Stock Idea - India Motor Parts and Accessories

As promised, here is the first stock idea. I will try  to delve into quantitative and qualitative data that i was able to glean from financial statements and annual reports. I am  a young investor with loads to learn ,so  don't expect a thorough analysis like some stock analyst . This is an attempt to apply whatever i have learnt till now  to analyze a company and figure out whether its worthy of an investment.

India Motor Parts and Accessories Limited (IMPAL) a TVS Group Company  is engaged in the distribution of automobile spare parts and accessories through its 50+ branch network representing over 50 manufacturers. IMPAL is one of the few all India distributors of motor parts and deals in engine group components, brake systems, fasteners, radiators, suspensions, axles, auto electricals, wheels, steering linkages, instrument clusters etc.Now lets dive into the financial statements of IMPAL and see how good or bad the business is.

Liquidity

The company has maintained a healthy current ratio of well above 2 for the past 5 years. The quick and cash ratio are also well above 1. Also ,the cash conversion cycle  is very less and came down drastically in 2009 to about 3.5 from 17. All this means that the company is well placed to tackle any short term obligations with ease.

Profitability

Gross profit margin of IMPAL has hovered around 10% for the last five years indicating the competitive nature of the industry. The presence of unorganized players in the sector puts a squeeze on the margins and the company finds it hard to pass on costs to the customers. Net profit margin is around 4.5-5% with 2009 being an exceptional year touching 5.68% . However despite low margins the Asset turns are high well above 2.5 resulting in Return on Assets(ROA) in the range of 12-15%.With very little leverage the Return on Equity(ROE) ranged between 12.7-18% . However ROE can be misleading with a company like IMPAL having a substantial part of its capital as investments. Investments are not employed in the day to day operations of the company and hence we need to look at a more suitable ratio - Return on Invested Capital(ROIC) . ROIC was well over an impressive 30% for past 5 years with 54% in 2009.

Financial Stability
IMPAL has a strong balance sheet with negligible debt although the debt/equity ratio has been going up over the past 5 years and currently stands at 0.14 . The interest coverage is very high implying little financial danger to the company due to long term obligations. This coupled with strong liquidity gives IMPAL the ability to survive any lows during the business cycle in the future.

Operating Performance

The company impresses with a Fixed Asset Turnover of well over 20 indicating the Asset light nature of the sector. Overall Asset Turnover is much lower at around 2.5 mainly due to the investments in the Balance sheet that drags it down. The Days Inventory and Sales outstanding has been reducing from the past 3 years whereas the Days Payable outstanding has remained around 30. The operating cycle has come down drastically  in the past 3 years standing at 3.5 days for 2009.

Cash Flow

It is in its cash flows that IMPAL impresses me the most. The company has posted positive cash flow from operations(CFO) for the past 5 years and more or less matched the profit after tax(PAT).The CFO margin is around 5% meaning the company is able to make 5paisa out of every 1 Rs of  sales.This is expected as the Net Profit Margin(NPM) too is around 5%. However one look at the most critical parameter the Free Cash Flow(FCF) reveals why IMPAL is a good if not great business to own.The Capital Expenditure(CAPEX) is abysmally low at around 0.3% of sales. More than 90% of the Cash Flow is converted to Free cash flow which the company can either reinvest in the business or payback to the shareholders. The reason for such a low CAPEX could be that all CAPEX for setting up new branches has already been incurred long back and it is just spending on the maintenance of existing branches. Its not clear from the Annual reports whether they have any plans of expansion in the future or not but if that does happen we can expect a rise in CAPEX and drop in FCF. The company seems to be beefing up its investments using the FCF and also paying a decent dividend.

Performance and Dividend
IMPAL's sales have grown moderately at a CAGR of 8.9% over the past 5 years and EPS has grown at 14.4%.This shows IMPAL enjoys a little operating leverage but the growth rates haven't been above average.The company has been a consistent dividend payer and the payout has been around 30%.Both CFO and FCF have also been growing at around 14% CAGR . Even the Dividend amount has grown at 14% showing a shareholder friendly management.

Valuation

I'll not go into trying to value the company but will analyze how the company is currently valued w.r.t Trailing 12 month metrics(TTM). At the current share price of Rs 484 the Market cap of the company is 201 Crs which translates to a P/E multiple of 11.6 ,P/BV of 2.1 and P/CF of 13 and a dividend yield of 2.43%. Hence the company is definitely not cheap neither is it expensive. However IMPAL had an extraordinary 2009 and it would be foolish to extrapolate that into the future.It's always a good idea to look at Price/Avg EPS and Price/Avg  Cash Flow as it gives a better picture over a business cycle.The following table shows the TTM and Avg valuation metrics.

