Reliance Industries: Do not buy on dips

Reliance Industries Logo
If you have listened to the crap analysts on business news channel who were recommending Reliance Industries to be bought at every dip, you have many reasons to worry now. Here are some of them:

1. Very low Gas price hike than anticipated: Analysts were almost sure that gas prices will be hiked to $8.4 per MMBTU and Reliance Industries will make a killing even though it could not fulfill its commitment of producing agreed amount of gas every year. Now the govt has finally hiked the price but far lower that what was discounted in the stock price to just $5.6 per MMBTU. 

2. No benefit of gas price hike to RIL: However small a price hike of more than 30% is positive though less positive than what was anticipated. But what's severely worrying for Reliance Industries is that govt. has denied the benefit of even this price rise to the company. It will have to continue to sell gas at the rate of $4.2 per MMBTU untill the shortfall is delivered.

Consequence of chasing stock prices: The live example

When stock prices move people become impatient both on upside as well as  downside. After 16th may people went crazy and bought whatever they can feeling they should not get left out. The consistent rising prices created perfect trap which sucked in most people. Today some of those junk names are down 50 - 60% from their June 2014 high.

In a post titled "Stocks to avoid under BJP govt." two stocks were specifically highlighted in bold that must have been avoided. But euphoria was so high that those stocks went up significantly over next 1 month. People were excited and still bought those stocks at higher levels without understanding the consequences. Today one of that stock is down 35% from it's level on 16th may and 50% from it's June 2014 high, while the other stocks is flat since 16th may but down 40% from June high.

You can check that post here

Moral: Never chase a running or falling stock price. List 5 solid reasons why you are buying or selling a particular stock. By this practice alone you will be ahead of many stock market pundits on street and achieve superior results. It must be remembered that succeeding in investing or trading doesen't require MBA degree in  finance. People with reasonable knowledge but with very high self discipline and control over emotions are likely to achieve much better result than people with MBA & Phds with fickle psychology and emotions. 

TCS - An IT Company or an Employment Agency?

TCS Employee base
Well I have not been a big fan of IT companies in India whether it's about working for them or investing in their stocks for long term. The recent run up in stock prices of TCS, HCL Tech, Tech Mahindra and other IT staffing companies has only increased my worries as they are being perceived as technology companies and getting valuations accordingly.

TCS is now valued at around $90 billion in market value and is trading at a PE of 21 times FY-16 EPS. If one believes that TCS is an innovative technology company like Apple, Oracle or Google then the valuations are justified but what PE would you apply to an employment agency who has just grown at the rate of growth in number of employees in the company. With employee billing arbitrage gradually getting narrowed due to very high wage inflation in India and less than 2% wage inflation in western world the margins will gradually decrease over next 10 years on this business model. 

Steel Authority of India Ltd (SAIL) Stock Analysis

When I look at Steel Authority of India Limited (SAIL) stock with 2 to 3 years investment horizon, it appears to be very attractive at current price (CMP as on 25th Sep 2015: Rs.68). Just consider the following points.

1. SAIL steel capacity is expected to reach around 21.5 million tonnes by March 2017 from capacity of around 13.3 million tonnes as on March 2012. As on March 2014, it had crude steel production capacity of approx. 16 million tonnes.

2. Considering the modest replacement cost of 6500 per tonne, the replacement cost for entire company comes to around Rs. 1.4 lakh crores (1,40,000 crores) against the current market value of around Rs. 29,000 crores.

3. Considering the net debt level of Rs. 45000 crores by March 2017, if one purchase the stock today at roughly 70 bucks, he will be paying an enterprise value of 74000 crores (almost half of SAIL's March 2017 replacement cost).

Portfolio Update - Sep 2014

The supreme court judgement on coal blocks along with weak global cues lead to massive selling in select stocks thereby presenting an opportunity to invest in those names incrementally at attractive valuations. 

Our model portfolio which has been sitting on lot of cash since past couple of months are now filled with lot of stocks along with some cash to utilize in case there is further fall in the market.



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