ITC - Bingo

I like the way ITC is evolving after running through its annual report. The company has been continuously de-risking itself from the tobacco business into other areas over the last few years.

The tobacco business continues to be the cash cow in the portfolio that generates the cashflow to be invested into the other business segments. The net income of the company has grown from Rs 4353 crores in 2001 to about Rs 14558 crores in 2008. I have taken net income as cigarettes have very high excise duties and levies and tends to skew the topline.

The interesting part is that Non cigarette income has grown from Rs 900 corores which was about 20% of Net turnover to about Rs 7300 crores which is over 50% of the net turnover.

ITC effectively today has a bigger non tobacco business than the tobacco business. It’s a dramatic metamorphosis of such large corporation. The company is doing some very interesting things in the agri domain which could potentially become a huge play for the corporate sector as Indian agriculture open ups.

A brief snapshot of the various business divisions and the brand portfolio that the company has built.

1) Cigarettes / Tobacco

The company is clearly the numero uno in this business and is the cash cow for the company. The company has no great competition in the domain and will maintain its marketshare in this business. The biggest challenge arises from the fact that finance ministers love cigarettes or atleast the revenues that come out of it. So it remains the favourite whipping boy in terms of taxes being levied.

2) FMCG - Food
a) Branded Packaged Foods

The company has built up a significant share in this segment. Both Aashirwad and Sunfeast are 1000 crore brands. The company launched the “Bingo” range of chips last year and is beginning to give Lays a run for its money.
b) Confectionaries
The confectionaries business grew by 40% last year. The company has 2 strong brands Minto and Candyman in the segment.
c) Ready to Eat Segment
The company sells products like Sunfeast Pasta, Aashirvaad Instant Mixes and has a strong export business where it markets under the “ Kitchens of India” brand.

3) Personal Care
The company entered the personal care business last year and has brands like Fiama Di Wills, Vivel Di Wills, Vivel & Superia. This is a 20,000 crore market with HUL being the big daddy of this business.

4) Hotels
It has emerged as the second largest hotel chain in India offering over 90 hotels across 77 destinations under 4 different brand propositions – ITC Hotels, Welcom Hotel, Fortune, Welcome Heritage & the Sheraton Franchisee aggregating about 6000 rooms. Turnover crossed the 1000 crore mark this year.

5) Lifestyle Clothing
The company has managed to carve a niche in the premium segment of the lifestyle retailing segment with the Wills Lifestyle range. The company has added a popular segment brand John Players to expand its portfolio.

6) Paperboards & speciality Paper
The paperboard segment delivered a growth of 13% last year with revenues of Rs 2364 crores

7) Safety Matches / Aroma Sticks
The company is the largest manufacturer of safety matches after it acquired Wimco Ltd. It also has a strong presence in the incense sticks segment with brands like Mangaldeep.

8) Agri Trading
This is clearly ITC’s pioneering work in terms of addressing and working closing the Indian agricultural economy. Its e-choupal model is a acknowledged case study in this domain and is today replicated by other organsiations. The divisions performance got hampered due to the ban on exports of agri commodities. However the company has constantly expanded its portfolio from tobacco to high value frozen foods, potatoes, spices, staples etc.

Will continue in my next post in terms of my take on ITC and whether it is a good bet at current prices.

Sachin Tendulkar, Rahul Dravid, Rakesh Jhunjhunwala

What does Sachin Tendulkar have to do with Investing? I think a lot and to me forms the basis of how I approach investing.

Sachin Tendulkar is a phenomenonal batsman and a thinking cricketer. He clearly the best batsman this country has produced if the not the world. I think he was born gifted and has a amazing sense of timing and hand eye co-ordination. He showed it, way early in his career and progressed by building on it. He is, as I would say a “natural”.

Every single Indian who picks up a bat aspires to be like Sachin Tendulkar. Mother pray and fathers bray in coaxing their litters into wielding the willow. But for every Tendulkar, there are a million who fall by the wayside and are left selling credit cards and writing blogs :-).

Let me examine another cricketer - Rahul Dravid. I wouldn’t by any stretch of imagination call him a natural. Dravid is the hard working, technically correct cricketer who puts in a lot of effort and displays tenacity. He unfortunately is not gifted with the raw natural talent that Sachin has ( This is true for 99.99% of us ). So he has made that up with sheer hard work and getting down to the basics. I would put Anil Kumble in a similar bracket as Dravid.

Dravid will not be as great as Sachin but he has left his indelible mark on Indian cricket.

The problem is that all of us aspire to be like Sachin when we are as talented as Dravid, if not worse. We walk in believing that we are potential god’s gift to mankind and leave the field with dreams shattered and egos hurt.

