Warren Buffet Coming to India - What Might be on His Shopping List

Recently, there were news reports that Warren Buffett plans to visit India next March, and has not ruled out making an investment in India.

These news reports went on to indicate that Buffett might consider entering India's insurance market through his insurance subsidiary, but that he was wary of India's foreign investment sectoral caps.

What Might be on His Shopping List?
Now, as lay people, we knew Buffett as an astute investor, known for his ability to identify companies with favourable long term prospects, solid cash flows, reputed management, and at a reasonable margin of safety.

In an earlier post, I had mentioned some of Buffett's stock picking criteria. My humble request to Mr. Buffett is to not get disheartened by India's myriad and sometimes counter-productive rules and regulations. Maybe he will be best served if he made a mobile phone call to Mr. Sunil Bharti Mittal.

Mr. Mittal's company - Bharti Airtel, is India's largest telecom company, enjoys superior cash flows and financial ratios, and has a great management team. What's more, it is currently trading at P/E ratios < 12, which is much below the Sensex & Nifty. The company has been one of the worst performers in the index over the past 1.5 years. Airtel is in a business which is probably going to be around for the next 50 years, and this is something Mr. Buffett really lays great stress on when he makes his investments.

So once again, this humble investor, would like to request Mr. Buffett to make the call to Mr. Mittal. He might just like what he hears.

Dish TV - Largest Player in India

Recently, Media Partners Asia, a media industry consulting firm published a report, in which it projected that India will be the largest DTH market in the world by 2015. MPA also believes that the 6 player market as it currently stands is ripe for consolidation.

In this scenario, it is worthwhile to look at the industry, and try to identify companies which might be potential multi-baggers.

Dish TV
Dish TV is India's largest DTH player, with a 35% market share of subscribers. the company already has over 7 mn subscribers, with ARPU at ~ 140 and growing. It is expecting to hit 10 mn subscribers by end of FY '10.

Industry Outlook
The DTH Industry is witnessing exponential growth. As mentioned earlier, the MPA has projected that India is poised to become the world's largest DTH market by 2015. The industry has high Entry barriers on account of the Government having given licenses to only 6 players. MPA believes that even 6 players in the industry is untenable, and that the industry is poised for consolidation.


Dish TV is the only pure-play listed DTH player. All the other players are listed through their parent companies. Being the first player to enter the industry, it is also the first to become EBITDA positive. It is expected to be first player to be PAT positive (in 2-3 years), with high free cash flows and low requirements for re-investments.
The same growth pattern has been observed in the global DTH industry as well.

Dish TV has the lowest subscriber acquisition cost in the industry. It has a major presence in Tier - 2 & 3 locations.

Recently, the company received 100 mn USD investment from Apollo Management, which the company plans to utilise to significantly expand its customer base.

Outlook
The DTH segment is expected to witness exponential growth and is following the same lifecycle as the telecom sector. Analysts predict great traction for movement from regular cable connections to digital platforms among subscribers.Only competitor segment is the Conditional Access System, which has not really taken off.

The DTH industry is currently lobbying with the Government to move to royalty share structure rather than royalty structure, and this is expected to turn around the fortunes of the industry, just as the New Telecom Policy 1999, revolutionised the telecom sector.

The company has strong backing from the Zee Group, which is one of India's largest media companies.

MIC Electronics - Profiting from a Warming Planet

MIC Electronics Limited. is a global leader in the design, development & manufacturing of LED Video Displays, high-end Electronic and Telecommunication equipment and development of Telecom software since 1988. An ISO 9001: 2008 certified company, it has marked presence in the highly dynamic segments of:

• LED Video, Graphics and Text Displays
• LED Lighting Solutions
• Embedded, System and Telecom software
• Communication and Electronic Products

MIC's flagship products are LED Video Displays (indoor / outdoor / mobile), that have become an integral part of Sports Stadiums, Transportation Hubs, Digital Theatres and Theme Parks, Advertisements and Public Information Displays.

Headquartered in Hyderabad, it has a nation wide presence in the form of a vast network of marketing, sales and service support centres in all metros of India. To meet the demand of its products worldwide, it has offices in Australia,Korea and USA. Now the company is gradually setting up operations in other international markets.

The company has also been rated by Forbes Asia magazine as one of the 'Best Under a Billion'.

Business Mix:
The company is present in 2 segments: Digital display solutions & LED based lighting solutions

The company's digital display business enjoys major presence in malls and commercial complexes in the country. These devices are set up in high footfall areas and are used to display advertisements and public interest messages. The company has an order in Delhi to set-up digital hoardings, which will be paid for through the advertising. Also, the company has entered international business, by tying up with sports event management companies in Australia, Latin America, etc for supplying digital signboards in sports venues. Going forward, Digital display business will produce regular predictable annuity income. Company has healthy order book in LED business also.

