April 21, 2017

Q&A: Predicting Performance, Warrants, Credit Rating Reports, Tracking Portfolio Performance, CF

www.drvijaymalik.com has a section dedicated to answering queries of readers: “Ask Your Queries”. Over time, many readers have asked their queries related to many aspects of stock analysis and sought clarifications about investing. I have responded to these queries as replies to their comments.

“Q&A” series is an attempt to share the queries & their responses, which have featured on “Ask Your Queries” section, with all the readers. The primary aim of this new feature is to share the knowledge with other readers of the website, who might have similar queries.

The current article in this series provides responses related to:
  • Predicting future performance
  • Allotment of warrants to promoters on preferential basis
  • Accessing credit rating reports
  • Making investment decisions amid uncertainties
  • Tracking portfolio performance
  • Cash flow statement
Answers to readers' queries related to Predicting Future Performance, Warrants, Credit Rating Reports, Tracking Portfolio Performance, Cash Flow

Query


Hi Dr.

I am grateful for the help that you are providing to the community, hopefully, I will be able to repay this by providing a good stock idea to you :) Currently, I have a couple of queries.

I am currently studying a ₹50cr Mcap company, which is available at ~19 PE but has a good margin of safety (MOS) built in the business. However, the only concern is if the business will continue to grow in the future or not. Recent years growth has slowed down though the market capitalization (Mcap) has been almost 3X due to the bull market.

Questions are:
  1. How do we know if the company will continue to grow, especially when it’s a small cap? Overall market size 1800 cr. Last 10 yrs growth 11% recent 3 yrs 5%.
  2. Related to above rest all the parameters have improved. How do I assess whether the company is at its peak and the only way in future is only flat or downhill?
  3. The company has almost no debt so no rating though it operates in Textile industry.

I will share a detailed analysis with you in case I get convinced about the future prospect.

Looking forward to your response.

Regards,

Author’s Response:

Hi,

Thanks for writing to us! We are happy that you found the articles useful!

We notice that your queries primarily relate to the predicting future business performance and couple it with future stock price performance.

We do not believe that we can predict the future in such situations. We do not know whether any company would show higher revenue or lower revenue next year. Similarly, we do not know whether the parameters would improve or deteriorate going ahead.


In our assessment, we invest in companies, which have profitable growth, are generating free cash flows after meeting their capex requirements and are conservatively financed. Whenever we find such a company and believe that it is run by a competent and shareholder friendly management, then we invest in such companies for the long term. This has been our investment approach.


We believe that a competent management should take the business to greater heights in future.

Simultaneously, the presence of a margin of safety (high SSGR and positive FCF) should help us tide over tough economic periods. Both these factors should help the business to grow in future and in turn create wealth for shareholders.


However, when or whether this would actually happen is anybody's guess. This requires faith in the management and that's what we do as minority shareholders.

Hope it clarifies our approach to you.

All the best for your investing journey!

Regards

Dr. Vijay Malik

Query


Warrants:


Doc, I recently came across situations where bankers force promoters to infuse money in a stressed company to disburse fresh loan or restructure existing loan.

Promoters may not have sufficient capital available to infuse and may use warrant route to infuse part money for the time being and rest after 18 months. Bankers tend to take comfort and disburse/restructure the loan basis the warrant issuance.

Please provide your inputs.

Regards

Author’s Response:

Hi,

Thanks for writing to us and providing your valuable inputs.

We believe that in a stressed company which is undergoing restructuring, the lenders are happy with whatever amount the promoters bring in in the form of equity. The company is anyway not doing good and not able to honour the commitment to lenders. In such a case any amount infused is good for lenders. Be it in the garb of warrants or any other form. Moreover, warrants do not dilute lenders' stake in the company.

Warrant have different implications for equity holders/minority shareholders and more so in companies, which are not stressed.

Hope it clarifies our views.

All the best for your investing journey!

Regards

Dr. Vijay Malik

Query


A couple of queries:
  1. How do I access rating reports of CRISIL, CARE etc.?
  2. Are they paid services?
  3. Screener and BSE/NSE and company websites are the best free resources. Do you use any other free sources to supplement primary research?
  4. Also, Is it possible to find any company which ticks off all parameters and is also available cheap? There is always something or the other missing from any prospective investment. Taking decision becomes difficult, how to go ahead mentally?


