Insurance is not Investment

This topic comes up quite often in my discussions with friends and relatives. They want to save money regularly, so the choice is to go for an insurance product.  Financial companies lure complexity and math-averse minds by using words like “returns”, “cover”, “bonus” etc and hide the fact that cost here is really much higher than buying pure insurance (term insurance) and pure investment (mutual funds) separately.

This rediff article, though old, presents the truth even now. Go through the calculations for clear understanding.

And next time, you are trying to buy ULIPs, do the calculations yourself and check where each figure is coming from. Usually you will see rate of return being assumed as >15% based on some past performance of the fund house. Compare that against market returns in that year. In long term(20 years), its highly unlikely that ~15% is possible. A more conservative estimate will be ~10%.

Arvind Ltd (Formerly Arvind Mills) – Not good enough

The company recently came on my radar on reading in recent Businessworld issue that their retail arm - Arvind Retail makes Rs. 50,000 per sq. ft in annual revenue, while Pantaloon, with its heavily stuffed store formats, makes only Rs. 8,000 and Shoppers Stop, with its premium collection, only Rs 8,500. The article mentions three store formats that company runs – Megamart (150 stores) for mass class, Flying Machine (60) for trendy and Arrow (70) for premium class. I knew Megamart was doing quite well in Bangalore but did not know it belonged to a listed entity. Megamart revenue grew by 65% in FY09 (Source: annual report). Arrow did well too (18%) in a rough environment.

I remember looking at this company about 2 years back. It was struggling at that time and was restructuring debts. It appears like a good turnaround story.

Quick financials: Market cap Rs 854cr, Book value: Rs 51 and CMP: Rs 38.

Company’s past P&L statements show the bruises. It makes less revenue than what it used to make in 2005. Book value is less than its 2005 figure due to low profit and some losses, which company attributes to adverse exchange rate movements and higher financing costs.

Arvind Ltd. still has twice as much debt as equity. That is scary but not unexpected for a company coming out of woods. Promoter shareholding is only 37% that is also not confidence inspiring.

More importantly, the promising, impressively growing and more profitable – retail arm’s revenues forms only about 21% (FY 09 annual report; BW article says 15%) of the listed entity’s. Remaining is mostly from traditional textile business, which suffers from many ills (capex intensive, low return on capital, heavy competition, poor pricing power and more) and is not very attractive.

Even if company repeats its last quarter’s profit making performance in next 3 quarters, PE will be 18. That is not cheap.

Above factors lead me to skip Arvind Ltd. at this time.

Hinduja Global Solutions - Stock Analysis

After last negative reco, here comes a positive one.

Mcap: Rs 1000 cr, PE: 11

What is good about it?

+ Good Business: Its a BPO company. Business is mostly non-discretionary (operational) on the part of clients. A large part of their business is incoming calls with a minimum guarantee from clients. Protects the company from recessionary trends to a good extent. In 2008 recession, this strength came through clearly with consistent revenue and earnings growth.

+ Strong Balance Sheet: Company holds Rs 328/share in cash. Book value is Rs. 478/share (Source: last quarter earnings call) The cash is from Hutch stake sale and has a high probability of being "real" money. This provides quite a bit of value per share. Also is nearly debt free.

+ Transparent Company: HGSL publishes its balance sheet, detailed financials (including banks in which cash is held) and holds earnings conference call every quarter, a rarity in India.

+ Good Sector: IT/BPO sector is going to be the flagship sector of India in near and mid-term future. All the qualified youths being churned out from engineering colleges will continue to do "computer work" - recession or no recession. In the worst case, there could be salary cuts - 20%, 30% or let's say even 60%. Even then jobs in these sector will be more lucrative and more in abundance than traditional sectors. The margins of IT companies have rooms to come down from 30% to 10% and still make good business sense. IT/BPO in India is a good sector to bet on.

+ Strong Legacy: Hindujas are a big and reputed group. Some people recall Bofors and shy away. Their business record and large legacy (Ashok Leyland: Mcap 7000cr, IndusInd Bank: 5800cr, Gulf Oil: 800 cr, Hinduja Foundries: 303cr, Hinduja Ventures:758cr, Hinduja Bank: Not listed in India) however makes odds quite favorable.

+ Dividend: In 2009, the dividend was Rs 15 (and the stock price then was near Rs 100). A year before, Rs 10. This payout is coming due to strong cash reserves and you could say they should pay more. But still, getting this payout is quite good.

