Monday, March 31, 2008

Investment Workshop at DoMS, IIT Madras

The students of the Department of Management Studies (DoMS), IIT Madras have been running Moolyankan, a diversified fund. As future managers and investors the students felt the need to have a platform to apply theory and knowledge to practice, the end result of which has been Moolyankan. The entire focus at Moolyankan is on learning about stock markets as well as on evaluating companies, based on the knowledge gained in the classroom. This also gives the students an opportunity to stay abreast of business happenings and trends across the globe and a chance to invest in the India growth story.

Since its inception on 10th September’07 Moolyankan has posted returns of 24% as compared to 4.5% from the Sensex. With a yearning for more knowledge and insights into the evaluation of firms for investment, DoMS IIT Madras, in conjunction with the Business Line Club organized an Investment Workshop and invited renowned investment advisors Mr. Rajat K. Bose for insights into Technical Analysis and Mr. S.P. Tulsian for imparting wisdom on Fundamental Analysis of stocks.

Mr. Rajat K. Bose is a well known technical analyst in Indian equity markets. He is a member of the online panel of global executives for The McKinsey Quarterly, the quarterly journal of venerable McKinsey & Co. and participates in the surveys conducted by The McKinsey Quarterly. Currently, he appears exclusively on TV18 India Ltd. group channels such as CNBC TV18, CNBC Awaaz and CNN-IBN. He also regularly contributes to http://www.poweryourtrade.com/ with daily calls and writes articles on market outlook on http://www.moneycontrol.com/. Mr. Bose has appeared on several Indian channels like NDTV-24x7, NDTV Profit, Zee Business, Sahara Samay and several other regional language TV channels. He has also written for The Economic Times, Kolkata edition and The Statesman, Kolkata.

Mr. S.P. Tulsian is a name to reckon with in the Indian investors fraternity. Mr. Tulsian was a member of the National Stock Exchange (NSE), right since the time of its inception in 1994. He started a hugely popular and respected weekly tabloid, Premium Investments as its Editor and Publisher and still runs this successful initiative to protect investor interest and give truthful advice. Mr. Tulsian is often seen on prominent business televisions channels like CNBC, CNBC AWAAZ and CNN-IBN. His articles appear in most of the leading financial newspapers in India, like Economic Times, Business Standard and Financial Express.




Mr. Rajat K. Bose helps unravel Technical Analysis

Mr. Rajat K. Bose started the first session by admitting the fact that while student community is getting increasingly fond of technical analysis, it doesn’t guarantee profits even to great technicians. Knowledge of stock markets is the key to success and emphasis should be on managing trading risk while technical analysis can provide controlling handle on the things. Most people assume that mathematics is the technical aspect in technical analysis. Initially when technical analysis started, very elementary school level mathematics was used but later on engineering mathematics also found application. Since 2000 there has been a de-emphasis on mathematics part because at the end of the day people are only concerned about making money and not using fancy mathematical fundamentals.

Talking about the history of technical analysis, Mr. Bose quoted Benjamin Graham and his role in the separation of technical and fundamental analysis in 1960s. Mr. Bose defined technical analysis as study of markets or company performance on price charts. Price and Volume of transactions are the basic raw data required for the analysis. Talking about the philosophies of technical analysis, Mr. Bose said market action discounts everything which is a direct inference from the Dow Theory. Technical analysis is like a chess board where everything is open while Fundamental analysis is like a cards game where many things are hidden. One of the basic assumptions of technical analysis is that history repeats itself. Many people consider it crazy but analysis has proved that it is possible to come up with price projections based on historical price movements. On one hand fundamental analysis stresses on causes of market action while technical analysis on the other hand focuses on the effects of these market action.

Getting deep into technical analysis, Mr. Bose explained three types of market trends i.e. uptrend, downtrend and sideways movement. These trends must be adequately supported by the volume data. The very essence of momentum trading is the fact that a trend is assumed to be in effect until it gives a definite signal that it has reversed. But it has a possible pitfall also because who knows if you are the last bull on the bourses. Another important philosophy of technical analysis is that averages must confirm each other. The averages here generally refer to the Dow Jones industrial average and the Dow Jones transportation average, both should move together. China in 1995 reported a flat transportation average while the GDP was reported very high; at this people suspected the figures.

