A Brief summary of the Micro/Small/Midcap Carnage


(Growth_without Debt) #280

https://www.yahoo.com/news/trump-says-market-crash-were-impeached-113604564.html


(Mahendra243) #281

Dont worry he will not be impeached by financial irregularities in election campaign…if bill clinton can come out of lewinsky episode…IMO this is quite a small in nature…US and world economy needs people like him…so that he can stop Chinese dumping in all countries with their cheap products…


(Paulbiplab) #282

Strange that in the entire thread there is no mention of Kwality, an operator driven stock which even SEBI does not have the guts to penalise - is ot because they have a cute advertisement featuring Akshay Kumar.:grinning:


(shyamutty) #283

The Magic of ROCE

The 2007 letter of Berkshire Hathaway is a classic. If there is only one Berkshire Hathaway letter you want to read, this one is it. In that letter, Warren Buffett narrates the success of See’s Candy.

“We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million (Modest seasonal debt was also needed for a few months each year). Consequently, the company was earning 60% pre-tax on invested capital. Two factors helped to minimize the funds required for operations. First, the product was sold for cash, and that eliminated accounts receivable. Second, the production and distribution cycle was short, which minimized inventories.

Last year See’s sales were $383 million, and pre-tax profits were $82 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business. In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire (or, in the early years, to Blue Chip). After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses. Just as Adam and Eve kick-started an activity that led to six billion humans, See’s has given birth to multiple new streams of cash for us. (The biblical command to ‘be fruitful and multiply’ is one we take seriously at Berkshire.)

There aren’t many See’s in Corporate America. Typically, companies that increase their earnings from $5 million to $82 million require, say, $400 million or so of capital investment to finance their growth. That’s because growing businesses have both working capital needs that increase in proportion to sales growth and significant requirements for fixed asset investments.

A company that needs large increases in capital to engender its growth may well prove to be a satisfactory investment. There is, to follow through on our example, nothing shabby about earning $82 million pre-tax on $400 million of net tangible assets. But that equation for the owner is vastly different from the See’s situation. It’s far better to have an ever-increasing stream of earnings with virtually no major capital requirements. Ask Microsoft or Google.”

ROCE = EBIT/Capital Employed

How do we calculate ROCE? Well, there are a few variants. But the easiest one is shown in this paper by Mirae Asset Management. Marketsmojo uses the same method.

EBIT is easy to calculate, but what about the Capital Employed? The paper says: “Capital Employed is the capital investment necessary for a business to function. It is commonly represented as Total Assets Less Current liabilities (or Fixed Assets plus Working Capital).”

ROCE is a far more useful measure compared to Return on Equity (ROE) as: “ ROCE is especially useful when comparing the performance of companies in capital-intensive sectors such as utilities and telecom. This is because unlike Return on Equity (ROE), which only analyzes profitability related to a company’s equity, ROCE considers debt and other liabilities as well. This provides a better indication of financial performance for companies with significant debt.”

It follows from the equation that in order to generate high ROCE, a company must either have very high profit margins or need low levels of Capital Employed or a combination of the two.

We have had many such companies in India as well. Many consumer related business enjoy high ROCE due to their Asset Light nature. Hindustan Unilever with ROCE at close to 800%, Nestle at 400%, Page Industries at 84% are great examples.

From MarketsMojo


(nil_71) #284

Agree. But what is the basis for PayTM Investment ? A hugely loss making company…and now all biggies will be vying for market share…


(Dinesh Sairam) #285

Berkshire Hathaway’s Market Cap is $520.50 Billion. The investment in PayTM is $400 Million or so. So in essence, the investment is 0.08% of the company’s market value. The deal is simply too insignificant for Warren Buffet to intervene. In fact, Berkshire Hathaway has specifically clarified that Warren Buffet had nothing to do with the deal.

Warren Buffet himself stated that it was Charlie Munger’s idea to invest in PayTM. In fact, given that Todd Combs has joined the board of PayTM, it is most likely his idea in the first place.

There are some speculations about whether Berkshire Hathway can use PayTM’s business model to generate substantial amounts of “float” to fund its own investment purposes. I personally doubt whether the RBI would allow such a thing. We’ll just have to wait and see.


