Reading the Annual Report

Well we often have been very much confused about how to read a Annual report as the volume of the report is too big. But the real problem is not the volume of it but it is us who do not know what information we should look for from a Annual report. I am here trying to jot down a number of things that I do look inside a Annual report .

Sales Growth :-
Sales growth data is available in balance sheet but this might not reflect exact efficiency of the company as we have to know whether this growth achieved by increasing price or increasing the sales volume. For this data we have to look down to the Annual Report and must have to make sure for the past decade the company has achieved this growth by a continuous and stable growth in both value(Price increase) and Volume (Quantity sold).

Capacity Growth :-
We also have to look for whether it has increased it's production capacity to a significant level to meet up the future demand which is also available in the Annual Report.

Promoter Salary & Remuneration :- 
This part also we can find from Annual Report of Investor relationship section. Which is very important to compare with PAT and Sales.

Project Execution Skill :-
Though not much information available in the report but by means of a comparative quantitative analysis one can found it. Like comparing the sales volume growth with the production capacity growth.

Days of Receivables Outstanding :-
Thus ratio also can be found in the annual report and we can have an estimate on this historically. Lower is always good.[also can be found from morning star]

Timing the Market

For long, those aspiring to invest in stocks have been told that they shouldn’t try to time the market. Financial advisors declare “Your time in the market is more important than timing the market,” and urge you to take up Systematic Investment Plans (SIPs). Yes, SIPs are a good idea if you don’t have a lumpsum to invest. But what if you do?

The assertion about ‘time in the market’ is not always true. An investor who bet ₹1 lakh on Sensex stocks in December 2011, a market low, has made ₹1.71 lakh in three-and-a-half years. But his counterpart who invested in December 2007 would be left with ₹1.31 lakh after a seven-and-a-half-year wait. This is why, leading fund houses in India have lately begun to use ‘tactical asset allocation’ models which allow them to buy equities when valuations are low and sell them when they hit the ceiling. Taking a leaf out of their books, you too can use three indicators to get your timing right.

Nifty price-earnings multiple

Previous bull markets in India have usually cracked when the Nifty’s trailing price-earnings multiple hit 28 times.

Both in February 2000 and in January 2008, the Nifty PE was trading a shade above 28. Similarly, markets have bottomed out when the Nifty PE was at 11-12 times. You can get this information from the National Stock Exchange website, which provides historical as well as current PE multiples for its indices.

Based on this history, asset allocation funds set their own valuation triggers. The Franklin India Dynamic PE Fund, for instance, invests 90-100 per cent of its portfolio in stocks if the Nifty PE is 12 or below. It cuts this to 30-50 per cent if the Nifty PE crosses 20. At above 24 times, the fund reduces equities to 10-30 per cent. IDFC Mutual Fund, which runs an asset allocation fund, deems a Nifty PE of below 16 as the ‘cheap’ zone, that between 16 and 19 as ‘fair value’ zone and anything over that as the expensive zone. (The site has a neat tool that tells where we stand now — http://www.idfcmf.com/is-it-a-good-time-to-invest.aspx).

There are two caveats to using PE-based strategies. One, the markets rarely make the same mistake twice. Therefore, it is likely that future bull markets will top out at a PE of well below 28 times and bottom out at PEs well above 12. Therefore, as an investor, you should be worried if the Nifty PE hits 24 and probably add to your holdings at 14-15.

Two, market players (but not funds) often use a Nifty PE based on ‘forward earnings’ (earnings for the next 12 months) to gauge valuations. But ignore this measure. As ‘forward’ earnings are based on analyst projections of Nifty profits, they tend to be coloured by the market mood. If times are good, the projections will be overstated, if bad, they will be understated. This is precisely the kind of bias you are trying to avoid.

Nifty Price-to-Book Value

Because corporate earnings can go through cycles, value investors like to use a different valuation parameter to get their timing right. ICICI Pru Mutual Fund, for instance, uses the market’s Price to Book Value (P/BV) to decide whether to add to or reduce its equity allocations under its Dynamic Fund and Balanced Advantage Fund. A low P/BV indicates that markets are under-valuing the hard assets (like plant, machinery, land) companies own. On a P/BV basis, in the past, Indian bull markets have usually peaked at five to six times and troughed at 2-2.5 times.

