Investing in Road Infrastructure stocks? Here’s one strategy.

This post is not buy/sell/hold advice. Please see the disclaimer at the end before reading further

While the goose of private capex has been cooked, the Government of India is taking every step to boost public spending on infrastructure.  The focus is currently on roads. In 2015-16, NHAI awarded about 50 projects to build 2,624 kilometres of roads. A budget of US$22.35 billion has been set out by the Indian Government for infrastructure projects, for which highway construction will play a major part.

As Bala writes in this brilliant piece infrastructure companies have many moving parts that make them unsuitable as buy and hold investments, not least of which are – cyclicity, incalculable extraneous and confounding factors such as commodity prices and the lumpy, often misleading nature of their earnings.

On the other hand Infrastructure is one of the handful of sectors in this market that shows earnings visibility and a clear growth highway ahead.

So how to negotiate this paradox?

Proposed strategy: PROTECT DOWNSIDE RISK (And the upside will take care of itself)

Since the opportunity size is so large, if we can find companies where the downside risk is protected, it should be profitable. Let me lay the downsides for you and the mitigating techniques while researching potential Infrastructure companies to invest in.

Risk 1: Uptick in Commodity Prices leading to Working Capital Problems

Commodity prices are cyclical and have been in their trough for the past two years. It is expected that the uptick in key commodity prices will begin from 2018. Steel, cement are some critical inputs for the construction sector.

Steel – In the recent years India has imposed anti-dumping duty on steel and China has rolled back on capacities. This suggests domestic steel may go up in price.

Cement – Cement is priced by a cartel of producers in India. Further the government has put it in the 28% GST category.

This is sure to increase burden of raw material costs on Infrastructure companies.

Mitigation: Find Companies with Low Leverage and low P/B

Like any sector emerging from a multi-year downturn, most infrastructure companies are currently saddled with debt. Take the following precautions:

  1. Consolidated earnings – When screening companies, check both the standalone and consolidated balance sheet. Construction/Infrastructure companies in India tend to be conglomerates with diversified interests in power, real-estate and (sometimes) loss making foreign subsidiaries. Always check the consolidated financials to get a real picture of financial health.
  2. Price to Book value – use this metric for relative valuation as P/E can be misleading, given that earnings are lumpy (more on this later) and P/E does not capture bloat in balance sheet
  3. Mix of project/order type with the company – While leverage is not a disqualifier in itself, too much debt on the books puts some companies out of the competition for BOT (Build-Operate-Transfer) projects. BOT projects have higher risk of exposure to commodity price related working capital problems. On the other hand BOT projects have higher entry barriers than hybrid and EPC (engineering, procurement and construction) models that require upfront commitment from the government to take on 40% of the burden of costs. It follows logically that EPC models (where the government takes on the full burden of working capital) will face more competitive bidding than BOT projects, which will enjoy higher margins. Companies with low leverage and healthy balance sheets will enjoy a huge advantage to bid and successfully execute BOT projects.

Risk 2: Lumpiness in Earnings

The public infrastructure sector has one key buyer: government. The project lifecycle is long with 100% buyer concentration. This impacts the nature of orders – sometimes you win the bid, sometimes you don’t.

Additionally, infrastructure companies can record “revenues” as time of the order or at time of complete transfer of ownership and risk. Accounting distortion is common in this sector.

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“Lies, damn lies and statistics”

Mitigation: Look at Cash EPS and Execution History

While the EPS of the company can be misleading. Cash EPS, which is a measure of Cash Flow from Operations / Dilute Equity outstanding would be a better measure of the health of the company. Again, due to the lumpy nature of infrastructure orders – do not look for consistency in Cash EPS but rather, its relative value compared to EPS.

Execution history is important. Companies that have suffered cost overruns in the past due to poor capital allocation or working capital management can be avoided. A leopard and management, rarely change their spots.

In Sum: The past is not the future

Road Infrastructure itself is a Rs 7-lakh crore opportunity. NHAI has 62000 crores worth of bids up in the next 6 months. Funding for Infrastructure is cheaper than it was in the past – interest rates are lower offering companies with debt significant relief in their existing interest payments while taking on new projects. Further, the Reserve Bank of India (RBI) has allowed companies in the infrastructure sector to raise External Commercial Borrowings (ECB) with a minimum maturity of five years and with an individual limit of US$ 750 million for borrowing under the automatic route.