The key to success is to realise whether you have the natural talent of Sachin and if not, to change tack and become like the hardworking Dravid. Strategy No 2 clearly has a higher probability of success.

So what does this have to do with stockmarkets?
I think most people behave very similar when it comes to the stockmarkets. We all believe that we are the Sachin Tendulkars of the market with inborn insights and natural stock picking abilities.

There are people who have those abilities and I have met people like that. People who have the right instincts in terms of timing the market or the ability to look at a trading screen and see patterns. I have met people who can look at a balance sheet’s and come up with amazing insights.

Unfortunately these people constitute just 0.01 % of the population that exists in the stockmarkets. The remaining 99.99 % of us are not born with natural instincts. And a significant chunk of this population enters the market believing that they are the next Rakesh Jhunjhunwala’s of the world.

They leave disheartened and disillusioned by the experience and unfortunately some a lot poorer.

The way I look at the markets for myself is to position myself as a Dravid ( Knowing fairly well that I m not a Sachin). Nudging here and there, scoring those singles and twos and hopefully a few fours and sixes along the way.

The key to scoring runs is to retain your wicket or your portfolio to play the next day.

Performance Update

I started this blog in the month of May and it has as a process helped me clear some of my own thoughts and formulate my investing strategies.

I have so far recommended 3 stocks based on analysis. ( I m a lil slow, cant think of one every week :-)). Posting a performance update on these stocks and plan to do this on a quarterly basis.

Peninsula Land

I was running through the Peninsula Land annual report for the year 2008. The report threw up some interesting things and in a sense reflects the kind off trouble that the real estate industry is facing.

Like they say the devil is always in the details, I think in case of a real estate company the devil is in the numerous subsidiaries and SPV’s that get floated.

Rs in crores

The company’s sales numbers have decelerated considering the previous period is for nine months. Net profits have also shrunk and so have the Net Profit Margins.

But the interesting part is that though on a standalone basis inventory has gone up from 224 crores to 279 crores, the devil is really in the consolidated numbers. The increase in investments and loans and advances in the standalone numbers are essentially money routed to the various subsidiaries which hold the inventory.

So on a consolidated basis inventory is about 546 crores most of which would be undeveloped land. The real value of developed stock would be much higher. Total Sales last year of Rs 357 crores and unsold inventory of Rs 546 cores. With the environment turning negative, some of these balance sheets are not going to be looking very good for a few years to come.

Stock Update - Bihar Caustic - Q1 Results

I had in my earlier post recommended Bihar Caustic. The company announced its Q1 results yesterday and the results were on track or better than expected.

Sales and net profit grew by 11% on a trailing quarter basis. On a year on year basis the growth is very impressive. The company should clock a EPS of over Rs 20 for the year and should increase book value to over Rs 100 per share.

The stock is available at a PE of 3 and closed yesterday at Rs 68.

Repro India - Q1 results

I had in my earlier post recommended Repro India. The company announced its Q1 results today.

Sales have improved from 37 crores to 46 crores a jump of 24%. Net profit improved by over 70% growing from 3.02 crores to 5.15 crores. Quarterly EPS moved from 2.75 to 4.69.

More importantly OPM improved from 17% to 20% primarily driven by growth in exports which now constitute 47% of sales. International business has a higher operating margin as compared to domestic business.

The only downside is that having been caught in work, I havent had the time to add to my position :-(. Post results today the stock moved to the upper circuit closing at 113. I guess a few down days on the market should help me buy some more of this stock.

Ranbaxy - The Soap Opera continues

I had written in a earlier post on how I was uncomfortable with the way Ranbaxy was shaping up after going thru its balance sheet. The stock was hovering around the 500 mark then.

Then came the news of the Daiichi takeover. I had written a post then on how it was a merger of two organisations that were struggling for different reasons, coming together and hoping to build something strong out of it. Stock moved to around the 600 mark and I sold off a large % of my very very small holding :-).

Now the US FDA has pulled up Ranbaxy. Not the first time though, Ranbaxy has a history of run-ins with the US FDA. Their US Hq got raided in FEB 2007. Here’s a link to that story. There are rumours of Daiichi exiting the deal flying around.

I now come to the reason for this post.

I read this interesting piece on Bloomberg. UBS pharma analyst Sonal Gupta states and I quote
"We believe there could be close to 50 percent downside to the stock if Daiichi Sankyo were to withdraw its current offer to buy a majority stake in the company,''.

So UBS believes that minus Daiichi taking over, Ranbaxy is worth only Rs 250 a share. Daiichi is buying Ranbaxy at nearly three times that at around Rs 729 per share.

UBS's call is building up a self fulfilling prophecy where based on the value assigned by UBS, would Daiichi withdraw the offer which would lead the stock to reach the 250 level.

What will Daiichi do? The soap opera continues …..