IOCL’s Disinvestment & How You Can Benefit From It?

Almost a year back, I had done a case study on Indian Oil Corporation Ltd. The study was an exercise to find a correlation (if any) between company’s share price and its book value per share. And surprisingly, this graph showed something interesting. To cut the long story short, it clearly showed that share prices of IOCL (almost) never stayed below its book value for too long.

So with prices hovering near 200 and adjusted book value of 250+, it seems that it might be a good time to look at this stock again.

The first thing which I decided to do was to update the graph between IOCL’s share price and book value per share. And as expected, this is what I got…

Indian Oil Corporation IOCL Book Value
IOCL || Worth A Second Look

During the last 15 years, share prices of IOCL have dropped below its book value only thrice. Once during the dot com bust of 2000-01, in crash of 2008-09, and now. And presently the Price/Book Value stands at a pathetic 0.75.

But this does not mean that prices cannot fall any lower. They can go down further. But also, the chances of Book Value going down are very remote. Even if we assume a nominal 5-8% annual increase in book value, the price at which shares are available seems to be quite cheap.

So why is it that IOCL is available at such low P/BVs? We can discuss and debate about various possibilities. But I feel that it makes more sense to find indicators which support the view that shares are indeed available at cheap prices. Or rather try to find reasons which might suggest that our hypothesis is not correct. Let’s see…

I have experience of working in oil industry and I feel that Oil Marketing Companies are currently trading at huge discounts to their intrinsic value. I agree that government is the sole decision maker in these PSU companies and we know how the government operates. And this fact in itself would shave off a decent chunk of intrinsic value from the shares of this company. 🙂

Crippled By Politics & Government

But you cannot deny the presence of massive refineries and oil pipelines. And just to give you all an idea of cost of building refineries, just head to this link to see costs of various projects being taken up by these Oil Marketing Companies. Just the cost of putting up a new refinery is in excess of Rs 30,000 crores!!

But on stock exchanges, the entire company which owns 10 such refineries is available for just Rs 50,000 crores. And I haven’t even taken the cost of laying more than 11,000 kms of oil pipelines. Nor have I taken into account the country wide network of retail outlets and a decent overseas presence in Mauritius and Sri Lanka!

And if one closely monitors the energy space, one would understand that it is now almost inevitable that subsidization of fuel would be handled more prudently by the government in years to come. And going forward, with reduction in subsidies by government & various caps on LPG cylinder’s domestic consumption, there is a decent possibility that OMCs like IOCL would benefit in the long run. But this would not happen overnight. And patiencewould be a key here. Agreed that with elections around, there might be temporary vote seeking measures like increasing the no. of subsidized cylinders, etc by the ruling parties. But things are changing on the energy administration space. And in due course of time, these subsidies would play much smaller role when people evaluate the oil companies. 

(Caution: The paragraph which you just read is full of speculation).

Another indicator of stock’s undervaluation is the ongoing discussion on disinvestment. The Petroleum Ministry has summarily rejected Department of Disinvestment’s idea of a stake sale. The reason being quoted is huge undervaluation of shares. But govt seems to have decided for stake sale and may eventually go ahead with sale of its stake to other energy companies like ONGC, OIL, etc. In past too, government has resorted to the so-called cross-holding route to shore up its revenues.Or the government might try the ETF basket route (source). But all-in-all, this indicates that prices are quite low, and even if they were to go down a little further, which is of course possible considering the overhang due to disinvestment and other election-related-factors,  it might be a good idea to accumulate this stock for long term. If not for appreciation, then for a decent dividend yield going forward.

Note – This post should not be considered as an advice to buy shares of company discussed above. 

Disclaimer – Long term positions in IOCL.



WTF… Wrist Watch On EMI??

Either I am getting old or there is something seriously wrong with the way our generation has decided to manage their finances. Just last night, I was taking a stroll with my wife in South Mumbai when I saw a board outside a shop –

Wrist watches on EMI
A Ticking (Financial) Bomb On Your Wrist

This shop was selling wrist watches of some good medium-to-high-end brands. And it provided the customer an option of purchasing these wrist watches on EMIs!!
Now I am not saying that this is wrong. But seriously, isn’t it simple common sense to use loans to buy assets rather than wrist watches??

I am sorry that this post is short and a little aggressive. But I could not stop myself from sharing my agony at seeing such a financial crime being committed by young people. I don’t say that one should not indulge in buying what one likes. But there are other ways of buying a watch. Instead of taking a loan and paying EMIs, one can delay the purchase a few months and save money in a Recurring Deposit(or even a simple savings account) and then buy the product. Its that simple.

