Stocks analyzed and Rejected

I analyzed these stocks on my blog:

Feel free to comment. I am not sure whether this is the right forum, but some of these stocks appeared under this forum topic. Hence, found it appropriate to publish it here.

I analyzed 4 stocks in depth this week. One company appeared on my screen due to superior return ratios and a decent CAGR over the past 5 years. I researched two other stocks as they were recommended by Hitesh Patel (of the famous hitstocks blog fame). The other stock I analyzed was due to low P/B and comparatively low P/E (and also considering it is a proxy for the consumer goods industry). Hereâs my analysis and reasoning of why I rejected these stocks. On the face of it, they look compelling, but on deeper dive, not so much.Please feel free to let me know your opinion.


_Reasons to Consider: _

)- Mazda Ltd operates in two different industries - Engineering (primarily Industrial machinery) and Foods
)- P/E ~ 6, P/B = 1.4
)- The company has been posting impressive numbers over the past 5 years
)- ROCE CAGR of ~ 20% and NPM CAGR of ~30% of over the past 5 years
)- Negligible debt, High interest coverage
)- Hived off the Valve division (low margin, high inv) for Rs 22 cr which is supposedly a catalyst. AR states that the sale proceeds would be used in the vacuum pump division which would grow faster.
)- All in all, looks an extremely good stock. So far so good.
)- However, operating in two different industries (diworsefication), and the Food division started and managed by the MD’s daughter (Ms. Shananya Mody, daughter of Mr. Sorab Mody)
)- Insider selling by the only other Wholetime Director (Percy X Avari). Mr. Percy Avari is supposed to be the brains behind the industrial machinery design.

Decision Taken:

Reject for now. The AR isn’t clear if they are investing further in the food division at all inspite of the razor thin margins and low volume. If they hive off the food division, this looks like a good buy. On the other hand, if Ms. Shanany Mody gets the ownership of the entire company, I would be skeptical in investing in this company (Food division is her pet project - I am not too sure how cashflows would be utilised).

STOCK NO. 2â HOV Services

Reasons to Consider:

)- HOV is one of the largest end-to-end BPO companies, providing healthcare, finance and accounting, e-content management and other services across key verticals such as BFSI, Healthcare, Government, Telco, Publishing, Retail, Commercial and Industrial Manufacturing industries.
)- The major motivation to get in depth of this stock was the recommendation by Hitesh Patel (of hitstocks fame - his stock picking ability is awesome!)
)- Although they have been paying down debt year on year, they still have a tremendous amount of debt, especially considering its a BPO company
)- Their earnings (recent and past 5 years) have been nothing to write home about
)- The lesser said about RoCE, RoE CAGR, the better. They are actually decreasing
)- I am not even sure of the Interest coverage
)- Even after a steep fall, the stock looks expensive on a adjusted PE. However Adj PE TTM is close to 12.
)- With so many BPO players, I am not even sure whether HOV would have any competitive advantage (inspite of many clients across sectors).
)- They are opening a center in China.

Decision Taken:

Reject for now. Their debt levels scare me. I’d probably look at this stock say 6 months from now and see if the debt levels have been reduced significantly. It may be a turnaround story, a value buy and all that - but I’d much rather wait and watch than jump the gun on this one.



Reasons to Consider:

)- A market leader in industrial gears for various industries like steel, sugar, power, aviation, cement.
)- Again, a stock covered by Hitesh Patel (I hope Hitesh doesn’t get pissed at me critiquing his stock picking) and hence the motivation
)- Fantastic return ratios ( > 20%) of RoE, RoCE and RoA till FY09
)- A sudden plunge in all these ratios in FY10 due to shutting down of plants, union strikes, restructuring etc.
)- Major upside can result due to the restructuring exercise.
)- They were planning to sell of the land/partner in a real estate deal in Coimbatore. But I’d guess it can only add Rs. 5/share to the earnings and its one time. Any long term growth can come only due to restructuring.
)- I got really interested in the stock due to its near monopoly in industrial gears although foreign companies are catching up.

Decision Taken:

Reject as of now, but will be closely tracked on my radar. I’d really like to see if the mgmt can pull off the restructuring successfully. Two quarters/year from now would be an ideal time to look at this stock (I am ok to buy this stock even at 1.5x current price if the restructuring comes off successfully). I believe in its long term story. If the restructuring goes south, well…that is about this stock then.


Reasons to Consider:

)- LEEL is largest makers of air-conditioner heat exchanger coils in India. The company is OEM supplier to almost all AC manufacturers in India, and have overseas business of approximately 20% of sales. Its main products are: Heat Exchangers, Rail Coach ACs, Window/Split ACs
)- Investigated this as Abhishek Basumallick had put it up.
)- Its closest competitor, rather similar competitor is BlueStar
)- The only attraction of LEEL is a low P/B value (0.6) and a low P/E value (~10 compared to BlueStar’s P/E of 20)
)- However, consistent negative cash flow for the last three years, very poor RoCE (~9%), RoE(~6%) and OPM of 8% and NPM of 4% make it very unattractive.
)- The only catalyst which I could see was that they started supplying ACs to metros. However, their debtor days are already close to 110 days. Considering LEEL would be supplying these ACs to metros, I’d expect this to go up, considering the usual delay in govt. payments.

Decision Taken:

Reject as of now. Would like to wait and see how they perform over the next two quarters. The stock has been stuck at Rs. 70 levels for long. I would not pull the trigger on this yet.

Hi kiran,

Thanks for the analysis. Criticism always helps.

regarding HOV services, you need to look at the consolidated numbers and not the standalone numbers as you seem to have done while calculating PE. Rest all negatives apply to hov, but for me it is a dividend cow giving Rs 2 dividend every quarter since last 3-4 quarters.



Hi Hitesh,

Isn’t the PE 12, on a consolidated basis? Am I calculating this wrong? (Standalone is close to 40 :))

This dividend policy. Never understood the logic of it. Why doesn’t the company pay down its debts faster (and bring it down to a more acceptable level) than pay dividends? I am usually in favor of paying down debt than receiving dividends - I will take the capital appreciation any day (and yeah, what’s with Rs 8/sh of dividends over the last year - isn’t that like a sign of poor management that they pay dividends than pay down debt? I still can’t reconcile to it :))

Hi Kiran,

HOV paid an interest of 6.31 cr in sep 2011 qtr as against 9.15 cr in sep 2011 qtr and around 13.68 cr in half year ended sep 2011 against 18.56 cr in half year ended sep 2010. Total loan is of around 524 crores as on sep 2011. I think part of loan may be in form of pref shares.

Half yearly eps is around 29 if u dont consider pref shares and 15.83 if it is considered according to their half yearly results published on bse. Most quarters are usually similar in terms of results, there being no seasonality in business.

Regarding dividend policy, it might be an attempt to restore investor confidence after their write off last year of around 132 crores which dampened sentiments.

Regarding paying debt etc, if debt is not eating too much into the profits they might be justified in continuing with it. Paying interest of 13 crores after gross profits of 51 crores on half yearly basis seems okay.

Although I need to dig into AR again to understand the debt imbroglio properly.

LEEL was last discussed in 2010. Things certainly have changed on the stock price front. Would you or anyone int he forum be willing to analyse LEEL once again?

LEEl has its own thread… please search.

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I just checked for curiosity, what would have been the performance of an equally weighted portfolio of these rejected stocks since end of 2010. it works out to about 20% CAGR.


Thank you for pointing me in the right direction. Could not find it on my earlier search. Found it now.