Saturday, December 31, 2005

 

The Fine Print: Indian Card Clothing



The Company:
THE INDIAN CARD CLOTHING CO. LTD (ICC)

The Business: The company pioneers in the manufacture of card clothing for the over the last three decades. It manufactures flexible and metallic card clothing and raising fillets and sheets and saw tooth wire. (Source: MyIris )

Market Capitalization: ~ Rs. 127 Crores
Latest Quote: Rs. 277.70

Trailing P/E : 9.07
Price/(three-year average earnings) : 13.07
Debt-Equity Ratio: 0.02
EPS CAGR (5-yr) : 23%
Price/Book Ratio: ~1.7

The Impression:
The Wrinkles:
The Question:

How can ICC increase EPS while sales are more or less flat?

A Closer Look at the Profit and Loss Statement:

The net sales as of March 2001 was Rs.37.96 Cr and the corresponding EPS was Rs. 7.80. In 2004, the net sales was Rs. 36.87 Cr and the corresponding EPS was Rs.20.29. That's a three-fold increase in EPS for the same number of shares AND net sales.

From the profit and loss statement, the income under the heading "Other Income" is steadily increasing. In 2001, Other Income was Rs. 3.34 Cr (~10% of net sales). By 2004, Other Income was Rs.7.64 (~20%). This company is getting 1/5th of its income from a source other than its main business.

What Other Income?

In 2004, the sources of other income based on the annual report (in Lacs) are :
I won't even bother to comment on the relative size of 'Others' within"Other Income'. Overall, it looks like ICC is selling a LOT of its investments. The income under these heads, except for rent, would not add to expenses. Any income received in this manner would get directly added to the bottom line and result in, would you believe it, an increase in profit margins.

When this income is discounted, the 2004 picture is:
In 2003, almost all of the EPS can be traced to the other income. The Operating income was Rs. 0.33Cr on sales of Rs.33.56Cr. That's a 1% margin for the year with sale of investments.

There are always two sides to anything

One view can be that this company is in serious trouble. Obviously, ICC cannot maintain its EPS at this level forever, for soon, there would be nothing left to sell. Then, the crash will be inevitable. The other viewpoint is that the company is undergoing drastic changes to improve profitability. After a bad 2003, the company's costs came down from Rs. 33Cr to Rs.30Cr even as sales increased from Rs. 33.56Cr to Rs. 36.87Cr. Most of this came from, it seems, cutting Employee Cost by ~ Rs.2Cr. Another positive is that the net sales for increased by 1/3rd from 2004 to 2005.

My view

This company has had recent growth in sales but the margins are very small. Given that most of ICC's reported EPS comes from 'Other Income', I'm not comfortable with its long-term prospects, i.e once all the money's gone. To me, the company is selling pieces of itself just to report a profit and pay dividends, which seems to be a rather underhanded way to manipulate the P&L numbers.













Tuesday, December 27, 2005

 

Saving Tax II

Questions, reasonable questions, arise with respect to my Saving Tax post. I thank 'Value Investor' for bringing them up, you can read his/her comments here. My analysis was perhaps too simplistic and his/her views on the subject are very much worth examining. I shall call him/her VI for the remainder of this post for convenience.


What? No Insurance?

With respect to my flat insurance no-no, VI points out that insurance is sometimes necessary (or necessary at some time) and you might as well get tax benefits out of it under 80C. It can be cost effective as, VI explains, "pure term policies are not investment products at all, but are pure insurance products, and very cheap at that." Pure term policies don't pay you back so are cheaper than money-back policies for the same coverage amount plus "[pure term insurance] gets cheaper the earlier you take it". Another insurance option is some flavor of money-back plans, especially ULIPs, that pay you an amount upon maturity that "certainly [are] far better in terms of the returns they provide than PPF for anybody who is comfortable with a modicum of risk".

I agree with VI's views on term life insurance. If you don't think you need insurance, think again, as the ad says. In fact, if i was going to buy any sort of insurance, I would stick with term policies only. However, I did not explain my insurance no-no and the impression given was that I will never buy insurance. My current situation is this: I have no dependents, no house, no loans and my parents are well off (MUCH better than I, I might add). At this time, insurance is not a priority. The relationship between cost of term life insurance and age is something that I ought to examine carefully, that is, am I better off buying term life now since I'm going to need it later anyway? But that is the why i say 'no way' to insurance. I don't need term insurance this year.

ELSS vs ULIP

The choice between ELSS and ULIP is clear to me. The overall cost of a ULIP works out greater than a combination of ELSS and term life insurance (see ELSS vs ULIP, PersonalFn.com or This or That, Economic Times).


