Indo Borax and Chemicals Ltd - Available at EV/EBITDA of less than 3

Indo Borax and Chemicals ltd, as the Management says is synonymous with Boric Acid and is referred to as the industry standard for many comparisons made in the industry. The Company's principal activity is to manufacture and sell chemicals. It's products include boric acid and borax. So, basically the company has a very streamlined product portfolio and considering the past, the management does not seem interested in expanding the basket of products.

In India, there are many companies where the management needs to be really motivated and need to be told about creating wealth, else you find them content with whatever little they are able to achieve without tapping their true inner potential. Indo Borax and chemicals seems a similar case, where although the company has been doing well, however there's no visible expansion of either the infrastructure or the product portfolio.

As I mentioned, the performance of the company has been good over the last 4 years. The revenue of the company have almost doubled from Rs 23 crore at the end of Mar'06 to Rs 45 crore at the end of Mar'09. The growth in bottom-line has been even better from Rs 2.55 crore to Rs 7.87 crore for the same period. This year i.e. FY 2009-10 there's a drop in net profit of the company to Rs 4.74 crore, largely because of the exceptional item of loss of sale of investment of Rs 1.67 crore.

The company has a very small equity base at just Rs 3.48 crore. I mentioned earlier that the management lacks inner motivation to expand the operations of the company and this can be well gauged from the fact that for the last 6-7 years the equity base has remained at just Rs 3.48 crore with almost negligible debt. If we ignore the fact that there's no visible expansion in the forthcoming quarters, the company is still being cheaply valued by the market.

Here we have a company with zero debt on its balance sheet, making a profit close to Rs 5 crore and available at a market capitalization of just Rs 23 crore. The other important point that is worth mentioning is that they have close to Rs 3.5 crore cash on their books, thus an EV/EBITDA multiple of less than 3.

Email: Ekansh@hbjcapital.com

3 i Infotech - Will the share price rise despite profits going downhill?

3 i

Infotech, with its key assets of 8000 employees, is a global Information Technology company which provides technology solutions to over 1500 customers in more than 50 countries across 5 continents, spanning a range of verticals.

The Company's Global Delivery Model provides for the best resources to be drawn from its vast talent pool across the globe to offer optimal solutions.

3i Infotech was promoted by ICICI Bank, India's largest private sector bank. The Company integrates its products and services to create customized solutions to allow its clients to undertake technology-based business transformation that allows reorganization in line with today's dynamic digital business environment.

3i Inotech business model revolves around the following products and services which it offers to its clients within the domestic as well as to its clients spread across 50 countries.

Premia Insurance Software Solutions Suite ,Kastle – Secure Banking Solutions,Tradis – Integrated Broker Office Solutions Suite, MFuund -Mutual Funds Solutions, C – matis – Wealth Management / Portfolio Management Services and i-enable rmf (remote monitoring framework)

Besides the above Products, 3i Inotech has established a niche in the domestic as well as in the international markets for its superlative offerings in the following services :

Business Process Outsourcing (BPO) Services - An Overview

3i Infotech provides end-to-end outsourcing solutions for Banking, Financial Services & Insurance (BFSI) and Telecom industries. Being the Registrar and Share Transfer Agent for one of the largest private banks in India for 15 years, it has established it’s credentials in both voice and non-voice based BPO services.

Needless to mention, 3i Infotech is the Registrar and Share Transfer Agent of ICICI Bank.

Software Services –

Some of the offerings of 3i Infotech in the Software Services arena are as under:

• Custom Software Development
• Product Re-engineering
• Software Testing
• Data Warehousing & Business Intelligence

Financial Performance

In brief, the financial performance was dismal especially due to Rs.260.46 crores hit on account of impairment of assets:

Rs.crs

	Fiscal 2009-10 Rs.	Fiscal 2008-09 Rs.
Total Income	2468	2304
Net Profit	33	282
N.P. Margin %	1.33	12.23

Though total income rose by 7.07 per cent, the Net Profit went downhill to touch Rs.33 crores against N.P. of Rs. 282 crores of previous year, down by roughly 88.29 per cent.

The reason for the downslide in Net Profit is due to the P&L being badly hit by “impairment of assets” explained below.

In accordance with AS on “Impairment of Assets” the company has reduced its profits by Rs.260.46 crores.

An impairment loss is recognized in P&L whenever the caarying amount of its Groups assets exceeds the recoverable amount. This is something akin to say, if you buy a share of “X” company for Rs.100/= which quotes now at Rs. 60, then your asset [ investment ] stands impaired to the tune of Rs40/share multiplied by the total number of shares purchased of “X” company.

