Interesting stock market tactics used by companies

The stock markets are a place where Caveat Emptor(Buyer Beware) applies to its fullest. If you come across any of the below tactics, do 

1. Issue QIP/Decisions just before a major negative event
1. Money Matters-QIP at peak price just before MD was arrested
2. Yes Bank-Issue QIP in Q4'17 before disclosing potential provisioning lapse
3. Axis Bank-MD/CEO reappointment and performance bonus, just before NPA issues
2. Declare results at a very early date after quarterly closing, to attract attention
1. Sanwariya Consumer-Declared Jul17-Sep17 results on Oct 3rd, 2017(Remember Oct 1/2 were holidays) albeit unaudited
2. Kitex-Releasing its audited results for Apr15-Mar16 on Apr 4, 2016!! Surpassed even Infosys. For FY167 however, they released with a month's lag
3. Delay results/ declare results quite late with some bad news/Extend Reporting year
1. Axis Bank-When it declared results for Q2'18 showing NPA slippage
2. Shree Renuka Sugars-Extended financial year to 15months without a clear rationale
3. Commission research report and upload on website
1. CRISIL research(most companies) albeit neutral
4. AGMs
1.  at remote locations to minimize attendance-Inox Wind?
2.  at quarter end/latest possible dates to minimize attendance-Many Cos
5. Glossy annual reports
1.  by firms like TRISYS to simplify business. metrics
2. Focus on extraneous stuff-Temptation Food seductive photos of women.
6. Suddenly start holding conferences presentations, analyst calls etc, but stop it when bad times happen. For example
1. Sanwariya Consumer sudden spurt of presentations, reports
2. Educomp ceasing to update its website after bankruptcy
7. Announce plans with limited execution 
1. DCB Bank retail expansion-subsequently rolled back due to resistance and ESOPs repriced to adjust for this benefits
2. Crompton Greaves-Plans to turnaround/hiveoff units but not done

Investment learnings in the week ended 21 May 2017

Starting this week, I have decided to publicly document my investment learning from what I read. Wherever possible, I include links to it.

1. Financials/Disclosures: The debacle of a leading listed private commercial bank YES Bank revealing more NPAs than expected , reinforced the fact that bank financials are a leap of faith, and that management integrity/readiness to disclose often correctly accounts for valuation multiples (https://www.bloombergquint.com/business/2017/05/19/should-yes-bank-have-told-investors-about-the-npa-divergence-before-its-qip). Having entered into the bank at levels above its current one, the lesson would be to wait for all mandatory disclosures before entering, like how I do not time quarterly results, extend this to annual results for banks
2. Auto Industry Perception: The autonomous car revolution would likely not affect the car seats market(people will still sit in cars), which is utility like in the safety and cost aspects(small % of car cost), and if it becomes a car differentiation tool, then as mentioned by Michael Blitzer of Kingston Capital management, companies like Adient (ADNT), the largest manufacturer recently spunoff from Johnson Controls, could benefit. Another example is car tires/tyres, companies like Michelin have technological/regulatory moat in developed markets, and since this is an aftermarket replacement driven, it is more a consumable than consumer durables stock.
3.  Matrimony.Com: Litigation can be expensive. The company spent ~US$8M to fight a litigation over a term sheet to invest in it, and finally ended up agreeing to pay US$8M to the affected party! While the promoter agreed to refund US$2M of the litigation cost to the company, this is an example of wasteful litigation
4. QIPs at a discount: Delta Corp and Premier Explosives closed their QIPs at a discount of 5% to benchmark price. Is the bull market finally cracking for these companies? Classic reason why mere QIP announcement is NOT assurance of short term gains. When Delta was at ~170, QIP base price was 163, and finally it was priced at 155. 
5. Regulatory Moat might erode: Gujarat Gas peak supply in Morbi industrial cluster was 4Mcsm but when the use of coal gasifiers was allowed(ban lifted), industries shifted to 3mth gas supply contract with GG but shift to dirty fuels basis economics. This is a classic case of ephemeral moat and may happen with solar(as in Germany)
6. Somany Ceramics has ~60% purchases through its associate companies(majority owned by promoters) which may account for lower margins. This analysis by Motilal Oswal in its annual report analysis of FY16 underlines need to read annual reports.
7.  

