Due Diligence Snapshot + Technical Cross-Section — Ador Fontech Limited — Nov 27 2012

Price – Rs. 81.30 per share

Earnings Per Share projected on the basis of quarter ended Sep 30 2012 – Rs. 12.62

Price to Earnings Ratio (thus, also projected) – 6.44

Price to Book Value Ratio – the stock is selling at approximately 2 x book value currently

Debt : Equity Ratio – Nil

Current Ratio – 2.73

Profit After Tax Margin – 12.51%

Return on Networth – 32.54 %

Pledged Shares %age – Nil

Face Value – Rs. 2.00

Dividend Payout – 50% -150% of face-value.

Average Daily Volumes – around 5 – 6 k / day on BSE.

Product – Reclamation of alloys, fusion surfacing (preventive welding), spraying and environmental solutions.

Promoters – JB Advani & Company Pvt Ltd (of Advani-Oerlikon fame) + a group of other Sindhi business-people.

Share-holding Pattern – Promoters (35.4%), Public (58.9%), Institutions (2.0%), NICBs (3.7%).

Technicals (see chart below) – This is a very low volume scrip, so there could be slippage. The scrip has corrected from its June 2011 peak of Rs. 150.90 to a pivot of Rs. 73.25 within about one year. This low pivot lies bang in between the 50% and the 61.8% Fibonacci levels of correction on the weekly chart. Currently, the scrip is quoting at Rs. 81.30, just below the Fib. 50% level. Volumes are average, with one high volume peak every 7 odd trading days. The scrip is trading in a broad band between Rs. 73.25 and Rs. 93.90. Perhaps it is trying to establish a base.

Comments – Fundamentals are good, and the company’s corporate governance is considered clean. Market for the company’s niche is considered small, and people view that as a long-term growth concern. Technically, correction has taken place, and thus value shines out fundamentally. Debt is nil. Dividend is excellent. Projected PE is low, though P/BV is a bit high. Cushion is there, and profitability and returns are exemplary. Future investment would be required to keep niche-segment status alive.

Buy? – I like the theme – reclamation and preventive welding. Contrary to what others say, I feel the market is going to grow phenomenally, as earth and rare-earth metals become difficult to source, and need to be reclaimed. Valuations are excellent, governance is great, payouts are great too, and a technical buying level has presented itself. Yes, it’s a long-term buy right now. Remember, this is not a trade we are speaking about, so we are not going to talk in terms of a stop-loss. This is a long-term investment, and we’ve been speaking in terms of margin of safety, which I’m sure you’ve noticed. Also, while buying, one needs to show caution regarding slippage, which is invariably going to occur owing to the low-volume nature of the scrip.

Disclaimer and Disclosure – Opinions given here are mine only. You are free to build your own view on the stock. I have bought a miniscule stake in Ador Fontech today. Data given here has been compiled from motilaloswal.com, moneycontrol.com and equitymaster.com. Technicals have been gauged and shown using Metastock Professional version 9.1 by Equis International.

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Due Diligence Snapshot – Mindtree Limited – Nov. 24 2012

Price – Rs. 665.25 per share

Earnings Per Share (projected on the basis of quarter ended Sep 30 ’12) – Rs. 70.61

Price to Earnings Ratio (thus, also projected) – 9.42

Price to Book Value – 2.82 (it’s ok for small to mid-sized IT companies to have a high price to book ratio, because book value doesn’t reflect human capital, and small to mid-sized IT companies are more about human capital than about real-estate, hardware etc. Thus, since the real book value is not going to be available, the given price to book ratio could be treated as an artefact, unless it is unreasonably high, which is not the case here).

Debt : Equity Ratio – 0.03

Current Ratio – 2.10

Profit After Tax Margin – 12.11%

Return on Networth – > 25 %

Pledged Shares %age – Nil

Face Value – Rs. 10.00

Dividend Payout – 25% – 30% of face-value.

Average Daily Volumes – around 1 Lakh per day on NSE.

Product – Product Engineering Services, IT Services, worked on Bluetooth technology, also worked on UID (Aadhaar) project.

Promoters – Mr. Bagchi (set up Six-Sigma services at Wipro) and Mr. Soota (has now retired from Mindtree, ex-Wipro, amongst others, responsible for Wipro’s phenomenal growth). Mr. Natarajan is co-founder and current CEO, and is also ex-Wipro.

Share-holding Pattern – Foreign Promoters (3.5%), Indian Promoters (15.9%), Institutions (33.0%), Non-Institutional Corporate Bodies (30.2%), Public (15.7%).

