Happy Diwali and a prosperous new Samvat to all my readers.
I am often asked about what do I look when I pick stocks. I learnt three techniques from Prof Bakshi of MDI, Gurgaon. I now only use those three techniques. First is, businesses holding more cash in the till than the market price. I recommended Piramal Enterprises based on that analysis. It had more cash per share than its market price. Apply a margin of safety of Benjamin Graham and you buy and put in the locker. One day the market will wake up and give you non linear returns.The second method is debt capacity bargains or businesses which have a very healthy operating cash flow and the debt they can get from a bank is higher than the business valued by the market. An example of that was my recommendation of National Peroxide. I could not buy it personally. If someone had bought it, he would have got a 50% return so far.
The third business is turnaround case or what we call a debt reducing, earnings increasing case. An example of that was my stock pick of Noida Toll Bridge.
For this Diwali, I recommend Swaraj Engines at a price of less than Rs 410. The business is debt free, cash rich. It makes engines for Mahindra and Mahindra tractors. Five types of engines. Excellent profitability, increasing revenue every year, healthy cash flow and dividend record and a proxy play for M&M. With agriculture getting attention of govt for growth, tractor sales will incrementally increase. The stock is trading at a PE of 9.8x and a Price to Book of 2.5. A buyable PEPB ratio of less than 22.5. Company is virtually debt free. It has a good return on equity( ROE) of >24%. It has good consistent profit growth of 28.95% over 5 years. It has been maintaining a healthy dividend payout of 28.72%.A regular dividend paying company, it should give good returns in the long term.
My next bet is Gateway Distriparks Ltd.(Buying Price < 130) A business which is in logistics. A competitor to Concor. They have their own railway siding at Garhi Harsaru near Gurgaon. Own rakes and containers to transport from port to destination. With Indian GDP set to move up only from a 5.5% growth rate, the future should be brighter. But I do not run on conjectures. The balance sheet of the company is very healthy. Debt free. Excellent deployment of funds and very high ROE. Good dividend payouts and a current yield >4%.
Zero inventory. Investments and cash worth 520 cr on balance sheet. And not to discount FDI in retail. It is bound to come , it is only a question of time whether Manmohan government gets it or the next govt. Gateway is better placed to take advantage because of their cold storage containers. Also, at some point defence business and strategic transportation of goods will partially be outsourced to Concor and Gateway.
A fantastic long term play on infrastructure, logistics and India growth (all the right stories) but supported by facts of cash and debt free balance sheet.
May Ganesh Bhagwan and Lakshmi Maiyya bestow their blessings on value investors and patient investors.