Screening Three Large Caps Companies for Long Term Investments

We all want to succeed in investments, but there are very few us who are willing to prepare for this success. Preparing and positioning yourself to take advantage of opportunities is something that is not learnt easily. It takes time and effort. What kind of effort are you making? I am continuing to expand watch list and buy list. I would like to be prepared for what I want to buy at next opportunity or when they fall in my fair value range. Following are three large caps that I screened.


Container Corporation of India Ltd (CONCOR): It is a Indian PSE wherein the Indian Government holds 63% shares. The company provides multi modal logistics services for domestic and international containerization trade. It consists of  inland transportation services by rail for containers; management of ports, air cargo complexes; and establishing cold storage chains. In India it has largest network of 59 inland container deport and container freight stations.

  • Operating Cash flow (positive, slow growth, but overall increasing trend)
  • Debt (no debt, I like such companies)
  • Dividends (yes, seems good quality)
  • Reported Net Profit (positive, and overall increasing trends)
  • Margins (positive, flat and stable)
  • Capital usage (flat, historically reducing)
  • I like this company because of its debt free balance sheet, cash flow, and market leading position. To me, it appears that management is doing good job of maintaining decent margins and use of capital.
  • Liquidity is a concern.
  • This could be a good company to hold in dividend portfolio. I will continue to read more about it.


Indian Hotels Company Ltd (INDHOTEL): The Company, together with its subsidiaries and jointly controlled entities are engaged in the business of hoteliering with the exception of two jointly controlled entities, which are engaged in the business of air catering. The other areas of business include ready to eat/ready to cook foods business, but is not significant in terms of revenue.  This company operates like a holding company, but is not incorporated as a holding company. It consists of more than 60 hotels across India and about 15 hotels located internationally. It market segment is wide spread in luxury, premium, mid-market, and value segments of the hotel industry. Its brand include Taj, Taj Exotica, Taj Safari, The Gateway Hotel, Ginger, etc.

  • Operating Cash flow (positive, volatile/cyclical)
  • Debt (high debt)
  • Dividends (yes)
  • Reported Net Profit (positive, volatile/cyclical)
  • Margins (net profit has reducing trend, in single digits)
  • Capital usage (reducing trend, in single digits)
  • High debt and relatively low dividends deter me from reading more about Indian Hotels.


Tata Global Beverage (TATAGLOBAL): Tata Global Beverages Ltd, formerly Tata Tea Limited, is engaged in processing, marketing and distribution of tea products. It operates from United Kingdom. It operates in three market segments (1) Tea – consists of cultivation and manufacture of black tea and instant tea, tea buying/blending, sale in bulk or value-added form; (2) Coffee and other produce – consists of growing coffee, pepper and other plantation crops, conversion of coffee into value-added products such as roast and ground coffee and instant coffee; (3) Others- consists of sale of natural mineral water, other minor crops, curing operations of coffee and trading of items required for coffee plantations. Some of its principal brands include Tetley, Tata Tea, Good Earth (herbal tea),  Himalayan (bottled water), VITAX (herbal tea),  JEMCA, (herbal tea), Eight O’Clock (coffee), TATA Coffee, GRAND, etc.

  • Operating Cash flow (reducing trend)
  • Debt (high debt, more than cash flow and profits)
  • Dividends (yes)
  • Reported Net Profit (cyclical)
  • Margins (cyclical)
  • Capital usage (stable in mid teens)
  • In last couple of years, the company evolved from India centric TATA tea to a global company, to form TATA Global Beverage Ltd. Now, close to 70% of its revenue comes from international markets.
  • High debt is my concern, but it is likely this global growth was funded by debt. Will this continue? Or the company has completed the transformation? I would tend to believe that, with this transformation, it has positioned itself beyond Indian markets.
  • I like high dividends, and hence I will continue to read more about it.


CONCOR and TATA Global Beverages seems to have good potential for my long term portfolio. I will skip Indian Hotels. These are based on preliminary screen type of reading. Who knows, when we dig deeper something else may pop up.


What are your thoughts? Do you agree? What are your observations?










Facebook User Comments:


27 Responses to “Screening Three Large Caps Companies for Long Term Investments”

  1. Aditya says:

    Hi TipGuy,
    I agree with you.I personally like container corp and Tata Global Beverages and the growth looks optimistic.
    I have tracked Container corp for quite sometime and later left it.
    When I look at Indian Hotels, the margins are reducing and this concerns me. I would stay away from this counter.
    If I were to choose among these 3, I choose container corp first and then Tata Global BeveragE.

    Nice Post.
    ~Aditya

    • TIP Guy says:

      Hello Aditya,

      Thanks for your message. Good to know your thoughts are similar.

      A passing note; I do not understand why it is necessary to say Indian Hotel shares (and a whole company) just as a ‘counter’. To me, its a huge business with thousands for employees and thousands of shareholders. So the ticker symbol is not a mere ‘counter’, but representation of bunch of stakeholders. And the value of those is much more than collective intelligence of mortals like you and me.

