Ok, I must confess, reading Security Analysis is a shade difficult, I feel sleepy after reading 5 pages at a stretch.

I’ve just been reading Security Analysis: Sixth Edition, Foreword by Warren Buffett (Security Analysis Prior Editions), which I’d recommend to all. It’s updated with new commentary by great current value investors such as Seth Klarman, James Grant, Bruce Greenwald and others. I had an earlier copy of the book, however, I must say, the additional commentary by these great investors really helped me understand so much more. It’s a true gem which every value investor must have.

So I got around to reading and learning the book in a different way, using Concept Visuals(a technique invented by a friend of mine, Sanjay Vyas). I made a Concept Visual about Intrinsic Value as described by them in the book…(do let me know your feedback after viewing it.)

Intrinsic Value as defined by Benjamin Graham (using a Concept Visual)

I’ve started reading or re-reading(the last time I picked it up I just couldn’t finish it) Benjamin Graham and David Dodd’s Security Analysis: Sixth Edition, Foreword by Warren Buffett (Security Analysis Prior Editions) , which I’d recommend to all. It’s updated with new commentary by great current value investors such as Seth Klarman, James Grant, Bruce Greenwald and others. I had an earlier copy of the book, however, I must say, the additional commentary by these great investors really helped me understand so much more. It’s a true gem which every value investor must have.

Columbia Business Schools, The Heilbrunn Center for Graham & Dodd Investing has some interesting videos delivered by value investing professionals who have contributed their time to share their insights with Columbia Business School students http://www4.gsb.columbia.edu/valueinvesting/schlossarchives/class_recordings

The next two links are basically interviews, and both very good…

While different investors arrive at intrinsic value using different methods, they are all searching for the same thing:  businesses selling well below their estimate of intrinsic value. You can read the Graham and Doddsville interview here. For more on Bruce Berkowitz, see his interview in the recent issue of Outstanding Investor Digest here. (This one is especially long and quite interesting).

The last one I read recently was Balance Sheet Analysis: Cash which is posted at the Distressed Debt Investing blog.

I hope you enjoy these as much as I did.

In general, when one hears of a company which is a monopoly, people look at it with distaste, but in the world of investing one literally salivates when one finds one.

In investing, businesses which have an edge, a monopoly are almost sure bets for providing great returns. In the words of Warren Buffet:

“In business, I look for economic castles protected by unbreachable ‘moats’.” -Warren Buffett"

(You can read the post I had made earlier where I’ve covered what a Moat is in detail Rule #1 Don’t lose money)

My focus in this post is to explore one of such companies, and list out a few more likely candidates, which have an advantage over most others. I would love to hear your thoughts about the companies I cover, and about similar companies you’ve identified.

Ok, here’s the first one, Indraprastha Gas(IGL).

General Company Overview:

• Incorporated in December, 1998(IGL took over Delhi City Gas Distribution Project in 1999 from GAIL (India) Limited (Formerly Gas Authority of India Limited ).)
• Having confidence of over 80,000 esteemed investors. 
• Having 181 CNG stations. (Started with 9 CNG stations & 1000 PNG consumers, Crossed 100 stations in 2003)
• Fuelling over 2,50,000 vehicles including over 12,000 buses, 85,000 three wheelers and over 1,50,000 private cars.
• Supplying online cooking gas to around 1,40,000 households.
• Providing energy solutions to major 5-star hotels, hospitals, embassies and restaurants.
• A dedicated team of 350 employees.

IGL now focuses on conversion of private vehicles (private cars) to CNG. In this connection efforts are being made on the private vehicle front encouraging them to convert to CNG mode. IGL has been in coordinating with CNG kit suppliers, Transport Department, Automotive Research Association of India (ARAI) and Vehicle Research and Development Establishment (VRDE) to ease the process for endorsement of the same on Registration certificate of the vehicle.

The company is in the process of enhancing its compression capacity by adding new stations and also by converting the daughter and daughter booster stations to mother and online stations.

IGL is also working towards expanding its gas retail network to the other cities of National Capital Region (NCR) viz. Noida including Grearter Noida, Gurgaon and Faridabad. The Company aims to lay natural gas pipe grid in these cities to set up CNG stations and providing PNG to domestic, commercial and industrial sectors.

The latest on IGL is, it’s gearing up towards the upcoming Commonwealth games, and hoping to setup new gas stations etc. IGL is a debt free company and the management has clearly identified that distributing piped gas is where it needs to focus on and expand it’s customer base.

