Warren Buffett on Debt

Warren Buffett does not like debt
Warren Buffett does not like debt and does not like to invest in companies that have too much debt, particularly long-term debt. With long-term debt, increases in interest rates can drastically affect company profits and make future cash flows less predictable.

In 1982, Warren Buffett noted that Berkshire Hathaway preferred to buy companies with little or no debt and has repeated this mantra on many occasions. He adopts the same philosophy for his company, preferring to avoid debt but where necessary going into it on a long-term basis only with fixed rates of interest and to obtain the finance before they need it.

What Warren Buffett says abour debt
Warren Buffet acknowledges that debt can effectively increase the return on equity in a company but warns against it. In 1987, he said this:

‘Good business or investment decisions will eventually produce quite satisfactory economic results, with no aid from leverage.

'It seems to us both foolish and improper to risk what is important (including, necessarily, the welfare of innocent bystanders such as policyholders and employees) for some extra returns that are relatively unimportant.’

Benjamin Graham on Debt
There are various approaches to looking at a company’s debt. Benjamin Graham, in The Interpretation of Financial Statements, defined some important terms:

Current assets - Assets which either are cash or can be readily turned into cash or will be converted into cash fairly rapidly in the normal course of business. Include cash, cash equivalents, receivables due within one year and inventories.

Current liabilities - Recognised claims against the enterprise which are considered to be payable within one year.

Shareholders’ equity - The interest of the stockholders in a company as measured by the capital and surplus.

The current ratio or the liquidity test
Benjamin Graham believed that the current ratio, the ratio of current liabilities to current debt was important in looking at a company’s financial position. In theory, the higher the ratio, the more comfortable, financially, is the company. This has been called the test of liquidity.

Benjamin Graham said this about the current ratio:

‘When a company is in a sound position, the current assets well exceed the current liabilities, indicating that the company will have no difficulty in taking care of its current debts as they mature.’

There are several reservations here:

A company with too high a ratio may not be using its surplus funds wisely
Cash businesses, such as supermarkets, generally require a lower ratio than businesses that have protracted periods for customer payments.
Again, Benjamin Graham:

‘What constitutes a satisfactory current ratio varies to some extent with the line of business …'

In industrial companies a current ratio of 2 to 1 has been considered a sort of standard minimum.’ David Hey-Cunningham believes that a reasonable rule of thumb measure is 1.5 to 1.

The formula is:

Current assets
Current liabilities



The Quick Ratio
Benjamin Graham also looked at the Quick Ratio, a similar calculation but excluding inventory. Again, the size of the ratio will depend upon the business: companies with inventories that can readily be converted into cash probably do not need as high a ratio as those with longer-term inventories. But it was important to Benjamin Graham:

‘In every case, however, the situation must be looked into with some care to make sure that the company is really in a comfortable current position.’

The formula is:

Current assets - inventory
Current liability

David Hey-Cunningham writes about the acid test, which uses the same ratio as above, but does not include any bank overdraft in current liabilities.

Debt to equity ratios
This shows the proportion of debt to shareholders’ equity. Debt can be either the total debt or more commonly long-term (interest bearing) debt. David Hey-Cunningham gives the rule of thumb test as 0.5 to 1. The formula is generally quoted as:

Long-term debt
Shareholder’s equity

Warren Buffett and long-term debt
Warren Buffett speaks only generally of his approach to debt. Mary Buffett and David Clark have concluded that he focuses on long-term debt, a conclusion that is supported by his public comments. They believe that his concern lies with the company’s ability to repay its debts, should the need arise, from its profits; the longer the time period, the more vulnerable is the company to external changes and the less predictable are its future earnings.

The formula for such a calculation is:

Number of years to pay out debt = Long term debt
Current annual profit

Company examples
If we apply this formula to Johnson and Johnson, for example, we find, using Value Line, that for 2002, the long-term debt of the company was $2022 million and the profit for that year was $6610 million. Dividing the first figure by the second, we can calculate that at that rate the company could pay off its long-term debt in .3 of a year.

If we apply the same formula to McDonald’s Corporation, we find, using Value Line, that for 2002, the long-term debt of that company was $9703 million and the profit for that year was $ 1692 million. Dividing the first figure by the second, we can calculate that at that rate the company could pay off its long-term debt in 5.73 years.