And this wrist watch thing was not just one-off case. My wife told me that now-a-days, even lady’s handbags are available on EMIs!!!!

I have nothing more to say. Period.


2014 Would Be A Good One For Stocks. But…

I was browsing through morning newspaper when the following headlines caught my eye –

Indian Mid cap stocks
And another similar optimistic one was present in the online edition of the same newspaper –

2014 to be a hot year for equities” (source- Economic Times).

The first thought which crossed my mind after seeing such eye-catching headlines was that everybody is turning bullish these days. So by being cautious as usual, was I being stupid?

And to tell you the truth, I have personally observed that during last 6 months or so, people have become more comfortable, or rather more ‘confident’ talking about investing and ‘making-money’ in stock markets. So is it that just because everyone else one has started talking about it, and business channels are discussing number like 25,000 for Sensex and 7500 for Nifty, does it mean that 2014 would a good year for stock markets? To be brutally honest with you, I don’t know. And please understand that in this world, Nobody can predict anything with 100% confidence.

But remember, there is a very thin line between confidence and over-confidence. And one generally does not realize when one crosses that line.

And with current PE close to 18.5 (Market PE details), the Indian markets are not very cheap. There may be some sectors which might be actually cheap. But overall large cap space is not that cheap as the headlines may make it appear like. So take a sensible call, weigh your options and your risk appetite. There are some big newsflow scheduled for 2014 (general elections, new banking license). Keep a sensible head on your shoulders and be greedy when others are fearful.


5 Thoughts For Investing In 2014

The year 2013 has ended. And today being the first Sunday of 2014, I have luckily got some free time to sip a cup of hot coffee and to think about what might happen in 2014, and how it would affect stocks, investments and my portfolio.
coffee 2014
First Sunday Coffee || 2014
Indian Markets Are Not Cheap
With large cap indices like Sensex and Nifty50 trading at 18-19 times earnings, it is quite clear that as of now, Indian markets are not (very) cheap. [Read more about how to know whether Indian markets are trading cheap or not here]. Experts might tell you that current PE ratios are 14 and 15. But that is because they are considering earnings in 2015 and 2016. Not 2013 and 2014. So, don’t believe too much of what experts have to say. And if you like watching business channels like CNBC, then do it for just one reason. 😉
Keep Cash At Hand
If the markets are not cheap, then it’s a good idea to stay out of markets for the time being and start hoarding cash. Because it is only a matter of time, when markets would once again regress towards the mean and correct (valuation wise) and give some tremendous buying opportunities. And you don’t want to run out of cash when there is a distress-share sale. Isn’t it?
Invest In Business, Not In Politics
With Aam Aadmi Party’s surprising win in Delhi, it seems that everybody has become an expert in politics. And with BJP and Congress ready to fight it out in the coming elections, it is inevitable that someone, somewhere would recommend you to buy shares of companies which might benefit from either party’s coming to power. Though it may seem like a good idea to buy stocks of companies which are friends with possible election winners. But this can be risky. You can never be sure of who is going to win these elections. Did any one of us had even a slight idea that within 6 months of active politics, Mr Kejriwal would become Delhi’s CM? So the point which I am trying to make is that almost anything can happen in politics. It is better to buy shares of a company because its business is good and its shares are available at a good price. And not because its owners are friends of Prime Ministers-To-Be. Period.
Beware Of New Banks
With only a few months remaining before the new banking license are awarded, its obvious that one would become quite excited about this episode and try to guess the names of new banks before RBI does it. Though it seems and is highly possible that prices of applicants who get the new banking licenses would soar, the fact remains that banking as a business is not easy. And though India is under-banked, it is also true that the existing banks are pretty strong and would not allow new players to take their turf easily. So, I am not saying that don’t buy stocks of new applicants. I am just saying that it’s a bad idea to become over excited about the whole issue. Just be fearful when others are greedy. Remember Reliance Power  and you will understand what I mean. 🙂
I Am Not Investing To Beat The Index
This thought is something which has always been one of my key decision makers. I have always believed that money should be available when one needs it to be. And that should be the whole purpose of investing. So, it does not matter whether I am beating the index or not, as long as I am able to fund my needs, desires and at times, greed(s) 😉 So beating the index would be great, but I am not Warren Buffet, and I am not going to loose even one night’s sleep over it.
So that’s it. These were some of my early-morning-first-sunday-of-new-year-thoughts :-).
I would be happy to hear your thoughts as well as your arguments against my thoughts. It’s always better to debate the initial (raw) thoughts rather than older (established) ones. So do let me know…

100+ Warren Buffett Quotes To Inspire You

I am 100% sure that you would not read this 2900+ word post in one go. And I don’t want you to do it either. I have this strange habit of collecting quotes by people I respect. And being a demi-god for me, Warren Buffett has a special place in my collection’s folder. So when I was checking the spreadsheet having all great quotes by Mr Buffett, I thought it would be a good idea to share a few of his quotes with readers of Stable Investor.

