Investing Basics - Feel free to ask the most basic questions

Chandragupta · December 25, 2021, 8:22am

I don’t have any specific knowledge of this subject, these are just stray opinions!

I think one must accept that there is an inherent conflict between industrial growth and environment, and each country has to balance the conflict in the light of their priorities. China now counts itself among the developed world (which is true also) and hence has begun to emulate what the West did 25 years ago. And so we see the “growth-at-any-cost” strategy replaced by a more mature approach. China understands that environment is important, and growth is no longer as urgent as it once was. For India, I believe economic growth should still drive the agenda as we still have a long way to go to uplift those at the bottom of pyramid. This is not to say environment can be ignored, but economic growth is more urgent. I think India has been playing this balancing act quite well.

As you rightly point out, India is not the only one to benefit from China +1, there will be others too. It all depends on who is best placed to fill up the space that China vacates. And here, the competitive position of each country will determine the outcome. For example, Bangladesh & Vietnam may benefit in textiles, India in Chemicals & Pharma and so on. Luckily for us, Chemicals & Pharma are not just manufacturing, they are also “knowledge” industries. This creates a natural entry barrier which others cannot break through just by playing a labor cost arbitrage. So these sectors can give India a sustainable edge for many more years to come.

Aside of all this, the world is also waking up to the fact that China is a political hot potato. This makes China + 1 a strategic imperative as over reliance on China can prove disastrous in case of a political black swan event. I don’t see China + 1 as a hype, it is a necessity to ensure long term survival.

barathmukhi · December 25, 2021, 8:54am

@Rafi_Syed China + 1 is a macro factor with too many moving parts and can be considered top-down approach to investing. Whereas, a bottom up approach usually works best, in my view.

When I heard China+1 for the first time, my mind immediately jumped to the conclusion that the +1 represents India. But a deeper look indicates otherwise. The +1 could mean numerous countries other than India.

Besides, here are some of the moving parts that may need to play out for China+1 to actually benefit India:

If the Chinese are clamping down on polluting factories, how long will they continue to do so?
What will happen when the music stops?
What are the chances of the Chinese eventually moving these polluting factories far away from the * cities? What will happen then?
How many other companies in countries other than India can benefit from China+1?
And so many other miscellaneous factors…

I don’t like to dig holes to the centre of earth to unearth information. In most cases, such investment cases are probably not worth investigating. That’s a trade off I make to keep things simple for myself.

I have seen some other superb investors who are very good at this and I am not. And I am at peace with that. As long as my existing methods can generate an alpha for me over the indices, why bother? This is not to say I won’t keep learning, but I will stay away from analysis paralysis.

How to play China+1 using a bottom-up approach?
What will happen when China+1 materializes and Indian companies start benefiting from this policy?
Sales, Profits , Margins and ROEs of Indian cos will rise.
To quote an example, Wuhan was the first province to be locked down by China, last year. Now, Wuhan is where a lot of APIs are made.

What happened when that business started moving from Wuhan, China to India in early-2020?
Mr. Market started noting this development and quickly jacked up prices of API cos like Aarti Drugs, Laurus Labs, etc. With every passing quarter this trend got confirmed and stock prices of API cos moved up swiftly.

So, one way to play China+1 is to keep an eye on companies where sales/profits are suddenly increasing. And the second way is to keep an eye on stocks that are breaking out to all time highs and then try to figure out why they hit an all time high.