UNDERSTANDING RETURN ON EQUITY By Timothy Vick

“The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share.” [From the 1979 Berkshire Hathaway annual report.] Warren Buffett joined the world’s club of billionaires in a unique fashion— as an investor, exploiting the world’s financial inefficiencies. However, his approach is anything but opaque. Instead, he follows a clear and consistent set of investment rules and methods. In his new book, “How to Pick Stocks Like Warren Buffett,” Timothy Vick delves into Buffett’s reasoning and stock-picking criteria. This article, excerpted from the book, focuses on a key component of Buffett’s analysis: return on equity. The 1990s truly were an extraordinary period, for investors and corporate America alike. Not only were stock investors amply rewarded with gains averaging nearly 20% a year, but corporations displayed their best internal performance of the century. The two results, of course, went hand-in-hand. Had corporations not been so profitable and efficient, investors would not have been so willing to pay high premiums for their earnings. It’s also doubtful that the stock market would have rallied by even a fraction of the amount it did. Indeed, some of the weakest market periods during the twentieth century coincided with slowdowns in corporate earnings growth and dwindling returns on equity. Low returns on equity have tended to produce low stock valuations, and vice versa. As the decade closed, it was apparent that U.S. corporations deserved valuations above historical norms simply because they generated returns on investor’s capital far in excess of levels seen throughout the twentieth century. The high returns on shareholder’s equity (ROE) posted by the nation’s largest companies in the 1990s were a major factor in the strong showing by the stock market. Those gains were made possible by some spectacular achievements: continued improved earnings, better internal productivity, a reduction of overhead costs, and strong top-line sales gains, to name just a few. The tools companies used to produce these results—restructurings, layoffs, share buybacks, and management’s success in utilizing assets—fueled one of the most impressive improvements in ROE history. Returns on equity for the S&P 500 companies averaged between 10% and 15% for most of the twentieth century but rose sharply in the 1990s. By the end of the decade, corporate returns on equity jumped above 20%, That’s a phenomenal rate considering that the 20% level was an average of 500 companies. Many technology companies consistently posted returns on equity in excess of 30% in the 1990s, as did many consumer products companies such as Coca-Cola and Philip Morris and pharmaceutical companies such as Warner-Lambert, Abbott Laboratories, and Merck. Because companies produced such elevated returns on their shareholder’s equity (or book value), investors were willing to bid their stocks to huge premiums to book value. Whereas stocks tended to trade for between one and two times shareholder’s equity throughout most of the century, they traded, on average, for more than Timothy Vick is a senior analyst with Arbor Capital Management, Chicago, Illinois, and the founder and former editor of the investment newsletter, Today’s Value Investor. This article is excerpted from Mr. Vick’s new book “How to Pick Stocks Like Warren Buffett,” published by McGraw-Hill (800/262-4729; www.books.mcgraw-hill.com). 4 AAII Journal/April 2001 STOCK SELECTION STRATEGIES six times shareholder’s equity by late 1999. But even before 1999, Warren Buffet began questioning whether corporations could continue to generate returns on equity in excess of 20%. If they couldn’t, he said, stocks could not be worth as much as six times equity. History favored Buffett’s assessment. American companies turned less charitable in the 1990s toward issuing dividends and retained an increasing share of their yearly earnings. In addition, the U.S. economy seemed capable of sustaining growth rates of just 3% to 4% each year. Under those conditions, it would be nearly impossible for corporations to continue generating 20% ROEs indefinitely. It would take yearly earnings growth in excess of 20% a year to produce 20% ROEs—an impossibility unless the economy were growing at rates far in excess of 10% a year. Returns on equity play an important role in analyzing companies and putting stock prices and valuation levels in proper context. Most investors tend to concentrate on a company’s past and projected earnings growth. Even top analysts tend to fixate on bottom-line growth as a yardstick for success. However, a company’s ability to produce high returns on owner’s capital is equally as crucial to longterm growth. In some respects, return on equity may be a more important gauge of performance because companies can resort to any number of mechanisms to distort their accounting earnings. Warren Buffett expressed this sentiment more than 20 years ago: “The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share. In our view, many businesses would be better understood by their shareholder owners, as well as the general public, if management TABLE 1. MICROSOFT PROJECTIONS: MAINTAINING 30% ROE Begninning Equity ($, mil) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 $8,000 $10,825 $14,650 $19,829 $26,841 $36,332 $49,179 $66,569 $90,109 $121,974 $165,104 Net Income ($, mil) $2,825 $3,825 $5,179 $7,012 $9,491 $12,847 $17,390 $23,540 $31,865 $43,130 $58,380 Ending Equity ($, mil) $10,825 $14,650 $19,829 $26,841 $36,332 $49,179 $66,569 $90,109 $121,974 $165,104 $223,484 Annual Earnings Growth (%) na 35.4 35.4 35.4 35.4 35.4 35.4 35.4 35.4 35.4 35.4 ROE (%) 30.0 30.0 30.0 30.0 30.0 30.0 30.0 30.0 30.0 30.0 30.0 and financial analysts modified the primary emphasis they place upon earnings per share, and upon yearly changes in that figure.” [From the 1979 Berkshire Hathaway annual report.] CALCULATING ROE Return on equity is the ratio of yearly profits to the average equity needed to produce these profits: ROE = net income (end equity + begin equity)/2 If a company earned $10 million, started the year with $20 million in shareholder’s equity, and finished with $30 million, its ROE would be roughly 40%: ROE = $10 million ($30 million + $20 million)/2 = 0.40 or 40% In this case, management obtained a 40% return on the resources shareholders provided them to generate profits. Shareholder’s equity—assets minus liabilities— represents the investors’ stake in the net assets of the company. It is the total of the capital contributed to the company and the company’s earnings to date on that capital, minus a few extraordinary items. When a company posts a high ROE, it is efficiently using the assets shareholders have provided. It follows that the company is increasing its shareholder’s equity at rapid rates, which should lead to equally rapid increases in stock price. Buffett believes that companies that can generate and sustain high ROEs should be coveted because they are relatively rare. They should be purchased when their stocks trade at attractive levels relative to their earnings growth and ROEs because it is extremely difficult for companies to maintain high ROEs as they increase in size. In fact, many of the largest, most prosperous U.S. companies—General Electric, Microsoft, Wal-Mart, and Cisco Systems, among them—have displayed steadily decreasing ROEs over the years by virtue of their size. These companies found it easy to earn enough profits to record a 30% ROE when shareholder’s equity was only $1 billion. Today, it’s excruciatingly difficult for them to maintain 30% ROEs when equity is, say, $10 billion or $20 billion. In general, for a company to maintain a constant ROE, it needs to exhibit earnings growth in excess of ROE. That is, it takes more than 25% earnings growth to maintain a 25% ROE. This applies for companies that don’t pay dividends (dividends reduce shareholder’s equity AAII Journal/April 2001 5 STOCK SELECTION STRATEGIES and make it easier to post high ROEs). If management wishes to maintain a company’s ROE at 25%, it must find ways to create more than $1 in shareholder’s equity for every $1 of net income produced. Table 1 shows that Microsoft would have to post average yearly earnings growth of 35.4% to maintain a 30% yearly ROE (Microsoft’s average ROE during the 1990s). Beginning with $8 billion in shareholder’s equity, Microsoft would have to increase equity to $223 billion by 2010 to attain those growth rates. The key to understanding ROEs, Buffet notes, is to make sure that management maximizes use of the extra resources given it. Any company can continue to produce everlarger earnings every year simply by depositing its income in the bank and letting it draw interest. If Microsoft shut down operations and reinvested yearly net income at 5% rates, earnings would continue growing, but ROE would plummet, as shown in Table 2. By doing nothing, Microsoft’s management could deliver 5% earnings growth for investors and brag of “record earnings” each year, but management would fail in its obligation to use corporate assets wisely. By 2010, Microsoft’s ROE would fall to 10%. ROE would continue to fall for another 70 years until it reached 5% and parity with earnings growth. Indeed, when net income does not grow as fast as equity, management has not maximized use of the extra resources given it. “Most companies define ‘record earnings’ as a new high in earnings per share. Since businesses customarily add from year to year to their equity share, we find nothing particularly noteworthy in a management performance combining, say, a 10% increase in equity capital and a 5% increase in earnings per share. After all, even a totally dormant savings account will produce steadily rising interest each year because of compounding.” [From the 1979 Berkshire Hathaway annual report.] Focusing on companies producing high ROEs, Buffett says, is a formula for success, because, as shown above, high ROEs must necessarily lead to strong earnings growth, a steady increase in shareholder’s equity, a steady increase in the company’s intrinsic value, and a steady increase in stock price. If Microsoft maintained a 30% ROE and the company never paid a dividend, its net income and TABLE 2. DECREASING ROE PROJECTIONS FOR MICROSOFT: 5% EARNINGS GROWTH Annual Earnings Growth (%) — 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 Begninning Equity 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 ($, mil) $8,000 $10,825 $13,791 $16,906 $20,176 $23,610 $27,215 $31,001 $34,976 $39,150 $43,533 Net Income ($, mil) $2,825 $2,966 $3,115 $3,270 $3,434 $3,605 $3,786 $3,975 $4,174 $4,383 $4,602 Ending Equity ($, mil) $10,825 $13,791 $16,906 $20,176 $23,610 $27,215 $31,001 $34,976 $39,150 $43,533 $48,134 ROE (%) 30.0 24.1 20.3 17.6 15.7 14.2 13.0 12.0 11.3 10.6 10.0 shareholder’s equity would rise at 35.4% annual rates. We also could expect the stock to rise at 35.4% annual rates over long periods. If the stock rose at the same rate that shareholder’s equity increased, the stock would persistently trade at the same price-to-book-value ratio. When evaluating two nearly identical companies, the one producing higher ROEs will almost always provide better returns for you over time. Five other points are worth considering when evaluating ROEs: • High returns on equity attained with little or no debt are better than similar returns attained with high debt. The more debt added to the balance sheet, the lower the company’s shareholder’s equity when holding other factors constant because debt is subtracted from assets to calculate equity. Companies employing debt wisely can greatly improve ROE figures because net income is compared against a relatively small equity base. But high debt is rarely desirable, particularly for a company with very cyclical earnings. • High ROEs differ across industries. Drug and consumer-products companies tend to posses higher than average debt levels and will tend to record higher ROEs. They can bear higher levels of debt because their sales are much more consistent and predictable than those of a cyclical manufacturer. Thus, they can safely use debt to expand rather than worry about having to meet interest payments during an economic slowdown. We can attribute the high ROEs of companies such as Philip Morris, PepsiCo, or Coca-Cola to the fact that debt typically equals 50% or more of equity. • Stock buybacks can result in high ROEs. Companies can significantly manipulate ROEs through share buybacks and the granting of stock options to employees. In the 1990s, dozens of top-notch 6 AAII Journal/April 2001 STOCK SELECTION STRATEGIES TABLE 3. ANNUAL ROE S FOR WARREN BUFFETT’S LARGEST HOLDINGS DURING THE 1990 S 1989 34.2 20.3 42.5 22.8 18.5 23.1 21.0 13.8 1990 35.9 15.3 42.5 19.4 17.1 23.6 19.3 — 1991 36.6 14.3 36.9 21.6 15.4 16.4 12.8 11.8 1992 48.4 8.7 34.3 17.4 16.9 17.4 12.9 7.2 1993 47.7 13.4 40.0 17.7 18.3 17.7 12.9 17.6 ROE (%) 1994 1995 48.8 55.4 21.5 19.0 34.6 32.8 19.0 18.6 20.8 18.0 20.2 20.2 15.1 16.1 16.9 15.8 1996 56.7 22.3 27.4 18.5 19.0 9.5 16.5 15.8 1997 56.5 20.8 29.5 18.5 19.2 10.9 19.8 16.5 1998 42.0 22.7 31.4 15.7 14.0 9.6 13.9 16.4 1999(Est)* Avg 39.0 45.6 21.5 18.2 30.5 34.8 16.5 18.7 16.0 17.6 7.0 16.0 13.5 15.8 14.0 14.6 Coca-Cola American Express Gillette Freddie Mac Wells Fargo Walt Disney Washington Post General Dynamics * Estimated at the time of this writing. companies bought back stock with the stated intention of improving earnings per share and ROEs. Schering-Plough, the pharmaceutical company, posted unusually high ROEs, in excess of 50%, during the late 1990s because it repurchased more than 150 million shares. Had ScheringPlough not been repurchasing stock, ROEs would have been between 20% and 30%. • ROEs follow the business cycle and ebb and flow with yearly increases in earnings. If you see a cyclical company, such as J.C. Penny or Modine Manufacturing, posting high ROEs, beware. Those rates likely cannot be maintained and are probably the byproduct of a strong economy. Don’t make the mistake of projecting future ROEs based on rates attained during economic peaks. • Beware of artificially inflated ROEs. Companies can significantly manipulate ROEs with restructuring charges, asset sales, or one-time gains. Any event that decreases the company’s assets, such as a restructuring or the sale of a division, also decreases the dollar value of shareholder’s equity but gives an artificial boost to ROE. Firms that post high ROEs without relying on gimmicks are truly rewarding shareholders. PREDICTING PERFORMANCE There is some correlation between the trend of a company’s ROE and the trend of future earnings, a point Warren Buffett has made on numerous occasions. If yearly ROEs are climbing, earnings also should be rising. If the ROE trend is steady, chances are that the earnings trend will likewise be steady and much more predictable. By focusing on ROE, an investor can more confidently make assumptions about future earnings. If you can estimate the growth of a company’s future ROEs, then you can estimate the growth in shareholder’s equity from one year to the next. And if you can estimate the growth in shareholder’s equity, then you can reasonably forecast the level of earnings needed to produce each year’s ending equity. Using the Microsoft example, we were able to project a 30% yearly ROE through 2010. That allowed us to calculate the net income needed to produce those figures. Using some simple calculations, we showed that Microsoft’s earnings would grow at 35.4% annual rates. Such assumptions rely, of course, on whether Microsoft can continue to produce 30% yearly ROEs. If the company’s ROE falls short, you cannot expect 35.4% earnings growth. No company the size of Microsoft can continue to grow at 30% rates forever, a factor you must take into consideration when evaluating any stock, particularly today’s less-established technology companies. Warren Buffet’s portfolio of consumer-products and consumer cyclical stocks shows his preference for high, consistent ROEs. CocaCola and Gillette, for example, have steadily posted yearly ROEs between 30% and 50%, an astonishing record for companies that have existed for decades. Nearly all the other public companies in which Buffett owns large stakes boast average yearly ROEs of 15% or better. By virtue of their high internal returns and lower than average capital needs, these companies have managed to generate high returns on shareholders’ money year after year and post earnings growth of between 10% and 20%. Table 3 presents the performance of several of Buffett’s largest stock holdings during the 1990s. 3 From “How to Pick Stocks Like Warren Buffett,” by Timothy Vick. Copyright 2001 by Timothy Vick. Reprinted by permission of the McGraw-Hill Companies. • Look for articles in the Stock Screens area on searching for stocks with high ROE: —“Return on Equity” —“Finding Stocks the Warren Buffett Way” • Buffett Valuation Spreadsheet: Go to the Download Library and look under the category Files From AAII for downloadable Excel spreadsheet for Mac or Windows. AAII Journal/April 2001 7

