Decoding Investment in Equity Market - 2nd video (Significance of Operating Cash Flow)

Hi,

I have got an overwhelming response for the first video on decoding investment in equity market for common investors. Thank you for all those who sent out their responses/called me with their feedback.

I have created the second video. This time the topic is importance of Operating Cash Flow (CFO). I believe that this is one of the most important topics However, irony is it is quite often ignored even by seasoned analysts. I have covered four cases studies without naming the company to explain the importance of CFO.

As I mentioned earlier and reiterate that these are free videos as a part of my social responsibility with an objective to educate common investors. Please send your feedback on this video series. Your feedback will make help me improve the process. Also send your responses to the quiz to me.

Please feel free to forward these videos to anyone you feel would get benefited.

2nd video can be seen here: http://goo.gl/bvI1IP

1st video can be seen here: http://goo.gl/C4NaIx

Always look forward receiving your feedback. 

Cheers,

Niteen S Dharmawat

Blog: http://dharmawat.blogspot.com/

Twitter: @niteen_india
Facebook: https://www.facebook.com/dharmawat
slideshare: www.slideshare.net/ndharmawat/

Linkedin: in.linkedin.com/in/dharmawat/

IMPORTANT DISCLAIMER: This presentation is prepared solely to provide information about and take feedback from the readers/viewers. This presentation is NOT meant for equity investment. It should NOT be construed as an investment advice for buy/sell/hold or anyother form of recommendation. This presentation does not recommend any price or price target for any company discussed as a case study. Investment in equity shares has its own risks. The information contained herein is based on my study and upon sources that I consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and not intended for any investment decisions. I am not responsible for any profit or loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the discussion thread anywhere in communication. It is safe to assume that I, my family, friends have vested interest in any of the companies/stocks discussed/presented here. Please do your due diligence and take the help of a qualified advisor before you take any financial decision.

Markets: some important data...

Three different periods.

- Last one year 

=>PE: 19.44, MarketCap/GDP: 0.76

-  Year 2010 

=> PE: 25, MarketCap/GDP:0.96

-  Year 2008 

=>PE: 28.5, MarketCap/GDP: 1.12

Also refer to my earlier article written in April for Subhankar (see here: http://goo.gl/AzPokp). The ratio in April 2014 was around 0.64. It was also mentioned in that article that the historical high of this ratio is 1.65; the historical low is 0.41 and fair market value will be around 0.9.

Do you still believe that we are overvalued?

Always look forward receiving your feedback. 

Cheers,

Niteen S Dharmawat

Blog: http://dharmawat.blogspot.com/

Twitter: @niteen_india

Facebook: https://www.facebook.com/dharmawat slideshare: www.slideshare.net/ndharmawat/

Linkedin: in.linkedin.com/in/dharmawat/

IMPORTANT DISCLAIMER: Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective. The above article is written with the sole objective of taking feedback from the readers. The information contained herein is based on my study and upon sources that I consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and not intended for any investment decisions. I am not responsible for any profit or loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the discussion thread above/anywhere in communication. It is safe to assume that I, my family, friends have vested interest in any of the stock ideas discussed here. Please do your due diligence and take the help of a qualified advisor before you take any financial decision.

Decoding Investment in Equity Market... 1st video

Hi,

I am creating a series of free videos for common investors to understand equity market and how to invest. If you consider yourself to be an expert in equity market, these videos are not for you. 

The first video is the introduction video with a length of about 12mins. Going forward, the length of the videos will be 5 mins max. Each video will have a quiz at the end of the video. 

There is no specific frequency when the next video would come. I will try to be as quick as possible but it will all depend on the availability of my time.

Please feel free to forward these videos to anyone you feel would get benefited.

These are free videos as a part of my social responsibility with an objective to educate common investors. 

1st video can be seen here: http://goo.gl/C4NaIx

Always look forward receiving your feedback. 

Cheers,

Niteen S Dharmawat

Blog: http://dharmawat.blogspot.com/

Twitter: @niteen_india
Facebook: https://www.facebook.com/dharmawat
slideshare: www.slideshare.net/ndharmawat/

Linkedin: in.linkedin.com/in/dharmawat/

IMPORTANT DISCLAIMER: Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective. The above article is written with the sole objective of taking feedback from the readers. The information contained herein is based on my study and upon sources that I consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and not intended for any investment decisions. I am not responsible for any profit or loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the discussion thread above/anywhere in communication. It is safe to assume that I, my family, friends have vested interest in any of the stock ideas discussed here. Please do your due diligence and take the help of a qualified advisor before you take any financial decision.

Why Operating Cash Flow is more important than Net Profit but is still ignored.