Mr. Bose explained the fundamental concepts of support and resistance. Support is the level at which demand exceeds the supply and resistance is the level at which supply exceeds the demand. Basic concepts of price gaps and trend lines were then explained with the help of several examples on patterns. Mr. Bose then moved to the topic of managing trading risks. If you put an intelligent guy in a group of fools, he no longer remains intelligent and looses all his intelligence. This is the condition prevalent in the market today, where people do not behave rationally but irrationally as opposed to the efficient market hypo thesis. People generally get trapped in belief that trend will continue forever and in the process make huge losses.

Mr. Bose gave few guidelines that should be followed while trading in the markets. Trade what you see, not what you believe. People need to keep aside their belief and preconceived notions and trade the markets. Selection of counters to trade is based on many parameters like risk averseness of the investor, size of risk capital (money, on loss of which an investor would not lose his sleep), liquidity of the counter in question, volatility of the scrip and the lot size. People should never average a loser. Many investors indulge into buying falling scrip but caution must be exercised on the extent to which one can buy falling scrip. Investors need to decide the stop losses level in advance and it should be strictly followed. Last but not the least, judgmental biases should be avoided. Many investors become adamant at my-current-trade-investment-must-be-a-winner. Such biases should be avoided and the losses should be minimized in this case. In the end Mr. Bose concluded the session by emphasizing on the risk management rather than following any analysis blindly.

At the end of the session, Prof. Rahul Marathe presented a memento to Mr. Rajat K. Bose and thanked him for providing profound knowledge on the topic of Technical Analysis.


Mr. S.P. Tulsian expounds on Fundamental Analysis


The second session at the Investment Workshop was addressed to by renowned investment advisor Mr. S.P. Tulsian. He held forth on Fundamental Analysis and various aspects that can help investors in valuing a company and decide on its investment worthiness.


Mr. Tulsian commenced by saying that he was very happy for Moolyankan and impressed by the fact that the future torch-bearing managers of India were doing a good job of making prudent investment decisions. He said that during the session he would be looking at the objective and subjective factors as well as components that help decide on investments in companies, in addition to 4 case studies of different companies.


Taking up the topic of objective factors that helped in investment decisions and are applied as liked by an investor, Mr. Tulsian enumerated the following important ratios and indicators:
· Enterprise Value (EV)/Earnings before Interest, Depreciation, Taxation and Amortization (EBIDTA)
· Discounted Cash Flow (DCF)
· EV/Sales
· EV/ Profit after Tax (PAT)
· EV/EBIT
· Price to Earnings (PE) Multiple
· Break-up value of Assets
· Dividend Yield
· Book Value
· Replacement Cost


Mr. Tulsian maintained that EV/EBIDTA is a very strong indicator of the core strength and stability of a company. For this purpose, he broke down each component of EBIDTA viz. Interest, Depreciation, Taxation and Amortization and explained that each of them must be discounted for the purpose of zeroing in on the true profitability of the company. Describing further, he said that EBIDTA margins are important benchmarks and companies with high EBIDTA are good investment avenues. However, one might look at firms with lower EBIDTA only if their future prospects and projects seem to be bright and profitable.


Speaking on DCF, he professed it to be an important indicator and said that one needs to discount the profitability of current as well as future projects of a company.
Pointing to the EV/Sales ratio as a valuable indicator of enterprise value, Mr. Tulsian said that in comparison market capitalization was a weaker parameter for measuring the enterprise value. The reason behind this is that market capitalization doesn’t consider the debt component of the company while EV does. However, the EV/Sales ratio is more applicable to industries such as services, technology, and entertainment, where proprietary technologies and innovations will be used in future projects for profitability.


Saying that today EV/PAT was not a very popular ratio today, Mr. Tulsian said that it was so 25-30 years ago. This is so because earlier there was really no difference between a company and the projects it undertook. However, with the entry of MNCs into India, each project that a company now takes is evaluated individually. He still emphasized that EV/PAT was still relevant as it was ultimately concerned with the bottom-line.


