Quarterly results declared by 682 companies on Moneylife’s list have been very encouraging
Indian stock markets have been rallying sharply since March this year. While a large part of the rally was seen as a euphoric market reaction to the new government at the Centre, it appears that the fundamentals have played a strong role too in keeping the kept market sentiments buoyant. Out of Moneylife’s sample of 1,294 companies, as many as 682 companies have declared their June quarter results. The aggregate sales of the 682 companies were 12% higher for the quarter ended June 2014 than the sales for the June 2013 quarter. The aggregate operating profit has grown by 14% year-on-year (y-o-y), while net profit has grown by as much as 24%. Over the one-year period ended 9 August 2014, the aggregate market-cap of the 682 companies has grown by 43%.
Therefore, along with the increase in earnings, the valuations of the companies have increased significantly over this period.
In terms of profitability, profit margins too, have increased. The net profit margin (aggregate net profit/aggregate sales) of Moneylife’s sample increased to 10.2% in the June 2014 quarter from 9.2% in the same quarter a year ago. Operating profit margin (OPM) increased marginally to 17.86% from 17.64% over the same period. As many as 356 companies reported an increase in OPM, while 341 companies reported a higher NPM.
Coincidentally, the number of companies that reported a net profit in the June quarter is the same in both the years. As many as 574 companies or 84% of the sample, reported a net profit. The number of companies that reported an increase in operating profit increased to 630 from 617 a year ago. As many as 393 companies reported an increase in operating profit growth and 362 companies reported an increase in net profit growth.
As many as 39 companies which reported a net loss in the June 2013 quarter have reported a profit in the latest quarter.
In terms of valuation, as calculated by market-cap to operating profit (latest quarter annualised), as many as 558 companies or 82% of the sample are quoting a higher MC/OP compared to a year ago. Taking an aggregate, the MC/OP for the 682 companies was 10.8 as on 9 August 2014, 26.21% higher, compared to an MC/OP of 8.6 as on 8 August 2013. Investors would be hoping that the trends in profitability will continue.
Another valuation measure considered by Moneylife is market-cap to sales. Nearly 92% of the sample or 630 companies are quoting a higher MC/sales compared to a year ago.
Taking an aggregate of the 682 companies, the MC/sales was 1.9 as on 9 August 2014 compared to 1.5 on 8 August 2013. The price-to-earnings (PE) of the sample has increased to 19 from 16.4 over the same period. In short, the market is expecting the excellent performance to continue which is why we are witnessing expansion in valuation.
Stocks picked during the calender year 2013, performance analysed upto 31 March 2014
In 2013, the markets were indecisive for the almost the entire year. High inflation, a depreciating rupee, policy inaction by the UPA-2 government and fears of tapering by the US Federal Reserve, dampened investor sentiment. However, a few months into 2014, investors were filled with hope and the markets began to rally as the new government came into power offering an optimistic economic outlook. Despite the volatile market movements of 2013, the stocks picked by Moneylife during the year delivered an average return of 13%, since the time of recommending the stock up to 31 March 2014, or the date of exit, whichever was earlier. In comparison, the Sensex delivered an average return of 9%. Our stock-picks of 2012, delivered a similar performance, beating the Sensex.
From a database of over 1,200 stocks analysed by Moneylife, we wrote about a total of 42 stocks between January 2013 and December 2013. The stocks picked featured in our Street Beat section and Cover Stories. Of these 42 stocks, 26 stocks touched their recommended price. The remaining 16 stocks either never hit their recommended price or were not given an entry price as they were too expensive at the time of analysis.
Moneylife believes in analysing corporate performance, coupled with a sensible approach to finding the right price (or ‘margin of safety’) for picking stocks. It isn’t that only stock-picking is important; equally important is exiting from a stock, for whatever reasons, either for profit or to cut losses.
Out of the 26 stocks that hit the recommended price, 15 were profitable and delivered an average return of 38%. Of the 11 loss-making stocks, seven have hit their stop-loss level; the remaining four stocks still remain ‘active’ as on 31 March 2014. The average returns of these 11 stocks works out to -21%. The positions in most of these stocks were squared up when the market dipped in 2013. However, with the market rally in the past few months, most of these stocks have gone up from their lows.
Our big winners are some of the unlikeliest names that stockbrokers usually don’t discuss, since they usually focus on big names. These stocks are rarely followed. Among the top performing stocks was MPS, a company which provides outsourced services to publishers, including full-service editorial and project management facilities. The stock price doubled in about four months from the time of our recommendation. We exited at a gain of 110%.
Three other stocks gained over 50% in a tumultuous market. These stocks are still active and have not yet been squared up. Alkyl Amines Chemicals, a company which manufactures amine-based chemicals used in pharmaceuticals, gained 78% as on 31 March 2014 since its recommendation on 18 April 2013. Fluidomat, which manufactures a wide range of fluid couplings for industrial and automotive drive shafts, gained 58% as on 31 March 2014 since its recommendation on 28 November 2013. AVT Natural Products, the largest exporter of marigold oleoresins (a type of spice), has gained over 52% as on 31 March 2014 since its recommended price on 12 July 2013. Over similar periods, the Sensex gained between 10%-12%.