This increases the odds that I catch the China+1 wave or any one of the other thousands of waves that keep happening all the time. The current fave being the EV wave.

guest_eps · December 26, 2021, 8:08am

Hi All,
have question on shared holding…
when it say:
" Individual share capital upto Rs. 2 Lacs" and “Individual share capital in excess of Rs. 2 Lacs”
is it individual investors count… with number of shares…
i.e individual investors with shares amounting to less than 2lakhs…
example of DeepakNitrite:
Individual share capital upto Rs. 2 Lacs
No. of ShareHolder: 3,63,709
No. of fully paid up equity shares held : 3,07,00,552

Individual share capital in excess of Rs. 2 Lacs
No. of ShareHolder: 14
No. of fully paid up equity shares held :32,20,057
i.e 14 shareholders with shares 32 lakhs… whose sharecapital is above 2lakhs…
is it correct, my doubt is only 14 above 2lakhs isnt clearing for me…
for a stock like DeepakNitrite we only have 14 shareholders with above 2 lakh invested… isnt something believable…

just any comments…

Thanks…

Surender · December 26, 2021, 5:21pm

This is how I infer: It’s not the amount of money invested by an individual shareholders.

As shown above, the total share capital of this business ( [DEEPAKNTR) is 27.28 Cr [13.63 Cr. shares Qty., each with Face Value of INR 2].

The 14 shareholders are holding share Qty of more than 1 lakh and the same results in the share capital of more than 2 lacs after multiplying with the Face Value of INR 2.

Gchamp · December 29, 2021, 5:20am

Entered tata motors at 280 levels and in good profit. bought tata motors for EV play. But the current results and growth is not justifiable . Is tata motors a good pick also how to conclude on how to sell a stock?

preetkaran · December 30, 2021, 9:40am

i was looking at the balance sheet of a company.

In consolidated BS, account receivable was 5 cr
In standalone, AR was around 13 cr.

Why the discrepancy?

Chandragupta · December 30, 2021, 1:52pm

Out of that Rs.13 crore, Rs.8 crore would be from its subsidiary company. It gets knocked off in consolidation, leaving only Rs.5 crore external receivables.

Quiet · December 30, 2021, 2:33pm

In screener.in it many times says in the list of cons that
“the company might be capitalizing on interest cost”.
What does it mean and is it a serious cor gov issue ? How can we detect if it’s true ?

preetkaran · December 30, 2021, 4:03pm

Thank you sir for clearing the doubt…

One thing more if I may ask;

One company I was researching was expanding into international markets but has inventory keep more than the sales amount.

Would it be a red flag for you?
Or it’s just a nature of growing company.

Thanks in advance…

Rafi_Syed · December 30, 2021, 9:03pm

EV Theme , especially Passenger Vehicle (4 Wheelers)

Is it hype or real ? If we see the sequential growth , people are not buying more cars. The prediction when Taxi Aggregators entered ; people will prefer to rent a car than own a car. This is the preference for the Millennials.

Total number of units sold ( ICE + EV) on sequential basis are not very huge when we compare against Pre-Covid level numbers ? ( There is huge pent up demand for new cars, few days back I visited a Toyota showroom to buy a used car, the dealer said the prices have gone by 40%, they don’t have stock of new cars to sell, one has to wait for atleast for 6 months , they are calling the their customers if they have car to sell. One of my friend bought a car last year 2020 just after first lock down for 20K, now the same car with similar specification and mileage they are selling at 27k, interesting part is people are ready to buy , two reasons are new cars are not available and in the west government is pushing very hard to give away Diesel cars by introducing ULEZ and all )

Please share your thoughts.

Thanks

Chandragupta · December 31, 2021, 9:03am

I presume you are referring to annual sales amount. If yes, it would indeed be quite unusual to have inventory higher than sales. It calls for further scrutiny as to why the inventory is so high, and if no satisfactory explanation is found, it can be considered a red flag.

You may note that certain businesses by their very nature are prone to high inventory levels. For example, basmati rice is “aged” for a couple of years before it is brought to market. Rice companies therefore show very high inventory levels. Aging is also very common in alcohol. Retailing & fashion have high inventories. A real estate player executing a large project may show high inventory level if there are a large number of unsold flats. Typically, it is a good idea to compare inventories of target company with inventory levels of peers in similar business lines. That should tell you what “normal” inventory should be for the company in question and whether there is a red flag.

