Investing Basics - Feel free to ask the most basic questions


(Rohit) #464

Hi , would like to know how much importance should be given to promoter buying. How good they are in valuing their own company. Do they also buy based on PE calculations, valuation models , tracking the markets etc ? If they are buying their shares how should we know if shares are actually undervalued according to them or they are just trying to increase the shareholding because they can also use the same money to buy other companies also which are better performing .

So if they don’t buy other company shares , does that mean they think their business is undervalued and better growing than others or they buy just for the sake of increasing share holding , though the company business can be average.


(sambandham82) #465

That a very valid question at this point in time when TCS buyback shares @ 31 P/E.


(Dinesh Sairam) #466

Promoters mostly buy shares in their own company because they have direct control of what’s going to happen. We as individual investors don’t have that kind of power.

But promoters also buy to raise market spirit for their stock during some kind of controversy, to show that they’ve still got skin in the game. This would be a token purchase (Say <0.5%).

Other than that, it hardly makes sense to worry Promoter buying or selling. After all, promoters are also human. They’re prone to making errors. I remember writing about this sometime back on Quora: https://www.quora.com/If-a-promoter-stake-is-decreased-should-we-avoid-that-stock/answer/Dinesh-Sairam?share=bd44bbb0&srid=RdHr


(axiskumar) #467

Dinesh…

I am not able to understad DCM to value company…May be my IQ is very limited or need more explnation on how to understand the things mentioned in website…

Please let me know where i can get step by step procedure to know the methodlogy…

Great help…


(Dinesh Sairam) #468

This video should be a very simple explanation of how a DCF model works and what it means:

The model I personally use is this one:

A step-by-step guide on using this model is here:


(Vimi) #469

I recently came across news of HDFC bank / Yes Bank are planing to Preferential issues to institutional investors, at what price these shares are issued to this entities ?

I have read about How Buffet led Berkshire enters into such contracts with US Corporations and the deal is quite complex and the odds are in favors of Berkshire. Buffet used this tool in difficult economic times such as 2002 and 2008 against Cash starved corporations and made billions of dollars for Berkshire owners.

In Indian context, how does it work ? Given, this is not worst of times for equity markets, how these preferential issues are priced ? Is it fair to assume the existing shareholders do not loose in such deal ?

Any general views preferential issues ?


(Rohit) #470

Thanks , so my question is mainly with respect to promoter buying. I have seen promoter buying in few stocks (though not huge , < .5-1%) in recent correction. Can we also consider buying if the promoters are buying. I read in Peter lynch’s book, if promoter are buying , company is not going to dissolve in near term. I was worried about high receivables increase in Caplin point but promoters bought few shares recently in correction. So can I interpret sales were real and they will receive cash flows ? otherwise , why they would buy from open market , if their was a real threat to business and cash flows?


(shreys) #471

Dear @Rohitsharma,
If you don’t mind I’d like to share my thoughts on your question. Promoter buying is usually a healthy sign. However, what’s of supreme importance is the quantity and intention of acquisition of shares.
Often, promoter buying is cheered by retail investors, share price appreciates by 20-25% and promoters book profits. So, I personally wouldn’t place much faith in such buying.


(Dinesh Sairam) #472

One of all-time favorite quotes is: “In theory, theory and practice are the same. In practice, they are not.

As @shreys pointed out, it’s not the buying or selling per se that matters. It’s the reason behind that buying or selling that does. A promoter could be selling shares, but it wouldn’t mean the end of the world if the promoter is old and trying to exit corporate life. A promoter could be buying shares, but it could mean he is crooked if he’s trying to mislead investors. Nothing in life is black and white, especially when it comes to people.


(Capsule91) #473

Seniors and co analysts…

Can you help me understand, how is the revenue booking done in the parent company in a franchising model vs distributors?

Thanks!


(Kavin) #474

Hai sir,
Please suggest me books to get in deep knowledge about how to read Balance sheet of the company.
i am a full time investor,since from past 8 months,
i have picked NOCIL,LT FOODS,SOM DISTILLERIES,SANWARIA CONSUMERIES,DELTA CORP.

THANK YOU SIR


(Dinesh Sairam) #475

Here’s what I answered to a similar question in this thread earlier:


(Kavin) #476

Thanks a lot for your support sir…


(axiskumar) #477

The numbers section is so confusing…as a novice person …not able to understand where to pick those numbers from annual report…

Can you please help on number section ( section 3 in valuationinmition site)


(Dinesh Sairam) #478

I’ve provided a list of where I got the details from and also shown a screenshot of the entires. If you have doubts regarding a specific item, feel free to ask.

Full disclosure, I recently made minor changes in the excel (For KRBL that is). You should refer to this post for updates:


(axiskumar) #479

Sorry to tell you…dont know from which column of annual report the excel needs to fill…again i tried to understand…

Defenintly help is required…

Please help


(saurabhshares) #480

One basic question:-
When company issue bonus shares (eg 1 : 1 bonus). Then does the company promoters bring in the share capital money. For example. Lets say before bonus face value is 10 and share capital is 100 cr. After 1:1 bonus face value obviously remain at 10. But share capital become 200 cr. So does that mean this extra 100 cr has been brought from somewhere outside into the company? Or it is just adjustment of increasing share capital and reducing from somewhere else?