Thus, add to your equity portfolio if the Nifty P/BV is at 2.5-3 times and take profits off the table at 5 times or more.

Mid-cap, small-cap behaviour

Another indicator that fund houses use to decide whether the market is overheated is how mid and small-cap stocks are priced relative to large-caps.

In the past, whenever the PEs of mid and small-cap stocks have overtaken the Nifty/Sensex, it has meant trouble for the market.

Here, track the PE of the CNX 500 index. . When market conditions are good for investing, the CNX500 PE trades below the Nifty PE. If the market’s close to bubble zone, though, the CNX 500 PE overtakes the Nifty PE.

This catch-up has happened on all three occasions when Indian stock markets reversed from a bull run in the last 15 years — February 2000, January 2008 and March 2015.

But here, note that the CNX 500 PE can remain poised above the Nifty for months together before the market cracks.

So, based on all these indicators, is this a good time to invest? Well, the timing is not great because the Nifty PE is 22.1 and the CNX 500 PE hovers above the Nifty’s at 23.6 times. On a P/BV basis, the market is at a middling 3.4 times. It’s best not to jump in with a lumpsum now. Either put that in a bank account and do a SIP or wait for those valuation indicators to flash a brighter green.

How to Invest in a Bear Market

Date :- 04/06/2015 -- Well I am writing this post when the Market already has been corrected by 20% withing a span of two months Nifty is below the psychological level of 8100 and the big question still stand out that will there be still any further downfall or it will get stable?

Well to answer this big question I would like to derive a few more question and will try to answer that and once all this question will be properly answered you will get the a proper answer I believe.

Why this fall happen ?
Well as nothing happens without reason so does the market. None of us must forget that we already have a bullrun of 2014 where market was up by 40% so we can say this is a timely correction.
But yet that not define all because in some strong bull market we used to see market gives 40-50% return year after year.So what actually happens?

1. Over expectation on the New Govt

• People does have some over expectation on the new govt. that comes to the power and tend to forget that they have a limit. Though they have not done very badly like GDP growth rate is increased by 2% IIP growth is at all time high of 5 years, new investments are coming, Debt is reducing on the account of some good policy like direct transfer of subsidy, de-regulated petrol price which makes the import cost lower, gold deposite scheme, green energy efficiency increment so all in all we can say about the performance they are on track. But couple of factor still affecting their operation like non implementation of few bill like GST , many power projects are yet to take a start off, power distribution infrastructure is still less equipped to meet the demand and more over green energy per unit cost is still very high as they are in the capex stage. Along with it realization of few projects mainly in the housing sector is very low. Even some finished houses is not getting sold mainly for the income disparity so the Housing for All is in a halt stage.

2. Few domestic concern

• First of all last year and this year there is below average monsoon [93% of avg in 2014 , 88% of avg in 2015 projected]. As india is a agriculture driven economy hence below par monsoon eventually greatly affect the economy adversely.
• Though IIP growth is high but due to bad infrastructure and transportation facility corp market is facing some big challenges and farmer are compromised which is grossly negative for the country.
• Many projects is stalled for socio economic politics and no direct channel of investment and realization is happening.
• Muted earning in the forth quarter which is a historically muted quarter hence leads to curtail down many stock price.

3. Few International concern

• Crude oil price is now moving on the up side and perhaps continuously do. Hence country debt as well as raw material cost for FMCG,Paints,Durable goods are moving up.
• International market is on a doldrums considering Greece debt ,Japan bearish market,Russia war like mentality, Yemen riot etc.
• FIIs are running out due to MAT concern though govt are in talks with the IT to resolve this issue.Also multiple IPO has launched in China which  is lucrative for them. As india is not the only emerging market hence it is easy for the FIs to switch.
• Rate hike by US due to strong economy . As we all know emerging markets in general were vulnerable to a rate hike by the US federal reserve over the next six months.

emerging markets in general were vulnerable to a rate hike by the US federal reserve over the next six months.

