Stock Idea - Abbott India - Update

CMP - 550
Sensex - 13802

In my earlier post I had recommended Abbott India. The stock has since moved up by 2 % as compared to the Sensex which has lost 16 % in the same period.

The buyback through the form of a tender offer which I had stated in my blog has finally received SEBI approval. The buyback of 5.83% of the equity of the company will happen at Rs 650 per share.

The company also announced its Q2 results. Sales was up from 157 crores in Q2 07 to 170 crores in Q208, a rise of 8%. Profits however remained flat at 18 crores with cost pressures kicking in.

The company will however deliver EPS growth because of reduction in the equity capital post the buyback.

Yeh na thi Hamaari Kismat ……

Yeh Na Thi Hamari Kismat, Ke wisaal-e-yaar, hota,
(It was not in my destiny, to be united with my lover)
Agar aur jeete rehete, Yahi Intezaar Hota
(If I had lived any more , I would still be waiting for it) …… Mirza Ghalib

Well what does Ghalib have to do with investing other than feeling poignant with the current state of the capital markets :-).

I have been struggling over the years to overcome one of the behavioural biases that I suffer while placing a order. In a fairly well traded stock there is enough liquidity and the impact cost of a trade is very small. So the market at a particular moment has the right price for the stock ( I m not talking about valuations here) based on the buyers and the sellers in the market.

The bias that I am referring to originates when I am buying a stock, I tend to put a price slightly lower than what the market is trading at to get a so called better deal. The implicit assumption by doing this is that one believes the market at that moment is inefficient and the actual price of the stock should be lower than what it is traded at.

Similarly when one is selling, one tends to place the sell order at a slightly higher price than where the stock is currently trading. Same implicit assumption that the market is inefficient however, this time the view is diametrically opposite that the market is paying less than what you believe is the fair price.

This is the dissonance where the market can’t be inefficient both ways. I have missed out on a lot of buying or selling opportunities and like Ghalib waited forever for the price to come :-).

Raymonds – Doesn’t feel like heaven

I was running through the Raymond balance sheet for 2007 – 08. The company closed today at about 224 and has a 52 week high of about 474. It is trading around the 52 week lows. It caught the fancy of the markets with the real estate story.

The company has two divisions Textiles and the Files & tools division. The company hived off its denim business which was losing money into a joint venture. Sales was up for the year from 1374 crores to 1460 crores but profits were down from 201 crores to about 66 crores.

Now comes the interesting part ….

1) In the Directors report with respect to the textile division performance ( which is 85 % of the company), the management states and I quote

“ The growth in revenues was largely due to increase in volumes. High wool
prices, employment cost increases and issues in the ERP implementation has
resulted in decline in profit before interest and tax of the division from Rs
228 crores to 166 crores)”.

I can understand raw material cost increases and employee costs ( which went up from 225 crores to 233 crores - just 8 crores). Compared to this rent went up from 20 crores to 38 crores.

But the brilliant one is dip in profits because of teething problems in the ERP implementation :-). I have mixed emotions on this one. This really takes the cake.

2) The company has quoted investments of over 1000 crores invested in about 100 odd stocks and they traded in about 45 odd shares through the year. If I wanted a equity fund manager I would go to a mutual fund and not to Raymond. It would be wiser for the company to repay about 800 crores that it has on its balance sheet as opposed to dabbling in the stockmarkets.

3) In such tough times one would expect the company to work towards cutting costs. Well the company has a Aircraft on its balance sheet worth 98 crores. Maybe they have to fly the fabric in the skies to make it feel like heaven.

Lol and behold guess what … They bought 67 crores worth of boats and water equipment this year. I am speechless. Well Mr Singhania’s Page 3 lifestyle surely feels like heaven.

I don’t own stock in Raymonds and don’t intent to change that.

The times they are a changin

The line it is drawn
The curse it is cast
The slow one now
Will later be fast
As the present now
Will later be past
The order is
Rapidly fadin.
And the first one now
Will later be last
For the times they are a-changin. – Bob Dylan

One wonders if Dylan was singing about the markets and watching the sectors churn by the sidelines.

Well the times they are surely changing as the old sweethearts like Real Estate, Power, Infrastructure etc are going through their phase of PE contraction as money has moved into beaten down sectors like IT, Pharma etc. Equities have made way to commodities and commodities will make way to what i dont know.

The cycle will repeat and the times will keep changing :-).

Innovation and Investment

I was reading the BusinessWeek dated last week of April ( better late than never :-)). The cover story is about the annual global survey that BusinessWeek does on the “Most Innovative Companies”.

It was heartening to see two Indian companies in the top 25, the Tata group and Reliance Industries. The Tata group made it to the list, fuelled by the $2500 Nano for the masses.

The brief description given on GE which stands 4th in the ranking list was about the $ 1500 Electrograph which its engineers based out of India have created focussing on servicing the bottom of the pyramid in developing countries.

One of the things that we tend to do in our minds is to equate innovation with industries like Pharma, Technology, Engineering etc. But innovation is far beyond this and covers the smallest of things in the smallest of industries. It is about the small sachets of shampoo to the rock bottom pricing that we have seen in the telecom industry.

How do you blend innovation and investment?

It is critical to look at companies which have innovation ingrained in their DNA. In this I don’t mean R & D spends which though important is not the be all and end all of the process of innovation.

