MARGIN OF SAFETY - Explained

In my recent post on three most Important words , I wrote on the importance of Margin Of Safety, especially after such huge rally in the markets. The market has given almost 40% returns since Feb and as Ramesh Damani said, in a recent interview with CNBC, could well be the 2nd part of a 3 part bull run. The following is an excerpt from an interview of Ramesh Damani few days ago.

Senthil: Do you think all the easy money has been being made in midcaps because you are a keen watcher of this segment?

A: I am a very keen watcher and I will frankly tell you one more time there is never any easy money made in the market. It’s pretty hard to make this money, trust me. We suffered those stocks on the way down. We have held on to the faith and now they are being rewarded. It’s still a good time to go out and invest. I believe that the bull market has long way to go. This is as good a time to come and invest. The market top out when there is huge public euphoria, there is outstanding positions lots of initial public offerings (IPOs) lots of qualified institutional placements (QIPs) — none of those symptoms are present right now. In fact, conditions are said to be benign, liquidity is good, India has the spotlight on it. So this is as good a time to go and buy. In fact, during the second stage, you see headlines now turning from largely negative to positive. Earnings would start coming through in some companies, so it is a good time to go fishing.

The other striking aspect for me so far is the results of many companies. Suddenly there is better performance all around and the valuations, in spite of the recent rally, don't look overly expensive. Unless there are other non-india specific reasons, the valuations are still very attractive on some of the nifty components and no new offerings hitting the market, this might be a good time to be in the markets and enjoy the ride.

It's extremely important to stick to the Margin of Safety as there is lot of euphoria around and many of them are at least 4-5 baggers in the last one year. Just keeping it simple, I would like to present my view on what I feel as Margin Of Safety of select stocks.

Tech Mahindra

Not so long ago, even after the huge run, similar to other IT companies, Tech Mahindra too under-performed. It was languishing below 1900 during the 30% rally since the elections when it touched 52 week high of 1950 long before the rally started. One of the major reasons for the under performance was the Re appreciation. I understand the impact but it would probably impact just the margins by a percentage or two and these are still the companies which will grow at the consistent rate. It grew 40% in Re terms last year and reported EPS of 126. Nasscom predicts IT exports to grow at 15% for this. I expect TM to out-perform based on the last 6 quarters and also the worst of Satyam merger is behind them. Assuming a 15% growth rate, they would end this year with 140 rs, the downside risk looks extremely limited and soon the market caught up with the valuations post the results of the biggies and it's trading around 2160 now. The real trend could be set on 31st post the result, but looks good for at least 25-30% returns for this year.

Indus Ind Bank

EPS for the last 5 years 

26.80

20.30

17.17

12.39

8.53

Reported first quarter growth of 26%.

Assuming the same rate of growth for this year, Projected EPS would be Rs 33 for 2014-2015.

They are the market leader in commercial vehicle space and with an expected improvement, it could be more but let me stick to the reported numbers.

A 20 times P/E would price the stock closer to 650 which gives a potential 20% returns in 9 months.

I'm seeing signs of the HDFC Bank like journey in terms of the growth rates, so it might be worth entering at current levels and track every quarterly for the right valuations and exposure.

Hope you all benefit from this bull run.

Cheers

SRS Investments - Funds performance for the first half of 2014

“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”

― Albert Einstein

The best and the guaranteed return of your investments comes from the tax rebates world over. You could save over 30% in most countries and upto 20% in Singapore, depending on your income. Average of rate of returns even in equities are way below the tax rebates for investment options. So it's extremely important to maximize your returns using the available investment options.

SRS is one such compelling investment option for employees in Singapore. It's been a great start to the year so far with both the bond and equity markets looking bullish world over. Please find below the returns from the Mutual Funds basket for the first half of 2014 and add to it the possible tax rebates of upto 20% for your contributions.

Why wait till December for the contribution when you could take advantage of the positive global sentiments. Please click here for more details on the contribution amounts and effects of power of compounding on your investments.

The three most important words

"MARGIN OF SAFETY", Graham wrote all in caps in response to self-directed challenge, if he were asked to distill the essence of sound investing into a single phrase.

Warren Buffett, writing in 1990, concluded that "forty-two years after reading that, I still think those are the three right words", with the respect to margin of safety.

Why is it important now?

Sensex has returned almost 20% returns in 3 months.
More importantly, many of the mid cap stocks have gone up more than 50% in the last 3 months.
Even large caps like SBI has moved up from 1500 levels to 2600 levels in less than 3 months.