LED based lighting solutions is a segment which is seeing high levels of interest due to the increased focus on eco-friendly technologies. The main reason for this is the technical superiority of the LED technology. LED based lights are able to generate significant cost savings over their lifetime against the CFL & incandescent technology. LED bulbs have a life-span of 100000 hours, as compared to bulbs and tubelights, which last between 1000-10000 hours. Further, the electricity consumption is much less than traditional lighting and even CFL lamps. This leads to major savings over the life time of the bulbs, despite the higher up-front cost. LED lighting technology has a payback period of 1-2 years.

The company has received orders from Railways for replacement of in-coach lights and signages with LED lights. This is a major growth booster for the company. Also, the company has a relationship with Delhi Metro for lighting its stations.

Valuation:
The stock is trading much below its pre-crash highs. The main reason for the stock's fall was that the promoters had pledged a major part of their share holding in order to raise debt for expansion. In the wake of the Satyam scandal, this caused a steep fall in the price. Also, the company is in a growth stage, and therefore it has negative free cash flows.

The company is on the verge of a re-rating. On a consolidated basis, the company has declared earnings growth of 25% in the quarter ended March '09. The current TTM P/E is 7.5.

The company consistently achieves PAT margins > 20%, and Return on Capital > 20%. The stock had a lifetime high of stock is 217 (adjusted for splits & bonuses), vs its current price of ~ Rs 40.

The stock is expected to provide multi-bagger returns in the future. The company has steady earnings growth, and also is cheap by most valuation measures.

3 Strategies for Competitive Advantage

In an earlier post, we had discussed Warren Buffett's 4 rules of value investing. these rules are: Competitive Advantage, Reputed Management, Businesses within Circle of Competence, Price.

In this post, we delve deeper into the topic of competitive advantage. Michael Porter, a professor at Harvard Business School, has devised 3 strategies to attain competitive advantage.

Courtesy valuebasedmanagement.net

Approach 1 to Competitive advantage: Cost leadership.
• = a firm sets out to become the low cost producer in its industry.
• Note: a cost leader must achieve parity or at least proximity in the bases of differentiation, even though it relies on cost leadership for it’s CA.
• Note: if more than one company aim for cost leadership, usually this is disastrous.
• Often achieved by economies of scale

Competitive advantage model 2: Differentiation.
• = a firm seeks to be unique in it’s industry along some dimensions that are widely valued by buyers.
• Note: a differentiator cannot ignore it’s cost position. In all areas that do not affect it’s differentiation it should try to decrease cost; in the differentiation area the costs should at least be lower than the price premium it receives from the buyers.
• Area’s of differentiation can be: product, distribution, sales, marketing, service, image, etc.

Competitive advantage 3: Focus.
• = a firm sets out to be best in a segment or group of segments.
• 2 variants: cost focus and differentiation focus.

Unknown Companies Produce Best Stock Returns

INSEAD professors - Lily Hua Fang & Joel Peress, have recently published research which concludes that investors can out-perform the market by investing in stocks with very little media coverage, and few or no analysts following the companies.

The Professors researched all of the listed stocks on the NYSE between 1993 & 2002, and analysed coverage in 4 publications featuring information about each of these companies. The publications were: the New York Times, USA Today, Wall Street Journal, and Washington Post.

The Professors found that companies with no media coverage during the period of the study, performed (risk adjusted) on an average 3% p.a. better than stocks with better media coverage. In the small cap segment, this out-performance was even more prominent, with "no-media" small cap stocks outperforming by 8-12% (after factoring in the added risks of investing in small and mid cap stocks).

Full Article

What is the source of this out performance?

Value investors would be quite familiar with this concept. By definition, value investors are in the business of seeking out stocks which are being ignored by the rest of the market for various reasons, and to try and hold these stocks patiently until the market re-evaluates the stock . Small, unknown companies are the best candidates for such investments.

The lower the media coverage, the greater the potential for the company to be undervalued in comparison to its fundamentals. For instance, company 'A' might be sitting on a land-bank which, if monetised, may lead to high upside for the stock. However, due to the obscurity of the company, the outside world might not yet discovered this story. If a smart media outlet or analyst picks up the information and highlights it to the rest of the world, then increasing numbers of investors will 'discover' the story and may decide to buy pushing up the stock price.

The best gains will go to those investors who managed to enter the investment before its discovery by the wider world. Hence, it is very important for value investors to constantly be on the lookout for unknown, unsung companies which are below the radar of the media, and the analyst community.