… and negatives?

- Management has been slow on acquisitions. For last several quarters, in investor calls and  news, we keep hearing the acquisitions are coming soon. Still awaited.
   Management says they are being conservative about acquisitions. Its hard to figure out if that is true.

  The acquisitions will deploy the idle cash, increase ROE and allay fears about cash presence. Given their prior acquisition record (Affina), hope is that acquisition will be  EPS accretive.

- Stock price has risen a lot, reducing value left in the stock. I don't see more than Rs 800 value in the stock for current fundamentals. Normal profit growth rate expectation would be 20%, which could probably be achieved in other stocks.
  So, not going to see spectacular growth here, except for the acquisition effect.

Summary:

Combining all the factors together - high cash, decent growth, low pe and good solid business is what makes HGSL stock compelling.

Disclaimer: I may be buying/selling/holding any of the shares I talk about in this blog anytime. Do your own due diligence.

Compact Disc India - Stock Research

Yesterday a friend pointed out this stock's Fundamental figures and said its selling very cheap (Less than 2 PE).

Compact Disc is mainly involved in doing animations - does outsourcing and also produces some movies/serials on its own. I vaguely remember looking at this stock about a year back and rejecting it for some reasons. One of which was - I had seen one of its animated serial clips and found it to be crappy.

I advised my friend to be extra careful with small companies and buy only when business model is good. He did some checks and finally bought some small amount.

At night, I thought let me check out this company again.

Fundamentals: (Moneycontrol)

Compact Disc India Ltd (CDIL) has a market cap of Rs 65cr (Microcap), No. of outstanding shares: ~1cr. BV (76) > CMP(65). Revenue and profit growths are phenomenal for last few years. Figures appear impressive.

Shareholding Pattern: (BSE)

The company is not listed on NSE. So, have to use BSE's crappier website for shareholding pattern. Shows promoter holding is 20%. That’s very low. Only really honest promoters will work for the advantage of shareholders at such low stake.

But promoter’s stake has gone up by 4% in Dec 2009, while the total number of shares remains 96 lakhs. Meaning they bought it from the market. Good sign! Let me see if there is a disclosure announcement for the purchase.

Corporate Announcements: (BSE):

I see no announcement for the purchase, but there is one for conversion of 4.8 lakh warrants (~5% equity) at Rs 100 to Pariscope Pictures Pvt Ltd (14 lakh warrants were issued to this company in Sep 2008 @Rs 100). This conversion is in mid-Sep 2009 i.e. around same time as 4% increase in promoter shareholding. The shareholding pattern in Dec 2009 does not show Pariscope. So, given total numbers of shares remaining same, the 4% increase and this warrant conversion may not be related. Will investigate this later. But promoters buying back is a good sign!

In fact there is announcement (June 2009) for a promoter company (Seengal Capital Advisors Pvt Ltd) and overseas company iMedia Ventures offering to buy upto 40% equity in CDIL by open offer. But it was not followed up.

Company Business:

Announcements to BSE suggest that company is onto a business restructuring exercise: doing only outsourcing business in main arm CDIL and devolving film production business into separate entity. They are setting up a Gaming unit (Laser Infomedia) at Jaipur, for which Rajasthan govt has allotted 13,700 sq. mts land. A brand licensing and merchandising unit (Premier Brands) in Baddi for which Himachal Pradesh has allotted some land. An animation unit (CDI Media LLC) in Los Angeles to be operational in 3 months. Whoa! That is a lot of subsidiaries for a company of this size.

Looking at the company site, the last newsletter is dated Feb 2009. It talks about Pele animation movie project and ‘Eternal Love’ 3D movie mentioning big names as Johnny Depp and Tommy Lee Jones. From BSE announcements, some previous deals were ‘Blame it on the Bhangra’ (with BBC Films, June 2009, website defunct), animation film ‘300 B.C.’ worth USD 19.8M and with WhiteLight Entertainment (makers of Jurassic Park) a movie titled ‘Playing with the Enemy’.

There is no trace of the Eternal Love, Bhangra project and 3000 B.C. on the Net. So, they may have been scrapped like most of the movie projects are. ‘Playing with the Enemy’ has an imdb page showing 2010 as release date, but it does not look like an animation film. So, maybe CDIL is doing a small portion.