                TTM                    3yr Avg                  5yr Avg

P/E         11.58(6.5)          14.98(8.4)            16.9(9.48)  

P/CF       12.95(7.27)        19.78(11.09)         22.24(12.48)

Interestingly ,IMPAL has investments worth 63.22 Crs on its books. Out of this 37.85 Crs is in liquid Mutual Funds, 1390000 shares of sundaram finance worth 55.18Crs at current market price and 8.85 Crs Cash on books. All this adds up to 88.36 Crs of Cash net of debt(I have excluded unquoted investments worth 18crs). That means Rs 212 cash per share of Rs 484 in other words 43% of the companies market cap is made up of cash & investments and hence the market is valuing the company at only 113crs.While this can change as the share price of IMPAL and sundaram finance move its clear that more than 40% of the value is in cash.All of a sudden the valuation now looks much cheaper - refer to values in parentheses in the table above.

Risks and Conclusion

The immediate risk that comes to my mind is that the stock is extremely illiquid making it hard to build a position quickly. One will have to be patient to build a position. Also the illiquidity can mean that the Bid- Ask spread can be high which can impact returns.Also being a small cap the stock can be quite volatile both on the rise and fall.Further the stock is close to its all time high and  more than 2.5 times above its 52 week low and hence could correct if the market corrects. However the rally in the stock is quite justified given the strong performance in the last 3 quarters. Both sales and profits have gone up each quarter with net profit up 43% for the 9 month period compared to last year. The company has already achieved an EPS of 41.09 in 9 months (EPS for year 2009 was 41.77) which is an all time high. So looks like IMPAL is well set for another year of record sales and profits. Overall a good business and a value buy.

This blog has been named The Thrifty Investor since i want to be as thrifty/frugal as possible while buying stocks. In short, looking at the value one gets for the price one pays.So if you feel that IMPAL gives you a lot more value for the price being paid you can start buying or add to your watch-list to buy on dips.I invite opinions and views ,i would love to hear any kind of feedback both negative and positive and try to respond to doubts if any.

Disclosure: None . Please do read the Disclaimer

Journey So Far - Part 2

I promise this is going to be the last post on my personal experience and soon I shall get posting about 'Stocks'.Carrying on from where I left in the last post,soon after reading that quote from Buffett I got my hands on The Intelligent Investor. I found it a very enjoyable,absorbing and enlightening read(many people feel its too boring).It just made so much sense and the principles laid out were timeless even though the book was written more than 50 yrs back. Ben graham must have been a genius to have come up with something like this which made investing look like more science than art. No wonder Buffett held it in such high opinion. I believe any investor or anyone having anything to do with stock markets and investing would be well served if they read this classical work. Ben graham could easily be credited to be the founder of Value Investing even though he didn't call it that. I was an instant value investing convert after reading the book.

This book served like a catalyst and I was soon reading a lot of books on Investing particularly Value Investing. It was a very steep learning curve and as I read more ,I learnt  about mistakes I had already committed in buying certain stocks. I was caught in a catch 22 situation whether to read more books or get down and do the hard work of researching stocks.  Let me confess I took the easier route of reading books which was any day much easier and enjoyable than going through annual reports and other documents. Due to this I ignored doing much work on stock research and paid the price as the markets rebounded sharply.

As the markets started going up ,due to lack of research I sold a lot of stocks early and also missed out on picking up good stocks at depressed prices. The bounce in the market from March 2009 onwards was totally unexpected and took me by surprise. I was still in the process of learning and by the time I could differentiate a bad business from a good one ,the stock prices had already run away. I was kicking myself for not having started learning Value Investing much earlier than when I started. However as the smart investors say,one shouldn't get impatient and the market always gives opportunities. As the markets continued to rise,I was still looking for value stocks and found that one could still find them in the Small and Micro Cap space. I was also simultaneously reading books and blogs and was having all kind of ideas in my head ultimately going nowhere. However I was lucky to not suffer many losses and come away with decent gains in most of what I bought. Since I had entered the market at such depressed levels there was no way I could have made losses.However the question remained whether the gains were due to my stock picking skills or due to luck(most stocks have doubled from their lows and anyone picking random stocks could have fetched handsome returns).