Thanks to everyone over here.


(Dinesh Sairam) #481

The Share Capital + Retained Earnings remains the same. It’s just divided into more parts (Additional shares) or put more precisely, the right to Share Capital + Retained Earnings is given to more number of people (Eventually). It’s just an accounting entry. No cash goes out or comes in.

If it’s a Right Issues, that’s when money actually comes in. In a Rights Issue, both the Number of Shares and Share Capital increases.


(bsdhindsa) #482

I was trying to understand valuations of different sectors.

Few common ratios for measuring majority of sectors are ROE, ROA , ROIC etc.

However there are different metrics to measure valuations of some specific sectors.

Financials are measured on P/B ratio.
Infra companies on EV/EBITDA.

Could someone please shed light on why these specific ratios for these sectors. Whats the significance ?
Please also share any specific info on any other sectors and their main ratios.


(abhrabumba) #483

Hi All,

This is my first post in this forum; though I come here often to have a look at the discussions going on individual stocks. Appreciate the quality of discussion and knowledge of the fellow boarders.

I tried to do the 5 year forecasting of a popular company - Rain Industries. More so because of its recent fall. Attached below is the link to the doc (I am unable to upload it since newbie):

Rain Industry forecast

I am a learner in this field and this is the first time I have tried to forecast and link the 3 financial statements. It goes without saying that I have failed in linking the statements despite the best of my efforts.

I would need help and feedback from all you in getting the sheet corrected and helping me learn.

The steps that I took and the issues I faced are as below:

Forecasted Income statement using Ratios:

  1. Sales Forecast:
    a. Calculated scenarios – Historical and Latest as per company sales
    b. Calculated Scenario where company sales will be equal to industry average. Competitors considered – Graphite India, Philips Carbon Black, Himadri Speciality Chemicals and BASF India. All companies are in Carbon production & Speciality chemicals field and are in related categories with Rain Industries.
  2. All other heads are forecasted based on Historical Average/ Latest/ Manual Figures.
  3. Depreciation is forecasted based on % on total Sales over years.
  4. Finance Cost is not forecasted as % of sales. It is derived from Balance Sheet.
    a. Finance Cost is derived as % to Non Current Liability to factor in the effect of change in long term liability.
    b. Non Current liability though is forecasted basis forecasted sales.
  5. Dividends are not directly forecasted in Income Statement. We derive these figures when we make the balance sheet.

What we see is that Profit (PAT) as a % of sales is inline with the latest trend.

Forecast Balance Sheet and tying with Income Statement:

  1. Equity Share capital is considered constant
  2. Reserves and Surplus is not directly forecasted.
    a. It is derived using (Reserves & Surplus = Total Assets – Liability)  Principle of Balance Sheet is TOTAL ASSET = TOTAL LIABILITY.
  3. Total Non Current Liability is forecasted as a % to Net Sales. Here too Historical/ Latest and Manual assumption mode is built in
    a. Considered “latest” ratio to forecast Non Current liability since we don’t know how long term liability will shape up. Also huge reduction in Long Term borrowing in 2017. Expectedly from 2019, the expected long term loan will be low and inline with 2017
    b. Individual items are Non Current Liability is not considered.
  4. Individual items in Current Liability is forecasted as a % to Net sales. Here too option of Historical average/ Latest Contribution and Manual option is given.
  5. Similarly Non Current Assets are forecasted as a whole since we would not need the forecast of individual items in Non Current Assets. (Only Change in Total Non Current Assets required in making of Cash Flow Statement)
    a. Here too Non Current Assets as a % of Net Sales is calculated and Forecasted basis Historical Average/ Latest/ Manual fig.
  6. Current Assets figs cannot be directly forecasted since Cash and Cash equivalents cannot be directly forecasted. It is derived from Cash flow statement.
    a. All other items under this head can be forecasted as a % Net Sales.
  7. We forecast Total Assets as a % of Total sales. Here too Historical/ Latest/ manual fig can be fed.
  8. Current Assets = Total Assets – Non Current Assets. This way Non Current Assets are forecasted.
  9. Retained Earnings = Total Assets – Current Liabilities – Non Current Liability – Share Capital
  10. Dividend to be paid (tax included) = Profit Generated – (Increase in Retained Earning)
    Cash Flow Statement is constructed basis the forecasted Income Statement and Balance Sheets.

Issues:

  1. Current Assets figs not matching.
    a. Cash is derived from Cash Flow Statement.
    b. Cash and Cash Equivalent in Balance Sheet = Opening Cash + Total Cash Flow Generated in the year.
    c. All Other contributors (Except Cash) are estimated as a % of Net Sales
    d. Ideally if balanced, Summation of individual elements in Current Assets = Current Assets Forecasted as a % of Total Sales.
    e. The above check is failing.
  2. Abnormal Dividend payout is happening.
  3. Also, in Dividend payout, how did the company arrive at the figs for year 2014-2017 is unclear. If we use the formula of (Dividend = PAT – change in retained earnings), then the figs are very much different than what is given in the annual statements.

Seeking help/ feedback from all valued contributors.