My take on IGL: Most people when talking about IGL seem to worry about the fact that by 2011 it’s monopoly would end and other players would be allowed entry into this market.

I feel that competitors would have an uphill task to reach the current level at which IGL is today. So, even though the monopoly might end in 2011, the tailwinds for the business would last for a long time to come. In addition, the nature of the business is such that once you’ve established yourself, for e.g. take the case of a customer who has piped gas from IGL, for a competitor to make the customer to change over, would be very difficult. It’s like trying to make you change your electricity provider, almost next to impossible unless the rates offered are far lower, which is very very unlikely. In addition, IGL has the first mover advantage of getting premium real estate spots for it’s gas stations. In short, IGL has a MOAT which would exist even if it’s monopoly to operate in the region ends in 2011.

Ok, now that you have a brief overview of the company, let me take you through their numbers?(Click on the image for a larger sized view.)

     

I’ve done a Discounted Cash Flow calculation by projecting Free CashFlow, basically the FWallstreet.com model as explained by Joe Ponzio, which in turn is based on Buffet’s model. (The data I’ve used is provided by CMIE, so if you’re using publicly available data you might notice some variations in the numbers. For detailed definitions of the various line items as indicated by CMIE visit their website www.businessbeacon.com)

Well, not surprisingly this monopoly is doing quite well. It’ median CROIC is around 17% and it’s FCF has been positive and growing at a median value of 28%. In projecting future free cash flow I’ve taken the lower of Equity, FCF and CROIC as the growth rate. I’ve taken a 25% Margin of Safety as it is a market leader/monopoly, in it’s area of operation. At a 15% discount rate, and current market price this stock appears to be undervalued. (Your valuation could and would differ from mine, and that’s quite alright, don’t worry about it, there is no precise fixed value, at best you could arrive at an approximate value.)

The basic point out here is that Indraprastha Gas is a clear monopoly and will remain so for quite a while, my guess is that it would be a good performer for at least the next 10 years. I even tried a different scenario by changing the growth rate to about 15% and then the per share value comes to about 195 which is about a 20% discount to it’s current value. Is this is a good buy? At current price levels I’m not completely comfortable. I do hold the stock and had bought it at a larger discount about 37%(avg. purchase price of about 110). So for now, I would suggest keeping this stock in your watch list and evaluate it further.

Here’s another company, GAIL (GAS Authority of India) – Again a virtual monopoly, laying gas pipelines across India.

As I come across more such monopolies either in the Indian or the US markets, I’ll highlight them here. Let me know if this is of value to you.

P.s. A question for you, do you think you might be interested in an excel based tool, which will help you quickly scan the relevant numbers for FCF calculation, for Indian listed companies? (based on 5 yr data provided by Reuters online). Basically you enter a symbol, and it will pull up relevant data from Reuters and it will show you what the current value per share is based on FCF calculation. As of now I don’t have a list of all symbols on Reuters, hence, I can’t create an automatic scanner of all listed stocks on Reuters. Let me know your thoughts and if you are interested, drop me an email at my last name, “shetty”, at hotmail

P.p.s. as I finished writing this blog post I noticed that IGL had jumped almost 12% at the end of the day before I posted this article, this is a huge jump and hence thought i’d mention it.

A lot of readers have often asked about free sources, providing 10 years data of companies, listed on the Indian stock market. As far as I’m aware there are none. However, a good listing of value stocks is available in the current issue, 03 April 2009 of Outlook Profit. It has a list of what’s going cheap, why and where to look. A Rs. 50 investment in the magazine I believe will go a long way in getting a good list of candidates for investment. Outlook profit is a fortnightly publication and each issue atleast has more than one good article worth reading.

I must say I’m not totally convinced by their list of 100 value stocks, there are however, quite a few which have piqued my interest.

Happy hunting.

P.s. The online version of the magazine features past issues, here http://profit.outlookindia.com/magazine/20032009/home.aspx so if you’d like to wait and check out the 3 April 2009 issue, you might want to wait and check their site some time later this month.

WallStreetNewsNetwork.com recently uploaded its downloadable Excel database called Debt Free Stocks Selling At Or Near Cash and a newer High Cash, No Debt, High Yield Stocks

In current times, the above lists are good starting points to examine companies which might be good investments.

Hope you find it as useful as I did… Enjoy!