Focusing on the EV/EBIT ratio, he said that the ratio indicates how many times the market values the operational result of the company. A low ratio suggests poorly efficient use of a company's resources, even if its profit margin is high.


Mr. Tulsian described the PE multiple as a very important indicator of the health and operations of a company. But valuing the company so would require us to only consider its operations one year forward as the future was really uncertain and looking too forward rosily might attach some risk with our decisions.


Break-up value of assets is the value realised when they dismantle assets or discontinue operations. Valuing companies on this parameter is a good idea as it values a company on the basis of all assets the prices they can fetch, stressed Mr. Tulsian. He revealed that a healthy break-up value of assets permitted many companies to have high stock prices despite a lacklustre performance.


Mr. Tulsian stressed that the Book Value or rather the Price\Book Value ratio as a valuating parameter is important to sectors such as the banking sector as well as the purposes of acquisitions.


The final component of the objective parameters was Replacement cost which is a parameter relevant more to infrastructure projects and companies as the profitability for them is not initially high but increases as the project progresses.


Next, Mr. Tulsian explained the subjective factors which include the following:
Promoter
Sector
Size
Geography
Project Engineering
Growth prospects


Taking up the effect of a powerful and influential promoter on a stock’s value, he said that the Reliance Power Limited’s (RPL) IPO euphoria was fuelled because of the image of Anil Ambani attached so strongly with the ADAG. However, with its fiasco people now don’t have the same faith in RPL. He explained that those companies whose promoters have a clean image, who follow all corporate governance norms have higher valuations.


Mr. Tulsian said that different sectors have different PE multiples. Currently capital goods, retail, infrastructure, power and entertainment sectors enjoy a high PE multiple. This lot keeps on changing depending on the boom an industry is experiencing.


The size of a company does matter in valuation, he said, emphasizing that bigger companies get valued better through their sheer breadth and multiplicity of projects. Here he gave the example of Kingfisher-Deccan merger, comparing them to Jet, as a result of which its valuations are decent considering the fact that the venture has still not posted any profits.


Indicating the importance of geographical location of a company and its operations, Mr. Tulsian said that because of favourable governmental rules and regulations and lower transportation costs from fields, sugar industries in Karnataka and Orissa would be valued much higher than those in Uttar Pradesh.


Similarly, project engineering and related efficiency and capabilities of a company was important, considering the fact that refining companies which can’t process light crude are valued much lesser than those which can. In the same vein, growth prospects of a company play an important role in its valuation.


Mr. Tulsian then went on to describe how components such as fundamentals, liquidity, sentiment at the market and its listed or unlisted status swayed the price of a company’s stock.
Fundamentals were extremely important for a stock. This is the factor, which if strong, should keep the long-term investor invested in a stock, accentuated Mr. Tulsian.


He considered liquidity of a company as important as its fundamentals as that is the factor that drives the market. This was in effect particularly for the period of August 2007 to January 2008, when the Sensex really spiralled ahead.


The fundamentals and liquidity for a company would only change in a period of 1-3 years. However, the sentiment at the market could change within 1-3 days and thus imparted volatility to the market as well as to a stock. He stressed that this was what was happening today at the market when the fundamentals as well as the liquidity of companies were in good shape.


A listed company attracts much more valuation than an unlisted one. On an average, an unlisted company would receive 25-40% less valuation than a listed one and thus a listed status for a firm matters.


After explaining all such factors, Mr. Tulsian took up the case of 4 different companies: TCI Industries, Reliance Industries Ltd., GMK Infrastructure and Parsavanath Developers Ltd. In each case he dug deep to help the audience understand how each factor discussed previously helped the company value better.


Finally at the end of the session, Mr. Tulsian answered questions ranging from how the Sensex was a true indicator of the growing economy, the current volatility in stocks, the case of efficient market hypothesis and how much a retail investor knows really, why Tata Motor’s stock price dropped on buying out Land Rover and Jaguar to the outlook on the banking sector.


Presenting a memento to Mr. S.P. Tulsian the students of DoMS, IIT Madras thanked him for taking time out and his effort to explain the intricacies of fundamental analysis as well for igniting their interest in it.


Vishal Chourasiya
Kunal Lal
DoMS Interface Team

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