Warren Buffet The Schumacher of Investing

Best Quote: Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale will give good results

Warren Buffett is by far the most successful investor of all times. He buys businesses that are simple and easy to understand. Once a business has been bought the time to sell it is “almost never”. Warren Buffet tries to look at stocks as pieces of part ownership of businesses. Buffet rarely follows the minute-to-minute fluctuation in stock prices and prefers to stay in the small town of Nebraska. Buffet’s holding period often extends into decades and this particular quote makes for a very interesting reading. In a a recent letter to the shreholders of his company, Buffet wrote:
“We bought some Wells Fargo shares last year. Otherwise, among our six largest holdings, we last changed our position in Coca-Cola in 1994, American Express in 1998, Gillette in 1989, Washington Post in 1973, and Moody’s in 2000. Brokers don’t love us”
Buffet argues that the key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and above all the durability of that advantage.



Key Strategies
• Be focused and buy concentrated portfolios – they perform better. Buying two stocks in every sector will help you create a zoo not a portfolio. A person who diversifies is the one who is unsure of his investments. Buffet once put about half of his wealth in a single stock “American Express” when he believed that the company was into a one off problem.
• Buy what you see and understand. Buffet never bought a single technology company in spite of being a very good friend of Bill Gates.
• Buy businesses not stocks. Buffet advocates investors to be and think like passive a owner of that business
• Understand the Margin of Safety and the Circle of competence. These are Buffet's favourite words. Do not be a jack-of-all-trades buy stocks of businesses that you understand.
• Employ the magic of compounding
• Investing is a full time job (24x7x52). If you can go to a dentist for your teeth, cobbler for your shoes, barber for your hair then why can’t you go for an expert for your wealth.


Piquant styles:

Separated bottle corks from the garbage so that he could know which company sold more cold drinks
• It took him about 2 years to figure out that his room was painted in his absence as he just looked at books inside the room.

• Although he owns a private jet he preferred to stay away from Wall Street in a small town and declined to invest in a company whose CEO took out a brand mew letter pad to explain the company’s plans

• He once invested in a company located on the seashore which had only three sides of its building painted. The side facing the sea was left without paint.

• When his wife spent US $ 15,000 on home furnishing his first comments to a friend were” You know how much is that worth if you compound it for 20 years.


Key learning

Business

Simple understandable – mostly buy what you see category
• Consistent operating history
• Favorable long-term prospects
• Strong Franchises with pricing power. Buffet wanted to hold on to companies that were surrounded by a moat so that your competitors could not squeeze you on prices and profits.

Amongst Buffet’s favorite businesses were Banks. Media and Consumer related stocks. Buffet liked T.V stations as he thought that the fixed capital requirements were low, companies operated with little inventories and negative working capital and had a very high profit margin on sales.



Management.
• Trust worthy managements deserve premium. They should be clear and forthcoming
• Avoid companies with managers following lavish and extravagant styles


Financials
• Look for High Return on Equity (RoE)
• Look for high and stable profit margins


Markets
• Use conservative earning estimates and the risk free rate of return as the discount rate
• Valuable companies can be bought at attractive prices when investors turn away.