The clear mandate for the BJP could be for their focus on development. This well could be the beginning of a long term structural bull market like many in the markets predict. But, as a retail investor, I feel it's extremely important to exercise lot of caution. As we have seen in the past on many occasions, market will very quickly move from potential/euphoria to reality. Come 1st week of July, it will only be the results which will decide where the stock is headed and that's precisely why Margin of Safety is extremely crucial at this point of time.

From the speeches of the incumbent PM, it's really clear that the development is the priority and it's the only way to address all issues, which I completely agree. But, development, job creations and all their promises, like cleaning Ganga, aren't easy tasks which just the majority numbers could fix it. As much as I tend to believe, that Modi and his team deserve a chance to see if they delivered their promises, I would be extremely wary of the current valuations of many of the stocks.

I'm not a qualified analyst, but as someone who believes in keeping it simple, the market has factored in much of the potential and it's reflected in the prices of many stocks in the last few months. Unless the fundamentals change and the confidence is translated to business and EPS, the upside is capped. I would exercise complete caution and not regret missing the 10%, but I would prefer the insurance of numbers in 1st of July to enter the markets than getting into the current euphoria and end up getting stuck with higher prices for the next few years.

What exactly is Margin of Safety?

Sometime in Feb, I got really excited about entering the market after a long and started with the following stocks.

Deepak Fertilizers - Rs 106.
HDFC Bank - Rs 667.
Vardhman Textiles - Rs 358.
NTPC - Rs 119.

Let's take the example of HDFC Bank. Stock which has been delivering 30% CAGR for so many years. Keeping it simple, assuming a 25% growth rate and PEG ratio of 1, I was comfortable at 660 levels for 30% returns in a year and now, we have got the same in less than 3 months. So it's almost negated the huge margin of safety it offered in Feb and the same goes for most of the stocks, except the IT and Pharma stocks which are beaten down mostly due to the rupee appreciation. (I find them offering huge Margin of safety at current levels is for different post)

On a side note, My friend, for whom I taught F&O just last week as part of the strategy for election result, started advising me on positions I should take and suggested making money is just as easy buying long futures or buy any stocks and do intra-day trading. It just reminded me, that we may be in the Fourth Phase of Peter Lynch's cocktail theory..

Read here on Lynch's cocktail there.

Be careful and grow your wealth, Safely.

Good Luck

Infosys - My Take

For the year ended March 31, 2014, Infosys' net profit grew 13 percent to Rs 10,648 crore and revenues jumped 24.2 percent to Rs 50,133 crore compared to last year. Net profit in dollar terms rose 1.5 percent to USD 1,751 million and revenues jumped 11.5 percent to USD 8,249 million in the year ended March 2014 that was inline with what the management has guided on March 11. Consolidated earnings before interest and tax (EBIT) increased 0.7 percent quarter-on-quarter to Rs 3,281 crore and EBIT margin rose 46 basis points to 25.48 percent during January-March quarter.

Source : www.moneycontrol.com

My 2 Cents on the current valuations :

" The company has forecast revenue growth of 5.6% to 7.6% in rupee terms for FY 2015. "

The investors would be really pleased with 13% increase in net profits considering the last few years. The CAGR for the last 3 years is around 15% and Nasscom expects the software sector to grow around 15% for this year. It's currently trading at 17 times P/E based on TTM.

Even if the company turns around under the leadership of Mr.Narayanamurthy, i think a 15% growth rate would give an EPS of around 215 and PEG ratio of 1 gives a fair value of around Rs. 3200. So i believe the stock is fairly valued and should be added at lower levels unless there is huge change in the rupee post the election results.

EquityMaster View :

At the current price of Rs 3,174, the stock is trading at a price to earnings (P/E) multiple of about 17 times trailing 12 months earnings. We recommend investors to Buy the stock at current price from a perspective of 3 years. Our target price of Rs 4,736 implies average annual returns of 15% over this time period. However, we recommend that investors should not buy the stock if the stock price exceeds Rs 3,700.

Disclaimer : I don't own infosys.

Olam to receive all-cash offer from Breedens Investments

Offer price at S$2.23 per share.

Breedens Investments Pte. Ltd. (Breedens) has announced that it intends to make an all-cash Voluntary Conditional General Offer (“Offer”) for all shares in Olam International Limited (Olam).