      Best Wishes,

  2. Rajini says:

    Tata Global Beverage is a surprise choice ? too much debt? like Rana, I would also like to know what does liquidity mean? does it affect stock picks?

  3. Nice screenings TIP guy
    The debt levels of Tata Tea are consolidated or stand alone?

    It’s interesting that you are entering in tea stock. I am already heavily invested in tea producing companies like Diana tea & Andrew yule. Will you please have a look on both of them?

    Kind regards

    • TIP Guy says:

      Hello MIP,

      I think I mentioned earlier, Andrew Yule is not my type of company – it falls short w.r.t. to what I look for.

      Diana Tea is a two edged sword – it also falls short on at least couple of parameters that I look for (1) I cannot understand how will the company grow. When I read its literature (ARs, news articles, etc), I find management is more interested in giving excuses why it did not perform. Instead of providing and following a growth oriented vision. (2) it is basically a company that owns tea plantations, processes and sell its produce in market. Too much dependency on its external factors. I did not find actions to work around it – sign of bad management. Therefore, I cannot give benefit of doubt.

      Having said that, I do consider Diana Tea could be a potential opportunistic play only if bought in mid teens. Why mid teens? In worst case, its plantation real estate has value. Buying in mid teens provided safety of capital and probable floor level. AND THEN I can bank on short-to-mid term vagaries (due to shortage, earnings jump, market volatility etc, etc.) To me, buying in 20s does not give me sufficient safety of capital or floor level. Unless it introduces new business lines or new products, it is could turn out to be cigar butt.

      TATA Global Beverages is completely opposite – Except debt on its plate, I find it has potential. A vision to grow, management making effort in multiple direction, dividends, etc. It knows tea business is depended upon vagaries of nature, so to remain profitable, grow and sustain, it is transforming itself. It has adapted geographically, increased branding, and increased product lines. The question is what price one should pay to buy its shares?

      Hope this helps! Any thoughts?

      Best Wishes,

      • John says:

        I have a query regarding real estate value of plantation.. Is the plantation owned by Diana tea?? I guess majority of the tea plantation are still owned by State governments.. The companies just took them on long term lease .. Probably something like 99 years.. I remember a case between Kerala Governement and Tata’s about their tea plantation in munnar.. same happens with Harrison Malayalam Plantation.. From my memory , verdict was favourable for govt in both cases.. The company cannot sell those plantations, they just can transfer the lease.. New company need to cultivate it. In that case, I think there is no point in considering real estate value which doesn’t belong to the company

        • TIP Guy says:

          Hi John,

          Great point! Intentionally, I did not go into that discussion. This is different for different companies.

          In some cases, it does operate under the scenario you mentioned. Long term lease from government. Even in such cases, the lease hold has value, which typically is based on area, quality of produce, and produce volume. The companies do not directly have land ownership, but it does get translated into equivalency. Plantations are considered as value add to actual land, which drives quality/volume of produce. So, in the end its lease hold + plantations + processing factory + intangibles which would determine value.

          In some cases, companies do own their estates. But here also, such land is protected by regulations/laws which only allow tea plantations. So even though a company owns the land, they can only do tea plantations. They cannot have construction activities such as develop resort, or hotels, or residential villas. Here, the value of land is again in the context of tea plantations only. You cannot value this land in the context of constructions in cities/towns. So, in the end value would include agri land + plantations + processing factory + intangibles.

          It is difficult for me to determine whether Diana Tea owns the land (company disclosure? or did not spend enough time to read? or my limited knowledge?). However, based on ARs, my initial guess would be they own agri land/farms.

          Hope this helps!

          Best Wishes,

  4. Arun says:

    Hi TIP Guy,

    I haven’t looked at these companies, but thanks for your analysis – it gives me a starting point to do my own analysis.

    Recently, analyzed one of the PSUs that looked fundamentally strong and fairly valued – would like to know your view on this – Balmer Lawrie Co. Ltd.

    Thanks
    Arun

    • TIP Guy says:

      Hi Arun,

      No, I have not looked at Bal. Law. in last two years or so. Cannot comment! But would like to know from you; why do you think it is fundamentally strong and why it is fairly valued?

      Best Wishes,

      • Arun says:

        Hi TIP Guy,

        I think, Bal.Law is fundamentally strong because of
        * Reduced their debt over years to Zero / Negligible Debt
        * Consistently > 20% ROC which is steadily getting better (shows good utilization of available capital)
        * Consistenly improving divident payout
        * Fairly valued because the Enterprise value is about 5 years ahead of the current total capital of the company when compounded using the 5 years average ROC. To buy, I would really want the price to go down a little further than its current price to create a cushion.

        Overall, I feel good for a long term buy. This analysis is purely from balance sheet and PL account data – need to further do to a qualitative analysis based on the business this company is into.

        Hope this helps.

        Thanks
        Arun.

  5. Praveen says:

    May be the high debt is due to the terrorist attack on their Taj hotel in mumbai. But now the Taj mumbai is open & it may be a turnaround story (like Tata Motors)???