Dynamic Asset Allocation-a genuine way to get outperformance in sideways market

If I had a rupee for each time I got a SMS/email/report guaranteeing me a multi bagger, I’d be a millionaire by now. Naturally, I am skeptical when someone claims the magic sauce of superior returns. But when that person has achieved it over a 13 year period across multiple market cycles, one would tend to sit up and pay attention. The below post outlines the dynamic asset allocation approach.

Volatility is the friend of value investors since it is at periods of extreme volatility that Mr Market offers bargains to buy, or premium prices to sell. However, most often, volatility is not a part of time  ‘Buy and hold’ is a cliché which fails in ‘sideways markets’. As Howard Marks puts it, markets are like pendulums which spend maximum time in the middle, and very little in extremes. So while equity returns do compound over time balancing out the periods of zero returns/negative returns, one wonders whether one can avoid even these periods of low returns. In theory, one can monitor market valuations levels and change the asset mix between debt, equity and cash. In practice however, this needs expertise and transaction costs, taxes and emotions reduce the odds of making alpha. Given the necessity of active management to spot and manage such potential periods of low returns, one could consider professional fund managers to do the same via specialized products/strategies which use dynamic asset allocation.

Being a member of the ICICI family be it savings account, home loan etc, I decided to see how ICICI performs in this. They have a fund called ICICI Prudential Balanced Advantage fund. http://www.icicipruamc.com/icici-prudential-balanced-advantage-fund

The fund benchmarks itself against the CRISIL Balanced Fund-Aggressive Index and has outperformed its benchmark over the last 3 yrs ending June 30, 2016. The equity benchmarks are Nifty 50 and debt benchmark is 1 yr Tbill. While one might question the relevance of the indices(since many investments are outside the benchmarks), the fact is that the fund’s returns exceeds the total of its benchmark returns. For example, in the year ended June 30,2016, the fund returned 6.7% while Nifty 50 and 1yr Tbill returned (0.96%) and 7.67%. The benchmarks returned totaled 6.71%, and averaged 3.36%(which was coincidentally the CRISIL index return, implying a possible 50:50 split. With the benefit of hindsight, someone investing in Tbills over Nifty 50 would have earned 7.67%, but lost only 1% return by choosing ICICI Prudential balanced fund, thereby achieving investment goals with much less risk. The picture is even more stark for inception to date returns, where the scheme CAGR of 14.62% outperforms the Nifty CAGR of 11.62%. The balance 3% yield is due to asset allocation to debt in times of flat markets. They have on average 70% equity exposure.

Also, one can withdraw upto 20% of the units till 18 months from investment, without an exit load(otherwise 1%). Post 18 months, exit load is NIL.

In short, it is apt for all investors-experts or otherwise-and this appears a superior substitute to debt or NCDs, in the Indian context.

Do note as always that this blog is not a substitute for professional investment advice. Further, mutual funds are subject to market risks, and the scheme related SID/other documents should be read carefully

 

Why are shareholders voting against dividends at AGMs?

Recently, I noticed an interesting trend in two AGMs of Sep 2013. In the AGM of  listed jewellery retail firm Shree Ganesh held on 6th Sep 2013, 99.61% of the votes(52823544 shares) were cast against the Board of Directors proposed final dividend of 10%. Promoters own 73.46% of 7,19,06,485 shares so they seem to have voted en-bloc against the dividend, and since no one else attended, that become a 100% vote against the dividend. Maybe this was an unwritten clause in the preferential allotment done earlier that month.

In the case of Gitanjali Gems AGM held on 30 Sep 2013 http://www.bseindia.com/xml-data/corpfiling/AttachHis/Gitanjali_Gems_Ltd_011013.pdf 100% promoter votes and 99,75% 'public shareholder' votes were cast against dividend declaration, while 100% institutional shareholders voted for dividends, but ended up on the losing side. A very interesting case of maybe financial distress or trying to push the share price down.

In the previous year, infrastructure firm Atlanta Ltd saw shareholders voting against its 10% dividend(20 paise per share) but there were no other examples I noticed. 

While Indian company law permits shareholders to reduce/avoid declaration of dividend proposed by the Board, this is the FIRST time I've seen two instances of companies doing so, both financially stressed firms in the jewellery sector. But then, this was a month of several firsts with the withdrawal of audit reports in FirstLeasing, MCX etc.