P.s. I’ve updated the post to correct the links.

How much time?

Joe Ponzio of Fwallstreet.com wrote an interesting post about What Should You Be Doing Now?

There have been quite a few agressive comments on his blog about it, and I felt I should add something, which can be a blog post in itself, so here it is.
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When there is fear it can lead to panic. Panic causes things to go from bad to worse.
Which means that on occasion the recent bargain which you thought was a bargain slips another 30-40%-50% or even more. (I mentioned about this on my earlier post, where I suggested one takes one’s time before investing, I feel it needs a little more elaboration, so here goes.)

Having said the above, if one looks at the current crisis, it seems different compared to other crisis, as a lot of businesses and people who depend on debt are going to find the going extremely tough. Even business without debt are going to have a difficult time as people might not spend as much, and so Joe making the general report for the benefit of all, where he says it might make sense for the conventional investor to get out of the market and stay in cash and fixed income investments is justified.

I welcome even more panic which would lead to a crash that just means things will get better faster. On the other hand the solutions to this current crisis might cause a prolonged crash and will not solve things immediately (1-3 yrs). However, these steps or new ones in time will restore confidence. The question is how much time?

Depending on where you are in terms of age, the impact of this time can be a dangerous situation for most people. Take 4 sets of differently aged people and the impact of time due to the current crisis will become obvious:

Set 1: 30-40 yrs—–Set 2: 40 – 50 yrs—–Set 3: 50 – 60 yrs—–Set 4: 60 + yrs
For each set, assuming they are investing in the markets now, below are probable impacts depending on the time this crisis lasts.

Crisis time period 10 + years (i.e market starts to revive after 10 yrs):
Set 1: They can thrive; they have a number of working/investing years left
Set 2: They can still make it, though their fortunes would be late in life.
Set 3: Slim chance
Set 4: They are fuc#$

Crisis time period 5-10 years: (Market starts reviving sometime between 5-10 yrs)
Set 1: They can thrive, they have a number of working/investing years left
Set 2: They can still make it
Set 3: Slim chance
Set 4: Very Slim chance, mostly fuc#$

Crisis time period < 5 years (market revives within 5 years), most people should be ok………

When you consider the time factor your investment perspective will change. This is the challenge which most individuals need to figure out for themselves as it will be different for different people. I gave time as a dimension to consider; another important one is how much can you afford to invest considering that time is unknown, considering your job, your family and other liabilities. You are each bound to reach different conclusions, just as each individual would value a company for investment differently. Even though you might have a huge margin of safety fear could cause that stock price to drop another 30% from the current discounted price or it might not. You need to be sure you can stomach that chance and that the company you’re investing in is a good value in both good and bad times. And ya the bad times can get real bad right now 🙂 Happy investing.

Words from the Oracle of Omaha,

“In fact, in my adult lifetime, I don’t think I’ve ever seen people as fearful economically as they are right now,” he told Charlie Rose in a PBS interview that aired as the Senate voted on a $700 billion bailout package.

On another ocassion he said:
“Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics is equally unpredictable, both as to duration and degree. Therefore we never try to anticipate the arrival or departure of either. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

Worldwide there seems to be fear in almost every market. We can’t anticipate if this fear will continue or when it will depart. However, we know that fear makes people behave irrationaly, causing them to undervalue almost everything. In the current markets, you could buy a stock and see it tank 20%-40% in a week as the fear increases… make sure you’ve done your analysis well.

Whenever there are great companies available at a discount to their intrinsic value, it’s time to buy. Over time price will definitely catch up with value. This time factor, can be a long time, sometimes years… And if what the fearful are saying that this is a recession of magnitude, then the time could be a long time.

The amount of fear and the problems which the current global markets face are definitely large ones. A friend of mine said a very interesting thing, “it’s certain that the markets are presenting a good buying opportunity, however, there are going to be many opportunities to buy”. The explanation for this is, what is a discount today might be an even greater discount tomorrow. When prices sink they usually go down faster than they come up. So take your time, be extremely choosy, and buy when you get a substantial discount to intrinsic value.

Lastly, nothing is more important than a good “Margin of Safety“, especially since investment is more art than science.

The big 3 statements talk to you so much more about a company than sometimes the analysts views or the CEO’s big talks, however, these statements can at times be a maze, I recently came across a wonderful site which explains the basics as well as gives answers to the nagging questions you might have.