(divyansh ) #286

Dont know the relevance of connecting Warren buffett with paytm. But out of the two legends according to me charlie is phenomenal when it comes to the use of various mental models and intelligence. He is more underrated but offer lot more to learn as compared to buffett , specially practical advise to be a better and learned person each day. Rest everything just follows


(Deepak Venkatesh) #287

Hi

True. There is no way the float benefit can accrue from a payments business in India as per RBI regulations. The so called float has to always be in an escrow arrangement with a scheduled commerical bank in India. The regulations to take care of customer and merchant interests are actually quite good. And I think RBI has done an excellent job in doing so. I personally have seen half a dozen good improvements in the last 5-6 years.

Rgds


(Dinesh Sairam) #288

As I’ve mentioned, the Investment is too insignificant to amount to anything. I could have personally made that call and it still wouldn’t have made so much as a dent in Berkshire Hathaway’s Value.

They could be testing waters by exploring the Indian BFSI landscape (Todd Combs did become a Board Member in PayTM). They could have thought that using Berkshire Hathaway’s knowledge in BFSI, they could turnaround PayTM. Or it could be a dozen other reasons.

All I’m trying to say is that the investment is too small to warrant a feverent discussion.

I was thinking along the lines of PayTM becoming a true ‘digital bank’ like they’ve been trying to do for over a decade. If at all they’re able to pull it off, there could be a possibility to generate a float. The RBI would still be strict about using a bank’s money for acquisitions.

Alternatively, I just thought about this. BH’s Ajit Jain was tasked last year to study the insurance industry in India. I remember Mr. Buffet saying that he’s the right man for the job. This could have something to do with the acquisition (Digital insurance?) But given Buffet’s distance from this deal, I doubt this is the case.


(Raj A A) #289

Looks Scary
Goldman Sachs indicator designed to provide a “reasonable signal for future bear-market risk” has risen to highest in 50 yrs

Bull/Bear Index, based on measures of equity valuation, growth momentum, unemployment, inflation and the yield curve, is now at levels last seen in 1969.


(Dinesh Sairam) #290

Is this for the US market or the Indian market?


(Raj A A) #291

It is not explicitly mentioned. i do not think it is India’s specific. This is to be taken with the pinch of salt.


(Devaki Nandan Tripathy) #292

This is US specific information. But, a better question would be, what is the correlation between Indian and US markets? Considering last few decades of BSE Sensex vs DJIA chart, it seems they are highly correlated.

EM stocks are the favorite whipping boys of any global fund manager. As LTCM episode of 90s or Bear Stern/Lehman collapse of 2008 has proved, emerging market stocks are dumped en masse at the first sign of investor panic and market crash.


(Dinesh Sairam) #293

Yes… that’s exactly why I asked. Historically, it’s true that EM Markets have taken a toll during DM Markets crashes. But now… the dialogue seems to be in favour of EM Markets:

https://www.google.co.in/amp/s/www.bloomberg.com/amp/news/articles/2018-07-06/this-metric-shows-emerging-market-stocks-are-cheap-cheap-cheap

https://seekingalpha.com/article/4196879-emerging-market-stocks-looking-cheap

There was also an article about a famous value investor endorsing EM equities as well, which I can’t find right now.

I don’t want this to look like a “this time it’s different” conversation. But it does look like it’s going to be a little different this time.


(Devaki Nandan Tripathy) #294

The third wave is in motion now. Let’s see how low it gets before stopping.


(shyamutty) #295

Carnage in Housing Finance today:
DHFL (-52%), Gruh (-17%), IBHF, Repco, PEL, BajajFinance, Can Fin etc.
What could be the reason?


(phreak) #296

Looks like a complete flash crash in progress! Exciting times :slight_smile:


#297

No its not a flash crash. Institutional market participants understood that the numbers behind some NBFCs were too good to be true. They kept making money on the long side while they knew true state of affairs.

"Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend and step off before it is discredited" - George Soros

IL&FS is a ponzi scheme and lot of subsequent skeletons will tumble.
Yes bank CMD being replaced is the tirgger and this means that possibly RBI will be conducting an audit on all NBFCs with too good to be true NPA figures

I am just sharing my opinion so please don’t accuse for rumour mongering.


(Devaki Nandan Tripathy) #298

Lots of multiyear supports have been taken out. Upturn may not be as swift as market participants expect.

With MF inflow falling day by day and FIIs unwinding carry trades, no strong hands to support the market. Today’s low will be tested and may be taken out subsequently.

The Modi trade seems to be unwinding. :grinning:


(phreak) #299

Its not just the NBFCs - This was the state of Midcap index today - Down almost 8% intraday and recovering.