Vikas WSP-why it deserves its P/E multiple of 1 despite great results

Whenever shale gas discoveries are announced in USA/EU, guar gum prices shoot up(since it is used as a fracking material in shale gas extraction), and then Vikas WSP gets into the news. Punters shoot up the stock price hoping to benefit from the hike in realizations, or from the appreciating rupee, considering that most of the company's sales are from exports. However, those who forget the past are bound to commit mistakes in the future, nowhere is this more relevant than Vikas WSP. Let us see the (in)glorious highlights of this company

1. FY 2012-13 annual report not available on www.bseindia.com despite AGM notice being filed. I had to download it from http://www.vikaswspltd.in/annual-reports/2012-13.pdf and even this is NOT a complete annual report-it just has auditor's report and financial statements! An elementary omission(or maybe not?)
2. Auditor remuneration dropped 40% y-o-y without a reduction in activities/scale. Commendable if this is cost cutting, but then what does it hold for audit quality? Incidently, the old firm a Big4 auditor BSR & Co(an Indian member of KPMG) was dropped from 2011-12 onwards, after its emphasis of matter in the audit report.
3. Inconsistent information. For example. domestic sales of Rs 730 Crs as disclosed in segment disclosure< domestic sales of Rs 558 Crs as disclosed in revenue note.    
4.  Working Capital position seems precarious with advance to suppliers increasing 25x from Rs 25crores to Rs 563 Crs. While this is backed by customer advances(Rs 170crs in Fy13 vs Rs 120crs in FY12), this is not an encouraging sign.
5. Lolmax corporate governance/basic lack of knowledge of secretarial procedures:- While appointing a relative as a director, the explanation was Ms. Kamini Jindal has been appointed by the Board as  an Additional Director w.e.f. 16.07.2012. Ms. Kamini Jindal is a person with excellent academic background and possesses good educational qualifications. She is
   Bachelor of Arts and Master of Philosophy. She is the youngest in the Board of the company. Considering and seeking attention and interest of youth, your Directors recommend appointment of Ms. Kamini Jindal as Director of the Company(emphasis added). For god's sake, why pretend to empower youth? And why omit the (obvious) fact of other family directors being interested in the matter?
6. Punter driven stock: For example http://mmb.moneycontrol.com/stock-message-forum/vikaswsp/comments/1501
7. Possible value trap-low Pitrovski score http://www.equitymaster.com/detail.asp?date=06/12/2013&story=1&title=A-sure-shot-method-of-avoiding-value-traps
8. Probable short term loss due to purchase commitments:- Vikas WSP currently has 60,000 tonnes of guar polymer production capacity which is running full. An additional 30,000 tonnes of capacity is expected to commence commercial production by the end of the current financial year. For 100% capacity utilization, the company requires 70 lakh bags of guar seed which has already been insured. Probably this is what the supplier advance is towards    Against the assured price of Rs 50 a kg, guar seed price has now fallen below Rs 42 a kg http://smartinvestor.in/common/srchoutdet-190588-car-Guar_seed_price_fall_pushes_Vikas_WSP_in_tight_spot.html

Bottomline, if you are fine with a great performance albeit speculative investors and err.management with political aspirations, then go ahead. Otherwise, in this bear market, such stocks are avoidable for me.

3 reasons why BSE is better than NSE for retail investors

 By no means am I a fan of the BSE-I consider it as an old boys club which was dragged to the technology age kicking and screaming after the entry of NSE. However, sometimes things change, and then one needs to revise the views. The reasons are explained below

1. Less co-location, so more parity for retail investors As per the SEBI discussion paper on co-location, the BSE had much less co-location orders as compared to NSE. What is means for you as a retail investor is that when you see an arbitrage and try to execute, you are not too much disadvantaged against a server http://www.sebi.gov.in/cms/sebi_data/attachdocs/1367581007462.pdf
2.  Excellent stock price page with easily accessible filings:-BSEIndia gives you the PDFs while NSE gives you the zip file of annual report/other filings. Also, BSE beats NSE hands down here.
3. Easily searchable stock news filings page:-Try searching company announcements on both NSE and BSE, you'll see my point.

Given that your broker would route the order to BSE/NSE depending on their costs/best price route etc, you'll have little control on who gets your business. However, do keep it in mind.