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Saturday, May 22, 2010

Question and Answers




Just trying to make the blog more interactive and one way would be to answer questions..
Will try and answer most of them.. my ability to answer depends on my knowledge and time

Hope we all learn something new as we progress in life.

If you have any questions or answers please post as a comment to this thread and we can start new threads for interesting topics.

=happy investing

Question on May 21,2010: Posted by Jaig56:
Thank you very much for the information In your old write up on Venky available in your blog But can you give me some idea about the tools for arriving at reasonable value of a stock Present stock value of Venky is said by some to be highly overvalued This will be great help for long term investor Further what is your view about i) Confidence Petroleum ii) Karuturi Global iii) Gammon infrastructure ...

Answer: Jaig56..Beauty is in the eyes of the beholder.. similarly reasonable valuation is also a moving target.. it is not an exact science..

Steps for Valuation of a Company (let us take Venky's as an example):
Step 1: Calculate Enterprise Value.
The current most common valuation technique is Enterprise Value of the company/Shares.
Enterprise Value = Current Market Cap+Debt - (Cash/Cash Equivalents)

Enterprise Value for Venkys = 373.36Cr(Current Market Cap)+ 93.89Cr(Total Debt)- 58.18(Cash + investments) = 409.07Cr

Enterprise value is the theoretical cost of acquiring 100% ownership at current market price. It also takes into consideration debt and free cash in the company to get a number closer to real value.

Ideally companies are valued at 1 times sales is considered fairly valued. Ofcourse this is just a plain statement.. companies can be valued at higher/lower levels based on their market share, reserves in case of resource based companies, news flow, latest developments and plain demand and supply.

Enterprise Value is like asking what's the price of a plain white shirt. Then we can add/subtract from the price based on a number of not so plain features like brand, exclusivity, texture, appeal. So Enterprise value will help you baseline the cost on simple numbers.

Step 2. Determine Company sales, PBDIT (Profit Before Depreciation, Interest and Tax), ROCE (Return on Capital Employed), Market Cap High/Market Cap low for past 4-10 years (check out the history)
Year/Sales/PBDIT/ROCE/High MCap/Low Mcap
2009/573.52Cr/47.64Cr/14.36%/234Cr/65.43Cr
2008/534.87Cr/58.89Cr/19.2%/149Cr/66.67Cr
2007/425.66Cr/29.86Cr/9.43%/188.03Cr/98.08Cr
2006/387.39Cr/27.28Cr/10.78%/162.35Cr/101.88Cr
2005/341.38Cr/35.77Cr/20.31%/Not Available/NA

Step 3: Read the data and crunch the information.
1st Observation: Venkys High Market Cap has always been in the past close to 50% of annual sales number
2nd Observation:  Company has been profitable for all the years and sales and profits are trending upwards.
3rd Observation:  ROCE is 14.81% which is higher than the rate of interest in India. If Venky's borrows money since its return on capital is 14.8% ideally it should have the ability to payback the loan amount. If the avg interest rate is 12% and the ROCE is consistently 10% .. loan funds/debt can bring the company to its knees but Venky's ROCE is high enough to safeguard the company in case of any such issues.

Step 4: Check out dividend payment, Loan/Debt in its books.Debt equity of venkys is below 1 and long term debt equity is below 0.5 which means the company is not swimming in debt. Also Venkys has been paying dividends on a regular basis (past 9 years) (no data available beyond 9 years)

Step 5: Check Cash flows of the company Operating Cash flows should be +ve for a well established company. Venkys Avg Cash flow from operations is +ve 26.23Cr for past 5 years which is good

Observations: Venkys is a well established company and is profitable and dividend paying company. Company has decent Return on Capital and low Debt so 5-10 years down the line we can still expect Venky's to be existing as a corporate. (keep track of above numbers ROCE/Cash Flows/Debt Equity and you will be able to identify any issues well before they are published)

After this very basic analysis which confirms Venkys as a good company with long term sustainability we need to dig deeper and see company website (http://www.venkys.com/)
We need to look at any announcements made (like the acquisition of shares from the market by the promoters) SPF egg manufacturing facilities, National Egg coordination committee read annual reports

My Final Conclusion: Venkys from the eyes of an investor seems to be over priced considering its historic valuation of Market Cap = 50% of sales. having said that Venky's is more than chicken and has a host of subsidiaries and at a consolidated level I am sure like Godrej industries worth a lot more. With the growth of the Indian economy consumption of chicken products is going to increase and we can expect Venkys top line and bottom line to improve substantially. Also promoters buying stock till levels of 170 clearly shows that there is some strategic change that is taking place.. I would at a personal level buy Venkys when it reaches its 200 DMA and try and reduce my Avg cost of shares (recommendation for new entrants)


- People already holding shares in Venkys at lower levels can continue to hold. Those who feel the company stock is overpriced are suggested to sell small amount and reduce Avg cost down to 170 levels. Hold the rest of the stocks for long term as the company is a well established company in its line of business and can be expected to do well for years to come.. It is a direct play in the growing consumerism that we are witnessing in India.
==========================
Regarding Karuturi Global, Confidence Petroleum, Gammon Infrastructure I have not evaluated these companies and generally would suggest.
- Shift from Karuturi to Gujarat Ambuja Exports (22.20)
- Confidence Petroleum and Gammon Infrastructure: No comments as I have not valued these companies but I would suggest exposure to Jayant Agro (78/=)as a play for the coming Peak oil which we are destined to see in our lifetime.
==========================
Visitors are free to pen down their thoughts about Karuturi, Confidence Petro, Gammon Infra, Venky's and any other stock. This is an open forum and appreciate any participation and questions

Most of the Data (Sales, ROCE,Cash flows) for the discussion is available for free in moneycontrol.com

4 comments:

purshi said...

What about buying venkys now at price of Rs.950
Is it not overpriced.?

What'sUp Prahalad said...

Purshi:

Yes Venky's is over priced no doubt.. and its being primed for a dump.. or maybe a takeover/selloff..

promoters have increased margins by 100% in one year by doing nothing..

It is being primed.. primed up for what? is anyone's guess..

It could be a sell off cause its no doubt the best company in the business.. but reading a recent interview of promoters the next generations seems out of place..
and out of touch

http://www.moneycontrol.com/news/business/see-margins-stabilisingq3-venkys-india_482472.html

=happy investing
whatsup-indianstockideas.blogspot.com

Purushottam said...

Prahalad: Your view of Venkys of being overpriced has come true and perfect.. Stock now lying at 700.. I pity for people who had entered the stock at 1000 levels..

No book is good as good as your blog.. gr8 going.. keep rocking..

What'sUp Prahalad said...

Purushottam:

Its good to hear praise..

I think you are over rating my abilities..

I am sure everyone who has a little bit of sense knows that Venky's was overpriced..

=happy investing
whatsup-indianstockideas.blogspot.com