"Value Investing And Behavioral Finance" By Parag Parikh (Author)

It is one of the good book on value investing, we would suggest our reader to read this.....Value Investing And Behavioral Finance Book Description....

When others are greedy be fearful and when others are fearful be greedy? ill-timed bouts of greed and fear among investors make stock markets volatile. Rational and successful investing is all about restraining and channelizing these emotions and understanding behavioral finance, not market sentiments, crowd behavior or company performances?

At a time when market upheavals are eroding investors' confidence, dooming life's earnings and corporate fortunes, and whipping up mass hysteria? Value Investing and Behavioral Finance comes as an antidote to investor anxiety and a guide to sane and safe investment decisions. Using investing trends in Indian capital markets over the last three decades, it shows how collective behavioral biases affect investment decisions, returns and market vagaries. As a corrective, it spells out long-term value and contrarian investing strategies based on the principles of behavioral finance.

Further, it advises on how to spot investment opportunities and pitfalls in commodity stocks, growth stocks, PSUs , IPOs , sectors and index stocks. It also alerts the reader to a "bubble" or crisis situation, and ways to identify and insure against it.

Value Investing and Behavioral Finance , a timely offering from a seasoned investment strategist, is a must read for stock brokers, bankers, lay investors, portfolio managers, fund managers, and students of finance.

Parag Parikh, an alumnus of Harvard Business School , is the founder-chairman of Parag Parikh Financial Advisory Services Ltd .( PPFAS) with over 25 years of experience in the financial sector. Thoroughly conversant with the dynamics of the Indian stock market, and a vocal proponent of behavioral finance and value investing in India , Parag has an abiding passion for making financial market a better and safer place for investors through emotionally restrained, rational, value-based and long-term approach to investing.

- Source (Web)

Characteristic of Value Stocks....

{Click the above image to enlarge}

What Does Value Investing Mean?

The strategy of selecting stocks that trade for less than their intrinsic values. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company's long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated. Typically, value investors select stocks with lower-than-average price-to-book or price-to-earnings ratios and/or high dividend yields.

The big problem for value investing is estimating intrinsic value. Remember, there is no "correct" intrinsic value. Two investors can be given the exact same information and place a different value on a company. For this reason, another central concept to value investing is that of "margin of safety". This just means that you buy at a big enough discount to allow some room for error in your estimation of value.

Also keep in mind that the very definition of value investing is subjective. Some value investors only look at present assets/earnings and don't place any value on future growth. Other value investors base strategies completely around the estimation of future growth and cash flows. Despite the different methodologies, it all comes back to trying to buy something for less than it is worth.

-Source (Web)

What Does Intrinsic Value Mean?

#1. The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value. Value investors use a variety of analytical techniques in order to estimate the intrinsic value of securities in hopes of finding investments where the true value of the investment exceeds its current market value.

#2. For call options, this is the difference between the underlying stock's price and the strike price. For put options, it is the difference between the strike price and the underlying stock's price. In the case of both puts and calls, if the respective difference value is negative, the instrinsic value is given as zero.

For example, value investors that follow fundamental analysis look at both qualitative (business model, governance, target market factors etc.) and quantitative (ratios, financial statement analysis, etc.) aspects of a business to see if the business is currently out of favor with the market and is really worth much more than its current valuation.

Intrinsic value in options is the in-the-money portion of the option's premium. For example, If a call options strike price is $15 and the underlying stock's market price is at $25, then the intrinsic value of the call option is $10. An option is usually never worth less than what an option holder can receive if the option is exercised.

Growth At A Reasonable Price - GARP

An equity investment strategy that seeks to combine tenets of both growth investing and value investing to find individual stocks. GARP investors look for companies that are showing consistent earnings growth above broad market levels (a tenet of growth investing ) while excluding companies that have very high valuations (value investing). The overarching goal is to avoid the extremes of either growth or value investing; this typically leads GARP investors to growth-oriented stocks with relatively low price/earnings (P/E) multiples in normal market conditions.

GARP investing was popularized by legendary Fidelity manager Peter Lynch. While the style may not have rigid boundaries for including or excluding stocks, a fundamental metric that serves as a solid benchmark is the price/earnings growth (PEG) ratio. The PEG shows the ratio between a company's P/E ratio (valuation) and its expected earnings growth rate over the next several years. A GARP investor would seek out stocks that have a PEG of 1 or less, which shows that P/E ratios are in line with expected earnings growth. This helps to uncover stocks that are trading at reasonable prices.

In a bear market or other downturn in stocks, one could expect the returns of GARP investors to be higher than those of pure growth investors, but subpar to strict value investors who generally purchase shares at P/Es under broad market multiples.

-Source (Web)