Author’s Response:

Hi,

Thanks for writing to us.

1) How do I access rating reports of CRISIL, CARE etc.?
2) Are they paid services?

The summary credit rating reports of 1-2 pages are freely available for public on the websites of respective credit rating agencies. The paid reports are about 8-20 pages long. However, until now, free reports have sufficed our requirements.


3) Screener and BSE/NSE and company websites are the best free resources. Do you use any other free sources to supplement primary research?

In addition to the websites mentioned by you, we use Moneycontrol and Researchbytes intermittently.

4) Also, Is it possible to find any company which ticks off all parameters and is also available cheap? There is always something or the other missing from any prospective investment. Taking decision becomes difficult, how to go ahead mentally?

We have been continuously investing in the markets in the stocks that we find are good and cheaply available. Our transactions are available to premium subscribers.

If an investor finds that any stock, which she likes is doing well on many of her favourite parameters, then she may make a tradeoff. This might be a case where the investor would be entering an investor while being conscious of the issues being faced by the company. Known issues are better than unknown issues as the chances of negative surprises are low and the investors tone down their expectations accordingly.


Hope it answers your concerns.

All the best for your investing journey!

Regards

Dr. Vijay Malik

Query


Dear Vijay,

Can you share how do you track your portfolio performance because with buy/sell transactions at different times, more cash infusion in the portfolio, dividends etc., I am not sure if I am using excel formula correctly to calculate CAGR on investment?

It will be great if you can share your view on how to calculate portfolio returns or any excel template for the same.

Also how to include the dividend paid by the company?

Author’s Response:

Hi,

Thanks for writing to us!

We use valueresearchonline for keeping track of our portfolio performance. We manually update each our portfolio transactions at Value research as and when we do such transactions. Value research shows us life till date CAGR of entire portfolio as well as individual stocks.

However, the yearly & cumulative CAGR data, which we put in our portfolio performance has been calculated by exporting the transactions from valueresearchonline.com into a Microsoft Excel file and using XIRR function.

The portfolio tracker at value research gives auto notification when any dividend is due on the stocks in the portfolio. One can then update the same in 2-3 clicks of the mouse and the dividend transaction gets added in the overall transactions of the portfolio and the updated returns reflect the impact of dividend as well.

Hope it answers your concerns.

All the best for your investing journey!

Regards

Dr. Vijay Malik

Query


In cash flow, many times we notice that the difference between cash flow from operation from cash from investing is getting tallied or it is being met from cash flow from financing. Does it mean that the company is using all the cash from operation for investments?

Author’s Response:

Hi,

Thanks for writing to us!

The money is fungible, which means that it might be that finance is being used for investments and operations are being used partly for investment and partly to repay the finance.

Or both operations and finance are being used for investments.

But overall, if CFO inflow and CFF inflow are equal to CFI outflow that would mean that CFI requirements are being met through using both CFO and CFF.

Hope it answers your concerns.

All the best for your investing journey!

Regards

Dr. Vijay Malik

P.S:

  • To know about the stocks in my portfolio, their relative composition, cost price, details of all our buy/sell transactions since July 30, 2017 as well as to get updates about any future buy/sell transaction in my portfolio, you may subscribe to the premium service:  Follow My Portfolio with Latest Buy/Sell Transactions Updates (Premium Service)
  • We use a customized stock analysis excel template which is now compatible with screener.in. This customized excel template is now available for download as a premium feature. For further details and download: Click Here
  • You may learn more about our stock analysis approach in the e-book: “Peaceful Investing – A Simple Guide to Hassle-free Stock Investing”
  • You may read more company analyses based on our stock investing approach in the Company Analysis e-book series, which is spread across multiple volumes: Click Here
  • I have used the financial data provided by screener.in and the annual reports of the companies mentioned above while conducting analysis for this article.




DISCLAIMER


Registration Status with SEBI:


I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013

Details of Financial Interest in the Subject Company:


Currently, I do not own stocks of any of the companies discussed above