Views on Life & on Equity Investing

Wonder, Wealth & Abundance

Cera Sanitaryware Ltd is a buy

with 6 comments

I had this stock and disposed of it in 60s last year.

Reason being, its price (not topline/bottomline) is strongly correlated to sentiments of Construction Industry. And that my friends is a dangerous place to be in given lack of information in Indian real estate market. I had a roller coaster ride in Unity Infra from 1050 Rs buy price in 2008 to 60 Rs low in 2009, back to 550 Rs now (after subdivision from 10 to 2), we learn.

Why I disposed of Cera Sanitaryware was low ROC, I like to dispose off companies that go below 20% ROE, ROCE or ROIC irrespective of brand name.

Scan through 2006 numbers, total capital employed ( Debt + Equity ) is 48 Crore and Net profit earned is 2.4 Crore, thats a rubbish number, 5% annual returns on investment, who wants to be in a business sad as that. In 2009, total capital employed was 107 Crore, return of 13 Crore, okay but not good enough @ 12% per annum.

Since no company can grow its net profits rate faster than return on equity over long term, I decided to sell. Analogous to science of accounting this is a post mortem measure too. It does not tell you that other players in industry are feeling more pain and your company is gaining market share. Net profit marging will improve from 3% of sales to 11% of sales on various accounts and economies of scale. Obviously that is overcast and veiled. This company is set to be a steady compounder 25%+ returns per annum and a buy. Especially to be loaded on bad infrastructure sentiments.

I am happy to buy at at 5x the price I sold it a year back, in investing it is never wrong to change your mind. It is only wrong to change your mind and do nothing about it.

Written by amitdipsite

October 4, 2010 at 9:02 pm

Posted in Uncategorized

6 Responses

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  1. Hi Amit,

    So when should a person sell a stock?
    And while calculating ROC, why is the Debt part not added and why it is subtracted as the debt also contributes to the net profit.?

    regards,
    Vikas

    Vikas

    October 5, 2010 at 12:53 am

  2. Hey Vikas,

    It was supposed to be hyphen and not minus, to be read like a brace, my bad. Changed it with brackets.

    When to sell is difficult to answer…but being 100% in Indian equities today is not advisable since opportunities have drastically reduced. 50 – 70% equity allocation is fine IMO. Trick is to find stocks that will not fall more than 30%. That gives you good buying power when rest are butchered 80%. 30% index correction happens every 7-8 years.

    If one depends on it for retirement then 50%, if not then 70%.

    I dont see any TV, CNBC so cant answer, also away from all noise and discussion and cocktail effect. But no brainer opportunities have reduced in the equities above 30 crore market cap which indicates less safety.

    Regards

    Amit

    Multibagger

    October 5, 2010 at 3:48 am

  3. Hi Amit,

    I found one theory very effective is whenever the Nifty has historically PE traded above 20, the mkt has witnessed crashes.
    Currently it is trading above 25 PE…which indicates some or the other crash is awaiting us.I don't know whether i am correct on this theory….as nobody can predict the future.
    And i too agree with you that the allocation should not be 100%.
    Please comment.

    Regards,
    Vikas

    Vikas

    October 5, 2010 at 11:03 am

  4. Hi Vikas,

    I've read that too, an article of that sort by Sanjay Bakshi too suggests that when nifty PE goes above 22 or so how returns are dismal over the next 3 years.

    I think from common sense we can make out that its become hard to find good picks even in small cap universe, so equity allocation should be reduced. One should get out of all cyclicals and commodities unless one is aware of a cycle turning around. One should get out of all cheap names returning dividend yield of 1% or less, or stock that one will not add if they fall 60% (unless you use stop loss, which I dont).

    But value investing is bottom up game rather than top down game which instititions play — greater fool game really — , so good opportunities are hard but not impossible even today, which can go down. From 1997-2003 sensex was flat but there were may multibaggers. In 2008 nothing was spared, so there can be a similar 50% fall if China collapses or US goes into recession again, anything is possible including a 8 year non stop bull run, nobody can tell.

    Dow is flat for 10 years, Nikkie is flat for 25 years, its very hard to invest in those kind of markets and succeed. India is in a favourable position relatively, if it falls again by a big percentage, it may even make sense to take bank loans to load up quality stocks. Since we are going to be around and play with equities for another 30-60 years, we have to be in the game every year, so we have to keep some money outside volatility of equities.

    Regards

    Multibagger

    October 5, 2010 at 5:48 pm

  5. Hey there,

    Just started following your blog..

    I checked on moneycontrol and smartinvestor.in, ROCE is well above 20 since 2006. Below is link for above:

    http://www.smartinvestor.in/company/compfin-22648-ratio-Cera_Sanitaryware_Ltd.htm

    Based on your analysis, ROCE is less than 20, can you advise why there is difference in calculations?

    S@A

    December 3, 2010 at 8:03 pm

  6. Hi there,

    ROCE is EBIT / Capital Employed. So that website may be technically correct.

    I use PAT / Capital Employed.

    Regards

    Multibagger

    December 3, 2010 at 9:05 pm


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