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| 04 May 2010
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| A K Capital: LTP 331.40: Strong Buy: Target: 500-600 in one year
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I am a big fan of Warren Buffett. I have read all his shareholder letters available here.
When Warren Buffett analyses a company for investment, there are four characteristics that he looks at:
1. Favorable industry
2. Robust financials
3. Capable management
4. Attractive valuation
About A K Capital:
A K Capital is one of India’s leading Merchant Banker for the Indian Corporate Debt / Fixed Income Securities market through Private Placement / Public Issues and for Management Consultancy, Advisory Services, Financial Restructuring, etc. It is the largest mobiliser of debt through private placement of bonds and non convertible debentures for eight consecutive years. It's clientele includes several well-known names and is available at http://www.akcapindia.com/clientele.htm . Recently, It's rating was upgraded from A- to A by CARE. It's not a fraud company.
Operational:
It derives its earnings primarily from Investment Banking fees and Investment Income. Its revenue has grown from Rs. 27 crores in FY06 to Rs. 134 crores in FY09, and the growth has been consistent @70% y-o-y.
The amazing part is that it has done so while maintaining profit margin (PAT) between 25% and 40% consistently. As a result, its net worth has grown at a CAGR of 75% over these years.
It's eps has grown at a CAGR of 50% over these years.
Also, the firm has been paying regular dividends.
Valuation:
The stock is currently trading at a P/E (ttm) of 4.5 and P/BV of 1.9. It has a ROE of 30-45%.
It was trading at a P/E (quarterly) of 14-17 from 2Q07 to 1Q08. From 2Q08 to 2Q09, it was trading at a P/E (quarterly) of 20-33. Since then to 3Q10, it has been trading at a P/E (quarterly) of 8-13. The good news is that the P/E (quarterly) is inching upwards from 8.2 (in 4Q09) to 10.7 (in 1Q10) to 11.2 (in 2Q10) to 12.9 (in 3Q10) in the last four quarters. Assuming it reaches a P/E (quarterly) of 20 and eps increases at 50% over one year from now, the stock should touch Rs. 600 within a year. Not bad, considering that the price today is around Rs. 331.50. Near doubling of investments over one year is not a bad deal at all.
A stock expands either due to expanding eps or expanding P/E. This stock will expand due to both.
Warren Buffett is a very patient investor who will wait for years for lack of any investable opportunity. But, once he spots an attractive opportunity, he doesn't waste time over-analyzing, instead he goes out and makes the investment.
Several fund managers maintain a 2x2 matrix with operational performance on vertical axis and valuation on horizontal axis. They refuse to look at companies with bad operational performance with expensive valuation. Similarly, they disregard companies with bad operational performance but cheap valuation. If they find a company with a good operational performance but expensive valuation, they will wait till the valuation reaches a more comfortable level. However, if they find a company with good operational performance and cheap valuation, they jump right on to it.
This stock has very good operational performance and is available at a very cheap valuation.
Risks:
1. Shareholding pattern - The promoters own 60% of the stock
2. Low volumes - On an average, only around 500 shares are traded everyday, hence there is nothing stopping an irrational movement.
3. FII/DII holding - Zero
4. It is not listed on NSE
Disclaimer: I hold this stock. Of course. Why wouldn't I?
Note: P/E (quarterly): Numerator consists of Average Share Price over that quarter and Denominator consists of earnings of that quarter. Hence P/E (quarterly) is roughly one-fourth of P/E (current) |
posted by Rohit
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