And since this post is pretty long, I suggest you bookmark it and read it at leisure. As far as usefulness of quotes is concerned, I think that the importance these quotes is well documented in pages of investment folklores. And any further explanation from my side would not add any value to any of these quotes. So here it is…

Read what the master has to say…

And feel free to add other good ones (in comments section), which I might have missed.

Warren Buffett Quotes
“Wishing makes dreams come true only in Disney movies; it’s poison in business.”

Every tomorrow has been uncertain.”

“Never risk what you have and need, for what you don’t have and don’t need.”

“More people fail because of liquor and leverage – leverage being borrowed money.”

“You do smart things, you eventually get very rich.”

“Turnarounds seldom turn around.”

“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

“There seems to be some perverse human characteristic that likes to make things difficult.”

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

“It’s better to hang out with people better than you.”

“Someone’s sitting in the shade today because someone planted a tree a long time ago.”

“Don’t pass up something that’s attractive today because you think you will find something way more attractive tomorrow.”

“Your premium brand had better be delivering something special, or it’s not going to get the business.”

“I don’t worry too much about pointing fingers at the past.  I operate on the theory that every saint has a past, every sinner has a future.”

“I’ve never swung at a ball while it’s still in the pitcher’s glove.”

“No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.”

“You can’t make a good deal with a bad person.”

“You do not adequately protect yourself by being half awake when others are sleeping.”

“The past is only useful to give you insights into the future, but sometimes there’s no insight.”

“Losing some money is an inevitable part of investing and there is nothing you can do to prevent it.”

“The stock market, like the Lord, helps those who help themselves.”

“The most common cause of low prices is pessimism.”

“Problems in a company are like cockroaches in the kitchen. You will never find just one.”

“Avoiding the dumb things is the most important. Learn more, know limitations and avoid the dumb things.”

“You should focus on what’s important and knowable.”

“Emotional makeup is more important than technical skill.”

“The best thing is to learn from other guys’ mistakes.”

“We will reject interesting opportunities rather than over-leverage our balance sheet.”

“You know, if I’m playing bridge and a naked woman walks by, I don’t even see her. Don’t test me on that!” 🙂

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

“Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars.”

“The business schools reward difficult complex behaviour more than simple behaviour, but simple behaviour is more effective.”

“You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing.”

“Can you really explain to a fish what it’s like to walk on land? One day on land is worth a thousand years of talking about it, and one day running a business has exactly the same kind of value.”

You only have to do a very few things right in your life so long as you don’t do too many things wrong.”

“If you’re in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.”

“I don’t have a problem with guilt about money. The way I see it is that my money represents an enormous number of claim checks on society. It’s like I have these little pieces of paper that I can turn into consumption. If I wanted to, I could hire 10,000 people to do nothing but paint my picture every day for the rest of my life. And the GNP would go up. But the utility of the product would be zilch, and I would be keeping those 10,000 people from doing AIDS research, or teaching, or nursing. I don’t do that though. I don’t use very many of those claim checks. There’s nothing material I want very much. And I’m going to give virtually all of those claim checks to charity when my wife and I die.”

“A very rich person should leave his kids enough to do anything but not enough to do nothing.”

“Chains of habit are too light to be felt until they are too heavy to be broken.”

“We enjoy the process far more than the proceeds.”

“You only find out who is swimming naked when the tide goes out.”

“A public-opinion poll is no substitute for thought.”

“A girl in a convertible is worth five in the phonebook.”

“We believe that according the name ‘investors’ to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a ‘romantic.’”

“When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

“It is better to hang out with people better than you … you’ll drift in that direction.”

“I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.”

“Price is what you pay. Value is what you get.”

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

“The investor of today does not profit from yesterday’s growth.”

“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

“If a business does well, the stock eventually follows.”

“It’s very important to have the right framework. You need to have an approach to investing that’s sound. …And if you have the right philosophy, you will find opportunities as you go through the next 20, 30, 40, 50 years.”