Notwithstanding the above, it should be noted that the company’s bottom line was indeed robust considering the global slowdown encountered by al I.T. firms.

The major revenues generated in fiscal 2009-10 were from following sources :

1.Software Products : Rs.783 crs, down by 3.45 % compared to previous year.

2.I.T. Enabled services : Rs.749 crores [ previous year Rs.748 crores ]

3. Transaction Services : Rs.915 crores, up by 26 % compared to previous year.

Massive investments in 57 subsidiaries and massive debt levels !

As on 31 March 2010, the company had cash and cash equivalents to the tune of Rs.199.60 crores and its Debt Equity ratio was 2.17.. It should be noted that 3i Infotech has 57 subsidiaries, combined Goodwill of .the Group being Rs.1810.71 crores. 3i is planning a QIP of Rs.500 crs in order to reduce its debt which will bring down the D/E ratioto 1.67 whilst resulting in savings of about Rs.60 crs Per annum presuming 12% interest rate

Goodwill arising on consolidation - The excess of cost to the Parent, of its investment in subsidiaries over its portion of equity in the subsidiaries at the respective dates on which investment in subsidiaries was made, is recognized in the financial statements as goodwill and in the case where equity exceeds the cost; the same is being adjusted in the said goodwill. The Parent’s portion of equity in the subsidiaries is determined on the basis of the value of assets and liabilities as per the financial statements of the subsidiaries as on the date of investment.

The Market Capitalization of the company stands at Rs.1697.21 crores based on today’s closing price of Rs.63.15/share. The 52 week High-Low was Rs.103/60.15

So, my dear friends , based on above would you place a bullish bet on 3i Infotech – not as a multibagger but in order to obtain decent returns of say 40-60 per cent in a span of say one year or so!

Kishor S. Khot, [Kishor@hbjcapital.com], Equity Strategist, HBJ Capital Services Pvt Ltd

ALL THAT GLITTERS IS INDEED GOLD

Off late, I have observed that many investors are keen to know about the pros and cons of investing in Gold and Gold ETF’s from the long term perspective

I have done some in depth analysis on this issue and I am delighted to provide you with my brief opinion on Gold/Gold ETF’s which is given below :

• It's very simple. Gold is money. But gold does not generate any return. It simply preserves purchasing power

• Dollars, Euros etc are simply currencies that competes with gold

• If people become less confident in dollars [ the worlds No.1 Reserve Currency ] gold goes up in paper terms – precisely what is happening now, because of inflation, enormous fiscal deficits, Eurozone crisis etc

• As the global community loses faith in the US economy and consequently loses faith in the dollar as the world’s reserve currency, then Gold will take centre stage and then many countries will park their reserves not in dollars but in gold – and that’s going to push up the price of gold to even higher levels!

Incidentally, as of now 7.06 per cent our country’s reserves are in Gold including 200 MT purchased on 31 November 2009 from IMF.

So, friends, it’s a great decision if you are planning to go for SIP type of investment in gold is indeed the right way forward. Go right ahead but be cautious as gold has already run up a lot and try to limit your total exposure to Gold [ physical + ETF’s ] in the range of 5 – 10 per cent of your total portfolio.

We also need to pay attention to what the renowned Dr.Doom’s/Dr.Marc Faber[ best known for his ‘Gloom Boom and Doom Report’ ] has to say about Gold :

“ Dr. Faber is a firm believer in owning assets in the physical form and advised people to park 5% of their investments in the yellow metal. At current levels, he felt that gold was not overpriced. Faber believes the central banks in the world will continue to print more money and there will be more quantitative easing and stimulus packages in the US. The fiscal deficit there will not come down much, so on that basis, gold has a place in every portfolio. Dr. Doom predicts a dollar tumble over the next decade and suggests to BUY physical assets - realty, gold, commodities.”

And more from Dr.Doom : “ Heavy borrowing by the US government will further weaken the dollar and there are already doubts about dollar’s status as a global currency. He opined that going forward, central banks especially in Asia will be converting their dollar reserves into gold.”


Another factor driving gold is Chinese demand. China holds just 1.6 percent of its currency reserves in gold, compared to 70 percent by the U.S. and a 66 percent allocation by Germany, according to Credit Suisse. Given the Euro destabilization and already huge US dollar reserves, China may look to Gold as a way to hedge it’s foreign reserve holdings.


