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Sunday, 15 July 2018

Wednesday, 30 May 2018

ET Markets Article - How to dig for gems of ideas in companies’ annual reports

You can read my latest article in ET Markets titled "How to dig for gems of ideas in companies’ annual reports" 


This is the time of the year when we as investors start getting emails of annual reports from companies where we are invested in. We start going through them one by one. I want to share some of the tips and tricks I have learnt over the years – some from my own experiences and some picked up from other senior investors - on how to read annual reports.

1.    Maintain a list of companies: Having a list of companies which I am interested in reading annual report for even when I am not a shareholder means that I get notified when it is published. I use screener.in and keep all such companies in the watchlist. I get an automated message which informs me when the company makes a BSE/NSE announcement regarding publishing its annual report.

2.    Cluster annual reports from the same industry: I make a folder on my computer and keep saving all the annual reports based on their respective industries. Reading annual reports of companies from an industry as a group gives a lot of insight into the competitive landscape, new developments, and differentiators for any one company. For example, when I am reading banking annual reports, I will read HDFC Bank, Kotak Mahindra Bank, SBI, Indusind Bank, Yes Bank, PNB (!!) one after the other covering both the private and PSU banks. Sometimes just looking at reports from the same industry helps in identifying the good and bad companies. Comparing management compensation, board composition across companies in the same industry also provides better insights than reading reports across multiple industries.

3.    Read reports of global leaders: While I am at it, I usually pick one or two global leaders and read through their annual reports. So, for the banking sector, reading Jamie Dimon’s letter in JP Morgan Chase or following the Wells Fargo annual report to understand how they are progressing to root out their mis-selling problems. In some industries, global reports can provide a glimpse of things to come. Google and Amazon annual reports are a must read for anyone who is interested in technology its impact on our day to day lives.

4.    Opening last 3-5 years annual reports together: With annual reports coming as pdf files, it makes it easier to reference the previous years’ reports. I tend to open the last 3 and sometimes 5 years reports in different tabs. Then when I am reading through say the management discussion and analysis, I will glance at what was written in the same passage last year or two years back. This helps me in understanding how the management commentary has changed over time. Is the same passage being copy-pasted every year? Are there same spelling mistakes every year? Has the management said something 3 years back and then not mentioned it ever again? Is the management in the habit of over promising and under-delivering or vice versa?

5.    Focus of Director’s report and MD&A: My main intention of reading an annual report is mainly to understand the developments and management view of the business climate. Secondary focus is on the financials, which I glance through at a high level. The director’s report and the management discussion and analysis help the most in this respect.

6.    Know what to look for: This is more important for companies in the portfolio and which I have been invested in for a long time. I am aware of the “story” in those stocks and know what to look for in terms of management commentary. For those where I am looking to invest, I take a more skeptical approach and try to drill holes in my investment thesis.

Annual reports are the primary source of investor information and reading them in a disciplined way gives a lot of information and insight on the workings of a company and industry. 

Friday, 27 April 2018

Jindal Stainless (Hisar)

Business
  • Jindal Stainless (Hisar) Limited (JSHL) is India’s first fully integrated stainless steel manufacturer with a capacity of 0.8 MTPA.
  • JSHL is world’s largest producer of Stainless Steel strips for razor blades and India’s largest producer of coin blanks, serving mints worldwide.
  • Currently, the only specialty stainless steel producer in India
  • Key projects / products:
    • SS fuel tanks (Ashok Leyland, Eicher Motors, Tata Motors)
    • SS exhaust systems for commercial vehicles (Ashok Leyland, Tata Motors)
    • SS bus bodies (Karnataka/ Telengana/ AP/ Goa State Transport Corporations, Volvo)
    • SS tanks, pipes and tubes are extensively used in the chemical industry
    • SS tanks and utensils in the dairy, beverage and food processing industry

Industry
  • Stainless steel is an alloy of Iron with a minimum of 10.5% Chromium. Chromium produces a thin layer of oxide on the surface of the steel known as the ‘passive layer’. This prevents any further corrosion of the surface. Increasing the amount of Chromium gives an increased resistance to corrosion.
  • Stainless steel also contains varying amounts of Carbon, Silicon and Manganese. Other elements such as Nickel and Molybdenum may be added to impart other useful properties such as enhanced formability and increased corrosion resistance.
  • India is currently the 2nd largest producer of stainless steel after China
  • The SS industry is growing at 8-9% yoy. The growth is in response to the rising demand for stainless steel, mainly from sectors such as auto, roads and highways, housing and the like.
  • Imposing a definitive countervailing duty (CVD) on certain stainless steel products from China have helped the industry. Government had removed the import duty on nickel, a key material required to produce stainless steel

Financials
  • JSHL has been profitable at the operational level even before the demerger from JSL
  • RoCE and ROE are healthy
  • Debt is a major concern and is a key monitorable
  • Profit growth is very strong and the momentum is likely to continue
  • Valuations are reasonable. Company is available at 0.5x Market Cap / Sales

What is changing?
  • Majority of stainless steel was imported from China; with the CVD in place now, major shift of market share to Indian players is expected. JSHL is to be one of the most important beneficiaries of this shift.
  • Strong demand from traditional segment of kitchenware & utensils the growth will be largely driven by ABC (Architecture, Building & Construction) segment, ART(Automobile, Railways &Transportation), process industry segment & defense sector.
  • Focus on niche areas - Signed a license agreement with the Defence Research & Development Organization (DRDO) for manufacturing high nitrogen steel (HNS) for armour applications
  • With more stringent norms like Euro-VI kicking in by 2020, consumption of stainless steel is expected to get a boost, as SS reduces the weight of a vehicle.

