Q&A: ICDs, Capital Allocation Skills, Management Analysis, Role of Macro-Economic Factors and Premium Services

Modified on July 2, 2018

The current article in this series provides responses related to:

Query

Hello Sir,

Should inter-corporate deposit given by company to its promoters or subsidiary should be considered as a red flag completely??What if company has given the deposit at particular interest rate???If it is given at an interest rate, how much should be the rate??

Author’s Response:

Hi,

Thanks for writing to me! I am happy to notice that you are going through all the articles in depth and are clarifying your doubts along the way. This is the best way to improve one’s investing skills.

Analysis and conclusions about investment parameters are never black & white. Final conclusion is always dependent upon the investors’ own judgment and these conclusions vary from one investor to another. For the same information two investors take exactly opposite views and therefore, one investor buys a stock and another one sells the same stock, which leads to occurrence of a trade.

Your doubts are very genuine. Ideally, deposits given to promoters are a red flag and should be seen with caution. Interest rate alone is not the key parameter. It might be that the promoter is willing to show high interest rate but is not paying the interest due, which get reflected as interest receivable in the related party section of the annual report. Instead of loan/deposit, the promoters can always take money in the form of dividends, which along with promoters also give the money to other shareholders as well.

Therefore, you would appreciate that the assessment of management quality is highly subjective and the investor should move ahead with her own conclusions.

Hope it clarifies your queries!

All the best for your investing journey!

Regards

 

Query 

Respected Vijay Sir, I have a hypothetical question for you ,in case if I own two different businesses shares in which one supplies an important chemical which is used in Tyre manufacturing industry and other one is in retreading business which is a substitute for Tyre industry ,in such a case there is “conflict of interest” which means one business is actually supporting Tyre industry growth and another one is not supporting the growth of the Tyre industry in such a case can I own both the businesses which are mutually contradicting one other.

Author’s Response:

Hi.

Thanks for writing to me!

Such a scenario leads to two situations:

  1. In case one of the companies does not do well, it is expected that the other company would do well. This is called hedging/risk management.
  2. It can be a win-lose situation, if the overall market size if constant and one company can benefit only at the cost of another company. However, if the market size is increasing, then it might be win-win situation as both the companies would be able to grow their business without eating into each other’s markets.

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Vijay

 

Query 

Dear Sir, I need some detailed meanings of terms used in screenshot of excel template shared by you: “Stock Analysis Excel Template (compatible with Screener.in)

Please elaborate with terms used in Screener & some of the following terms in detail-

  1. Total Debt = (Borrowings + Liabilities) or Only Borrowings
  2. Receivable Days = from where and how you calculated this?
  3. MCap = how you calculated or taken for last 10 years each?
  4. Cash + Equivalent = (Cash & Bank) or (Cash & Bank + Reserves)
  5. FCF = does it mean Net Cash Flow
  6. Book Value = How did you calculated or taken from where for each of last 10 years?
  7. In Capex NFA means “Net Block” or something else? Also how to calculate or what figure you have taken for WIP Change?

Author’s Response:

Hi,

Thanks for writing to me!

All the data has been used from the default data provided by screener.in

1) Total Debt = (Borrowings + Liabilities) or Only Borrowings

Total debt = long term debt + short term debt + current maturity of long term debt

2) Receivable Days = from where and how you calculated this?

You may see the formula in the following article: How To Analyse Operating Performance of Companies

3) MCap = how you calculated or taken for last 10 years each?

You may find further clarification in the following article: Q&Author’s Response: NMDC, Sintex, Sharda Cropchem, Dish TV India & others

4) Cash + Equivalent = (Cash & Bank) or (Cash & Bank + Reserves)

The excel template refers to Cash + Investments which equals: Cash & equivalents (bank balance + FD etc.) + current investments + noncurrent investments

5) FCF = does it mean Net Cash Flow

It is free cash flow. You may find formula and the further clarification in the following article: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of StockInvesting

6) Book Value = How did you calculated or taken from where for each of last 10 years?

It is calculated from the latest annual report data provided by screener.in

7) In Capex NFA means “Net Block” or something else? Also how to calculate or what figure you have taken for WIP Change?

NFA is net block/net fixed assets. The data has been provided by screener.in in default data sheet.

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Vijay

 

Query

Dr. Vijay, your premium services are very useful and must have.

I have a query regarding assessment of “capital allocation skill” of promoter/management. Many companies earn healthy profits and have FCF also but when it comes to placement of this fund, they fail at this stage by unnecessary acquisitions or move in the business that they don’t know. Promoters’ decision to generate more profit or keep cash on hand is very crucial for investors.

Please provide your views.

Rgd.

Author’s Response:

Hi,

Thanks for writing to me!

You have raised a pertinent point as the efficient allocation of funds by the promoters is a key parameter. Many investors use incremental ROE as the parameter for this assessment. However, I do not prefer sticking to the incremental ROE, and like to assess the allocation in terms of

  1. Whether the new deployment of funds is in the related area/unrelated area
  2. Whether the project/expansion was completed smoothly within time & cost projections and
  3. Whether the new plant has begun production in time and the impact is visible in the financial results.

The new capacity might not start producing to the full capacity immediately, therefore, the same needs to be kept in mind. Putting oneself in the shoes of the promoter would help in such a situation.

Hope it clarifies your query.

All the best for your investing journey!

Regards

Vijay

 

Query

Hi, Dr V.M (MD in Stocks)

What are the ways through which i can know that whether any share at current market price is overpriced or underpriced?

I have been using your premium calculator from a while but the problem is it doesn’t show that whether a share at current market price is overpriced or underpriced.

I know stocks move & have deep connection with emotions & also operators can do anything in the short term. But I want to know exactly.

Thank You

Author’s Response:

Hi,

Thanks for writing to me!