A ] PHYSICAL GOLD - COSTS AND RISKS INVOLVED

1. Storage – While you may consider buying physical gold from your family goldsmith [ just as we trust our family doctor ] yet the risk of security vests with you, in which case you have two options :
• Keep it in your house in a fire proof safe [ this, none the less entails spending sleepless nights when you lock your house and go on a long holiday – nothing can be guaranteed in India- house breaking takes place even in the best security backed residence complexes ]
• Keep it in a bank locker, in which case you may be able to sleep better but with the additional costs involved for sleeping better in terms of the bank charges.

2. Insurance –
Here again, you have to take a calculated risks. Insurance is such that it can make even the best brains in this world to look foolish –
Examples :
• RIL factory in Patalganga, Maharashtra – company incurred crores of rupees loss when flash floods hit the area way back in mid 1989 because they were not insured for “flood.” Subsequently they took a policy for “ flood.”.
• Aban Offshore –more recently Aban had not obtained “Loss of Profit” policy for its ‘Pearl” which sank in the Caribbean.

But I am sure that you all will take proper decision whether to insure your gold holdings or not.

God forbid that gold is never stolen from anyone but if it is stolen and Insured then too there is a bigger problem – that’s related to filing a dreaded FIR with our polite and disciplined police force and then chasing the insurance company to make good the loss as per insurance terms which need to be read with a nice magnifying glass!

The point is whether it’s a 737 jet plane, an offshore rig, a house or gold,insurance makes sense – after all you are buying gold as an insurance against gold [ even as you gain notional profits as the price rises ] and if you don’t insure it, then the very purpose of buying gold gets defeated, if something untoward happens.

3. Costs of Re-assay has to be borne by seller –
To assay a metal is to subject it ( such as silver or gold) to chemical analysis, to determine the amount of alloy. The costs involved in re-assay has to be borne by the seller – after all the seller is more interested in selling than buyer is interested in buying, isn’t it? So, owning physical gold has this demerit. Trust you may be aware of this and may be you can check with your family goldsmith for more information on
assaying/re-assaying


4 Million/ Billion dollar questions ?
Ask the jeweller questions. Will he repurchase the gold? Will he pay in cash? Would he discount some gold while calculating the buy-back price? Would he insist on exchanging, and not buying back, the jewellery?

I have deliberately focused more on physical gold as it reflects the higher costs and risks involved in holding physical gold as compared to Gold ETF’s.


B ] PHYSICAL GOLD VS. GETF’s

In India, Gold Exchange Traded Fund is a relatively new concept but since the day Benchmark Mutual Fund launched the first Gold Exchange Traded Fund on 8 March 2007, six more mutual fund houses have launched Gold Exchange Traded Fund, which is a cost effective and convenient method for investing in gold through units of mutual funds. Gold ETF offers many advantages over the conventional method of buying physical gold. Investment objective of Gold Exchange Traded Funds is to generate returns that closely correspond to the returns provided by domestic price of spot gold.

At present, there are seven Gold ETF schemes available in India which are as under:

1.Benchmark Mutual Fund was the first Mutual Fund House to have launched Gold Exchange
Traded Funds (NSE Symbol GOLDBEES) in India.

2.Reliance (NSE Symbol RELGOLD),

3.Kotak (NSE Symbol KOTAKGOLD),

4.UTI (NSE Symbol GOLDSHARE),

5.Quantum (NSE Symbol QGOLDHALF),

6.SBI (NSE Symbol SBIGETS) and

7.Religare (NSE Symbol RELIGAREGO)

Source :http://ezinearticles.com


And, now given below is a brief comparing physical gold with gold ETF’S.

S No	Parameter	Jeweller	Bank	Gold ETF
1	How Gold is held	Physical (Bars / Coins)	Physical (Bars / Coins)	Dematerialized (Electronic Form)
2	Pricing	Differs from one to another. Neither transparent nor standard.	Differs from bank to bank. Not Standard.	Linked to International Gold Prices and very transparent.
3	Buying Premium above gold price	Likely to be more	Likely to be more	Likely to be less
4	Making Charges	Charges are incurred	Charges are incurred	No Charges are incurred
5	Impurity Risk	High	Nil	Nil
6	Storage Requirement	Locker / Safe	Locker / Safe	Demat Account
7	Security of Asset	Investor is responsible	Investor is responsible	Fund House takes the responsibility
8	Resale	Conditional and uneconomical	Banks do not buy back	At Secondary Market Prices
9	Convenience in Buying / Selling	Less convenient, as Gold needs to be moved physically	Less convenient, as Gold needs to be moved physically	More Convenient, as held in electronic form under the demat account
10	Quantity to Buy / Sell	Available in standard denomination	Available in standard denomination	Minimum is ½ or 1 gram according to the fund
11	Bid Ask Spread	Very High	Can’t Sell Back	Very Low
12	Risk of Theft	Yes, possible	Yes, possible	No, Not possible
13	Wealth Tax	Yes	Yes	No
14	Long Term Capital Gains Tax	Only after 3 years	Only after 3 years	After 1 year

Source :http://www.equitybulls.com/mutualfunds/goldetf.asp.