Business Risks
  • JSHL has very high debt – 2774 cr (in aggregate) with 408 cr of interest payment during FY18.
  • JSHL has high receivables / sales ratio, though it is reducing (~8% in FY18 vs 12% in FY17)
  • Co has a single location operation in Hisar which increases geographical risk
  • Reduction or removal of CVD of imported Stainless steel
  • Significant delays in infrastructure spending, specially on railways & defense sectors

Disclosure: I am invested from lower levels. Please do your own due diligence before investing. This post is for educational purposes only.

Friday, 20 April 2018

Tribute to a legend - Marty Whitman

Martin Whitman, a legendary value investor, passed away on 16th April. He was the founder of  Third Avenue Management. Marty, as he was better known as, was a passionate value investor and a teacher. He was associated and took classes at Syracuse University’s Whitman School of Management, named after him. He was a distinguished Management Fellow at the Yale School of Management and served as an adjunct professor at Columbia University Business School.

I first became aware of him about 15 years back, from a talk given by Seth Klarman, where Seth suggested reading Marty's book "The Aggressive Conservative Investor". I read the book and it was packed with a lot of good and simple insights. Two ideas that stuck with me were, i) buying companies with low margins because of low competitive intensity and ii) mean reversion of sectors.

Here are some links to help you know the man from his works:

Dear Fellow Shareholders - (online book) )https://mjwhitman.pressbooks.com/




Weekly reading: some interesting stuff

The current economic recovery is the third longest in history, and if it goes on another year, it will be the longest in history — there’s nothing to say it can’t [keep rising],” said Marks, founder and co-chairman of Oaktree, the largest investor in distressed assets in the world. “There are no laws of nature or physics at work here. So there’s nothing to say it can’t go on another year, another two years, another three years. Anything’s possible.

No economic recovery has lasted more than 120 months, or 10 years. The U.S. recovery is in its ninth year. While there is no apparent reason why the recovery couldn’t hit a new record, Marks said it might be one of those historical limits that could stick.

When there’s too much money, when there’s too little risk aversion, when there’s too little fear, too much eagerness, etc. — that’s how you get excesses to the upside that have to be corrected to the downside.

The “supreme irony” of the shift to passive is that the actions of active managers do determine the weightings of the stocks listed in an index in the first place, Marks said. “There’s a trend [toward] passive investment on the premise that the active investors don’t really know what they’re talking about. And yet the [modus operandi] of the passive investor is to emulate the decisions made by the active investors who they think are idiots. It doesn’t make any sense. That’s what passive is doing today and we have to wonder about the wisdom of passive investing.



Contrary to what Mark Zuckerberg mentioned, the benefits of GDPR regulations are not being made available to people all over the world. Facebook intends to change its terms of service to put all non-European users under the jurisdiction of its U.S. headquarters rather than the international headquarters in Dublin, Ireland. That means users in Africa, Asia, Australasia, and Latin America won't be covered by the European Union's General Data Protection Directive, which goes into effect on May 25.

Under the GDPR, companies can be fined up to 4 percent of their annual global revenue for not having sufficient customer consent to process data or ignoring the "privacy by design" principle that states customers' privacy rights must be handled as a core feature of the product, not an afterthought. In Facebook's case, that's $1.6 billion based on 2017 revenue. It's natural for the company to try to limit its exposure to that kind of punishment, but it undermines its narrative of contrition and a commitment to privacy. 



A tidal wave of retirement dollars flooded the mutual fund industry . The 401 ( k ) was invented in 1981 , just as the bull market began . By 1998 , roughly three of every four new dollars invested in corporate retirement plans were going into 401 ( k ) s . At the end of the decade , two - thirds of all active workers covered by a retirement plan were responsible for directing their own investments . Hands down , they chose stocks . By the end of the millennium, 401(k) investors had stashed 75 percent of their assets in equities. Even older employees preferred stocks: in 2000, 401(k) investors in their 50s had entrusted 49 percent of their savings to equity funds, another 19 percent to company stock.


Mahar, Maggie. Bull!: A History of the Boom and Bust, 1982-2004 (p. 23) - understanding if the impact of retail money through SIPs and pension funds coming into the Indian markets could mimic the US in the 80s, which then went on to have a 20-year bull cycle.

Thursday, 12 April 2018