Technicals – IPO days in March 2007 were big, with the scrip peaking at Rs. 1023.30 very early into its launch. By March ’09, though, Mindtree had bottomed out at Rs. 187.05. It then made a high pivot of Rs. 747.00 in Jan ’10, fell to Rs. 321.00 by August 2011, and is currently on the rise, forming a cup and handle pattern on the weekly chart, with the handle having broken out in Sep ’12 to 770.00 on average volume. This was a false breakout, and the scrip came down, to then move in a band between Rs. 633.80 and Rs. 699.90. Currently, Mindtree is quoting at Rs. 665.25, and Friday (Nov. 23rd, 2012) saw it rise by approximately 1 % on volume that was three times its 50-day moving average and many more times its 10-day moving average.

Comments – I like all the fundamentals. Couldn’t find any scams or frauds related to the company, looked only online though. Debt-equity ratio almost nil, great! Ex-Wipro people are the promoters. CEO is ex-Wipro. Friday’s higher volume has gotten me on alert. If all-round conditions in the markets remain stable, the scrip could break-out to beyond Rs. 770 soon. Glassdoor has “OK’d” work culture at Mindtree, with the same rating that Infosys has received. Salaries are considered on the lower side, though, at Mindtree. Also, some employees feel that company is stagnating. Reasons why Mr. Ashok Soota left the company are unclear to me. On the other hand, corporate governance still seems to be decent at Mindtree.

Buy? – Hmmmm, I like almost everything, except the salary and the stagnation bit. Mr. Soota’s presence would have been a bonus. I can take a “stagnating” company that generates good numbers. The ratios are all good, and profitability is decent. There’s almost no debt on the balance-sheet. No shares have been pledged. Dividend is decent. Excellent return on networth. Company does R&D too. Question is, will the scrip correct another 30 to 40 bucks to the lower end of it’s current band, so that one can pick it up 5 odd % cheaper? Anybody’s guess. One could actually go and pick it up now. Earnings are good, and so is the projected PE, well below the industry average, actually.

Disclaimer and Disclosure – Opinions given here are mine only. You are free to build your own view on the stock. Currently, I don’t hold a position in Mindtree Limited, but am considering long-term entry on the basis of what I have found and liked. Data given here has been compiled from motilaloswal.com, moneycontrol.com and equitymaster.com, and technicals have been gauged using Advanced GET 9.1 EoD Dashboard Edition.

The Frog That Lived in the Well

Once upon a time, there was a frog.

It lived in a well.

Its cousin, however, lived in the ocean, and this particular cousin came to visit.

Cousin froggy was stunned. How could one thrive in such a small space? Our original froggy, however, did not believe that one’s world could get any better. It loved the well, and only after much coaxing did it agree to see what the ocean was like.

Upon seeing the magnitude of an ocean, our original froggy’s head exploded. This story’s from Paramhans Yogananda. 

I’m sure you’ve heard this story from someone. Something similar probably happened to you too, of course on a much smaller scale of magnitude, with no head explosions and all that.

I used to walk around pretty smugly with my Blackberry, thinking that I was like there, connected. Experienced kind of a head explosion upon moving to an Android smartphone.

What is it about us humans?

Why are we so limiting?

Why do we create barriers around our life-experience, around our possibilities?

Market conditions keep changing. Just as we get tied up into a rut and define a market as range-bound and going nowhere, it breaks out. Are you able to cope?

Be honest.

Can you adapt to such changes in conditions?

Are you quick on your feet? Or are you lethargic, and full of inertia?

What’s that song by The Black Eyed Peas?

“don’t…don’t…don’t … … don’t-stop-the-party!”

I know you’ve been humming this song during your continuing debt market party, but there is more to the scene than just the debt market. The debt market is not where things start and end in the world of investing. There’s more.

The world of investing is like an ocean.

The next buzzing market will make itself known. It’s only a matter of time. Be ready for it. Don’t remain clogged up within the claustrophobic walls of one market only, out of sheer laziness and a false sense of security.

Get out there.

Experience the ocean, without your head needing to explode.

“Don’t Turn Around – Der Kommissar’s in Town”

There’s activity within our slow-poke government.

Yup, we just got a new finance minister. PC’s back. Or, as the newspaper said, PC reboots.

He’s probably reinforcing backdated taxation.

He’s hinted at interest-rate cuts.

He’s after more service-tax candidates.