Further, risk of input costs and overruns have been transferred from the building company, to the government under the Hybrid Annuity Model (HAM) and the EPC (engineering, procurement and construction) model. So the company executes and keeps the money, which is not trapped in working capital. We may be at the cusp of a unique wealth making opportunity in the stock markets. Stay vigilant.

DISCLAIMER:

This post is not BUY/SELL/HOLD advice but a statement of my personal analysis and opinion. I hold road infrastructure stocks so my views are biased.

I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”. No BUY/SELL/HOLD advice is offered on this blog, in any form whatsoever. Views expressed are my own and not of my employer. Stock Markets are very risky and can cause a permanent loss of capital. You should seek professional advice.

Kriti Nutrients and Sanwaria Agro: Soya and Edible Oils back in focus

This post is not buy/sell/hold advice. Please see the disclaimer at the end before reading further

Soya products and the edible oils are areas I have been closely following. India imports  67% of its demand for edible oil. This is economically unsustainable due to several reasons. There are a few key factors about the industry:

  • The demand for edible oils is inelastic and insulated from macroeconomic conditions as cooking is a basic need for survival.
  • India has failed to be self-sufficient in edible oil production due to misaligned incentives for farmers and low agricultural efficiency, which causes Indian soya to be globally uncompetitive in prices.
  • Soya has applications beyond cooking oil in cattle feed (poultry), food proteins, value added products (like soy milk).
  • China is driving the global demand in soya and increase in prices of the raw material.

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The Indian government unfortunately has not recognized the importance of self-sufficiency in cooking oils and has not made it a policy priority. However with GST and the financial demise of large listed companies like Ruchi Soya, the space has opened up for smaller organized players with good balance sheets like Madhya Pradesh based Kriti Nutrients. I would prefer companies based in M.P and Maharashtra as they have the competitive advantage of sourcing Soya from local growth belts.

The financial health of Cooking Oil and Soya companies has been tenuous. Edible oil and Soya products is a low margin and commodity business. Bad macroeconomic and industry conditions have wiped out many companies big and small (e.g. Ruchi Soya). Only a few remain investment grade.

The cyclicity in the business is through the supply side – introduced by dependence on raw materials like Soya and Sunflower. The production of edible oils and soya products is subject to the vagaries of the monsoon and Indian agricultural conditions. The demand side itself is not cyclical as cooking oil is in demand around the year. This makes companies with good inventory management stand out.

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Kriti Nutrients : Improving on all parameters

Due to these factors discussed, it is also wise, when investing in the edible oil sector, to look for companies that are not pure play edible oil manufacturers but look to be mini-FMCG or food processing companies – thus diversifying their risk.

Kriti Nutrients: Offers products such as Soya flour, Sunflower oil and produces Soya liechestien for Nestle (probably for use in their baby food products). Kriti management though conservative has shown an intention to launch value added products albeit slowly. With access to M.P’s soya-belt, they are well positioned to capture new product categories like Soya milk and protein foods when the market is made. It also makes me believe they are a good acquisition or partnership candidate for large FMCGs like Britannia and Nestle. Fun fact: Inventory turnover of Kriti Nutrients is better than Nestle’s. All of this is not discounted in the price as Kriti trades at multiples that are normal to the edible oil industry.

Sanwaria Agro: The company is more of a food-processor than Kriti Nutrients, which leans more towards being an edible oil company. In addition to edible oil and soya chunks; Sanwaria offers flour and even basmati rice. The price has run up significantly in the past few months.

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Sanwaria Agro, Investor Presentation

In sum, a few reasons to be bullish about the edible oil/soya product businesses are listed below:

  • Unorganized to organized: GST pushes the unorganized market towards an organized market benefitting large and mid-sized listed players with low leverage and good inventory management
  • Push to pull: Domestic demand will see growth as the country moves towards self-reliance in edible oil and competitively priced soya products
  • The business has emerged out of a multi year down-trend, so valuations are reasonable
  • Reliance on monsoons is going to decrease and agricultural incomes are set to rise incentivizing farmers to grow soya and edible oil cash crops – securing supply side cyclicity
  • Protein intake increasing in a vegetarian country and the addition of value added products will see increased demand for soya chunks, tofy and other soya proteins as well as soya milk in the medium to long term
  • Health and quality consciousness: Soya oil is healthier than its counterpart – mustard oil, which is the dominant variety of cooking oil in India

DISCLAIMER:

This post is not BUY/SELL/HOLD advice but a statement of my personal analysis and opinion. I hold Kriti Nutrients since lower levels so my views are biased.