ULIP vs. PPF

This one is tough. If you're going to lock your money in something other than a ELSS, should you go with PPF or an ULIP? Well, it all depends. First, it's my contention that , despite past performance, there is no guarantee that the equity markets will provide 15% CAGR or any other number so, and VI agrees, growth in ULIP carries more risk.

ULIPs assure only 3% or so annual return and the growth component that will allow ULIP to beat PPF will come from investing in the markets. This is something I cannot honestly say I am certain will happen, especially 6 years from now. ULIPs are far more stringent with respect to size of yearly premiums. With PPF, you can get away with Rs.500 a year if somebody changes the I-T law. And let's not forget, if you dont pay, you're not covered.

This PPF is for a rainy day (about 15 years from now) and consists of funds that I cannot actively manage right now. So, I don't think of the PPF as a good standalone investment BUT it is a vital part of my integrated portfolio. I dont want to pay for insurance under ULIP as I have already scratched out a ELSS and term life insurance combination.

In The End, It's All About You

This may not be the best approach for everyone, of course, but as VI concluded, to each his own.




Monday, December 26, 2005

 

Don't just do something, stand there


The speculative public is incorrigible. It will buy anything, at any price, if there seems to be some "action" in progress. It will fall for any company identified with "franchising," computers, electronics, science, technology, or what have you when the particular fashion is raging. Our readers, sensible investors all, are of course above such foolishness.

—Benjamin Graham, The Intelligent Investor, 1973


I have this habit of reading 'The Intelligent Investor' every now and then just to remind myself of what investing is really about. The book is by Benjamin Graham, the father of value investing. Warren Buffett calls The Intelligent Investor "by far the best book on investing ever written". I'm just gonna go with 'the only investment book I think I'll ever need'. So far, I'm right in my assessment. I have the new paperback with the updated commentary by Jason Zweig. The examples, including Zweig's, are in an American setting but the principles set forth in the book can (and should) be applied to any market.

The Basic Ideas (as per my reckoning):

1. Don't lose.

Make the effort not to lose through thorough research before, during and after any investment.

2. Demand a margin of safety from any investment.
Make sure that, if you are wrong, you're not horribly wrong. You will be wrong sometimes.

3. You are your worst enemy.
Investing requires, above all, control over one's emotions. If not, you're just going to sell when the markets collapse and buy when the market's rising like everyone else. Easier said than done.

4. Stocks represent a stake in a company.
Stock prices SHOULD be a function of a company's performance. Nothing more and nothing less.

5. Markets are not all that efficient.
Stock prices sometimes dont reflect the company's worth due to the human emotion component in the markets. The efficiency of markets is a nice theory that WOULD work if we were all unfeeling robots.

6. You have no idea what the markets are going to do next.
If you think you do, you will pay the price. Minimize risk.

7. It's not enough to buy into a great company.
You need to buy in at the right price.

8. There's only one kind of investor: a value investor.
There's only one kind of value investor: a long-term investor. The rest are speculators. To wit, dont just do something, stand there.

9. For a value investor, risk does not increase with return.
By buying a stock at a price lower than its true value, you're essentially buying a dollar for 40 cents. 40-cent dollar is a popular expression among value investors. The lower the price you pay, the lower the risk and higher the potential return.

10. A valid approach to investment will not change.
The methodology by which one invests does not change with the market. There are investing principles that will remain valid under ALL conditions.

I do have to warn you that this book WILL change your investing outlook drastically. Television commentary on intra-day trading will come to resemble 'Saturday Night Live': worthless but funny. You will embarass yourself by giggling when some pundit uses phrases like 'technical analysis' or 'range-bound'. Don't take my word for it. Read the book.

One thing I find really scary about the book is its contemporary relevance. Little did I realize that stock markets behave the same way now as they did in Graham's day.A glimpse of that is given by Jason Zweig as he provides contemporary examples in addendums to each of Graham's chapters. The 'new economy' boom of 2000, WorldCom, Motley Fool's 'Foolish Four' are among the ones eviscerated. If you were a true 'value investor', you would have lost nothing during the 2000 crash AND profited in the ensuing bear market (in India or the US).

Here are some of value investing related blogs I found for further info:

Value Investing In Nigeria : Name says it all.
Dah Hui Lau (David) : A value investor from the UK
Mr Market - are you irrational today? : A contrarian investor, a related species.
Value-Stock-Plus : A fellow Indian value investor
Shai Dardashti on Grahamian Value : what would Graham do?WealthJunkie : value, value, value
Fat Pitch Financials: 40-cent dollars
Value Investing in the Indian Stock Market: detailed and practical analysis

Discover value investing. I am, all the time. For now, I'll leave you with another extract from the book:

Outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook. More than that, some speculation is necessary and unavoidable, for in many common-stock situations there are substantial possibilities of both profit and loss, and the risks therein must be assumed by someone. There is intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unintelligent ...




