24 February 2013

8 investing GEMS from Warren Buffet - Morning Star


U.S. Investor Warren Buffett listens to a question during a news conference
This is what makes the legendary investor's investing philosophy a WINNER.
Berkshire Hathaway, the holding company managed by legendary investor Warren Buffett, yesterday announced it was, along with a Brazilian private-equity firm, buying American ketchup-maker Heinz for $28 billion.
The deal, the largest ever in the food industry globally, reinforces two things. One, Warren Buffett is still relevant in the investment world despite concerns over how the increased size of Berkshire's portfolio will make it exceedingly difficult for him to continue to deliver the stellar returns it has logged in the past.
And two, what helps him stay relevant is a clutter-free mind and a simple investment logic: the best investment opportunities are found not in the direction everyone is looking, it's often right in front.
At Morningstar, we have long been fans of the Oracle of Omaha and the core of our equity-research philosophy revolves around Buffett's stated principles: look to buy businesses with competitive advantages trading at a discount to what they are worth, and hold for the long term.
Which is why the highlights of our stock analyses are our fair value estimates of a firm; a moat rating, which describes the sustainable advantages (or lack thereof) it has over peers; and a star rating based on the fair value estimate that tells you whether the stock is trading near or away from its fair value.
Here we look into various aspects of the Heinz deal and supplement each with a Buffett quote, signifying how it has Buffett's investing philosophy stamped all over it:


Howard Marks - High Yield Bonds:: Oaktree

GAIL (India): BUY :: Business Line


Outlook- Reliance Industries, SBI, Tata Steel, Infosys, :: Business Line



Technicals-Bajaj Hindusthan, JB Chemicals, Graphite India, UFLEX, PC Jeweller, Parabolic Drugs :: Business Line




IL&FS Transportation Networks: Buy :: Business Line


Go for bull put spread in Nifty :: Business Line


‘Consumption is still a great long-term bet, but beware of unreasonable valuations’ :: Business Line


Following the rally in stock prices since 2012, investors will have to unearth value through bottom-up approach opines Lalit Nambiar, senior Vice-President and Fund Manager (Equities), Head – Research, UTI Mutual Fund. He also feels that we could be nearing the bottom of the investment cycle though a recovery could still be some way away.
Excerpts from the interview
With sectors delivering good revenue and profit growth already having run-up, where do you find value in the market now? Is the consumption theme still a good bet?
It has been a flows driven rally rather than based on fundamentals and I would think that even sectors where revenue and earnings growth were modest, have run up. Value will have to be unearthed through bottom-up stock picking. That said, perhaps there is still some opportunity in oil and gas names and perhaps private sector banking.
While at the current juncture one would want to be looking at investment-cycle driven themes, the consumption theme in India is a structural one and as such quite resilient. It may be overshadowed in the short-term by India's immediate needs for an investment recovery, but the consumption theme will endure throughout the time that the demographic dividend plays itself out. Net-net, I think consumption is still a great long-term bet, but we need to be wary of unreasonable valuations.
In 2012, investors did not prefer value stocks (dividend yield, stock trading below book value etc) and ran after growth instead. Do you see this trend continuing this calendar?
As we get closer to the bottom of the investment cycle, the wheel of fortune logically points toward the lead sectors in an investment-led recovery. A lot of liquidity is finding its way into the equity markets while global macro has not really improved; this potentially makes for a very volatile environment. But the 'bottoming out' process could be a prolonged one and there is a real risk of calling the recovery too early. On balance, I think the market will continue to go with growth but there will be many sharp adverse movements within this larger move.
What is your view on commodity stocks? Are they a buy now with China showing signs of revival?
Global economic indicators are still weak. It is still early days to conclude whether the China demand is in fact a revival or merely a seasonal blip, as data seems to show that their markets do perk up around the Chinese New Year, which corresponds to about mid-February in the Gregorian calendar.
Since the valuations in small-cap index have risen very sharply of late, what is your strategy with respect to small-cap stocks now?
Suffice to say that small-caps come with a disproportionate amount of risk, especially in the Indian market context. Given that based on fundamentals there are only a few stocks which exhibit a good investment case, we continue to maintain a low level of exposure in this space.
What is your expectation of earnings in FY14? How do you expect the market to move this calendar?
We should be in the range of 10-12 per cent on earnings growth coming off a lower base, unless there is a global blowout. With stronger flows into th equities worldwide a bit of P/E multiple expansion can also be expected, so our market should provide a return between 15-20 per cent in FY14.
What is your view on the rupee? Are export-oriented stocks a good bet given the structural weakness in rupee and mounting CAD?
From a fundamental perspective the INR fx rate seems to be now quite close to its intrinsic value. It seems to adequately reflect our economic fundamentals relative to those of other major global currencies. The INR looks like it will be flat with a slightly upward bias. The competitiveness of the rupee may not last long as it is reasonable to expect competitive devaluation by major exporting countries, thus the export tailwind from the rupee may not last for long.
How do you expect the FII flows to be in the year ahead?
A lot of money went into DM debt in the last few years, as the economic environment was very unstable. This money went in search of safety but the returns have been poor.  Now that some semblance of stability seems to have returned to the global markets, we understand that some of this money is now moving into equities in search of returns, especially into EM equities. Barring an unexpected global blowout, we expect this trend of flow into markets such as India to continue into next year.