I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”. No BUY/SELL/HOLD advice is offered on this blog, in any form whatsoever. Views expressed are my own and not of my employer. Stock Markets are very risky and can cause a permanent loss of capital. You should seek professional advice.

Making a quick buck in the market ..??

Bala writes about how greed and FOMO can lead one astray in the stock markets. Also a lot of other insights on the impact of sector rotation, industry cycles and structural fundamental changes that fool investors. Like always, people who catch the trend early make money at the expense of others who get stuck in price and time corrections. The more things change, the more they remain the same.

Source: Making a quick buck in the market ..??

Bitcoin above $3000. Is it too late to buy Cryptoassets?

NOTE: This post is NOT Buy or Sell advise. Cryptocurrencies are very volatile, are subject to legal / regulatory risk and also carry a risk of permanent capital destruction.

Bitcoin went past $3000 as “segregated witness” or Segwit, the latest version of its open source code is days from locking in to the nodes on its blockchain on August 8th, 2017.

Segwit aims to solve Bitcoin’s long standing scaling problem and serves as a positive fundamental trigger to its price. For stock investors, imagine capacity expansion without the capex. True to fashion, the market bought the rumor before the news and pushed the price above the last all time high of $3019 in June.

This move caught many technical analysts by surprise, as Bitcoin – honey badgerlike – continues to shrug off bad news and humiliate market oracles. I think what is most significant is that the long-term underlying bullish trend has been confirmed this week, which means the odds of a major Bitcoin “crash” have plummeted and a $5000 to $10,000 Bitcoin price is now in sight.

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Suprise! While the RSI and other momentum indicators suggested a correction the breakout in the simple moving average confirmed the direction of the trend.

So is it too late to enter? Bitcoin has no intrinsic value. The fair price is unknown. The market price is determined by demand and supply. It has gone up too much too fast. It’s in a bubble. All of this fear, uncertainty and doubt is legitimate but not in the ways one might think.

Bubble valuations (aka the Price has gone up too Fast!)

Every generation has a bubble. Tulips. Dotcom. Unicorns. Cryptocurrencies are the bubble of the coming generation. We are in very early stages of price discovery of a completely new asset class which is still dismissed by a majority of old street finance as a pyramid scheme or vaporware. Banks buy bitcoins only to pay off future ransomeware attacks. Hedge funds are only now beginning to show interest. Equity investors are still to enter. If it is a bubble, it is a bubble that is yet to grow until it floats regal and mountainlike before the thunderous pop.

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So has the price gone up too much? Bitcoin was in a bear market from 2014 to 2016 and the anchoring/recency bias makes us fear mean reversion.

Here are Bitcoin’s historical returns since Satoshi Nakamoto wrote the famous white paper:

2011: +1500%

2012: +399%

2013: +5400%

2014: -43%

2015: +37%

2016: +130%

2017: +220%

Notice the trend? The trend is your friend and Bitcoin can be the long trade that changes your life.

What are you buying when you buy Bitcoin?

Don’t buy what you don’t understand. For the non tech savvy, the blockchain is not an easy concept to comprehend. Buying Bitcoins is roughly analogous to buying:

  • A share in protocol/infrastructure of the future de-centralized internet. Like buying CISCO shares in early years.
  • A scarce asset. Like buying Diamond before De-Beers, because there is no central authority or control on price or inflation schedule.
  • The energy and time units that go into mining. Mining Bitcoins gets progressively difficult as Bitcoins grow scarcer (the supply being strictly capped at 21 million). It is expensive to set up a mining rig and involves large amounts of power consumption.

Besides at just 21 million in total supply, with scope for no more to be created, Bitcoin is scarce

Bitcoin is an Experiment. A community without a leader. A cult in thrall to the idea of a world without centralized authority.

An absurdity about this peer-to-peer currency meant to act as store of value is that the developers of the original protocol were idealistic libertarians. Satoshi Nakamoto, the founder of Bitcoin is a myth. No one knows who the real Satoshi Nakamoto is because he chose to shun recognition and remain anonymous (with his stash of Bitcoins worth billions now of-course). In spite of its de-centralized nature, there is an almost cultlike ownership of the protocol by its many participants many of whom are not in it for the money but to achieve their goal of disrupting the financial status quo and making payments truly peer-to-peer without trusted third parties. Their counter is that the trusted third parties like banks could turn untrustworthy and rogue as banks and governments are wont to do. Governments can issue currency as legal tender and declare them illegal overnight. Governments can confiscate your assets and nullify your property rights.