Breedens, an indirect wholly owned subsidiary of Singapore investment company Temasek Holdings (Private) Limited, also intends to make an offer for the outstanding convertible bonds and outstanding warrants issued by Olam.

Breedens leads a consortium which includes Aranda Investments Pte. Ltd. (Aranda), Olam founding family shareholders and 10 members of the Olam executive committee, including Olam CEO Sunny Verghese. Breedens and Aranda together hold the largest stake of 24.6% in Olam, followed by Olam founding family shareholders with the second largest stake of 20.2%. Together, the consortium owns a combined majority stake of 52.5% in Olam.

The Offer price of S$2.23 per share represents: a price which exceeds the highest transacted price in the 52 weeks preceding the Offer Announcement; a premium of 11.8% over the last traded price on the last full trading day immediately preceding the Offer Announcement; and 24.2%, 32.4% and 39.5% over the one-month, three-month and six-month VWAP respectively, preceding the Offer Announcement.

With the Offer, minority shareholders will have the flexibility to tender all, part or none of their Olam shares in acceptance of the Offer. By tendering part of their shares, minority shareholders can create a balance between monetisation and continued participation in Olam’s potential growth over the long term.

Through this Offer, Breedens wishes to provide Olam with a stronger long term shareholder base to support Olam’s strategy and growth plans over the medium to long term.

Mr David Heng, Director of Breedens, said, “Members of our consortium are all long term shareholders of Olam. We have invested in Olam over the years, and share a common investment philosophy to invest and build for the long term.” He added, “We believe a successful offer will provide Olam with a stronger and more stable shareholder base to support Olam’s strategy and business model for the long term.”

He further noted, “We prefer to keep Olam as a listed company, which will continue to be guided by its board and management team. However, we will reassess our position if the minimum public float requirements are not met at the close of the Offer.”

Olam founding family shareholders and Key Management are acting in concert with Breedens for this Offer.

The Olam founding family shareholders and Key Management have agreed not to dispose of their stakes without Breedens’ consent during the Offer period and six months thereafter. They have also given Breedens a pre-emption right to purchase their shares, subject to certain limited exceptions as specified in the consortium agreement. Olam founding family shareholders and three members of Key Management have agreed to tender a 5.6% shareholding interest in Olam in acceptance of the Offer.

Source : Yahoo.com

Why Critical Illness insurance is important?

• Do you know Cancer is the No.1 killer in Singapore?
• Do you know 1 in 4 Singaporeans die of Cancer?
• Are you aware the cost of healthcare increase much more than the normal inflation?

What is Critical Illness Cover?

Critical Illness cover is a type of health insurance that pays out a tax-free lump sum if you are diagnosed with an illness that is deemed to be life-threatening under the terms of your policy.

This means that if you have critical illness cover in place and are diagnosed with one of the conditions, you will receive a lump sum payout from your insurer to maintain the same lifestyle during the period when you are undergoing treatment to cover the loss of income.

Please watch this Video on the importance of CI cover.

How much is an adequate cover to provide financial security for the family?

The primary purpose of any insurance policy is that it should be useful on major unforeseen circumstances. For eg, A whole life policy has huge advantages, but if the total coverage is going to be only $100,000, the benefit wouldn't provide enough financial security for the family. So it's important to cover with a pure term as a priority, if one cant afford whole life, at least till another income replacement starts with the family.

For Critical Illness cover, an adequate protection could be anywhere between 3-5 years of monthly expenses. Eg. If your monthly requirement is $5,000, to maintain the same lifestyle, an adequate cover for the sole bread winner would be $300,000 in coverage and $200,000 in case both work.

When is the good time to buy Critical Illness cover ?

Similar to any insurance plans, It's always better to start early at a young age when we are hale and healthy as it not only guarantees complete coverage, but also get the same at a much cheaper price. So start as soon as possible, especially before the health conditions change due to family history or otherwise.

I strongly recommend all parents to cover the kids at a young age.  How many parents are above 40 without any critical illness cover and find it extremely expensive to start cover at 45 and above? Kids need this at some point of time in their life and we could cover for $500,000 for just $5000 that too with a whole-life plan. 

What are the conditions covered ?

Please check the details of Critical Illness covered here

Are you keen for the family to maintain the same lifestyle irrespective of the situation?? If Yes, do give me a call at +65 8113 3272 or reach me at eshers@gmail.com