Let's first define Net Profit and Cash Flows before we proceed further to explore the importance of each of terminologies.

Definitions:

Net Profit (NP) comes from Profit and Loss (P&L) statement while OCF comes from Cash Flow statement.

Net Profit: Net of revenue or sales after removing all operating expenses, depreciation, interest and taxes and including any other income, and taking into account exceptional items.

Operating Cash Flows (OCF): The net cash generated from operations.

Investing Cash Flows (CFI): The net result of capital expenditures, investments, acquisitions, etc.

Financing Cash Flows (CFF): The net result of raising cash to fund the other flows or repaying debt.

Why OCF and not NI:

The OCF is a better metric of a company's financial health for two main reasons. First, cash flow is harder to manipulate than net income. Second, "cash is king" and a company that does not generate cash over the long term is heading to get wiped out. The OCF gives you the picture about the cash received in the organization. Without cash, the company may not be able to fulfill its promise to make payments to suppliers, employees and financial institutions on a sustainable basis.

Though OCF is extremely important many investors lean towards net income. The primary reason being OCF numbers are provided once in a year while the Net Profit numbers are provided at the end of every quarter. This gives an opportunity to the media and so called experts to discuss NI numbers at least four times in a year and accordingly be more worried about the growth. Also many small investors find it difficult to read these simple set of numbers in the annual reports primarily from the fear of unknown.

Accrual Accounting system v/s Cash flows

To generate Net Profit, a company may just be required to make a sale. This sale could be either cash or on credit. If it is a cash sale it gets recognized in OCF also.

However, in reality this is not the case. Most of the companies provide credit facilities. This could provide an opportunity to manipulate the net profit numbers. The company makes a credit sale and based on this immediately recognizes the sales in the P&L and accordingly net profit number. However, the cash is not received and hence the OCF is not affected.

What happens if the customer delays payment or returns the goods or this sale was a bogus sale? This results in in a buildup of receivables in balance sheet. But the real OCF has never happened. The company may continue to do so but not indefinitely. It will have to face the reality at some point of time. The receivables numbers then will turn bed debts and result in pain.

Some examples

There are several examples where the companies were not generating cash flows but continued to show profits through various means. These companies faced the grim reality at some point of time and that led to the downfall. Also if the promoters’ holding is poor or there is a continued equity dilution along with poor OCF then it is a deadly cocktail heading for a disaster.

Also there is a common element that I found in companies with poor OCF v/s NI. These companies are often backed by very strong growth stories and are widely traded in the stock market with lots of hope.

I have covered two examples viz. Opto Circuits and Arshiya International. Both these companies were the darling of stock market. These companies were running with several growth stories around. Also both the companies were backed by celebrity analysts and FIIs. You may see the details of what happened with these companies when they were unable to generate OCF: http://goo.gl/rY7l0l

Ideal OCF v/s NP ratio:

It will be ideal to have a ratio close to one, more the merrier. However, there could be a year or two where OCF is down due to market conditions or circumstances. But it cannot be for an indefinite period otherwise the survival of the company will be in question. Remember NP without CFO is like a body without oxygen.

Cheers,

Niteen S Dharmawat
Blog: http://dharmawat.blogspot.com/
Twitter: @niteen_india
Facebook: https://www.facebook.com/dharmawat
slideshare: www.slideshare.net/ndharmawat/

Linkedin: in.linkedin.com/in/dharmawat/

Reference: http://www.investopedia.com

IMPORTANT DISCLAIMER: Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective. The above article is written with the sole objective of taking feedback from the readers. The information contained herein is based on my study and upon sources that I consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and not intended for any investment decisions. I am not responsible for any profit or loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the discussion thread above/anywhere in communication. It is safe to assume that I, my family, friends have vested interest in any of the stock ideas discussed here. Please do your due diligence and take the help of a qualified advisor before you take any financial decision.

Fedders Lloyd Corp updates

Fedders Lloyd Corp was one of the quiz questions covered when it was at around Rs53 about 4 months ago. Please find below the updates post recent quarterly results. The stock has reacted sharply to the results.

The profit has come down and I have given an explanation below. 

Some good points

- the promoters stake continuous to be healthy with no pledging. They increased the stake in last Dec by around 2.3%

- the stock is cheap with a good brand

- the company has presence in railways and defense sectors and may benefit from the actions taken by the new government.

- the operating profit margins are very good and have improved

The immediate concerns are:

- the interest component has increased to Rs33 Crore from 9Cr a year ago and 13Cr in last quarter. Had this not been such a steep rise the profits would have been much better. We do not have the info as of now to understand the rise in interest cost.