Remember George Orwell’s 1984?

‘It exists!’ he cried.
‘No,’ said O’Brien.
He stepped across the room. There was a memory hole
in the opposite wall. O’Brien lifted the grating. Unseen, the
frail slip of paper was whirling away on the current of warm
air; it was vanishing in a flash of flame. O’Brien turned away
from the wall.
‘Ashes,’ he said. ‘Not even identifiable ashes. Dust. It does
not exist. It never existed.’
‘But it did exist! It does exist! It exists in memory. I remember
it. You remember it.’
‘I do not remember it,’ said O’Brien.

Memory holes were furnaces in which the Government burnt all records of a person’s existence. The distributed ledger of the blockchain is the exact opposite of the dystopian memory hole. Every transaction, every record of your property rights will be recorded on every node on the blockchain. O’Brien and his cronies cannot destroy the memory of you – without destroying every node. Indestructible memories interred in memories like fractals.

This radical de-centralization is an altruistic idea that makes your investment in Bitcoin a part of a militant albeit greater cause.

A dyed-in-the-wool speculator may ask – why do I care for these outlandish ideas or cultish early adopters? Remember these early adopters are like promoters in a listed company. The early developers and miners fanatically hold on to a significant stash of the total Bitcoins in supply. Block and wallet data shows they have been hoarding and not selling – which reduces the potential downside risk on your investment and leads to upward pressure on the price. This is the same affect as gold and silver that for the most part ar no longer in circulation except on exchanges.

Bitcoin is Honey-Badger

Bitcoin is thick skinned, like a honey-badger. A great humiliator of its naysayers. Back in June people predicted a hard fork of the main chain would lead to uncertainty, following it up with platitudes that the market hates uncertainty. But what the market hates most of all is people who are certain they know how the market will behave (I am guilty and have burnt my fingers) and Bitcoin has proved that in spectacular fashion.

The hard fork happened and Bitcoin’s price stayed firm in the 2700+ USD range. It achieved the opposite of what was predicted that the market cap would be reduced by the market capitalization created by the forked currency, i.e Bitcoin Cash. The fork actually made existing Bitcoin holders richer by giving them a free Bitcoin Cash for each Bitcoin in their account creating $7 billion of helicopter money overnight.

I will leave you with the below links and images to stress the survivability of Bitcoin and how the potential of this new asset class is still not properly understood.

https://99bitcoins.com/bitcoinobituaries/

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The KISS of Altcoins. Keep it Simple Stupid

While investing in Cryptoassets other than Bitcoin – or altcoins – it helps to keep it simple. What I like about Bitcoin is it doesn’t pretend to be anything more than a scarce store of value and does a great job at it (de-centralized control, scarcity, fungibility, increasing difficulty to mine). Monero and Litecoin similarly are good projects that seek to be stores of value.

Personally for me, Ethereum seems like a complicated protocol and investment albeit with great leadership and community.

Ethereum’s main challenges are –

1. Security (It’s turing complete)

2. Scalability issues

3. Untested new design

3. Economics (Confusing inflation schedules, ICOs)

Bitcoin has lower downside risk from hacks and inflation. It can imitate ethereum’s “smart-contracts” functionality using a concept called sidechains.

Apart from Bitcoin, which is king, in my strictly personal opinion I see significant scope of adoption for the following protocols:

Monero – What Bitcoin used to be, only more secure. Use in the dark web/grey market business offers some downside price protection.

Litecoin – The silver to Bitcoin’s gold. Runs on Bitcoin’s chain. Popular with miners and Bitcoin users. Fast. Solid development team.

NEO/Antshares – Technically most sound, on paper. Backed by corporates. KYC compliant, which is a huge deal in China.

Ethereum – Its popular with the South Koreans (the early adopters of all cryptocurrencies) and is being promoted as an alternative to Bitcoin, which I do not believe it is.

Risks

Price discovery is a work in progress. Cryptocurrencies are illiquid, unregulated, listed on limited exchanges and this makes them subject to price manipulation.

Final Word

Here is some great advice from a venture capitalist from Matrix Partners on how to invest in Cryptoassets. Do click and read the full thread. I could not put it better.

 

Taneja Aerospace. Looking Bullish on the Charts?

I am new to Technical Analysis and this post is not a BUY/SELL recommendation.

I recently wrote on how the announcement of the Hosur airport might be an inflection point for TAAL (NSE: TANEJAERO) in way of monetizing its fixed assets.