The site “AccountingCoach.com provides FREE online educational material to help you learn the accounting concepts practiced in the United States. The site provides hundreds of pages of explanations, drills, exams, crossword puzzles, and a glossary of over 1,000 terms.

AccountingCoach.com was developed by Harold Averkamp, a university instructor and consultant.”

What I found most unique was the kind of question answer(they call it drills) kind of information presentation which helps stick information in your head.

Overall its an amazing learning site and I’m spending quite a lot of time on it.

If there is one statement which is repeated a number of times by Walter, it is, “I don’t like to loose money.” I think that was the most used statement by Walter in the recording.

He seems to have very simple rules for investing:
1. Low Debt
2. Good History
3. Price
4. Management
5. Investor Characteristics

Let me try and explain each of these as I have understood them.

1. Debt
Walter preferred to buy companies with low or no debt. Debt can definitely work as a great leverage for quite a few businesses, however, it can get companies into a lot of trouble. So when you the investor have a choice, between two identical companies, it’s a no-brainer to pick the low or no debt company.

2. History
The 2nd Characteristic which Walter looked for is companies with a long history of being successful in business. He mentions looking at a company history over a period of 20 years. A business which has done well over long periods of time, has been through a huge number of up’s and downs and so the probability is that it’s capable of being around for a long time. Now History alone is not a definite indicator of future success, hence when looking at what Walter is saying one has to really look at all the parameters in combination.

3. Price
Walter preferred stocks selling below Book Value.Stocks with Book Value considerably larger than selling price were extremely attractive to him. He also mentioned when asked about buying a good company at a fair price
“I don’t think I want to buy good companies at a fair price”, I want to make a profit and hence I want a discount. However, companies trading at prices far below book value could be takeover targets and here’s where the next principle comes in.

4. Management
Walter has two thoughts about management, he wants Management to have a large stake in the business. The reasoning is simple. If they have a large stake in the business the investor needn’t be overtly bothered even if the price goes down further, as Management would ensure that the price is correctly reflecting reality.
Management wants to be a success too, especially when they have a large stake in the business.

On another thread, Walter mentioned he doesn’t like interacting with Management as he couldn’t judge people well. People might appear to be charming, good people, however, judging them and knowing their true character eluded him. So he preferred to simply look at the numbers. He preferred reading the annual reports than interacting with top management.

5. Investor Characteristics
Be able to keep your emotions out of the picture. Look at things logically as they are, not as you think they may be at a later date.

E.g. The electric car, is a good idea however, when would there be a successful implementation of the car, is anybody’s guess. Today’s reality is something else and the future is uncertain, don’t let your emotions drive you.

Be willing to make mistakes however, not loose money -If the prior statement seems like a conundrum, here goes. Lets say you’ve just sold a stock and the price runs up another 25% don’t bother wasting time thinking what a fool you’ve been. Similarly if the price drops after you’ve purchased, you should be feeling happy to get an opportunity to get in cheaper. This would happen only if in the first place you’re extremely clear on what you’re getting into.

The most interesting thing which I found Walter say was that different pople do things differently, some may be good judges of character, he gives the example of Warren Buffet, what he’s basically saying is there is more than one way to successfully invest. The other thing he talked about was in response to recessions, he didn’t really care about what the general economy was doing, he cared to know how the business is doing, and in getting it at a good price.

There are many more nuggets in the interview, and I’d encourage you to check it out, I’ve scratched the surface.

One of the first people in the lecture given by Warren Buffet titled “The Superinvestors of Graham-and-Doddsville” is Walter Schloss, an amazing person with amazing returns.

I found an interview, which I felt everyone should listen to, it’s kind of large in size, however, the insights simple, and the man a person who doesn’t like to lose money. I can’t help but like this unassuming old man 🙂 check the video out here(It does take a while to download):http://www.bengrahaminvesting.ca/Resources/Video_Presentations/Schloss.htm

I’ll try and summarize Walter Schloss’s, investing ideas in my next post, but make sure you watch the video.

Btw if you haven’t read it yet, please make sure you read the original article :
http://www.bengrahaminvesting.ca/Resources/Articles/The_Superinvestors_of_Graham-and-Doddsville.pdf

Another good one to read and re-read:
Buffet, Warren. Berkshire Hathaway, An Owner’s Manual

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P.s. Edited the link to the Walter Schloss interview on 13th Aug 2009.