Read more at: http://www.moneycontrol.com/news/market-outlook/real-estate-to-see-more-pain-nifty-may-breach-8000-ambit_1399462.html?utm_source=ref_article

emerging markets in general were vulnerable to a rate hike by the US federal reserve over the next six months.

Read more at: http://www.moneycontrol.com/news/market-outlook/real-estate-to-see-more-pain-nifty-may-breach-8000-ambit_1399462.html?utm_source=ref_article

emerging markets in general were vulnerable to a rate hike by the US federal reserve over the next six months.

Read more at: http://www.moneycontrol.com/news/market-outlook/real-estate-to-see-more-pain-nifty-may-breach-8000-ambit_1399462.html?utm_source=ref_article

When this will be over ?
Well it's really hard to say when this will be over or there will be a further downfall:-

1. Like nifty has a psychological barrier at 8000 level so analyst are expecting it to get stable around it. Though if it will not get stable around it then there is a serious problem.
2. Once the MAT issue is resolved by govt policy intervention then there should be great interest for the FIs to invest.
3. Once the GST bill will be passed then there will be a definite uplift in the domestic market.
4. Also in the first & second quarter we can expect some better profit and performance from these companies hence.

Is there still some fundamental downside ?
Well to be honest Yes there are few.

1. In case there is a drought situation then inflation will increase which will adversely affect the economy.
2. In case the GST was not passed then the growth will be muted.
3. In case real estate demand will not pick up then realization will be very low and high debt company will suffer.
4. In case big projects gets halted then many related things could have been affected.    

What we should do ?

1. Try to find some fundamentally good stock which is now available at attractive valuation and where downside is very limited.[Strides Arcolab,Lloyd Electric]
2. Avoid high debt stocks [specialty banking and finance stocks also the NBFCs ]. Strictly avoid all those stocks which have more than 1 DE ratio.[PFS,DHFL,Delta Corp from finance and Mahindra CIE,Atul Auto etc]
3. Avoid high PE stocks[like Nestle,HUL,ITC] . Any stocks above 30 PE should be avoided even if it has a 20-30% CAGR growth rate. But a high growth stock i.e. which PEG is under 0.5 or so and available under 30 or around 30 PE should be a good buy but do not for get the rule 2 of DE ratio[e.g. Tasty Bite,Tata Elxsi].
4. A mid cap,'0' Zero debt, high growth stock with PEG < 1 could have been a very good buy.[Tata Elxsi,Strides Arcolab]
5. High quality but low market cap stock should have been your ploy.[Lloyd Electric,Tasty Bite]
6. Also try to check the fair value of the stock as per our previous post.  

Check List :-

So the checklist should be.

1. PE under 35 [in case zero debt only] or 30. Low PE will be good.
2. DE under 1 or 0.5
3. PEG must be under 1.
4. Sales growth 9 year CAGR should be >20%     
5. Market Cap should be small or mid.
6. Fair value should be less than the market price.
7. Technical position should be bullish like bullish MACD crossover happen, stochastic should be at oversold position.

My Favourite Stocks and there parameter :-
     

Stocks	PE	PEG	DE	Fair Value	Market Cap	Sales/EPS Growth [% CAGR for 9 year]	Trigger	Sector
Tata Elxsi	34	0.91	0	1172.21	3516	Sales :- 17 EPS :- 11	Customer concentration removed from Japan	IT
Tasty Bite	28.44	0.19	0.72	1271	306.89	Sales :- 24 EPS :- 20	QSR growth and PBI marketing in overseas	QSR FMCG
Strides Arcolab	13.18	0.39	0.12	2322	7023.61	Sales :- 15 EPS :- 25	Shasun Pharma integration US growth story to begin and Apsen pharma in Australia	Pharma
Lloyd Electric	8.5	1.18	0.92	480	690.69	Sales :- 22 EPS :- 14	Moving to FMCG AC branding	White Goods