Companies to avoid:
• Buffet avoided investing into companies that required a high degree of research. He did not buy technology and pharmaceutical companies.
• Buffet was apprehensive about retailing companies his concern – A company could report good numbers year after year and then suddenly go bankrupt. Buffet avoided investments into aircraft carriers as well.
• Companies that had a very long inventory cycle like farm (agricultural) businesses should also be avoided.
• Buffet advised investors not to put money into Cash guzzling businesses but instead look for businesses that generated free cash flows year after year.
• Commodities were an absolute no - no. Buffet stated that agricultural commodities in particular are dependent upon the mercy of weather, which adds another twist to computation of the probability of an event.


References:
• Warren Buffet – The making of an American Capitalist – Roger Lowenstien
• The Warren Buffet way – Robert.G. Hagstorm.
• The Essays of Warren Buffett : Lessons for Corporate America by Warren E. Buffet

FORD

Ford Motor Company

Company Profile: http://www.investor.reuters.wallst.com/stocks/company-profile.asp?rpc=66&ticker=F

Ratios
http://www.investor.reuters.wallst.com/stocks/Ratios.asp?rpc=66&ticker=F

The CEO MULALLY ALAN R: Declared Holdings
http://biz.yahoo.com/t/18/3950.html

The DEBT to Equity Ratio 16.85. This is figure denotes that the company has a hugh debt and makes investing in this company very risky. But if you look at the balance sheet the long term debt has been decreasing
119,980 05
129,330 04
177,998 03
167,331 02
167,173 01

Analysis:
There is no PE ratio for the company because there is no earnings.
The Debt Equity Ratio is very High.
There are too many analyst looking at Ford. (Actually look for stocks which are not noticed much).

Playtex Products Inc. (PYX)
Analysis:
1.The PE ratio is very high. When the earnings is only 0.19 the price of the share is 13.4. thats not good.
2.The Debt/Equity Ratio is 4.27. Thats way too risky.
3. Profitability is another factor to look at. Its Profit Margin is only 1.86% when the operating Margin is 16.23%. Thats most because it has to payback its debt.

Aarthi Drugs LTD

Wednesday 10th january 2007:
This company's stock price has been decreasing for more than a year. Now It is priced at RS 75. The book value is Rs74.50. The earning per share is at Rs 10.67. After a decrease in operating margin it is at 12.4%. The OPM has actualy dropped 15% from the OPM five years ago. The ROE is 15%, 25% less than five year old ROE(20%). The market is very competitive and the margins are very low. The promtores hold 51% and the forgein holdings and Govt togather hold 10 %.

Pros

• The company is paying Continuos dividend year after year.
• Continuous increase in EPS except for year 05.

Cons

• This business is generating a Net profit margin of a meagre 4.7 %.
• The Debt Equity ratio looks dangerous at 1.97. Last years figure was 1.73. The debt Equity ratio has been continously increasing from 1.28(Mar02).
• The inventories have risen to 62 crores from previous years 52 crores.

The main thing to worry about is the hugh debt equity ratio.

			Mar07	Mar08	Mar09	Mar10	Mar11	Mar12	Mar13	Mar14
ROE			0.00	12.98	13.59	20.92	0.00	24.48	23.56	26.92

Stocks I dumped (SOLD)

I alway try to make sure that I dump the stocks whose fundamentals does not look favorable. Some of the stock which I sold recently was Nava Bharat Ventures(Few shares) and MTNL. The reasons for selling was different.

Sold ONGC on the grounds that wonderful business managed by a government which cares less about the minority shareholders interest of adding value by putting burden of covering the loss of oil companies on its business. Should the interest of the shareholder come secondary to other stakeholders if not equal?

AEONIAN Investment Company Ltd

Tuesday, 2nd January 2007:
The industry structure relevant to the Company's operations is mainly concerned with the Capital Market and to a lesser extent with the Mutual Fund Industry. The Company handles its investments in capital market mostly through reputed Portfolio Managers and to some extent on its own.

In order to increase the liquidity of Company's Equity shares in the capital market the Nominal Value of Equity shares of Rs.10/- each was sub - divided into Shares of Rs.2/- each with effect from 01.09.2005.

History:
Started in 1981. The promoters hold 86.96 percent.

Financias:
Market Price Rs 214
Face Value: Rs 2
Equity Capital: 0.96 Cr
The EPS is Rs 31.29 for Mar 06 and the book value is 129.79. The average net profit margin and the operating margin has been above 60% and 68 % respectively for 5 years.
The company has zero debt and the ROE for Mar 06 is 27 percent (last yeras was 20 percent).

DJS Stock & Shares Ltd

Tueday, 2nd January 2007:
This is a financial arm of LMW group. The promoters holding is around 83%. The Company has zero Debt.

Product Name Sales
Brokerage 1.92
Income from Trading 1.75
Interest 0.28
Dividend 0.07

Current Price is Rs 9.45. The Book Value for mar 06 is 20.52. The current ratio is 1.96 for mar 06 with current asset 13.92 crs. The companies has equity capital is 5 crs and reserves of 5.29 crs. The management says it does speculate in trading and since 50 % of its sales comes from brokerage, the price is Rs 9.45 is a bargain.

Note:
Saturday, 6th January 2007: This company comes in Z category and I am having difficulty in buying it. Actually the price has come down to 9.1 rs.

Indian Toners & Developers Ltd.

20th November 2006 - Why we think you should buy Indian Toners & Developers Ltd. (Abstract)

Current price - Rs. 28

Potential price - Rs. 70.
ITDL is quite a find, if I say so myself. It's a company that is in a vertical with a fairly limited number of serious players - they make toners for printers, photo-copying machines etc. In fact, it is one of the largest in India. They also have a global presence - they currently have offices in UAE, Singapore and USA. They are planning a presence in China. They currently export to 29 countries across the globe.

Already, they can produce 1200 mt of toners a year - and in a couple of years, that capacity will be doubled.

Now, the numbers. The first thing that made me smile about their balance sheet was that ITDL is a debt-free company. This means that they can be more agile and risk-taking than similar companies that do have interest costs and associated operating risk. With a trailing EPS of Rs. 5.66, the trailing PE of the company is only 5.1 - this is excellent - definitely so when compared to the absurd valuations of companies like Hindustan Inks (Micro Inks). Next, they have a free-cashflow to enterprise-value ratio of about 4 - very attractive. Also, it has cash, reserves and cash-equivalents of about Rs. 8 a share - giving it a real price of only Rs. 20 a share.

Finally - some valuations. From a discounted cashflow point of view, if we assume a conservative growth of only 10% a year - this company is worth closer to Rs. 72 per share. If it grows even at 15% then this number is closer to Rs. 100 per share. This essentially means that the stock price can go up two to three times from its present value! Medium to long-term investors can start accumalating the stock right away.

Need to check this company! Alpha Hi-tech Fuels Ltd Message List

Alpha Hi-tech Fuels Ltd.
Overall: BUY
Potential: 8-10 times
Time-frame: 3-4 years

Alpha Hi-tech Fuels Ltd. is a small company based in Gujarat India. Gujarat is not a place that conjures up visions of super-successful companies and individual investors making it big byinvesting in them. But, lets talk about this company with its BSEcode of 531247.

Waste Management Inc., is the name of a company in the United Statesthat Peter Lynch talks about in his book One Up On Wall Street. Itwas a 100-bagger. Yup, you read that right.