Pele project is the most significant. There are bunch of press articles about Pele movie and the deal with CDIL. It was supposed to be announced at Cannes Film Festival 2009 with a red carpet welcome for Pele. There is no trace of this on the Net including the Cannes Festival site. So, it may be still in the works.

At the bottom of the newsletter, company boldly provides guidance of Rs 540 cr in revenue and Rs 124 cr in profit in FY09-10. Actual figures attained in 3 quarters of the year are Rs 150cr revenues and Rs 34cr profit. Way off!

Order Book:

Company claims to have an order book of Rs 329cr. The Pele project is worth Rs 309cr. That raises a suspicion if this is included in the Rs 329cr, in which case this is nearly just one project company. There is a BSE announcement in Dec 2008, that  board approved the budget of USD 63M(Rs 309 cr) for the Pele project. That makes it further unclear whether this is an outsourcing project or a production project.

Dividend:

There are bunch of people in MC board complaining of non-receipt of dividend (20% in 2009) and no one saying they have got it. Not sure if there was only dividend announcement or it was paid too.

Moneycontrol Board:

I usually go through all messages on MC board for my stock research. Only few messages there are useful but they provide a chronological view of the company and some good leads for further research.

In CDIL case, it proved decisive!

There was one post about the Chennai unit of the company was delayed and multi-million dollar projects like “If Tomorrow Never Comes” and “Hustle Bustle” not seeing light of the day. But the deadly knock came from this:

Mumbai cops seek probe into Seengal activities
September 24,1996

The crime branch of Mumbai police has written
to the Securities and Exchange Board of India (Sebi) to probe into the activities of the Seengal group and of Suresh Kumar Seengal for allegedly floating fake companies and garnering money from public issues.
The letter has evoked no response from the regulator so far, according to Mumbai crime branch deputy police commissioner (economic offences) Sanjay Pandey, who wrote the letter.
Suresh Kumar, who has now floated a new company Global Internet Limited, which is set to launch Plus 21, the country`s first adult channel, had earlier come out with two public issues for Compact Disc and Total Exports, raising about Rs 9.20 crore, allegedly without any plant or factory to manufacture the items the companies were supposed to.
When contacted in Chandigarh, Suresh Kumar said that he was just an employee of Global Internet and claimed the company was actually promoted by three non-resident Indians, whose names he refused to divulge.
The Chandigarh-based company has the same address, telephone and fax numbers as Compact Disc and Seengal Hotels, promoted by him.
While the new project profile of the Global Internet does not talk about any public issue plan, an earlier profile of the same company, a copy of which is available with Business Standard, shows it had plans to raise Rs 55.74 crore through public issue and another Rs 3.52 crore through term loans and from other modes. The channel planned earlier was entertainment-oriented covering India, Pakistan, Bhutan, Bangladesh, Sri Lanka and Nepal.
However, the plan to go public was shelved after Sebi called off another public issue by the Seengals, that of the Rs 5.54-crore Seengal Hotels, on September 4, 1995, just a day before the issue was scheduled to open for having concealed a fact on litigation.
In the case of Compact Disc India Ltd, which promised to manufacture and sell compact discs at a low price of Rs 90, the company had claimed to have a plant at Gurgaon.
However, a retired army officer and an ex-employee of the company and the officials of Contour Advertising agency, which had earlier handled two new-issue campaigns for the Seengals, said after visiting the site that there was no plant at Gurgaon to manufacture compact discs.
Suresh Kumar, when questioned about Compact Disc, lost his temper and said, Don`t ask me anything about Compact Disc.”
Information furnished in the prospectus of Compact Disc India, like a buy-back arrangement with a UK-based company Delta Disc, had also come under suspicion as Delta UK denied having any such arrangement with the Seengal company and challenged the existence of any company by the name Delta Disc, UK.
A source said Seengals Petrochem Products, a company floated about a couple of years ago by Suresh Kumar to provide dealership for liquefied petroleum gas connections for a fee of Rs 500, had also come under suspicion.
A total amount of Rs 26 lakh had been collected under the scheme, a source said.
There are two receipts available with Business Standard to show that the amount had actually been collected. But, so far, no gas connection has been provided to anybody.
There is no plant for Total Exports — housed in the same building as the Petrochem Products — to manufacture duplicate micro-floppy diskettes.

This appears to have appeared in Business Standard in 1996, but I can’t find the authoritative link. But I believe this article is authentic.

At this point I stop the investigation and advise my friend to sell whatever amount he bought. With this kind of profile, its not worth investing single paisa in this company.