Simran Farm - Query

Friends, 
I got this query from Kumra.


Hi Team,

Its true that simran farms is a gr8 pick but for no reason it has fallen down from 85 odd levels to 40....do u have any reason for this??? 


Whilst replying I realised that there were several reasons hence I am replying through a new post. Please appreciate that the reasoning given is my understanding of the situation.


The reasons are as follows.
a) The general downtrend in the market has reduced midcaps and smallcaps by an average of 50%-100% from their highs.
b) Monsoons are never a good time for poultry industry especially in North India because of festivals like "Navratri" etc. A lot of people also turn veggies during "Saawan".
c) Floods in North India led to dumping of products by farmers and this plummeted rates. Read this article on Economic Times.


Hence the profit margin for Simran plummeted in September 2010 quarter.


Let me leave you with a very interesting comparison between Simran Farms and Srinivasa Hatcheries. Sales for both the companies are about same but look at the market cap of both companies. Check it out guys.
Some of the difference can be ascribed to low levels of profit margin of Simran. But 16 crores compared to 114 crores. Thats a lot of difference. Isnt it?


Just imagine if Simran gets even close to the profit margins of Srinivasa Hatcheries.


Till my next post happy investing.

Chicken and egg story

Inflation seems to be on everyone's lips nowadays. Not because it is fashionable to talk about inflation but because its hurting everyone quite bad as soon as you venture into the market. On one of my recent visits it just occurred to me that amidst all this price rise if we could find a company which was benefitting we could possibly hedge the pinch to our pockets, (i.e., the increase in price of daily food would be offset by the increase in the share price of the company gaining from the inflation)

Hence, I put on my thinking cap to scout for companies which would benefit. I started trying to find companies which were producing and selling onions, garlic or tomatoes or other pricey vegetables. Soon I realised that my efforts were in vain.

However, a few days later whilst I was dining out at KFC I got the company I was looking for. It was companies engaged in the poultry sector. I tried verifying at the market (Eastern India) and realised that the prices of eggs and chicken too had shot through the roof. An average of 33% rise whilst the fodder price would not have increased to the same extent. However this was lot less than what had happened to the prices of vegetables. Hence I am sure the consumption of meat products must have substituted to some extent the usage of vegetables.

Again we add to this the fact that the cold has been particularly severe this year and the consumption of meat products go up quite a lot during winters you will realise what I am getting at.

Volume increase + price increase+ not much increase in price of input raw materials (Ideal combination for profit growth)

And the companies are

1) Venkys
2) Srinivasa Hatceries
3) Simran farms (My favorite as it has the potential to double form current levels of Rs 44 odd)

All of these have the potential to give atleast about 50% gains after the results come out. If you think my reasoning is good enough go for it guys. However, if you think my reasoning is flawed do let me know

Till my next post happy investing

Bonus and split – a valuation perspective

Friends, a belated happy new year to all of you

I was again quite busy for the past couple of months. Hence my absence. Unless some other assignment comes up I think from now on I should be on this blog atleast once every fortnight.

But in hindsight it was actually quite good to be away because it saved me from the ignominy of discussing a stock and then watching it crash. Its even better considering that some stocks have now come at mouth watering levels. Will try and dwell on them in the posts to come. But this post is largely dedicated to my views about bonus and stock split and what they actually mean.

In recent times the number of companies doling out bonus shares or doing share splits seems to have increased dramatically. And this phenomenon seems to cut across sectors and market capitalization. 
And what happens when these corporate actions are announced. The share prices invariably shoot up. There is a common feeling amongst the shareholders of being rewarded when they get a bonus share. I for one have never understood what difference it makes and why the prices should go up suddenly because from a valuation perspective nothing changes.  Thus I felt I should share my thought with all of you and get your inputs as well.
Before I go any further lets understand what happens to the equity share structure of a company when bonus shares are issued or share split happens.
First the difference.  In case of bonus shares the paid up capital increases and there is a corresponding reduction in the reserves. On the other hand in case in case of share split neither the paid up capital increases and nor is there a reduction in the reserves of the company.
But in both these cases the effect is the same. The number of shares increases.
Now to the valuation aspect of bonus shares / stock split. There are broadly 3 ways we could look at the valuations of a company.
a) Enterprise Value / EBITDA – This essentially means the value of an enterprise with respect to its cash earnings.
b) Book value per share – Simply put, this is nothing but the value of a business (assets less liabilities) divided by the number of outstanding equity shares.
c) Earnings per share – This again in simple terms would mean the net profit of a company divided by the number of outstanding equity shares.
To my mind the 3 measures mentioned above are key to identifying value.
So lets take an example to understand the implication of bonus shares / stock splits.
Suppose the number of outstanding shares of Company A is 1000 of face value Rs 10. It decides to issue bonus share in the ratio of 1:1 (one equity share of one share held). Say the ruling price of equity share in the market is Rs 400.
So, after the bonus shares are issued an investor holding 100 shares initially will have 200 shares and the ruling share price of Company A's shares would become close to Rs 200.

What else changes. To my mind nothing else. Assuming the post bonus price to be closer to Rs 200 the EV / EBITDA measure will remain about the same. The book value and EPS will become half of what it was pre bonus. But you will have more number of shares. Please note that if the price remains at Rs 200 then the value of investment will remain closer to Rs 40000. (ie Rs 400 X 100 shares = Rs 200 X 200 shares)

So what is the free share that we talk about?

Similarly in a stock split the same thing happens. A 1:1 split will have the same effect as a 1:1 bonus except that the face value of shares in both cases will be different.

So what is the purpose of issuing bonus shares (rewarding shareholders....huh) or doing stock split? It only increase liquidity which means you can find sellers when you want to sell and will find buyers when you want to buy at smaller levels of price.
A classic case is that of SEINVEST. When it was ruling at Rs 350 odd in March 2010 trying to buy even 500 quantity would have taken the price up to Rs 375 and vice versa.
Whereas look at it now after the bonus and the split.

However, where bonus shares has an advantage and scores over stock split is with relation to the tax benefit it provides if used judiciously. That process is called bonus stripping and you can read more about it here. (Bonus stripping)

Till the next post, happy investing