Taneja is a very speculative scrip because there is not much information from fundamentals (low EPS, slow moving industry), so in this post I delve into some technical charts to see if Price and Volume behavior could give me more information on how the market is reacting to the news.

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1 year Candlestick and MACD charts

Here’s a copypasta from Investopedia on how to use the MACD.

The concept behind the MACD is fairly straightforward. Essentially, it calculates the difference between an instrument’s 26-day and 12-day exponential moving averages (EMA). Of the two moving averages that make up the MACD, the 12-day EMA is obviously the faster one, while the 26-day is slower.

Look how the 12-day EMA rises above 26-day EMA after a long subdued period on March 30, 2017. What happened on this day?

March 30 was the day when the Indian Central Government announced routes assigned to 5 regional airlines under the low-cost UDAAN scheme. One of them is TruJet that plans to use the Hosur Airstrip for regional flights to Chennai. For more details read the analysis of this announcement’s significance.

Let’s zoom in a bit.

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You can see how the news was priced in after 31st March and the short term trend became Bullish as the blue line (short term Exponential Moving Average) increasingly diverged from the long term Red line.

Stocks react to news all the time. Why is this significant to a fundamental analyst like me, you may ask?

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The above is a 5 year chart of weekly volumes in Taneja Aerospace. You will see the highest 5 year weekly volume was during the week of April 10, 2017 after a brief lull period.

It may be safe to assume this unprecedented surge in volumes in response to the news that broke on March 30, 3017 which has significant ramifications for TAAL which operates the Hosur airstrip. Let’s break this week down a bit more to examine what’s been happening under the hood.

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You can see above that the surge in price was supported by the largest weekly volume in 5 years, which was followed by a sell-off – which was probably triggered by HNIs “stuck” in Taneja for a long time and who used this rise in price as an opportunity to offload their “stuck” shares.

Remember the last time Taneja went as high as 68 rupees was 1-year ago in January 2016. Since this is a non-profitable company and a speculative grade stock, its price responds mostly to “news” or “noise” and a lot of folks were stuck at those higher levels in early 2016. So the price range of 65-68 serves as a RESISTANCE zone for Taneja Aerospace’s stock price.

This is indicated by the huge volumes and red candlesticks (selling pressure) whenever the stock hits this resistance price range, even if it is preceded by white candles in prior sessions. See the price action for earlier last week (24 July) for the most recent illustration. High volume buying, following by high volume selling when the stock price hits the resistance zone.

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Piercing Line Reversal after Huge White Candlestick – This sort of price behavior makes this stock a Knife!

So where does it go from here? There were 3 significant candlestick patterns in the recent weekly chart labelled 1, 2, 3 in the image below.

  1. White candle with huge volumes. Like the week of April 11 and June 15 – all surges in price have been accompanied by huge volumes which are usually twice or more than the selling volumes.
  2. Long lower shadow – after selling in the resistance zone, a bullish indicator shows itself on 25th July. Volumes are dropping significantly.
  3. Doji – which shows the fight between bulls and bears is coming to an end. The opening and closing price are nearly the same and the selling pressure has been absorbed.

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Conclusion

The stock has been range bound for a long time. In the short term it seems the price is being kept down artificially by traders and short positions. These traders sit it out on days of huge volume as seen by the clean white bullish candlesticks. Weak hands and “stuck” HNIs seem to be almost out of this scrip and we may see significant moves in the future once accumulation/distribution is complete.

DISCLAIMER:

This post is not BUY/SELL/HOLD advice but a statement of my personal analysis and opinion. I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”. No BUY/SELL/HOLD advice is offered on this blog, in any form whatsoever. Views expressed are my own and not of my employer. Stock Markets are very risky and can cause a permanent loss of capital. You should seek professional advice.

Linkfarm. Stuff I am Reading (Week of 7/21)

Inside the Mind of Jeff Bezos

JP Associates – the road to hell is paved with good intentions

Fundamental Analysis : Book Value

Investing in the Roads Sector : Problems Remain

Farmer Protests in MP and Soya Prices

Professor Sanjay Bakshi on Killer Jeans

On Cryptocurrencies:

What is it like to lose a large number of Bitcoins?

I was wrong about Ethereum

Four things to know about Bitcoin Bubbles

Inside the Rise and Fall of Ethereum

Reflections on the Best Blockchain Tweets Ever Written

I am not worried about Bitcoin but I am losing sleep over Ethereum

Bitcoin and Ethereum: The Puzzle of valuing Cryptocurrencies