The nature of inventory also matters. I am quite okay with high raw material inventories. Companies sometimes buy in bulk to take advantage of low commodity prices, avail of bulk discounts or simply to insure against supply chain disruptions. But high finished goods inventories may point to window dressing and one must be cautious such cases.

preetkaran · December 31, 2021, 9:09am

Thanks for reply sir. It’s very much clear.

The company is in home decor space.
It manufactures window binds and their model is like, the take orders from customers throughout India and then manufacture the item as per the customer need.

Created a thread on this;

Ritwik1 · December 31, 2021, 10:10am

Hi friends
I was learning about cash flows, but got a doubt. This is cash flow statement of TCS from screener.in, as far as i know Row 4 in screenshot is know as free cash flow. But this row is not very consistent (negative in 5 years out of last 12 years) although TCS is stable company. If there is so much inconsistency in free cash flow, how can we do DCF analysis? Am I missing something?
Please help

, Thanks in advance.

Caution_Investor · December 31, 2021, 11:27am

That’s not the way you do it bro!

Expand “Cash from Investing activity” under which you find “Fixed assets purchased” and “Fixed assets sold”

Free Cash Flow = Cash from Operating Activity - Fixed assets purchased + Fixed assets sold

FCF For TCS in Mar2021 IS:
38802 - 3075 + 37 = 35764 Cr.
Thanks

Ritwik1 · December 31, 2021, 3:37pm

Got it @Caution_Investor Thank you.

Rafi_Syed · January 3, 2022, 6:09pm

What is break even capacity ?

I was going through a report of Rajratan and come across this term. My understanding is earlier the company used to sweat its asset by at least by 52% to break even now they can achieve that by by 32% , is my understanding correct ?

Vikram.b · January 4, 2022, 3:14am

A query to all experienced folks here ,

How should we invest based upon capex plans of a Co. Should we invest when the capex is announced or when the capex is in execution or it’s completed and production has started or when we see actual numbers in revenue ? In later cases it might be too late to ride the growth ? Case here could be deepak fertilizer or nitrite , both have big capex plans ,share price is not much increased so is it already priced in , or it would start reflecting inline with capex execution.

Thanks in advance.

Chandragupta · January 4, 2022, 3:16am

You can divide all costs into fixed costs and variable costs. Contribution Margin is what is left after you deduct variable costs from revenues. This is what is available to cover fixed costs. When contribution margin is equal to fixed costs, you have a ‘no profit no loss’ situation. Earlier, they achieved this at 52% capacity utilization, now they reach it at just 32%. So business risk has come down. They start making profit at 32% utilization instead of 52% earlier. That is what they are saying.

ChaitanyaC · January 4, 2022, 5:06am

I am not experienced but I can say this.

Capex funding is one aspect to look for. How is a company funding the capex, internal accruals, external debt, if so at what rate? Where will this additional product go, what will be the margins, what are the competitors doing and saying? etc.

I have read, that in anticipation of demand, companies make capex plans and then market is flooded, so profits come down. So not every capex plan may not be beneficial for the company and for the investors. I guess, market senses this very easily and its reaction in whichever way can be treated as an answer to this.

On the other hand, for a company, which does not take external debt and funds its capex plans with internal accruals, whose addressable market is large enough for the additional product to get absorbed, with a management who has experience in this and executes, price appreciation is bound to happen, more so in oligopoly or niche markets. The pie is large enough for many to eat or all eat different items.

One could even do this. Company A is supplying to a large company B, so it would help if to know the business of company B too. If B does not grow for whatever reason, what would A do with the additional capacity, inventories?

Hope this answers a bit.

Ritwik1 · January 4, 2022, 6:10am

Hello friends
I have a portfolio of around 15 stocks. While adding stocks, i did not allot any stock more than 7 %. But now one share (Saregama) increased and its weightage is now around 19%. I have confidence in this company. What to do now, should I sell small portion of its stock ?
What should be the maximum exposure in a particular company ?
Thanks