See the original posting: http://dharmawat.blogspot.in/2014/04/can-you-identify-stock-my-next-find-2.html

Disc.: No holding in the stock.

Cheers,

Niteen S Dharmawat
Blog: http://dharmawat.blogspot.com/
Twitter: @niteen_india
Facebook: https://www.facebook.com/dharmawat
slideshare: www.slideshare.net/ndharmawat/

Linkedin: in.linkedin.com/in/dharmawat/

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 we 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 discussion thread above/anywhere in communication. It is safe to assume that I, my family, friends have vested interest in the stock idea discussed here. Please do your homework and take the help of a qualified advisor before you take any financial decision.

Snowman Logistics Ltd IPO: Avoid

Received few queries about Snowman Logistics IPO. These are my two pence worth:

- Good part is the IPO funds are getting used in the company.

- Though the company is good, the issue seems to be expensive to me.

- At higher price band 788cr mkt cap + 88 cr debt for a company with 23Cr PAT and 155Cr revenue of 2013

- Also retail portion is just about 20Crore so we may have difficulty in allotments.

I do not find a strong conviction to invest in this IPO. However, you never know. In a bull market anything is possible. The stock may still touch new highs after listing. Take your decision based on self conviction.

Some reference docs:

http://www.edelweisspartners.com/Mutual%20Fund%20Info/Product%20Note%20-%20Snowman.pdf

http://www.moneycontrol.com/news/ipo-news/crisil-assigns-45-grade-to-snowman-logistics-ipo_1052297.html

Launch Date	26th of August
Issue Period	Opening date: 26th August; Closing date: 28th August 2014
Exchange	Listing on both NSE and BSE
Issuer	Snowman Logistics (“Snowman”)
Offer Type	Initial Public Offering / Reg S
Offer Size	Total	42 Million Equity Shares
Net offer	25.23% of Post issue paid-up equity share capital
Offer Price	[ 44 - 47 ] Min Retail 300 shares
Issue Split (No. of shares)	QIB Portion: Atleast 75% of the issue  (31,500,000) Non-Institutional portion: Upto 15% of the issue (6,300,000) Retail Portion: Upto 10% of the issue  (4,200,000)
Use of proceeds	· Capital expenditure for setting up new temperature controlled and ambient warehouses · Long term working capital and · General corporate purposes
Current Shareholding			Pre-Offer	Post-Offer
	Gateway Distriparks		54.04%	40.41%
	Norwest Venture Partners		13.78%	10.30%
	Mitsubishi Corp		12.57%	9.40%
	IFC		12.40%	9.27%
	Others		7.21%	5.39%
	Public		-	25.23%
Syndicate Member	HDFC Securities Limited

Cheers,

Niteen S Dharmawat
Blog: http://dharmawat.blogspot.com/
Twitter: @niteen_india
Facebook: https://www.facebook.com/dharmawat
slideshare: www.slideshare.net/ndharmawat/

Linkedin: in.linkedin.com/in/dharmawat/

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 we 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 discussion thread above/anywhere in communication. It is safe to assume that I, my family, friends have vested interest in the stock idea discussed here. Please do your homework and take the help of a qualified advisor before you take any financial decision.

Suni Hitech Engineers - BSE: 532711, NSE: SUNILHITEC (June 14 Qtr Result updates)

Sunil HiTech was identified at Rs53 about 6 months ago and booked profit at around 145 about 2 months ago. The stock is now around Rs 122 levels.

My original post: http://goo.gl/wqlq6o

It has given good set of numbers for first quarter ended on 30th June 2014.

- YoY quarterly Sales increased by 29% and profit by 47%
- Comparing QoQ Sales and NI may not be appropriate as the March quarter is hyper active for such companies/industry
- Promoters holding increased by around 4.5% due to Conversion of Warrants.
- High finance cost still remains an area of concern.
- See the original post + comments to understand the rational for investment in Sunil Hitech: http://goo.gl/wqlq6o

See results here: http://www.bseindia.com/xml-data/corpfiling/AttachHis/Sunil_Hitech_Engineers_Ltd_140814_Rst.pdf

Disc: Entered into the stock.

Cheers,
Niteen S Dharmawat
Blog: http://dharmawat.blogspot.com/
Twitter: @niteen_india
Facebook: https://www.facebook.com/dharmawat
slideshare: www.slideshare.net/ndharmawat/
Linkedin: in.linkedin.com/in/dharmawat/

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 we 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 discussion thread above/anywhere in communication. It is safe to assume that I, my family, friends have vested interest in the stock idea discussed here. Please do your homework and take the help of a qualified advisor before you take any financial decision.