VA Tech Wabag: BUY :: Business Line


Investment Focus - Talwalkars Better Value: Buy :: Business Line


Investors can buy the shares of Talwalkars Better Value Fitness, which owns and operates the Talwalkars chain of gymnasiums and health centres across the country. The fitness and wellness industry itself is vastly untapped and Talwalkars, with a strong presence in smaller cities too, is the only listed player in the space.
At Rs 163, the stock trades at 15.7 times the trailing 12-month earnings, at the lower end of the three-year valuation band. Given that most stocks tagged with a consumer theme trade at much higher levels, Talwalkars’ valuations appear reasonable. That said, being a small-cap (market capitalisation of Rs 440 crore), the stock is risky and investors are advised to take limited exposures to it.

SMALLER TOWNS

Besides the flagship Talwalkars chain, the company also has a chain called HiFi. Smaller in size and priced about 40 per cent lower than the Talwalkars, the HiFi model is being used to push into tier-II and -III towns. The margins are lower in this model, but it helps faster expansion, especially in small cities where the fitness wave is beginning to spread.
Rising aspirational spending on fitness in smaller cities may mean better business for Talwalkars, which has a good presence in Tier-II cities. Talwalkars also has the first mover advantage in these cities. As of December, almost 70 per cent of its health centres were in Tier-II and III cities.
Talwalkars’ new initiatives this year include high-margin Zumba fitness classes, weight-loss programmes centring on diet, and a new form of exercise regime involving electrical muscle stimulation. These offerings have got good response. Health centre expansion has been put through at a steady pace, and the company has used franchisees for faster expansion, especially in the smaller cities. So far this fiscal, the company has added 22 centres taking the total count to 137. Addition of members and renewal of membership have been steady.

MARGINS IMPROVE

Sales have grown 26 per cent in the nine months to December 2012. The once-wavering operating margins have steadied, holding above a healthy 35 per cent. But the company’s huge debt, taken on to fund expansion, and the asset-heavy model have led to high interest and depreciation costs. Net margins, thus, have hovered around 10 per cent. Net profits grew 43 per cent in the April-December 2012 period.
The company raised Rs 42 crore in equity in the December quarter and this will reduce the need for debt and also trim the debt-equity ratio from 1.01 times (March 2012). A possible dip in interest rates will also help reduce the interest outgo.

Whirlpool of India: BOOK PROFIT :: Business Line


INDEX OUTLOOK: Stocks will sway to FM's tune :: Business Line