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Wednesday, July 7, 2010

How to analyze the fundamentals of a company (with 3 sample case studies)

Cases: MIC, Prakash Industries and Asahi India Glass with a comment on overall market direction


I have analyzed all the three companies from long term perspective with an objective to understand the inherent strength in the financial positions of these companies. I have not looked at the business prospects and any relevant news items or future plans/industry outlook while analyzing these stocks. These factors may also affect investment decision. However, having said this, the primary factor is margin of safety and if the Principal is protected then only one should be comfortable.

I have also pasted my views from a recently written article on the overall market direction.

Trust this is of help. Please feel free to share your views.

Happy investing...

===========MIC Electronics===========

It's presently trading at 40 levels. The 52 wk high and low of this stock are Rs 60 and 30 respectively. It's somewhere in between.

The PE is 6.45 and Dividend yield is 1.03%. The face value is Rs 2. The debt is Rs 69Cr compared to equity + reserves of Rs 329Cr which is a good sign. The working capital /Current Assets: Current Liabilities position is very comfortable.

In last 6 years, though there was a variation in the revenue growth rate, the revenue has been increasing and there was not a single drop. Also the net profit has been showing a similar trend (except in one year where it was marginally lower than the previous year). These two factors are very positive about this company. The company has been paying dividend and in last 3 years has paid 20% dividend. The book value is Rs 29.

The promoters’ holding is 32.59% and has come down marginally from 32.63% earlier. This is not a significant number but if it's a trend then it could be an area of concern. This may require a further analysis. The public is holding 53.49%. The Return on Invested Capital (ROIC) has been impressive and always been in double digit. The cash flow situation for FY09 was negative due to investment activities undertaken by the company.

This company is on my radar and I would recommend this company near its book value i.e. Rs 28-30 levels. So wait and watch.

===========Prakash Industries===========
It's trading near 177 and has seen a year high and low of Rs 243.95 and 99.50. The current PE is 8.24. The dividend yield is zero.

The revenue is Rs 1566Cr and profit is Rs 266Cr. The profits and revenue are not showing any consistency and there were drops in between. The debt burden is not significantly high and working capital position is also comfortable. The book value is Rs 74. The company has never paid any dividends and I am not comfortable with this at all.

Last but not the least; the promoters’ holding is at 51.79% compared to 54.28 a year ago. This is a significant drop and not at all comfortable.

I would not recommend this stock.

===========Asahi India Glass===========
It's trading at 72 level. It is trading near its year high of Rs 79.25 (52 wk low is Rs 42.70).

The working capital position is good and comfortable. But it has very high debt of Rs 1617.30 cr compared with equity + reserve base of Rs 201.98 Cr. The company has incurred a loss of Rs 40 cr in FY09 on revenue of Rs 1300 cr. However, the company has turned in green with a profit of Rs 1.23 cr on a revenue of Rs 1287 cr. The book value till FY09 was Rs 12.63. The company was paying dividend till 2 years ago and paid a dividend of 65, 65, 250 & 225%. The current dividend of last two years is 0 and the face value is Rs 1.

The promoters’ holding is 55.21% which is increased by .02% in last 12 months (not a very significant number). Considering all these factors, I would not like to put my money in this stock. The price is appreciated and does not offer margin of safety. I am not comfortable.

===========Overall market outlook===========

I have recently written a article on this subject where I looked at 3 parameters of the BSE Sensex - the Current PE Ratio, Price to Book Value and Dividend Yield %. The present P:E Ratio is 19.96, Price to Book Value is 3.56 and Dividend Yield is 1.15%. These parameters definitely do not indicate that the market is the normal zone. But these parameters are also not indicating excessively overheated situation; however, it’s close to that. It other words markets are almost fully priced. If market goes down then it would simply offer an attractive investment opportunity.

You may like to read the complete article: http://dharmawat.blogspot.com/2010/06/is-sensex-heading-for-moon-give-me-tips.html

===========IMPORTANT DISCLAIMER===========
Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective. The information contained herein is based on analysis and up on sources that I consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations above.

Happy investing...

Niteen S Dharmawat