  6. basavaraj says:

    Hello Sir,
    I love the analysis published in this site. The approach is very good. However what I feel you always analyse the stock which is in the business for a long time may be decade or so. I request you to analyse some hidden gems which has the potential deliver more returns. Few stocks I have in my mind is Adani Enterprise, Mundra, JSW Energy,Yes bank etc. What I feel all few of these have a very good CAGR and just started their business. What my request is kindly analyse such companies which are currently investing in their business and can pay off well when the operation starts in a full swing.
    Thanks,
    Basavaraj.

    • TIP Guy says:

      Hello Basavaraj,

      Why do you think the examples that you gave are hidden gems? How can you say that? I get a feeling you are looking for multi baggers! Just using the word ‘hidden gems’. Most of the time, (if not always), new businesses like you mentioned are so much hyped that they are never cheap. Its hullabaloo and we can only recognize ‘hidden gems’ looking backwards. I cannot identify ‘hidden gems’ looking into future.

      I think you are missing the point. The thought about hidden gems is very subjective. A hidden gem to me, may not be a hidden gem to you. You may be looking for hidden gem (I am not) that gives you high returns in short time (I am not). It all depends upon context. To me, the stocks that I have in my portfolio are all hidden gems. They give me consistent and sustainable results. Read this asset for wealth building.

      I look for low risk companies where I can get long term consistent and sustainable returns. To me, it is important to know how as an investor I get my returns. It does not matter which type of companies it comes from. In doing that, in most cases, new business fail my selected metrics.

      Thanks for stopping by and leaving a message.

      Best Wishes,

  7. Saif says:

    Hello Sir,
    I have been reading some articles and speeches from Ben Graham.One of the methods for selecting stocks while running his Graham-Newman fund (which he also mentions in Intelligent Investor) is narrowing stocks with market cap < (2/3) net current assets (NCA).This was meant to be bargain ,with few more criteria thrown in like the business should not be losing cash ,otherwise the staring eventually reflects in balance sheet and so on NCA.
    What do you think of this approach.Have you tried using it anytime.How efficient do you think it can be used to our markets.Considering the bull run we have had for 20 odd months now,there are not a lot of companies in midcaps or large caps which come under this criteria.I found one Khaitan electricals .
    NCA is 252 crores and full mkt cap is 182 cr.
    The problem here is it has high PE already (around 30-35)Also they are loading up on debt.So not exactly a bargain hunt.
    Can you elaborate this methodology ,what are the pitfalls etc as a post,if you find time.

    Regards,
    Saif

    • TIP Guy says:

      Hello Saif,

      You always come up with tough questions!! But are good one….

      So far, in my dividend based buy n hold portfolio, I do not use NCA based criteria. There is nothing wrong in using NCA based criteria in evaluations. But one needs to understand the context in which it can be used. My personal view is NCA type of criteria are good for cigar butt type of companies. In cigar butt types, NCA provides a minimum floor at which its assets can be sold in bit n pieces or lumpsum. Buying at 2/3 provides margin of safety. Not losing cash tells you the NCA won’t keep reducing, or atleast it will remain stable.

      Using NCA criteria may not be a good strategy for growing companies and/or most of the companies in growing economy like India. A company that is expected to grow (or is in growing economy) will always be more than NCA.

      Regarding Khaitan Electricals….. I think you are using 250cr NCA based on balance sheet calculations. In general, these calculations do not reflect NCAs in true sense. A company can bump up NCAs by increasing inventories or sundry debtors. Take a look at Khaitan’s inventory and sundry debtor – they just keep increasing. Theoretically, inventory can be an asset, but when liquidated, you never get its full value. Same way, the fact that sundry debtors keep increasing tells me, they are not paying back for stuff they bought. Many of them will likely default. Therefore, in case of Khaitan Electricals, I would guesstimate that tangible/true NCA would be less than 100crs.

      Hope this helps!

      Best Wishes,

  8. Well, as always, your analysis gives me great input to think through. Thanks for that.

    I do have position in Indian Hotel. The reason is rather strange. I sometimes like to take positions in companies that cater to the rich. Good time, bad times, Rich people seem to always spend their money. Indian Hotels is one such company. But, I try to buy these when they are at deep discounts. What is a deep discount? I think if I can pick these up at 30-50% of their Life time high, that would not be so bad. 2008 gave such an opportunity. Having said that, I understand your analysis and understand how it goes counter to your philosophy of picking the stocks at the right time.

    I also have Tata Tea. but not Concor.

    Thanks again.

    • TIP Guy says:

      Hello Student…

      I would tend to agree, buying Indian Hotels as an opportunistic play would not be bad idea, only because it is a valued brand which will not vanish. Buying at 30 or 40% of its peak would make sense to me. The point being opportunistic.

      The screen (and this post) was for long term buy and hold type of positions.

      Best Wishes,

  9. vikrant says:

    Hi tip guy,

    just checking to see, when are we going to see further updates on the two companies? Your decision and detailed analysis.

    Vik

Leave a Reply




~