Help Me Fight 'Comment Spam'

I just spent 45 minutes deleting spam comments from various posts on the blog and am really PISSED! So far I'd kept the comments free for all, hoping that it would encourage all you guys to share your views with the minimum of fuss and bother.

Unfortunately, spam comments are outnumbering genuine ones by at least 5 to 1 and so I'm having to disallow anonymous comments. I hope all you guys out there will understand and take the time to create a blogger ID so you can continue to contribute to this blog. On my part, I hope this step reduces the spam to a more manageable level so I can devote more attention to writing.

Thanks for your support and do come back soon!

Companies I'd Love to Own - 1

For a follower of Warren Buffet, I’ve been quite remiss in my attention to great companies. It’s time I focused more on the brand names and businesses I’d be proud to own rather than chasing every company that looks undervalued and diffusing the gains on my portfolio.

Buying only on value and / or clear future promise is a philosophy that has paid off very well so far, getting me into great businesses like ITC, Infosys, SBI and Bharti at prices that seem throwaway by today’s standards. I’ve made at least 60% on these on an annualized basis, not bad by any standards!

In line with this strategy, I plan to maintain a watch-list of my favourite companies, starting today. Today’s post contains a few of the more obvious ones and I will keep adding companies to the list over subsequent posts. These may not be undervalued right now – in fact almost all would be priced quite high in today’s market – but there’s bound to be a time in future when I can pick them up on ‘sale’.

And, when that happens, I’ll be there. Will you?

Today’s List

I bet you recognize all of these companies, making them a great way to start a list of 'Great Companies to Own'

1. Jet Airways
2. Blue Star
3. Hero Honda
4. Bajaj Auto
5. Maruti Udyog
6. State Bank of India
7. Punjab National Bank
8. ICICI Bank
9. HDFC Bank
10. Kotak Mahindra Bank
11. United Breweries
12. ITC
13. Infosys
14. TCS
15. Wipro
16. Blue Dart
17. Sintex
18. Britannia
19. HLL
20. Asahi India
21. Apollo Hospitals
22. Hotel Leela Ventures
23. Mirza Tanners
24. CRISIL
25. Trent
26. Pantaloon Retail
27. Dabur
28. Marico
29. Gillette India
30. Cipla
31. Wockhardt
32. Ranbaxy
33. Bharti Televentures
34. Biocon

Do write in with your suggestions on companies big and small that might belong to this list. They must have something that gives them a strong, sustainable advantage in their market. Usually this is a brand name but it could be anything - a captive market, a niche area of expertise that others cannot get into, an early mover advantage in a potentially lucrative market...

Will wait for your comments. See you next time.

IPO - Suzlon Energy

Suzlon is by far the largest wind-energy provider in India, a lucrative and under-served market for renewable energy. It is also the sixth largest such company in the world.

What I Like

• The company holds a strong and sustainable position in a growing market where barriers to competition (need for an impeccable track record and significant capital to bid for projects) are high. Further, India is a potentially huge market for wind energy and there’s plenty of room to grow domestically. And petroleum prices are shooting through the roof, making renewable energy even more attractive
• Suzlon has captured 3.9% of the global market this year, which is much better than the 1.9% it has of the cumulative installations till date. This means it is actually increasing its share of the pie, a very encouraging sign
• Further, the company has demonstrated sales and profits growth of 54% and 47% respectively on a cumulative basis for the past 4 years, which compares quite well with the issue PE range of about 29-34

What I don't Like

• The EBITDA / EV margin is in the range of 11%-13% for the issue price band, which, unfortunately is a bit low for a relatively high-risk business. Wish the company had been able to bring it up to at least 15%
• The company has re-stated its numbers due to changes in its accounting policies. The cumulative effect of these changes has been to increase the profits for the last year by Rs. 204 mn leading to an EPS increase of about 66p, which is significant. While the accounting changes are probably all right, I’m sure the fact that they led to increases in profit was a big factor in approving these changes. Sneaky!
• The Price to Book ratio for Suzlon is around 12, whereas the same is in the range of 3-10 for its peer group companies. A P/B ratio of 12 is very high and would be an immediate disqualification for conservative investors
• Being sixth (with a tiny market share of about 1.6%) in a relatively small global market means Suzlon will have to really work at its strategy in order to grow faster than the market and move into the big league. The top player in this market has twenty-two times it market share and even the 5th largest has five times the market share of Suzlon.