C ] WHICH IS BETTER – PHYSICAL GOLD OR GETF’S

And finally, if any one of you were to ask whether physical gold and Gold ETF’S [ GETF ] will have the same value?

Well, the answer is no because the GETF’s value will depend on the objective of the fund and the inception date and consequently on the NAV of the GETF which will fluctuate on a day to day basis based on the price of gold prevailing in the international market.

Most important, one should go for that GETF which has highest liquidity (read volumes) Gold Bees is usually traded well. Besides, you need to check out the expense ratio. I understand that the expense ratio in most of the GETF’s hovers around 1 per cent except SBI -SE Symbol SBIGETS [ its around 1.6 per cent ]

So, SBI’s GETF should best be avoided.

I guess, GETF’s are a better option than physical gold.

1 Please do not be tempted to take a leveraged position in Gold – physical/ Gold ETF’s can backfire if the price of gold goes downhill.

2. Please do not invest more than 10 per cent in gold [ physical +GETF ]

3. Please consider the opportunity costs involved whilst buying gold i.e. the returns you have to forego by buying gold instead of investing in other avenues which would have given you better returns. [ of course, after factoring the risks involved ] Any way, no risk, no gain and higher the risk, higher the gain.

Going forward, I believe that gold will continue to be a part of every investor's portfolio as an insurance against inflation, geopolitical tensions and turbulence in the global financial markets

Friends, Good luck to you all and may your life and dreams glitter like gold.

Kishor S. Khot, [Kishor@hbjcapital.com], Equity Strategist, HBJ Capital Services Pvt Ltd

Bank NPAs on the Rise

The Finance Minister, Mr. Pranab Mukherjee, recently cautioned Indian banks regarding the rising NPAs on their books, and warned bankers to be extremely cautious as they chase fast-paced growth in an economy poised to grow at 10% p.a.

As of March 2010, the combined NPAs of 43 scheduled banks in India stood at Rs 35,946 crore. While Net NPA ratios have declined over the past year, NPAs have risen on an absolute basis, owing to the fast paced credit growth witnessed during the last financial year.

NPAs, or Non-Performing Assets, arise when a customer fails to pay a bank her dues for 90 days. Rising NPAs is one of the earliest signs of stress in the banking system, and has a cascading effect on the entire financial system. When banks have to write-off NPAs, they suffer a hit on their income/ capital, and this forces them to be more conservative while lending to other companies and retail consumers.

As the Indian economy continues its journey towards double digit growth, banks are likely to be at the forefront of economic growth. Backed by credit growth in excess of 20% p.a. (Source: RBI - Monetary Policy Review), bank stocks are likely to be among the performers in the market. However, as value investors, it is pertinent for us to keep a close watch on the NPAs in the system, and invest only in those banks with adequate provisioning cover for their NPAs.

Is it Time to 'Invest Like Your Grandmother Would'

The ad for a new Fund by Canara Robeco encourages investors to invest like one's grandmother would. The hoardings are plastered all over our cities and show a grandmotherly lady wearing gold necklaces.

This advertisement set me thinking. If one were to invest like one's grandmother, what would one buy? I would have to say, gold would be on top of my own grandmothers' (both maternal and paternal) shopping list, as far as investments are concerned.

Is my grandmother's style of investing wise? Here's a graph which shows that it might just be so.

Image Courtesy: Equitymaster.com

The graph above shows the returns enjoyed by investors in Gold over the past 40 years. The yellow metal has given CAGR returns of 14% p.a.

As a value investor, would it be smart to invest in gold today? Let us evaluate it according to our 4 rules of value investing, which I had earlier listed here.

Competitive Advantage:
Gold does have a competitive advantage in terms of the loyalty which its customers have demonstrated over the past many centuries. The hold that it has on minds has not been diluted, despite what the diamond and platinum jewelery companies might try to tell us through their advertising campaigns.

Circle of Competence:
Gold is a commodity which is within the circle of competence of most investors. And if it isn't, then all we have to do is to ring up our mothers, sisters of partners, and we are sure to be flooded with information on the many splendours of it, and why we should be purchasing more and more of it for them. So, in that sense, Gold has an insatiable market.

Management:
The production of Gold is in safe hands under the management of Mother Nature, and such managements are not made anymore.

