Q&A: Virinchi Limited, Investment Books, Investing Terms, P/E Ratio, Balance Sheet Items, Peers

Modified on July 12, 2018

The current article in this series provides responses related to:

  • Queries about Virinchi Limited
  • Books to learn stock market investing
  • Different terms related to equity markets & investing
  • Clarification about the investable P/E ratio of stocks
  • Calculating different balance sheet items like assets and liabilities from databases
  • Finding industry peers of different companies

 

Query

Hi Sir,

Virinchi Ltd is small cap company with ₹130 crore market cap, it has been growing over 30% for the past 5 years and available at a low PE ratio of 7. It is a software company, but now they have started a 500 bed hospital (3-4 months back) with investment around 500 crore in Hyderabad, numbers from the hospital business will be reflected in the quarterly results? If yes, isn’t the stock available cheap?

Author’s Response:

Hi,

Thanks for writing to me!

Assessment of the competitive advantage of an IT company is difficult in the light of ever changing technological environment in which such businesses operate. Sustainability of the past growth in future, would determine whether the stock is available cheap or it is justified at current valuations. The investor should understand further the kind of products/services the company provides, its competitors etc. to make an opinion about the future sustainability of the demand of its products/services.

Regarding start of the hospital, it remains to be seen whether the management is able to successfully execute and run the hospital profitably. There have been many instances where hospitals have not been able to run profitably and have proved to be a drain on the wealth of shareholders. Therefore, assigning any value to the future earnings of hospital should be done with a pinch of salt and it is advised to wait and see the execution ability of the management before arriving at any view about the under/fair/over valuation of the company’s stock price.

You may take guidance from the following article for learning more about the companies, which operate in industries that are new to you:

Read: How to Analyze Companies in Industries new to you?

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Vijay 

 

Query

Dear Sir,

I am an avid reader of your blog and highly appreciate your simplicity in explaining the things which is essential to common man for understanding the complex nature of finance.

I am interested in understanding the companies’ balance sheets, what are the norms and rule of accounting practices used by them and what actually things mean beneath the surface. I believe merely computing numbers don’t lead to insight, it’s required that I understand the underlying principle and intention behind them.

A lot of areas like employee benefits (insurance, pension obligations etc.) , currency hedging , adjustment entries , capitalization of assets and debt and their deprecation or amortization, related party transactions and understanding consolidated balance still need further deeper understanding to complete the analysis.

Kindly suggest me accounting and finance books that is relevant to Indian companies and Indian laws and is also easy to understand and serves as complete resource for any information and clarification.

This will enable me understand things for clearly and ask relevant questions.

Author’s Response:

Hi,

Thanks for writing to me! It’s pleasing to know that you wish to read more about accounting concepts. It is important as accounting is the language of the business and the proficiency at accounting is definitely an asset for every stock investor.

I believe that for investors who do not have background in finance in terms of formal finance education, they should read 2 books by Benjamin Graham: The Intelligent Investor and Security Analysis. These books are very intuitive to investors as I could learn a lot about finance and accounting, when I read Benjamin Graham in 2008-09 before I received formal finance education as part of MBA (2009-11). Further the investor should read the book: Financial Shenanigan by Howard M. Schilit, which is a very good book on understanding accounting juggleries used by smart management to cook their books and present a rosy picture, which things are not as bright.

Read: Investment Books For Beginners

I guess that after reading these 3 books, the investor would be very well verse with the general concepts, which are applicable across markets. As accounting rule within specific markets e.g. India, keep on changing year on year, therefore, it is advised that after reading the above recommended books, the investor should refer internet for further clarity on individual accounting clarification. As the latest articles on the internet would have explanations as per latest accounting rules applicable.

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Vijay

 

Query

  1. Different categories of stocks, based on Market cap
  2. Terms such as Upper circuit, lower circuit and how these are decided and where one should see for them
  3. Volumes of shares exchanged and how to make sense of this data
  4. Different categories of Market cap and limitations set by market regulators for thinly traded stocks
  5. How to disclose only partial buy quantity so as to not increase share price

Author’s Response:

Dear,

Thanks for writing to me!

1) Different categories of stocks, based on Market cap:

They are usually classified as large cap, mid cap, small cap. Different sources decide different threshold for classifying stocks in to these categories.

2) Terms such as Upper circuit, lower circuit and how these are decided and where one should see for them:

They are maximum amount of up move or down move that the exchange would permit before it stops the trading in a particular stock or market. An investor can find the criteria about deciding the circuit filters at the exchange websites: BSE and NSE for Indian markets

3) Volumes of shares exchanged and how to make sense of this data

For fundamental investors, volume of shares is essential to decide about the liquidity of a stock before investing. For technical analysts, the volume data is used in calculation of many indicators, which are used to decide the buying/selling triggers. At www.drvijaymalik.com we follow fundamental analysis and do not use technical analysis for our investment decisions.

You may read more about our thoughts on fundamental analysis vs. technical analysis in the following article:

Why I Left Technical Analysis And Never Returned To It!

4) Different categories of Market cap and limitations set by market regulators for thinly traded stocks:

Same as per point 1 above. Market regulators like SEBI as well as stock exchanges, which also have quasi regulatory functions, they stipulate different rule for trading and delivery of thinly traded stocks to avoid manipulation of stock prices of such stocks so that retail investors do not get stuck in such stock, which are many a times stock operators driven. Such restrictions include rules like compulsory delivery of some stocks. An investor may learn more about such restrictions on the websites of SEBI and stock exchanges (NSE, BSE).