The excel file [“Stock Analysis Excel Template (compatible with Screener.in)”] provides the P/E ratio at the current prices. I have detailed my approach to decide about the investable P/E ratio of stocks for value investors in the following article:

Read: 3 Principles to Decide the Investable P/E Ratio of Stocks

You may use the guidelines to arrive at the preferred investable P/E range for the stock, which you may like and similarly, you may arrive at the price at which you might be comfortable buying it.

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Vijay

 

Query

Read: Analysis: Chaman Lal Setia Exports Limited (Maharani Basmati Rice)

Dear Dr. Vijay Malik and Faisal,

Thank you for the thorough and insightful analysis of the company.

On page no. 21 of the annual report for FY 2016 remuneration, experience and education background of top ten employees of the company is given. From the given information it feels like the company has no managing staff of significant importance. Even after considering that it’s a family run business, the remuneration and education background of highest paid employees looks insignificant compared to the newly joined third generation of the family, i.e., Ankit, Sukarn and Sankesh. Further, the educational background of Ankit, Sukarn and Sankesh is not mentioned which creates doubt about their capability of running the business in the future. Also, as discussed earlier, the remuneration of the promoters is higher than the maximum allowable limits.

Are these worrying signs of high nepotism? And how important is it from investors’ perspective?

Author’s Response: 

Hi,

Thanks for sharing your valuable inputs. We appreciate the in-depth assessment of the annual report done by you.

You have beautifully explained your point of view. However, as with assessing people in general, the assessment of management of a company also has significant amount of subjective component. Therefore, every investor needs to make her own point of view about the management.

In general, I personally would be ok with the promoter family being completely in charge until they are leading the company well and generating good growth in the business along with taking care of the minority shareholders, I am ok with the promoters driven organization.

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Vijay

 

Query

Hi Dr Vijay,

Thank for your continuous support and prompt reply.

I have gone through in details about your website and almost all term and articles and got much more confidence in stock investment. I appreciate your work on such excellent website in short and sweet guidance

I have analysed some good business and want to invest but awaiting since some of fear factors.

Please clarify some of my concerns.

  1. There is global economic fear about US and Europe recession in coming years (I read lot for same), I have 60% invested in gilt funds and want to shift to stocks so should I invest now or wait to have good opportunity to come.
  2. Almost tensions are there in geo politics, Indo- Pak-China, USA- Russia etc. factors.
  3. All this external factors should I consider for investment in good company or there will be minor impact of such factors in future if company business is good.
  4. Which is bad for investment from your point of view sir- Wait for some time and invest in late or invest in current time with good business.

Thanks in Advance,

Author’s Response:

Hi,

Thanks for your feedback & appreciation! I am happy that you found the articles useful!

1, 2, 3) All these queries are related to external macro factors and their impacts on stocks. As detailed in my stock picking approach on the website, I am a bottom up investor and do not base my investment decisions on macro factors. I ignore all the macro factors while investing.

4) The best time to invest is whenever the investor has money to spare and invest in markets. Whenever an investor is able to find good opportunities, she should invest.

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Vijay

 

Query 

Read: Subscribe to “Follow My Portfolio” with Latest Buy/Sell Transactions Updates

My experience shows that on an average I add one new stock in my portfolio in a year. This is the pattern since last 3-4 years. However, the number of buy transactions are frequent”

I am confused. First statement says that you add 1 stock (buy 1 stock) in a year. Second statement, says, that buy transactions are frequent. So do you buy once a year (based on history) or do you buy frequently (more than once a year?)

Author’s Response:

Hi,

Thanks for writing to me!

1) “On an average I add one new stock in my portfolio in a year”

refers to adding a new stock to the existing stocks in the portfolio.

2) “the number of buy transactions are frequent”

means that I invest additional money in the existing stocks of the portfolio.

Hope it clarifies. In case of any further doubts, please feel free to contact.

All the best for your investing journey!

Regards,

Vijay

  

Query

Read: Analysis: Ultramarine & Pigments Limited (OOB brand of detergents)

Thank you Dr. Vijay Malik. This analysis helped me a lot to include some more components on my stock checklist in terms of management behavioral analysis.

I’ve one question to you, do you know how to get the current ratio from screener excel sheet? The main sheet (Data sheet) doesn’t have separate component for Current Asset and Liability. Would it be possible to help me on this?

Regards,

Author’s Response:

Hi,

Thanks for writing to me!

You are right that the current assets and current liabilities figures, which are conventionally used to calculate current ratio are not available in the Screener data sheet. Therefore, it’s advisable to calculate CR from either the annual report or the data from any other source like moneycontrol

All the best for your investing journey!

Regards,

Vijay

 

Query 

Respected Vijay sir, where can we find annual report of a company before the year 2010 and in my Google search I am getting from report junction.com which is a paid service, can you please mention any sources other than that.

Author’s Response:

Hi,

Thanks for writing to me!

You may try finding the annual reports at: 1) Company website, 2) BSE website 3) Moneycontrol website

Additionally, you may try google and see if the annual report has been uploaded by anybody on any other public source.

All the best for your investing journey!

Regards,

Vijay

 

Query

Dear Dr. Vijay Malik sir,

Namaste, I am searching for a good stock screener for fundamental analysis, I find some screeners but those are showing some mistakes, in my view which is Best stock screener for Indian stocks sir?

Please give your free time sir. Thanks in advance sir.

Regards

Author’s Response:

Hello,

Thanks for writing to me!

I find that screener.in is one of the best sources to screen stocks in Indian markets based on fundamental parameters.

All the best for your investing journey!

Regards,

Vijay

P.S.

 

DISCLAIMER

  • The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
  • I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
  • Currently, I do not own stocks of the companies mentioned above in my portfolio.

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