“Most stocks at one time or another sell at very silly prices, and it doesn’t take a high IQ to figure out that they’re cheap, but it does take a temperament that is willing to step up and actually act.”

If you’re good at one thing, you’re not necessarily good at another. You ought to use your talents where they’re most useful and get others to use theirs.”

“A 16-year-old will have more accidents than me, not because I’m a better driver, but because the 16-year-old is driving a lot more and is trying to impress the girl sitting next to him. That doesn’t work for me anymore.”

“Interest rates are to asset prices what gravity is to the apple. When there are low interest rates, there is a very low gravitational pull on asset prices.”

“If we do something stupid, it’s because we do something stupid … no external factors are pressing on us, and it’s a great way to operate.”

“We’re not going to take 98 cents for something that’s going to give us a probabilistic loss of a dollar.”

“We will have another bubble, but usually you don’t get it the same way you got it before.”

“There some parts of the game that we don’t understand, so we don’t play with them.”

“We’re not looking at the aspects of the stock; we’re looking at the aspects of the business.”

“It’s not because I calculate some precise P/E ratio or Book Value ratio, but because I have an idea of what the company will look like in five years, and that there’s a discrepancy between price and value.”

On economic forecasts: “Why spend time talking about something you don’t know anything about? People do it all the time, but why do it?”

“If [investors] try to time their purchases, they will do very well for their broker and not very well for themselves.”

“There is no perfect mathematical formula for pricing a business.”

“In stock markets it’s an auction market, and crazy things can happen.”

“Equities will do well over time — you just have to avoid getting excited when other people are getting excited.”

“Four or five times during their lifetimes, investors will see incredible opportunities probably in equity markets … they have to have the mental fortitude to jump in when most are jumping out.”

“When people get fearful, they get fearful en masse. Confidence comes back one at a time. When they get greedy, they get greedy en masse.”

“When we see falling prices, we think it’s an opportunity to buy.”

“More kids are ruined by the behaviour of their parents than the size of their inheritance.”

“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”

“Never invest in a business you cannot understand.”

“Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market”

“It is optimism that is the enemy of the rational buyer.”

“As far as you are concerned, the stock market does not exist. Ignore it.”

“The ability to say NO is a tremendous advantage for an investor.”

“Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.”

Lethargy, bordering on sloth should remain the cornerstone of an investment style.”

An investor should act as though he had a lifetime decision card with just twenty punches on it.”

It is not necessary to do extraordinary things to get extraordinary results.”

Remember that the stock market is manic-depressive.”

“In the business world, the rearview mirror is always clearer than the windshield.”

“Without passion, you don’t have energy. Without energy, you have nothing.”

“To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses -How to Value a Business, and How to Think About Market Prices.”

“The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.”

“Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

“You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.”

“I have pledged – to you, the rating agencies and myself – to always run Berkshire with more than ample cash. We never want to count on the kindness of strangers in order to meet tomorrow’s obligations. When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.”

“Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards – so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.”

“When we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever.”

“The stock market is a no-called-strike game. You don’t have to swing at everything–you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum!’”

“We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.”

“Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.”

The truly big investment idea can usually be explained in a short paragraph.”

“Investors should remember that their scorecard is not computed using Olympic-diving methods: Degree-of-difficulty doesn’t count. If you are right about a business whole value is largely dependent on a single key factor that is both easy to understand and enduring, the payoff is the same as if you had correctly analyzed an investment alternative characterized by many constantly shifting and complex variables.”

“I am a better investor because I am a businessman and a better businessman because I am no investor.”

“Our approach is very much profiting from lack of change rather than from change. With Wrigley chewing gum, it’s the lack of change that appeals to me. I don’t think it is going to be hurt by the Internet. That’s the kind of business I like.”

“Time is the friend of the wonderful business, the enemy of the mediocre.”

“Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway.”

“In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond.”

“The fact that people will be full of greed, fear or folly is predictable. The sequence is not predictable.”

“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”

“Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.”

“Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid.”

“We don’t get paid for activity, just for being right. As to how long we’ll wait, we’ll wait indefinitely.”

Lose money and I will forgive you, but lose even a shred of reputation and I will be ruthless.”

“Risk is a part of God’s game, alike for men and nations.

“If you are in a poker game and after 20 minutes you don’t know who the patsy is, then you’re the patsy.”

“The rich invest in time, the poor invest in money.”

Cash never makes us happy. It’s better to have the money burning a hole in Berkshire’s pocket than resting comfortably in someone else’s.”

“I buy expensive suits. They just look cheap on me.” 😉

So which ones did you like?