5) How to disclose only partial buy quantity so as to not increase share price

Disclosing partial buy quantity is a feature offered by many stock brokers to their investors. Many brokers offer options to disclose minimum quantities like 10% of the total order quantity or 1000 stocks, whichever is lower.

An investor may get to know more about such facilities/features offered by their brokers at their respective website.

There is a lot of literature available on the internet about the points discussed above. You may read other articles available online to learn more about these concepts. If you need any further specific clarifications about the doubts which you have after reading those articles available on internet, then feel free to write to us.

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Vijay

 

Query

Hello Vijay

I saw this recently in a forum

1) Total Public shareholding:

  • A) No of shareholders — xxx
  • B) Total no of shares held by public– yyyy
  • C) Total number of de-materialized shares available — xxx

My query:

  1. What is the meaning of 1, A, B, C?
  2. Where can we get this data?
  3. Can a listed company, be part private and part public to avoid hostile takeover?

Author’s Response:

Dear,

Thanks for writing to me!

1) Total public shareholding: it is self-explanatory. It indicates the % of shares held by general public (i.e. people other than promoters)

Author’s Response: Number of shareholders: it is self-explanatory

B: Total number of shares held by public: means the number of shares which constitute the total public shareholding in (1) above

C: Total number of De-materialized shares available: the number of shares which are not held as physical certificates and can be electronically transferred.

2) We can get this data from the annual report and the quarterly shareholding disclosures filed by the company to the stock exchanges

Read: Understanding the Annual Report Of A Company

3) A company cannot be part private & part public. However, there are certain shares (like the shares held by promoters), which are not available for others to buy as promoters do not sell these shares easily.

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Vijay

 

Query 

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

  1. What is 10% in the denominator? Is it sales growth %? Or 10% cushion?
  2. So in your above example, when you say “premium of P/E ratio of 2”, we mean, if the current P/E is 13 then we can invest up to P/E of 15 (i.e. 13 + 2)?

Thanks Vijay

Author’s Response:

Hi,

Thanks for writing to me!

1) 10% in the denominator is cushion. It means that for every 10% cushion, a premium of P/E ratio by 1 can be paid. If the cushion is 30%, then a premium of P/E ratio by 3 can be paid. This is the rough guideline that I follow while making investments. An investor can tweak these guidelines as per her preferences.

2) Premium of P/E ratio of 2 should be paid above the benchmark P/E arrived from G-sec yield. To elaborate further:

As mentioned in the above article: “In case of such companies, an investor may choose to pay a premium (higher P/E ratio) over and above the P/E ratio arrived at after considering ongoing 10 years G-Sec yield”

The article also gives examples of calculating the benchmark P/E ratio from G-Sec yield:

  1. If the 10 years G-Sec yield is 10%, then the investor may decide about the maximum P/E ratio to be paid for a stock as 10 (i.e. 1/10%)
  2. If the 10 years G-Sec yield declines to 8%, then the investor may be comfortable at paying a P/E ratio of 12.5 (1/8%) for the stocks.
  3. If the 10 years G-Sec yield rises to 12.5%, then the investors should pay only a P/E ratio of 8 to the stock (1/12.5%)

An investor may also use 10 year SBI FD rate instead of 10 year G-Sec yield.

Also Read: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing

So if the benchmark P/E arrived at from the above method from 10 year G-Sec yield is 10 and the premium P/E from SSGR cushion is 2, then the investor may decide to pay a P/E ratio of 10+2 = 12 for the stock.

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Vijay

 

Query

Dear Sir,

I am unable to calculate other asset and other liabilities from screener website balance sheet. If you don’t mind can u please explain how screener calculate the other asset and other liabilities?

Author’s Response:

Hi,

Thanks for writing to me!

As per my understanding, the screener balance sheet data has the following classification:

  • Equity Share Capital = directly from balance sheet
  • Reserves = directly from balance sheet
  • Borrowings = Long term borrowings + Short term borrowings + current maturity of long term debt presented in Other Current Liabilities in the annual report
  • Other Liabilities = All other liabilities + Payables + Provisions etc.

Total = equal to the balance sheet total liabilities

  • Net Block = tangible + Intangible net fixed assets directly from balance sheet
  • Capital Work in Progress = directly from balance sheet
  • Investments = current investments + non-current investments
  • Other Assets = rest all the assets/working capital/inventory/receivables/long & short term loans & advances etc.

Total = equal to total assets in balance sheet

There might be minor adjustments in these items based on the details provided by the companies in their schedules/notes to accounts.

Read: Understanding the Annual Report Of A Company

In case you need any further clarifications, then I would request you to write to screener directly and update us as well.

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Vijay

 

Query

Hello sir,

A great work to be appreciated…

However I’m getting stuck with finding suitable peers in industry, as I’m researching Kanpur Plastipack Limited. So when it comes to its peer comparison. I can’t find because Kanpur Plastipack Limited main product is IFBC and I don’t know how to find other suitable players in IFBC or in that industry reliably…so is there any way out for such case…

Author’s Response:

Hi,

Thanks for writing to me!

You are right that many a times, finding exact peers becomes a challenge. This is routinely a case in SMEs, where a particular company may be operating in a niche area. A web search would help you get details of more suppliers for the exact product who are present on whole sale portals like Indiamart etc. Alternatively, you may try contacting the dealers/distributors or call the company directly.

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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