Apart from these, nine stocks gained over 15%. These include Unichem Laboratories (41%), National Buildings Construction Corporation (40%), RS Software (37%), Good Year India (36%), Shriram Transport Finance (27%), Elantas Beck India (24%), FDC (23%), Elgi Equipments (15%) and Mahindra & Mahindra Financial Services (15%). While these stocks averaged a return of 29%, over the same period, the Sensex averaged just 14%.
The other ‘active’ stocks which delivered meagre or negative returns as on 31 March 2014 were: Shriram City Union Finance (3%), Gujarat Gas (-6%), Greenply Industries (-6%), National Peroxide (-9%) and Balmer Lawrie & Co (-20%). These stocks have now benefited from the market rally and have gone on to deliver double-digit returns.
For long-term holdings, it is crucial to get out of stocks which have not met certain criteria. Out of the 26 stocks, 17 remain ‘active’, while we have exited from nine stocks. Out of these nine stocks, two were squared up at a stop-profit and the remaining seven were squared up at a stop-loss. We exited from Venus Remedies at a gain of 8% on 24 May 2013 since its recommendation on 2 May 2013, at a price of Rs277. The stock went on to hit a low of Rs140 on 2 August 2013. Even on 28 July 2013, the stock was trading below its exit price.
One of the common traits that separates good investors from average ones is the ability to cut losses. Ador Fontech, which we exited at a price of Rs60 in August 2013 and a loss of 28% since its recommendation in January 2013, went on to hit a low of Rs50 a couple of months later. An average investor is reluctant to get out of such stocks because of a behavioural bias known as disposition effect, wherein winning stocks are sold too soon and losing stocks are held on for long periods. Though this stock would have rallied recently, its market-cap is 1.14 and 6.53 times its sales and operating profit. When we had recommended this stock, its market-cap was 0.81 and 4.11 times its sales and operating profit. This stock has gone up with the broad-based market rally.
It is essential to review one’s portfolio periodically. This is an integral part of investing. By reviewing your overall portfolio, you can exclude the losers and improve your performance. Our stocks are reviewed on a fortnightly basis. If you would like to gain access to stocks that are picked though our analysis and you are updated about the performance every week, you can subscribe to Moneylife Stockletters (https://www.moneylife.in/promotion/Stockperformance/index.html). If you would like a holistic review of your investment portfolio, including the right mutual funds to buy and require solutions on your regular savings, do check out Moneylife Smart Savers (https://savers.moneylife.in/).
Crooks clog the courts, denying the honest the time to have matters heard
Friday afternoon. It was getting late in the Thane district court. The next day was a holiday. The opposing advocate had not turned up. We asked the judge to consider our situation, coming all the way from Mumbai and not getting ahead.
His Honour was sympathetic but asked us to be patient, saying that he had to hear the other side and, maybe, they had a legitimate reason.
Now you be the judge.
What would you have done?
We got to talking of cabbages and kings—of how overburdened the judiciary was; the pay increase meant longer hours. Saturday meant work with the Lok Adaalat, not a holiday like the lawyers and others got.
As we were discussing ways to tweak the system for speed, the opposing lawyer arrived and all was well. We progressed. Patience had paid dividends.
Three days later, a news report carried a story about the Thane court’s Lok Adaalat and how a Rs79-lakh award was granted by it in just six months. The speedy settlement was applauded by all, insurers included. The system had worked well. Good had prevailed.
On the Internet that morning was another bit of news. Two Delhi women had approached the West Delhi District Consumer Disputes Redressal Forum, asking for relief. They had two bills from a beauty parlour. The bills guaranteed ‘life-time’ service, something denied to them.
As in all cases, documentary evidence is of utmost importance. The bills had the words ‘life-time’ written on them. The women said that was proof enough. They must be compensated. The complainants had told the Forum that they had registered for the beauticians’ life-time course for limited services from Global Looks Beauty Parlour in June 2010, but the salon neither gave any services of this particular course nor did it refund their course fee of Rs16,000.
Open and shut case? Well, not exactly. On proper scrutiny of the bills, it was found that the words ‘life-time’ had been added later. Even the handwriting was different.
Now you be the judge.
The consumer forum is not a place to be toyed with. It held that the complainants tried to take undue advantage of the system, tampered with the receipts (forgery would be the correct word) and filed the complaint on frivolous grounds. Anyone so inclined, it said, must be shown the door.
“The legal system is meant not only to protect the poor litigant and a consumer who is not having enough bargaining power in comparison to the service provider but it is also meant to do justice to both the parties before it….” the Forum member, Urmila Gupta, said.
At a Moneylife Foundation seminar, the topic of bogus cases had come up and it was pointed that a very large majority of cases is filed by dishonest people. The beauty parlour case is one more instance of crooks that clog the courts, denying the honest the time to have matters heard.
If readers are at the receiving end in something similar, what should they do? First, win the case. It is easy, if you are in the right. Next, take the perpetrators to court. Forgery is a crime. Coupled with malicious prosecution, you will be awarded costs, for expenses and harassment. And you will find that the courts are, surprisingly and quickly, decongested. To cry oneself hoarse with suggestions of 24X7, 365-day courts, more judges and more staff, is not the answer. The real solution is before us. It is up to us.
Bapoo Malcolm is a practising lawyer in Mumbai. Please email your comments to [email protected]