So, what has that got to do with Alpha HiTech (ALPHIT)? Just this -industrial waste (even domestic waste) is a big deal. There's tonnes of it generated every day and ALPHIT takes care of it. Large industries want to pay someone so they can wash their hands of managing this large amounts of garbage, rubbish, industrial wastesand trash. What can be simpler than paying someone to just that?

How many companies are in this business? I looked around a little...and there aren't many. Now, what does ALPHIT do with all this waste?It converts most of it into alternative fuel! As companies try to reduce their energy bills, they look to see what their options arewhen it comes to running their mills, boilers, what have you. With crude prices well above $50 a barrel and looking to continue their climb, alternative fuels are getting more and more important by theday... enter ALPHIT.

How about the financials? ALPHIT is a small company. A micro cap, youmight say. But for its size, the financial picture is sharp.

First of all sales have grown from 37 lakhs to more than 1 crore last year. Net profit margins are more than 50%. It has no debt and has cash reserves of more than 1 crore. Considering that it is trading at12 rupees a share right now, you can discount 30% of this cost purely from the cash it is carrying (it doesn't have that many outstanding shares!).

From a cash-flow valuation perspective, with a conservative forecast of only a 10% growth of its more than Rs. 12 earnings-per-share this past year, I value the share at more than Rs. 200. By the way, almost 78% of its shares are with the individual investors and almost 12% is with the owners, who incidently, have been running the company for the past several years.

With (almost) no other players in this market, ALPHIT is very wellpositioned to make good on its potential. Definitely a buy!


Note:

Friday 29 December 2006: I just accidently came across my old posting in my yahoo groups "Intelligent Investor". This compnay has no debt and produce fuel by waste management. Company operates only in one segment, i.e., making Bio-mass briquettes out of agriculture waste. The operating profit is 50 percent and more. I brought 50 shares at Rs 4.40. I would keep investing in it. The book value is 17.85 and the share trade at around Rs 4. This is definitely a bargain. The company has been able to continuosly improve its operating earnings.

Tuesday 2nd January 2007:
The total equity is 3.68 crores with the face value of Rs 10. So the total number of shares is 3.68 million. I like would buy 1 percent of the company in the coming year. Currently I need to buy a total of 36800 shares.

Today I got 2450 shares and now totally I have 2500 shares and an average of 4.64 Rs per share.

Saturday 6th January 2007:
I got delivery of 5000 more shares today taking the total to 7500 shares. I am actually hurrying up buying this company when the price is shooting up. In fact I had purchased it after the stock rose 30 percent higher. Actually Iam buying at a considrable discount to the book value of 17.85 rs per share. This is truly a bargain stock.
cons:

The promoters hold a small stake around 4.39 percent. Actually the promoters have still reduced their stake of 12% mentioned in the above article. Point to note: The market price at that time was Rs 15-20.

The Company has stopped its production from and this is the reason mentioned in the director's report.
"With the change in management and for re-design of the production routines to secure enhanced operational convenience, the production, which is at halt since, 01.08.2005, is scheduled to commence on its result oriented alignment. To ensure enduring potential, growth strategy is under consideration. Ploughed back resources are being used to match the need of the recent developments. "

pros
Govt and Financial Institutions hold zero percent.

Warren Buffet Letters to the shareholders

http://www.berkshirehathaway.com/letters/letters.html

Investment plan

22nd december 2006

Income streams:

• Monthly Income from business, salary and others.
• Income from interests and dividends.
• Having and increasing income streams.

Investing method

1. Search Strategy
2. Valuation Strategy
3. Discipline

Portfolio:

• Having 20% in Cash to meet the day today expenses.

22nd december 2006: Currently portfolio A has 5.45% cash, portfolio B has 2.16% cash and both put togather has only 3.69% cash.

• Having the balance in equities, mutual funds and real estate.

22nd december 2006: Portfolio A has 0.32% in mutual funds and Portfolio B has 6.4% in Mutual funds and both put togather has 2.7% in mutual funds.

• Depending on the risk appetite the ratio of equities and the mutual fund can be changed. I would prefer to have total exposure to equities.

wednesday, 27th december 2006: My investment habit started on 13/1/98 though I have been investing before that. Actually I had federal bank shares that my father gave me. He had bought it the primary market. It gave me a decent return. My intial investment works around to roughly a lakh. Currently it has given a return of 525% return for 8 years combined. That works out to a compounding growth of 23%.

Thursday 28th december 2006:

Long time since I did my last purchase. I invested in 250 shares of GTL Infrastructure Limited which is a spin of from GTL Limited. Actually the business proposition is good. But the purchase is not in a value investment point of view. The GTL Ltd actually has fundamentals and the promoters hold more than 40%. The business made a operating profit of 6 crores but the depreciation cost dragged the bottomline to red. It constructs and maintains towers for telecomunication companies. After the intial capital outflow, the company will have sustainable cash inflows. This kind of venture has been profitable in the US.

I have been looking into the shares of Gujarat NRE Coke. The fundas are good and the comapanies share is priced at 27. Investing in it would be a value buy since the book value is around 40.

Amar Remedies: Story

http://finance.yahoo.com/q?s=532664.BO

12 december 2006

Pros:

• Revenues has grown from 27 cr to 167 crs is 600 percent in the past five years.
• ROE is consistently above 20 and this year its 36.
• The average DE ratio is 0.57 for 5 yrs
• Current PE is 8.
• Book Value is 33.

ITC: Thinking of selling

ITC has a PE of 35. I chose the stock actually by mistake. Actually I purchased it after stock split to 1 re per share. I calculated the PE wrongly, thought it was around 5. Other wise the stock is a good buy. For Mar 06 the PB ratio is around 8. The Debt equity ratio is negligible and the Cash EPS is around 30. The Free cash flow is growing. A 1Re of ITC share has a market price of Rs180 now.

All good except the PE. I am considering to sell as the market has overpriced the company.

Bharat Petroleum Ltd

3rd december 2006

I had bought Kochi Refineries as it was a value stock. Since it is now merged with BPCL now the fundamentals of this company has changed. The stock now trades at Rs 340 with a 52 day high and low at Rs 502 and Rs 291 respectively. The total shares outstanding is Rs 300 million whereas the total market capitalisation is Rs 102 Billion. The Book value is around 252.79. The debt equity ratio is high at 0.92.

City Union Bank Ltd

L&T to buy 10% in City Union Bank
December 01, 2006 02:53 IST

Engineering major Larsen & Toubro will pick up nearly a 10 per cent stake in the Kumbakonam-based City Union Bank for Rs 45 crore.
The company will subscribe to the preferential allotment of 2.66 million equity shares, representing a 9.99 per cent stake in the post-issue equity of the bank, at Rs 169 apiece. The allotment is subject to the approval of the Reserve Bank of India.
The City Union Bank board on Thursday approved the issue of preferential shares to L&T. The City Union Bank stock closed at Rs 170.70 on the BSE, 4.88 per cent higher than Wednesday's close of Rs 162.75.
The proposed move of L&T is aimed at leveraging the strength of the bank and L&T's financial services firm L&T Finance. "Also, it provides an investment opportunity in the banking sector, which has been doing well for quite some time," said an L&T executive.
It is not clear whether L&T's financial services arm will be the investment vehicle for the acquisition of the bank's stake.
It is learnt that L&T will seek permission from the apex bank for acquiring the stake.
RBI norms allow a corporate entity to pick up up to 5 per cent stake automatically and up to 10 per cent with the apex bank's permission.
However, scaling up of stake beyond 10 per cent in a bank by a corporate entity is not allowed.
The 102-year-old bank, formerly known as Kumbakonam Bank, manages over Rs 3,500 crore in deposits and its advances portfolio increased by Rs 537 crore in the 2006 financial year.
In FY 2006, CUB's total income stood at Rs 184.14 crore with a net profit of Rs 56.37 crore. It's operating profit increased to Rs 109.15 crore from Rs 81.67 crore in 2005.
The bank slashed its NPA liabilities on net advances down to a mere 1.95% in fiscal 2006 from 3.37% in fiscal 2005.