Sunday, December 25, 2005

 

Saving Tax (and ICICI's best-kept secret?)

It's that time of the year again when tax starts to weigh on one's mind (atleast, it should be). A lot of changes in the I-T act this year say most websites that i bother to read.

In case you dont already know, one can exempt upto 1L off the salary and get the tax benefit of your bracket. So, instead of a not-so-attractive %15 rebate like last year, your investment of 1 Lakh is not taxed. In theory, you can get upto 30% off of taxes when investing in instruments specified in Section 80C of the I-T Act.

So i set out on a quest to ascertain the tax saving that I could perform and the instruments available. Its times like these when I wish i had a huge house loan so i didnt have to go search for other tax saving products. Anyway, here's what I found:

1. NSC (National Savings Certificates):
- Gives 8% compounded half-yearly
- Lock-in 6 years
- Interest is taxable

Dont like this option as interest forms part of taxable income next year! In essence, I don't receive the interest AND pay tax on it. That's some sort of double whammy. Effective interest after tax is 5.something (not the sequel to five point someone).

2. ELSS:
- Lock-in 3 years
- Equity-linked

Most say that this is the best option as equity gives highest returns of all asset classes over the long-term so you cannot go wrong with ELSS. What they neglect to mention is you got to do ELSS right. First, dont overpay by ALWAYS using a SIP plan. Second, I think the stock market is scary at the moment so investing lump-sum right now is not for me. Its too late to start a SIP plan this late and make the 1Lakh cut within March 2006. So, this plan too is out for THIS year. Next year, I'm atleast 50% ELSS+SIP.

3. Insurance:

short Answer: no way
long answer: NOOOOOOOOOOOOO WAAAAAAAAAAAAAAAAAAYYYYYYY


4. Housing Loan:

step 1: buy a house...

5. PPF:
- 15 year lock-in
- interest is non-taxable
- got to make contributions every year for 16 years (atleast Rs.500 a year).
- 8% interest compounded annually

This is sort of like NSC except the effective interest rate is lower (as NSC is compounded
half-yearly) but, on the flip-side, the interest income is non-taxable. Lock-in is longer though. You dont really need to stagger this investment like ELSS. The interest is the same whenever you enter. Next, the interest is non-taxable so I dont get taxed for income i dont get. I figured that if i have some money that i wont need for 15 years, then I ought to just park the funds in a PPF.

So based on that unscientific analysis, i decided to open a PPF account. First, the venerable SBI closed on me (it was saturday after lunch). The post-office also shot me down (it's right across the street from the main bangalore SBI) although they didnt really give me a reason why. My PPF action item was not going down easy.

Now, at some point, I had read that ICICI was recently authorized to collect funds for opening a PPF account. A press release from ICICI stating that they are going to offer online access to PPF account from your savings account at ICICI. The ICICI website, perversely, makes no mention of this fact anywhere. You can search for PPF all day long at icicibank.com and you wont find a thing. The other scheme mentioned in the press release, some senior saving scheme, gets a page of its own so you're left wondering if the addition of the PPF in the release was a huge mistake by the Marketing Dept.

I figured i ought to give ICICI a shot. I had already heard 'no' twice and was getting used to rejection. i stepped into the main ICICI branch and, wonder of wonders, they do open a PPF for you if you ASK. Ten minutes and one submitted photograph later, I was given a PPF account number WITH online access from my savings account. The account would be activated 10 working days after the submission of the form. There, wasnt that simple?

Questions that I want to scream at the top of my lungs are (but didnt) are:

(A) Why does SBI require two photographs, compulsory witnesses for nomination AND an initial cash deposit? By contrast, ICICI wants one photograph and cash/cheque and no signatures when nominee is a major!

2. Why is ICICI not publicizing its PPF capabilities? Is one web page extra too much cost? I'm guessing, since opening a PPF at ICICI does not benefit ICICI in any substantial way, they'd rather not spend time or money on informing the public.



In conclusion, my big tax saving plan for this year: PPF.






 

Worst of all, patient

This blog is about investing from an Indian perspective and my take on it. The title is derived from one of my all-time favorites, 'Seven'. An investor should be, as Morgan Freeman describes John Doe, "methodical, exacting, and worst of all, patient".

This blog is a record of my investing actions and plans, This blog is not advice on investing in India. Basically, PLEASE do your own homework and dont blame me for anything that happens from taking me seriously. Or as a person with lots of law books would say:

Aditya Ramachandran
advices users to check with certified experts before taking any investment decision. However, Aditya Ramachandran does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Aditya Ramachandran especially states that he has no financial liability whatsoever to any user on account of the use of information provided on his website.


Now you know why law books are the size of dictionaries. Law invented half the words in existence!


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