentieth century…

The inertia of existing massive and expensive energy infrastructures and prime movers and the time and capital investment needed for putting in place new convertors and new networks make it inevitable that the primary energy supply of most modern nations will contain a significant component of fossil fuels for decades to come.

http://europe.theoildrum.com/node/6828#more

A barrel of oil contains 5.8 million BTU and can be purchased today for $77.00. But in natural gas, using today's price of $4.80 per million BTU, you can obtain the same quantity of energy for $27.85.

http://gregor.us/transition/cheap-is-nice-but-its-not-everything-natural-gas/#comments

Subsidy rates benchmark

But for arriving at the per kg NBS rates, the Department had benchmarked them to the IPPs of urea (for 'N'), DAP (for 'P'), MOP (for 'K') and sulphur (for 'S'), which were taken at $310, $500, $370 and $190 a tonne respectively at Rs 46-to-the-dollar.

Buffers (physical ones) are expensive to create and manage, and it is difficult to gauge how much

of a buffer should be carried. Buffers should be carried for supply disruptions rather than market

risk; market risk should be managed through other methods like long-term contracts and options,

etc. Oil pool (financial buffer) was prevalent earlier when prices were moving in a narrow range

and the Govt. was trying to manage retail prices, but it would be less prudent to leave this to the

Govt (and better to let market forces of supply-demand manage it).

The WPI index which is used as a measure of inflation in the country. The weightage of petrol and diesel in them is as follows 

Gasoline  - 89bps

Diesel   - 202bps