Cheviot Co. Ltd.

Report Dated: 30 th January 2005

HISTORICAL BACKGROUND
:
•
This Kolkata-based jute major was promoted by the Kanoria group more than
100 years ago has been operating as a 100% EOU (Export Oriented Unit) and
is today, by far the
most profitable jute manufacturer in the country.
•
Its second plant at Falta (FSEZ) (a 100% EOU) in West Bengal commenced
commercial production on March 27 th 2003. Both its units (the other being
at Budge Budge) are engaged in manufacture of high-grade industrial
fabrics.
•
Over the past few years, the company has embarked upon a modernization and
diversification exercise and has this endeavour has largely been met with
success.
•
Occasional labour unrest is somewhat inherent to the jute industry and
Cheviot too has had its share of the same in 1998, 2000 & 2004. Its
operations though have remained largely unaffected.
•
Its captive power plant became operational in January 2003, thereby
enabling the company to secure itself in the wake of frequent power
failures prevalent in West Bengal.
BSE Code
526817
Promoter Holding 73.13%
CMP Rs.
512
Market Capitalisation (Rs. In crores)
154
2
•
In keeping with Company's strategy to focus on its core business of
manufacturing value added items of jute goods, the Company is taking
effective steps to expand operations at its 100% Export Oriented Unit at
Falta Special Economic Zone, by setting up a backward integration project
to create facilities to manufacture jute yarn as per permissions granted by
the Government of India.
The proposed expansion of the aforesaid Falta Unit would be advantageous
and can be conveniently carried on along with its existing operations and
would ultimately make it an integrated unit manufacturing and exporting
value added jute fabrics and yarn. The work on the said project is expected
to commence soon.


OVERVIEW OF THE JUTE INDUSTRY:
•
India is the world’s largest jute producer followed by Bangladesh, China,
Myanmar, Thailand & Nepal. India and Bangladesh together account for more
than 90% of total world jute production as also the total world area under
jute cultivation. India was 2.6 times the size of Bangladesh in terms of
both area under jute cultivation and jute production.
•
In terms of yield per hectare though, China leads the race with 52% higher
yield than India but since China’s total jute production is just 7% that of
India, this is not very significant.
•
Within India, around 70% of the jute production comes from West Bengal and
productivity in terms of quintals/hectare is also highest in W.B. The rest
of the production comes from Bihar, Assam, Andhra Pradesh, Orissa,
Meghalaya, Tripura & others. This production pattern is in line with
cultivation patterns.
•
The Indian jute industry has been facing very difficult times over the last
few years. Losses have been mounting. In the 3-year period from FY00 to
FY02, aggregate losses for the industry went up from Rs.344.31 crores to
Rs.418.67 crores. This number though has since been falling and stood at
Rs.387.27 crores in FY04.
•
Out of 74 companies in the jute industry, only 33 were profit making during
2003-04.
•
Operations at as many as 13 jute mills stood suspended as at October 2003
and as many as 30 jute mills were BIFR cases.

3
•
Due to mounting losses in the industry, the total capital employed has
eroded fast and stood at negative Rs.1939.7 crores as at the close of FY04.
Cheviot’s capital employed stood at positive Rs.110.82 crores as on the
same date.
•
To put things in perspective, most of the losses were resulting from the 6
jute mills controlled by the Government owned NJMC (National Jute
Manufacturers Corporation) and if one excludes these, the picture is
materially different. To illustrate this, between 2001-02 and 2003-04, the
losses from NJMC & 2 other Govt. owned mills increased from Rs.376.9 crores
to Rs.447.16 crores, the rest of the industry recorded a sharp turnaround,
reporting a net profit of Rs.59.89 crores in 2003-04 as against a loss of
Rs.41.76 crores in 2001-02. (Source: Office of the Jute Commissioner,
Kolkata). A similar trend was also seen in the capital employed figures.
•
The jute industry got a breather by way of the TUFS (Technology Upgradation
Fund Scheme) w.e.f 01/04/99, which enabled textile and jute manufacturers
to avail of loans for modernization at lower costs. As per the scheme
which remains valid upto 31/03/04, the fund would be used to re-imburse 5%
of the interest cost paid by the company to the approved lender.
•
Until 15/10/05, Rs.80.36 crores of assistance under TUFS had been
sanctioned, out of which Rs.69.47 crores had already been disbursed.
•
A number of jute manufacturing facilities have closed down over since May
2005, in view of the non-availability of raw jute and rising prices
thereof. However, the Government’s recent moves to control prices have
brought some stability. In fact, the JCI termed the high prices as
extremely speculative, given the better crop output and 21 lakh bales of
surplus carryover.
All this means better margins for jute manufacturers.
•
Presently, the jute industry’s major products include hessian, yarn,
sacking, CBCs & JDPs. There is however, great potential for the use of
Jute Geo-textile (JGT) in roads, particularly in rural areas. JMDC has
entered into a MoU with the National Rural Roads Development Agency
(NRRDA), to undertake a Pilot Project in rural roads under PMGSY with Jute
Geotextiles. The Pilot Project will cover at lease two stretches each in 6
states totaling to around 50 km. Successful completion of the project is
expected to bring a new future to the Jute Industry.
•
The National Jute Policy 2005 of the UPA Government is targeting a 15% CAGR
in quantity terms for jute and jute products. In value terms, the targets
are even more optimistic and are expected at Rs.5000 crores by 2010 as
against Rs.1000 crores in 2005.

4 .BUSINESS PROFILE
:
•
Let us now evaluate Cheviot’s performance in light of the grim industry
outlook painted above.
Cheviot has thrived in spite of the poor business environment.
•
Exports as a percentage of total sales have been rising and stood at 72.25%
in FY05. Margins in the export market are much higher than those in the
domestic markets. Cheviot exports fine yarns to Belgium, U.K., Germany,
U.S.A., Holland and other countries.
•
The company has increased its focus on value added items of jute and jute
blends thereby improving its product mix.
•
Cheviot is a niche player and one of the lowest cost producers of jute in
the country. Cheviot enjoyed the highest pre-tax profitability margin in
the industry at 12.27% in 2003-04 as against the industry average of 1.73%.
To put things in perspective, Birla Jute (division of Birla Corporation
Ltd.), which is the largest listed player, had a profitability of just
3.35%.
Profitability for Cheviot has improved to 14.89% in 2004-05 and
15.38% for the 9 months ended December 31, 2005 (after excluding Rs.6.27
crores of one-time income that was included in the net sales for the
period)
It would only be fair to say that Cheviot is an exception to the otherwise
ailing jute industry.