Coming to the present ,I am still looking for bargains but am hardly finding any given the current valuations of the market.A lot of ideas like Quantitative vs Qualitative investing and small/micro cap vs large cap are going on in my mind. I have developed a bias towards small and micro cap stocks as I feel that this is an area where individual investors have an edge if they do their homework. However the problem with them is the low liquidity which also affects Bid-Ask spreads and the volatility. Additionally in India with the low standards of disclosures and transparency it becomes really hard to get information on small /micro caps(sometimes its hard to get just the Annual Reports). Even if one does find Annual reports they hardly contain any qualitative data.However I strongly believe that there are a lot of hidden gems to be found in this space and  I shall  strive to do that through this blog. I have also been pondering over how I can adopt a Quantitative approach with above market returns. This has the advantage of being free of behavioral biases and less time consuming which is very important for investors like me having day jobs.

I have started this blog with the aim  of documenting my reasoning and thought process and bringing discipline in my investing .I enjoy investing for the intellectual challenges it provides me more than the monetary gain(also believe that the process is more important than the outcome).Enough of talking now,time to get to work. I will try and post some stock ideas in the coming days and also hope to have rewarding discussions with other investors. If you are reading this,thanks for dropping by and surviving my long and boring posts,feel free to give your feedback.

Journey So Far - Part 1

After a lot of pondering and procrastination i have finally decided to start blogging and the only subject i could think of was Investing. I am a very average writer and haven't been writing too much off late so please bear with this long and boring post. This and the next post is about how i got into investing,my experience so far and the objective of this blog.

The Stock Market has intrigued me since high school as far as i can remember. A chapter on stocks in high school and overhearing my father as to how one can make money with them had piqued my interest .However studies took center stage pretty soon and my interest in stocks faded away. Fast forward to 2008 January , i was in my last semester of Engineering doing Internship in Bangalore. This was also the time when the Indian market breached the 21k mark and there was euphoria all around with newspapers carrying them in headlines.In short the stock market was the place to be and no one wanted to miss the bus. This coupled with the fact that my mother was now a part time Mutual Fund distributor got me interested  in the stock market again .I was soon discussing about Mutual Funds with mom and looking it up in the net.  The stock market seemed like a fun way to grow  one's  money provided you knew what you were doing. After reading a bunch of articles  i  fell for the cliched statements like 'let professionals manage your money' ,'invest in SIPs' , 'start early'  blah blah and started investing a part of my stipend in SIPs(Systematic Investment Plans) .I was lured by the performance and returns of the top funds unaware of the big crash that was to follow.Soon the market took a nose dive and kept going lower as i kept investing in  SIPs hoping for a bounce back. 6 months  down the line and i had lesser money left than i began with ,down 35 %.

This was a real disappointment as i was expecting a 100%+ return in a year,something which most funds had delivered in 2007 . I later realized that the Indian markets had had a fantastic bull run starting in 2003 all the way up-to 2007 and that explained those phenomenal returns produced by the funds. I had entered the markets at the peak and was expecting to make money,how stupid of me. This episode reaffirmed my belief that there was no free lunch in this world. Why should the media and financial analysts/experts give us advice about making money instead of they themselves doing it. However this didn't mean that the market itself was a bad place, it was a great place to grow one's capital provided one be ready to do the hard work. Now this incident actually inspired me to read and research more about stocks rather than shun them.The whole idea about making one's money work hard for him/her seemed too compelling to let go.But soon  priorities changed and i was concentrating on my Job search and investing got sidelined. A few anxious months later and after a couple of interviews i got the job i was looking for and joined soon after graduation.

Now with a steady source of income i decided to allocate a  portion of that to investing in the markets(Mutual Funds excluded,direct investing) . The time was Nov'2008 and i couldn't control my enthusiasm and jumped into the market.Looking back,I couldn’t have chosen a better time to invest as the markets were at an all time low owing to the credit crisis. I bought a couple of stocks immediately after getting a Demat account opened,few based on expert recommendations and few because they were selling near 52 week low. During this time as i was impatiently and enthusiastically going through all market tutorials and blogs i was helped a lot by Investopedia(excellent source for beginner investors) . It was here that i learned about The Oracle of Omaha  - Warren Buffett. There were tonnes of resources and articles available on him all over the cyber world and the more i read about him the more i got inspired. Whatever he said seemed to  make a lot of sense ,he had a simple technique that he had followed for decades beating the pants off the market . I came across a quote where buffett referred to this book called ‘The Intelligent Investor’ by his teacher Benjamin Graham. He went to the extent of calling it the best Investment book ever written. This book was about to change my whole outlook to stocks and investing in general..but more about it in the next post.Please feel free to share your thoughts on the post and about your first encounter with stock markets.