Margin of Safety:
Value investors who have read so far into this post, would be quite pleased with Gold's performance on the first 3 criteria above. The problem comes in the last, but most important criterion. Does buying Gold today provide an adequate margin of safety? My personal belief is that it does not. Gold is regularly making record highs these days. Also, many investors are turning to Gold to escape the turmoil being seen in stocks and fixed income. Gold is usually seen as a safe haven in such circumstances. As the economic turnaround gathers steam, and money starts flowing back into risky assets, what will happen to Gold? Will it continue to rise? Only time will tell!

In conclusion, I believe that due to concerns over the Margin of Safety, I would avoid investing in Gold at this time.

Fidelity India Value Fund - Where's the Value?

In Jaunary 2010, Fidelity India launched its value fund targeting long term oriented investors. The launch of the fund was accompanied by a big campaign in which Fidelity tried to build up interest in Value Investing among Indian investors, by advertising it as being similar to bargain shopping, a talent Indians excel at.

The fund has now been in operation for about 4-5 months now. Ever since the launch of the fund, I have been eager to find out what kind of stocks the talented guys at Fidelity would buy. So, I decided to have a look at the portfolio using Morningstar India's excellent Mutual Fund screening service.

The Fidelity India Value Fund portfolio
The portfolio snapshot is available here.

Having a look at the portfolio, I felt that there is a big gap between Fidelity's grandiose proclamations of investing in value stocks, and the ground reality of what their portfolio actually looks like.

P/E Ratio of the portfolio
As is well known, the P/E ratio is considered to be a reasonably efficient way to identify whether a stock is a value investment or not. Purists (i.e. of the Benjamin Graham) would probably say that a P/E < style="font-weight: bold;">

The portfolio Price/ Prospective Earnings ratio of the Fidelity India Value fund is > 10. Given that the projected earnings growth of the portfolio is calculated at 16%, it is safe to assume that based on past earnings, the portfolio P/E > 12.

The portfolio's P/B is > 2x. The biggest component of the portfolio is Reliance Industries, which is trading at a TTM P/E of 19, and is also trading very close to its 52 week high. Another major holding is ICICI Bank, which is currently trading at a TTM P/E of 20. Infosys - another holding - trades at TTM P/E > 25.

As a value investor, the most important attribute is the ability to stay away from the crowd and invest in companies which are not being favoured by the rest of the markets. It is very difficult to understand how Fidelity believes that companies trading at P/E > 20 are stocks which are being ignored by the market, and hence worthy of being part of a Value Focused Fund. (It is to be noted that these P/Es are not high because of a low base effect, i.e. low earnings last year due to the global recession. These are Trailing Twelve Month P/Es, i.e. based on earnings in the 4 quarters leading upto March '10, when corporate India has recorded bumper profits, which means that the high earnings are already factored into the stock price).

This double-speak is wide-spread
This fund seems to be following a pattern that is seen across fund houses. Frequently, MFs start new funds, claiming to follow different themes like Infra, PSU, Contra, etc. However, at the end of the day, the portfolios of these funds are remarkably similar. I was surprised to see, for instance, that Reliance Infrastructure Fund, which raised several hundred crores claiming to invest in India's infrastructure opportunity, was investing in bank stocks. The rationale: since banks are lending to infrastructure companies, they are also part of the infra story, and hence are well suited for an infra fund.

The only word of advice this humble investor would like to give is that one must be very cautious of fund houses and their gimmicks. It is better to invest in index funds than to fall for such tricks.

Bruce Greenwald on Value Investing in India

Bruce Greenwald is a Professor at Columbia Graduate School of Business & a director of FirstEagle Funds. He currently occupies the professorial chair which was once occupied by Benjamin Graham at Columbia. He conducts an extremely popular course on Value Investing at the school.

He academic background:
BS, Massachusetts Institute of Technology, 1967; MS, MPA, Princeton, 1969; PhD, Massachusetts Institute of Technology, 1978

A couple of years back he did an interview with Outlook Profit, in which he discussed some of his investing principles, as well as taking up some Indian case studies.

The full interview (Courtesy Outlook Profit) is below:

BruceGreenwald Interview


Some of the key takeaways:
Value Investing has outperformed the market by 3-5% historically.

Valuing companies by using the Discounted Cash Flow model is very risky according to the good professor. He believes that the process of estimating future cash flows is highly error prone, as there are a lot of assumptions to be made. Hence, the scope for errors increases.

Invest only in companies with sustainable competitive advantage, as otherwise it is only a matter of time before others will enter the industry, and hyper competition will put downward pressure on margins.