Are the companies that one invests in, capable of coming up with disruptive technologies and processes which could change the rules of the game. Reliance made it to the list for the way it is rewriting the rules of the retailing industry in India.

In the current world of higher food prices Walmart has managed to bring food prices down. How did they manage it? Most cereal makers put their product in large sized boxes ( Compare a Kellogs box with the amount of cornflakes in it). They do this to enable greater shelf space and branding. All Walmart did was promise the same amount of shelf space for their products but pushed mfgs to reduce box sizes. This reduced not just the amount spent on paperboard but also reduced the transportation costs as more boxes got fitted in the same trailer.

A latter post on how innovation has kept the US economy going and reinventing itself.

Daiichi & Ranbaxy - (Weak + Weak = Strong)

It is interesting how two organisations that are respectively struggling believe that this deal would make both of them stronger post the exercise.

Ranbaxy’s promoters have got a great deal for themselves but is this a great deal for Ranbaxy. Ranbaxy clearly has been struggling last few years with abysmal ROE and struggling to make all the acquisitions pay for themselves. The R & D pipeline hasn’t been great and the Lipitor patent appeals against Pfizer hasn’t been going its way. Ranbaxy has raised $ 440 million of FCCB’s for acquiring Terapia which is the largest generics company in Romania. The FCCB conversion price is about Rs 716 per share. Clearly the FCCB is not going to be converted into equity considering the current market price and Ranbaxy was lined up to repay this loan. The Romanian acquisition has not paid off for Ranbaxy with it getting subjected to healthcare reforms post joining the European union.

Daiichi has delivered about 6-7 % ROE over the last 3 years. Net sales for Fy 2007 in Japan declined by 10.4 % and in the US declined by 7.1%. Net Sales in the other regions increased by 48% on a smaller base. Japan still constitutes about 68 % of their sales and with the Japanese market slowing down, it needed a generics play to expand the generics market in Japan. So effectively they are hoping to buy themselves growth with the Ranbaxy acquisition.

I m not getting into the valuation bit on whether they overpaid but Ranbaxy had a great time over the years buying growth through the acquisition route and now when the time was coming to make those acquisitions work, the Singh family has magically palmed off that headache to the Japs.

The Japs who have been struggling at home believe that this is their magic bullet to deliver growth. It wouldn’t surprise me if Daiichi itself gets taken over in a few years time :-).

But then we have Pfizer to jump into the fray :-).

Daiichi takeover of Ranbaxy

In my previous post on Ranbaxy, I had expressed my concern on how the balance sheet was looking and the fact that other income was driving bottomline. Well I guess the promoters were concerned about the same :-).

Daiichi Sankyo has bought Ranbaxy and the promoters, the Singh family, have made a good exit for themselves and are laughing to the bank. Emotions apart I think they have got a great deal for themselves.

To be honest the deal completely caught me by surprise and is a example of a white swan which comes along the way occasionally.

I hold a few shares in the company and was planning to exit post the demerger of the R&D business ( which has now been put on hold). So what should the retail shareholder do?

The open offer price at Rs 737 though attractive will only pick up about 1/3 th of the share that will get tendered. The stock might languish much lower post the open offer from the current price of Rs 560. I plan to exit if I get a spike in the share price closer to the open offer date.

Black Swan

“Black Swan” is a book written by Nassim Nicholas Taleb. The central thesis of the book is the inability of the human mind to either visualise or predict event which have great impact on markets and life in general. The “unknown unknown” as he puts it differently from the “known unknown”. The outliers which exist beyond the six sigma bell curve. Ex 9/11 bombing, Oil at $135, Subprime etc

I will not dwell too much into the contents of the book as there is good summary available on Wikipedia. No point rehashing the same thing or doing cut paste :-) to increase content on my blog.

I will move forward to how do I factor in Black Swans in my investing process. The starting point is to acknowledge that black swans exist and the futility of trying to predict 10-15-20 years ahead.

In our investing lives we encounter both black and white swans ( positive ones). These are random in nature, however we tend to more often than not rationalise the white swans as a proof of our vision and insight and not attribute it to the roll of the dice.

Assuming that we encounter black and white swans in a equal probability of 50:50. The investment strategy should be that on a black swan the portfolio loses less than what the portfolio can gain on a white swan, hence on a net off basis remain ahead of the game.

To achieve this we come back to the original Benjamin Graham principle “Margin of Safety” in what we buy. If the portfolio has adequate margin of safety to ride out the black swans then any white swan will result in the portfolio outperforming the market.

PS: I like the cover of the book :-).

“Nitwitted ninepins” – ( Captain Haddock in Tintin& the Land of Black Gold)

Billions of blue blistering barnacles, they finally did it.

In my earlier post I had written on the worry variable associated with oil. The markets have moved substantially lower since then.

The government finally developed a spine and did the right thing in my opinion. The move from the government will ease the pressure on the oil marketing companies and the associated fiscal deficit build up. More importantly passing down the costs will result in greater energy efficiency in the economy and will hopefully contract demand.

I think this move could have a interesting fallout. It could actually lead oil prices lower. With demand contracting across the world in economies that are passing on the cost of oil, India and China were the last major bastions where subsidised oil was fuelling demand. China I suspect wont move till the Olympics are through but India’s move might trigger a move down in oil which is increasingly getting bracketed as a bubble.

We of course have to wait and watch.