He’s transferred lots of portfolios.

He’s trying to dish out motivational quotes, so that the economy revives.

“Alles klar, Herr Kommissar?”

The last time PC was in town, there was volatlity in the markets. First they went up and up and up, and then they went down and down and down. Mr. Chidambaram is a by-word for volatility.

How does he do it?

Frankly, I don’t care.

If I’m getting volatility, I’m taking it.

Not that India as a market lacks any volatility without PC.

We Indians are emotionally volatile people. When we are happy, we are sooooooo happy. When we are down and out, man, we are totally gone. No surprise that our markets reflect our topsy-turvy and dramatic emotional nature. Yes, the trader in India is blessed with a volatile trading scenario by default.

So, PC or no PC, volatile trades make themselves available to us in the Indian markets regularly. What PC does is, he gives the system’s volatility a turbo-boost. Our market’s “beta” goes up wth PC, and it goes up fast, quite fast.

Man, how does he do it?

You know, I still don’t care, but if I did, I think this would be the correct answer.

Der Kommissar seems to do it in two steps. First he creates carrots, lots of carrots. These are dangled before India Inc. Things start hotting up. Foreign investment wakes up – demand – buying pressure – our markets go up. Then, when the balloon is inflated, der Kommissar will appear on television and will let out comments (implementation of stick, like the backdated taxation thing) which the market takes exception to. Or, he might give some interview in the media which India Inc. interprets negatively. Well, down we come crashing. Frankly, I still couldn’t care less. Upwards or down, there’s a trade to be found.

Just a few days in his seat, and pivot points are leading to bounce-backs, supports are holding, resistances cracking (it’s the carrots), and technicals are very, very initially changing from “range-bound” to “trending”.

Fine, let’s just trade the Kommissar while he’s in town.

I’ve quoted Falco above and I’m quoting him again : “Alles klar, Herr Kommissar!”

So, When Does One Attack Here?

Ammunition.

Your game revolves around it.

We’re not talking war over here.

Or are we?

The marketplace is a war-zone, come to think of it.

Question is, how do you use you ammo?

Do you fire the bulk right away?

Who are you trying to scare?

This is the marketplace, people, overall, it’s not scared of your few rounds. There are just too many players, with varied interests and ideologies. Your few rounds might cause a mini-spike in the underlying concerned, but that’s about it. That mini-spike is not going to make it to tomorrow’s paper.

So, why bother? You don’t need to attack here. Straight away, that is. You can attack when the time is ripe, and when you are ripe too.

What does being ripe for an attack mean?

It means that your defences are fully in place and on auto-pilot. Your basic income is taken care of and suffices your family’s needs. Actually, let’s go a little further and say that your family is able to live comfortably on income generated by you which is independent from any of your speculative / risky activities. This is the first step. You need to work yourself into such a position, even if it takes you a long time. Without knowing that your family is safe, no matter how you fare in the marketplace, you will not be able to trade freely.

Then comes the second step in setting up your best defence. You need to have access to an emergency fund. Meaning, this kind of a fund needs to be salted away first. It then needs to be made accessible when required, and otherwise, it is to remain unused. Don’t let your emergency fund’s miniscule return bother you. In lieu of that, you are getting safety. Your emergency fund needs to remain safe, sound, and there, when you need it. This way, if and when something happens, and funds are required, a). you won’t have to tap into your family’s basic income, and b). you won’t have to tap into your trading corpus. You’ll access your emergency fund. Your family will remain financially undisturbed, and so will your trading, despite the emergency.

Now comes the final step, before you can get on with your trading, yes, even aggressively. In this step, the focus is on you. While setting up your family’s basic income and your emergency fund, you have struggled. Your health could have taken a knock. Your mind could be in a whirl. Normalize, my friend. Take time off. Stare at the wall. Get your body-chemistry back to equilibrium. Take a vacation. Take many vacations. Finally, when you are in shape, go for it.

Ok, so you’re in shape, and ripe for attack.

Now, the time needs to be ripe for attack too.

Mrs. Market has three basic modes of movement. She trends, moves in a range and then, she just plain goes nowhere, i.e. she’s flat.

Your aggression needs to be implemented only when she’s trending. Period.

That’s when it’ll yield mind-blowing returns.

Fire away when she’s flat or moving in a range, and you’ll keep getting stopped out.

How can you tell when she’s trending?

Through technical analysis.

So, study. Learn to differentiate between her three basic modes of movement.

Then, when she trends, and only then, use your ammo aggressively.