FINANCIALS
:
•
Summarised below are the financials for the last 5 years:
(Rs. in million)
FY05
FY04
FY03
FY02
FY01
Income :
Operating Income
1,492.93 1,416.13 1,317.03 1,215.49 1,041.40
Expenses
Material Consumed
672.08
553.28
585.30
617.89
477.66
Manufacturing Expenses
94.60
235.55
115.57
101.51
90.22
Personnel Expenses
257.60
232.82
237.00
215.08
210.62
Selling Expenses
108.99
89.04
76.65
71.43
103.05
Administrative Expenses
74.52
67.35
55.00
65.16
48.32
Cost Of Sales
1,207.78 1,178.04 1,069.50 1,071.06
929.86
Operating Profit
285.15
238.08
247.53
144.43
111.55

5
FY05
FY04
FY03
FY02
FY01
Other Recurring Income
1.86
2.68
3.35
14.11
3.22
Adjusted PBDIT
287.02
240.76
250.87
158.53
114.76
Financial Expenses
1.61
7.56
3.63
1.65
4.68
Depreciation
70.14
72.77
40.97
36.26
38.85
Other Write offs
0.00
0.54
0.54
0.54
0.54
Adjusted PBT
215.27
159.90
205.74
120.09
70.70
Tax Charges
31.29
7.66
27.72
13.70
11.00
Adjusted PAT
183.98
152.24
178.02
106.39
59.70
Non Recurring Items
6.91
13.83
-0.34
3.29
1.67
Other Non Cash adjustments
0.01
1.46
48.34
-1.19
6.43
Reported Net Profit
190.90
166.07
177.68
109.68
61.37
Earnings Before Appropriation
206.08
182.33
236.80
115.39
75.21
Equity Dividend
30.08
24.06
15.07
9.04
7.54
Retained Earnings
171.73
155.19
219.80
106.34
66.90
Operating income and material consumed for FY01, FY02 and FY03 are
inclusive of inter-unit sales.
•
It is clear from the above statistics that
Cheviot’s operating profits
have grown at a CAGR of 20.6% over the last 5 years, which by any
standards is commendable.
•
The topline has grown at a CAGR of 10% during the same period (on a
normalized basis), which shows that the growth has been led by cost
cutting and improvement in sales realisations brought about as a result
of moving up the value chain.
•
The performance for the 9 months period ended December 31, 2005 along
with comparatives is shown below:
Description
YTD FY06
YTD FY05
Net Sales
1,184.5 1,074.9
Other Income
19.7 8.1
Total Income
1,204.1 1,083.0
Expenditure
(918.3) (851.7)
Operating Profit
285.9 231.3
Interest
(0.6) (1.4)
Gross Profit
285.3 229.9
Depreciation
(50.1) (51.3)
Profit before Tax
235.2 178.7
Tax
(36.9) (26.8)
Profit after Tax
198.3 151.9
EPS
65.91
50.48
Value (Rs. in million)

6. The bottom line growth of 30.6% on a topline growth of 10.2% is
commendable. EBITDA margins rose by 170 bps to 22.5% from 20.8% in the
year ago period. This is despite substantial reduction in export market
assistance (EMA) w.e.f. April 05 and higher raw material and fuel
prices.
•
As on March 31, 2005, Cheviot had cash and liquid investments of
Rs.361.4 million (Rs.120 per share), thereby providing a margin of
safety to investors.
•
The table below shows the key financial ratios of the company for the
last 5 years, which makes it evident that
Cheviot is in the pink of
financial health.
Key Performance Indicators
FY05
FY04
FY03
FY02
FY01
PER SHARE RATIOS
Adjusted E P S (Rs.)
61.17
50.62
59.05
35.29
19.80
Adjusted Cash EPS (Rs.)
84.49
74.99
72.82
47.50
32.87
Reported EPS (Rs.)
63.47
55.22
58.94
36.38
20.36
Reported Cash EPS (Rs.)
86.79
79.59
72.71
48.59
33.42
Dividend Per Share
10.00
8.00
5.00
3.00
2.50
Operating Profit Per Share (Rs.)
94.81
79.16
82.11
47.91
37.00
Book Value Per Share (Rs.)
480.43 431.75 591.33 382.89 341.29
Free Reserves Per Share (Rs.)
333.09 281.04 233.22 163.71 119.12
PROFITABILITY RATIOS
OPM (%)
19.10
16.81
18.79
11.88
10.71
GPM (%)
14.40
11.67
15.68
8.89
6.98
NPM (%)
12.77
11.70
13.45
8.92
5.87
Adjusted Cash Margin (%)
17.00
15.89
16.62
11.64
9.48
Adjusted RONW (%)
17.81
17.37
24.24
20.28
15.30
•
Other listed companies engaged in jute manufacture are Birla Corporation
Ltd., Champdany Inds. Ltd. & Willard India Ltd. While Birla Corp. &
Willard are diversified companies, Champdany is a dedicated jute
manufacturer. All 3 companies have suspended operations at most or all
of their jute mills since the last few years due to illegal strikes
and/or unviability of operations. Cheviot is the only company to
increase capacity in recent times.

7. INVESTMENT RATIONALE
:
•
The Cheviot stock has nearly quadrupled since I initiated coverage of
the stock at Rs.140 per share in November 03. In spite of this, the
stock remains grossly undervalued.
I believe that the re-rating on the stock is far from over.
Its valuation parameters are discussed below:
Cheviot trades at a price to book of just 1.07 times based on its FY05 book
value of Rs.480 per share and below its expected book value of Rs.550 per
share for FY06.
Cheviot’s PE Ratio based on projected FY06 EPS of Rs.80 stands at 6.4
times. Champdany Industries trades at a PE ratio of 29.7 times its
annualized EPS for H1FY06.
Cheviot’s dividend payout has been increasing steadily and the company is
expected to pay Rs.12 per share for FY06.
The company’s margins, on the operating, gross & net levels have been
increasing steadily.
Cheviot’s reserves have been swelling at a rapid pace and it is a likely
bonus candidate.
Cheviot’s cash position has been improving for the last 5 consecutive
years.
Cheviot is sitting on sizeable real estate assets (Rs.85 crores as at FY05,
as revalued as on FY03). The market value of these assets would have
appreciated significantly and given that the company has already amended
its objects clause to include real estate development, any concrete moves
in this direction could provide additional triggers.
•
The jute industry is perceived as substitute to cotton in certain areas
and with rising cotton prices, jute manufacturers will also see their
margins increasing.
•
The industry’s future hinges on introduction of new innovative
applications for jute products and Cheviot with its strong cash flows is
well placed to invest in R&D.

8. In September 2004, Indian jute exporters in general and
Cheviot in
particular got a shot in the arm, with the lifting of anti-dumping
duties in Brazil.
After a protracted legal battle by the Jute Manufacturers Development
Council (JMDC) which lasted for 7 years, the Brazilian Government has
lifted the Anti-Dumping Duty on import of jute bags into Brazil for 5
Indian jute companies, including Cheviot. (USD 0.77 per kg)
This augured well for penetrating into the vast Brazilian market for
food-grade jute bags for packaging coffee and cocoa beans.
•
The continuation of the compulsory jute packaging for food grains &
sugar to the extent of 100% & 90% respectively has been a big positive
as far as demand for jute packaging material is concerned. In fact, Mr.
Budhadev Bhattacharyya, CM,
West Bengal, has been pushing for 100% jute
packaging for both. The JMDC has been lobbying for compulsory jute
packaging on similar lines for all industrial products too. Jute is an
eco-friendly substitute for plastic.
Even in an eventuality where compulsory packaging is phased out, Cheviot
will be least affected, given that its sales predominantly come from
exports and it manufactures high value non-traditional diversified jute
yarns and fabrics.
•
The world’s no.1 retailer Walmart’s recent decision to source $5 billion
from India by 2010 could benefit the jute industry in the longer term.
•
In the post-2005 free trade environment, with removal of QRs on all
products, efficient exporters such as Cheviot could benefit.
•
Given these positives, the stock is likely to outperform in the medium
term. Accordingly,
a conservative 12-month price target of Rs.800/- is
set on the counter. At this price, the stock would trade at just
10xFY06-projected earnings, which is very reasonable, given its
prospects.