In Summary

Apply if you like ‘growth’ stocks that with potentially significant upside (though at a high risk) – and even then go for the lower end of the band. Those willing to hold it for many years will definitely reap huge benefits - after all the market will really explode when the cost of wind energy comes close to that of fossil fuels.

Don’t touch it if you are risk-averse or if you have a short horizon.

Value Pick - The Coming of Zicom

I first stumbled across this company (www.zicom.com) when I was surfing the net for home security solutions. And I was instantly hooked!

Well Worth Watching

This tiny concern has a lot going for it, investment-wise.

• It's in a niche sector and getting to a dominant status with growing brand recognition and appeal
• A slew of products and partnerships catering to the security needs of organizations
• An impresive and growing client list
• A recent product cum service offering targeted towards home users, priced attractively on a monthly payment model
• Improving financials - better margins, better ROCE / RONW, fairly low debt (rising, but that is to be expected with a growing company)

I believe it has ample room to grow given the focus and attention that Indian corporations are now giving to security.

I also expect the home user offering to be simply lapped up by the well-to-do. At a couple of thousand a month, even I can afford it and it comes with the 'cool' factor that's likely to appeal to the upwardly-mobile, urban male. Wait for a few years and watch the home security market explode!

A Tad Over-Priced

It's difficult to price this company, just as it is with all small-caps. There isn't a sufficiently long track record to base one's opinions on unlike with, say, an ITC. However, we can take a guess.

Today's price (even after the Sensex fall yesterday) is about Rs. 150, which implies a PE ratio of 22.5, approximately in line with historical earnings growth. This is a little too high for my liking, though the good news is that quarter-on-quarter growth seems to be over 30% and RONW is nice and healthy.

Ideally, I'd have liked to buy the stock at Rs. 125-130, though I must confess that when I first saw it at that level I wanted it below Rs. 100! Just shows you what we value investors are like - never happy!

I expect Zicom to reach at least Rs. 165 around April next year. Hence, in my opinion, it is an OK buy at Rs. 150 and a great deal at Rs. 125. Hold it for longer and the story should get better once the company attains some scale and gets noticed by the fund houses.

So set your limit orders, sit back and enjoy.

Current Market Price: Rs. 150

iFlex - A Good Time To Sell

I sold my iFlex shares yesterday.

The company has rewarded me well - I especially enjoyed the run-up in the price after the Oracle news - but it seems to me that it has gone too far ahead of its real value for one to hold on any longer.

Valuation Seems High

• PE stands at around 35 but the company has only grown at about 23% CAGR over the past 5 years. Average PE over the past 5 years has been around 25
• EPS growth has slowed down over the past couple of years
• RONW has consistently fallen from about 35% in 2002 to around 18% now, a huge drop, especially given the fact that book value has not really been growing very fast either
• Oracle's open offer (based on their assessment of the company's value) is much below current market price

Prospects Not Clear

• iFlex has so far been a leading player in universal banking software, which is usually purchased by mid-tier banks. Given the company's phenomenal success over the past few years, it has actually covered large parts of its traditional market in Middle-East and Africa. In order to grow it now needs to look at the US and Europe, which are much more competitive markets and have several established, dominant banking systems players
• The company has shown greater growth in the services space than in products, making it more of a mainstream IT player and bringing it in direct competition with the Wipros, Infys, TCSes and Satyams of the world
• The ability of iFlex to move into large banking solutions through the good offices of Oracle might be a little over-rated as Oracle works closely with many of the other leading banking software vendors as well

The way forward for iFlex is fraught with a lot of uncertainity and it seems more prudent to sell at what seems to be a high and wait for iFlex's strategy to become clearer over the next year or so.

Current Market Price: Rs. 970