The company distributed dividend of 13 rs for the year 2011-12.


Notes:
Essay on development of jute textile industry In India

Swot Analysis of Indian Jute Industry at www.indiantextilejournal.com

Jutecomm.gov.in/indostry_intro.htm

TATA SPONGE

Tata Sponge to invest Rs 800 cr in Orissa Business Standard— July 20, 2005
Tata Sponge Iron has lined up an investment of Rs 800 crore for capacity expansion at the existing premises at Bilaipada near Joda, in the Keonjhar district of Orissa. Ashok Pandit, managing director of Tata Sponge, said the board has given an in-principle approval for setting up three kilns and three additional power plants and this would be done in phases. This would take the capacity of the plant to 8.4 lakh tonne per annum, an increase of 115 per cent. The total investment would be to the tune of Rs 800 crore, out of which, 25 per cent would funded through internal accruals and the balance would be debt funded. "We are not looking at equity funding" said Pandit. The kilns would be put up at a gap of one year but everything would depend on the market situation. He said the gap could be brought down to six months also. At present, the board has approved an investment of Rs 300 crore for installation of the fourth kiln of 1.5 lakh tonne per annum capacity and a captive power generational facility of 18.5 megawatt (Mw) capacity along with other related facilities. After the first phase of expansion, the installed sponge iron manufacturing capacity of the company would increase from 3.9 lakh tonne per annum to 5.4 lakh tonne per annum. Out of this, 1.5 lakh tonne per annum was currently under implementation. The capacity expansion was part of a growth plan to enhance the sponge iron manufacturing capacity to 8.4 lakh tonne in a phased manner. Further, the captive power generation facility would increase to 44.5 Mw, including the captive power plant of 18.5 Mw currently under implementation. The plant was initially designed for a production capacity of 90,000 tonne per annum which was enhanced to 1,20,000 tonne per annum through various modifications during 1990-91. Later, to cater to the growing demand of quality sponge iron, Tata Sponge doubled its capacity by adding another kiln of equivalent capacity in 1998-99. In December, 2001 Tata Sponge commissioned a 7.5 MW captive power plant to produce electricity from the waste heat of exit gases of its second kiln. Tata Sponge was incorporated in 1982 as a joint venture of Tata Steel and the Industrial Promotion & Investment Corporation of Orissa Limited (IPICOL). It was set up for the production of sponge iron based on the Tisco direct reduction (TDR) technology. Later during 1991, Tata Steel acquired IPICOL's stake and at present Tata Sponge is a sister company of Tata Steel.

Entertainment Network India Ltd

Radio Mirchi
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Radio Mirchi Logo
Radio Mirchi is a nationwide network of private FM radio stations in India. It is owned by the Entertainment Network India Ltd (ENIL), which is one of the subsidiaries of The Times Group.
"Mirchi" is Hindi for chilli. The tagline of Radio Mirchi is "It's hot!".
The original avatar of Radio Mirchi was Times FM, which began operation in 1993. Until 1993, All India Radio or AIR, a government undertaking, was the only radio broadcaster in India. The government then took the initiative to privatize the radio broadcasting sector. It sold airtime blocks on its FM channels in Hyderabad, Mumbai, Delhi, Kolkata and Goa to private operators, who developed their own program content. The Times Group operated its brand, Times FM, till June 1998. After that, the government decided not to renew contracts given to private operators.
In 2000, the government announced the auction of 108 FM frequencies across India. ENIL won the largest number of frequencies, and thus started its operations under the brand name Radio Mirchi.
In January 2006, Radio Mirchi bagged 25 frequencies in the second wave of licences that were issued by the Government of India. This pushes the Radio Mirchi presence in 33 centers. In the first wave of launches, It launched recently in April in Bangalore ,which has been a spectacular hit among the folks.It is giving a healthy competition to Radio City in the city.

[edit] Areas of operation
Currently, Radio Mirchi has a presence in 10 cities, including the 4 metros of India:
98.3 FM - Ahmedabad '"Mirchi Sunanevale ALWAYS Khush. Its HOT! !! " in Ahmedabad.'
98.3 FM - Bangalore It uses the tagline "Sakat hot maga!" in Bangalore.
98.3 FM - Chennai It uses the tagline "Idhu sema hot machi!" in Chennai.
98.3 FM - Delhi
98.3 FM - Hyderabad It uses the tagline "idi chaala hot guru!" in Hyderabad.
98.4 FM - Indore
98.3 FM - Jaipur
98.3 FM - Kolkata
98.3 FM - Mumbai It uses the tagline "Its HOT!" in Mumbai.
98.3 FM - Pune
It claims to reach almost 70% of FM radio listeners in Mumbai and Delhi. In Ahmedabad, Pune and Indore, it is the only private radio broadcaster. Radio Mirchi has started providing Visual Radio to its subscribers in Delhi from 25 july, 2006 onwards and would be started soon in Mumbai.

Notes
Pros:
1. Zero debt as on 25.11.06
2. The share capital has reduced from 1169.9 to 339.18 for the year 05 to 06. I need to check for insider trading. Actually it could be because of "Adjustment on account of reduction of Share Capital/Securities Premium Account (Refer Note 2 (f)(iii) on Annexure V)"
3. Promoters holding is more than 71 percent.
4. Strong brand power.
5. Around 3 percent held by Institutions.

Tata POWER

Pros

1. Dividend Growth:
06 85.00
05 75.00
04 70.00
03 65.00
02 50.00

2. Earnings Growth:
06 29.66
05 26.80
04 25.72
03 26.27
02 25.68

3. Consistent Reduction is administration and other expenses

4. Cash and other cash items
06 990.55+18.06 secured loans 946
05 979.60 +12.87 secured loans 1059.07
04 51.90
03 126.41
02 307.01

5. Rise in Book Value
06 990.55
05 979.60
04 51.90
03 126.41
02 307.01

6. Dividend History
1994
25%
1995
28%
1996
30%
1997
35%
1998
35%
1999
37%
2000
37%
2001
42%
2002
50%
2003
65%
2004
70%
2005
75%
2006
85%

Cons
1. The cash position is only just sufficient to meet the secured loans. The cash position will have to improve further.

Nov 27, 2006
Tata Power Company advances following Q2 results
As many as 1.51 lakh shares were traded in the counter on BSE.
The stock witnessed a steady rally since late-October. From Rs 528.15 on 26 October, it rose steadily to Rs 576.50 by 24 November 2006, as buying continued.
Tata Power Company posted 60.99% rise in net profit to Rs 202.32 crore for the Q2 September 2006 as compared to Rs 125.67 crore for Q2 September 2005. Total income increased to Rs 1279.17 crore (Rs 1097.21 crore).
On 23 November, Tata Power signed a joint venture agreement with Tata Steel for captive power plants in Chattisgarh, Orissa & Jharkhand. This joint venture aims to meet the power and steam requirements, to facilitate expansion of Tata Steel in the three states. Tata Power will hold 74% equity in the venture, with Tata Steel holding 26%. Under this agreement, Tata Steel will consume power generated from these power plants, meeting the requirements of captive plant norms stipulated by the Government of India’s captive power plant policy.
Tata Power had recently formed an EPC (engineer-procure-construct) consortium with Siemens Power Generation, Germany and Doosan Heavy Industries & Construction, South Korea, for the design and construction of power plants based on super critical technology.
Source: Capital Market