rohitc99

As a citizen, poor infrastructure and corruption are big issues and impact the quality of life. As an investor , it is a non issue. They are a lot of good companies which have grown well inspite of all the issues, created a lot of wealth for investors and have decent corporate governance. A 15-18% CAGR for 10+ yrs is par for the course and a lot of value investors i know have made that kind of return. I will actually make a claim - A lot of smart investors on this board could actually make 20%+ returns very easily in india. A few sectors such as the oil& gas are a problem. I think the airline sector should be opened ...after the way indian investors have lost money (20+ airlines have gone bankrupt in the last 15 yrs), it would be interesting to watch foriegn investors do the same.

There are scores of companies in india - family owned - which do an excellent job of managing shareholder capital and have created a lot of wealth piramal healthcare - ajay piramal asian paints - india's largest paint company - a 30% compounder for 10+ yrs thermax, blue star - cyclical yet wealth creators IT service companies such as infosys Lakshmi machine works - Textile machinery and several more there even govt owned companies you would assume would only destroy wealth, which have done well inspite of the goverment holding (though there is not as much meddling ) The usual tendency for most foriegn investors including FII is to look the top 20-30 companies and draw their conclusions, whereas there are over 5000 companies, several of them quite good to choose from

here is more about ajay piramal http://fundooprofessor.wordpress.com/2011/03/26/the-grand-strategy-of-ajay-piramal/ i am baised about him as i am invested in the company. ajay piramal is a smart capital allocator and follows buffett & munger (see the picture - poor charlie's almanac is on his coffee table).

i think there are paid screeners available. I have however done it the hard way - go through numbers manually one company at a time and build my own list using website like moneycontrol.com

yes that correct. one reason you can find a lot of net nets in india is due to poor to non existent capital allocation skills of the promoter/ manager There are several business like textiles, auto parts etc where the core business generates attractive returns on invested capital, but the excess capital is not returned back to the minority shareholders via dividends (buybacks are very rare and barely understood). These promoters who in some cases hold more than 70% of the stock, have no concept of shareholder value and just hold on to the cash So the graham thesis of liquidation does not work in such cases. In addition take over laws are not clear , so you dont have takeover attempts on such companies. In effect you can see the value, but never realise it - classic value trap.

How reliable are the financial statements in India? I have done net nets in india. Financial statements are reasonably reliable ...you may have corporate governance issues in some cases You can find a decent number of net nets as there are 5000+ listed securities. however at the same one can do far better with good companies. also in a lot of net nets the company and management is terrible and that makes your stomach churn I think after doing nets nets for a few years in india, i have found good companies selling at decent valuation to be more profitable and a far more pleasent experience

yes i plan to attend the meeting. rohit

aah !! the double pleasure of confirmation and instant gratification (had started loading up on BAC recently) :)

i have banked with them for the last 8 yrs - only bank. as long as FDIC covers my deposit, its like the local utility for me. adequate service and mostly painless. beyond that dont care if they their stock drop to 6$ or goes to 60$

its maruti suzuki which is likely to get hurt more. the company has around 50% market share and grew sales in excess of 20% last. their margins however dropped due rising competiton/ raw material cost i worry more about the roads ...where will everyone drive these cars ? the road network is expanding in low single digits at best

mcdonald's has a vegetarian burger ...and there are indian versions of burgers - chicken, fish and you name it for the last 15+ years. you will be surprised with all that you find :) getting a steak is not too difficult either

Uccmal aggresive marketing in case of icici is not an issue. ICICI has a long history in india. It was a DFI (development financial instution) - short form for a government institution which the politicians used to provide capital to favored business groups. this was prior to 1990. the government sold off most of the holdings and ICICI has minimal government involvement now. they grew very rapidly in the 90s based on a combination of good customer service and aggressive marketing and cleaned up the non performing loan mess. however the bank has always been focused on size and scale. i was happy to buy life insurance and mortage from them as they did not require much in terms of documentation and their standards were not too stringent..compared to some of the other banks which were more particular about the requirements. ofcourse i sold off my stock in the bank . a lot of my friends had similar experience. the caveat in my experience is that this was prior to 2005. maybe the bank has become conservative and has better underwriting standards in the lombard division

I have bought insurance from icici lombard in the past as a resident. ICICI is known for high decibel marketing and is an aggressive company which has expanded rapidly in the last 10+ yrs however on the downside this company has lax standards - atleast in their other divisions. As a resident, i had approached icici home loans (mortage company) and they are willing to write a high mortage with minimum documentation. This is in comparison to some of the other companies in india which have much stricter standard. Maybe one cannot extend this to their icici lombard division, but the culture is the same. The life insurance division, which i think is a different division from lombard, is also lax in their standard (they require much lesser medical tests and are more lax overall). i hope the same culture does not pervade the icici lombard division

Book value rose from 8.7 to 12.83 in 2004. I think 2005 was ameriprise spin off, so 2005 book value was 8.5. since then it has risen again to 13.23 in current quarter

I am reading a book called the rational optimist - think mohnish recommended this book during the AGM the book talks about the same progress which is shown in the video. fascinating book and gives cause for hope

I want to add my thanks too. I am usually a lurker on this board and have posted occasionally. I would have never looked at FFH, but for this board. Ofcourse i am cursing myself for taking so long to do that, although i have been around since for sometime now. the more i read about the company, the more i am impressed by prem watsa and his company. the only downside is that once you invest with an FFH or BRK, your expectations from a CEO are raised high and the irritation goes up when you see other CEO's falling way short

how do the foreclosure issues affect WFC ? are they exposed to any liability from investors if it is proved that they signed documents with reviewing them ? i dont know how to evaluate this risk. would appreciate if someone has figured it out and can share it

I agree with your statement and although it would be nice to have a predictable business selling at cheap valuation, i think that is unlikely to happen unless there is a full panic. and even then although the business is predictable, the environment is not I am looking at LUK with a range of values. The upside is limited by one's imagination :) or whatever one is smoking. I am trying to avoid getting too giddy by looking investments of the type of Fortesuce notes and assuming that they will be able to get full value (though makes me wonder what the other party was thinking at the time they accepted this offer ) personally, i am trying to be as conservative as possible (future will tell if i was conservative enough) and trying take book value in some cases where the investment is not impaired and the management seems reasonably optimisitic (for example keen ). In other cases there is more data such as for ACF, CLC and other positions ..so i am trying to figure a more reasonable valuation (book value may be too low in such cases). I think my final assumption is that a management which has grown book value over 19% for such a long period of time has not gone bonkers all of a sudden..so hopefully the past will repeat in the future

biaggio - i have been doing a sum of parts valuation (looking at each investment/ operation etc individually). I have come up with a valuation of around 8 Bn (including the NOL @1.3 Bn and excluding the 1.9 Bn debt). The valuation is quite crude and has a lot of approximations and assumption..but in the course of looking at each piece i found quite a few interesting investments - CLC mining : at 30% stake, the mine is not fully operational. at current copper prices, the NPV comes to around 800 Mn. - JHYH : could be worth 500 mn or more - fortesuce notes and stock investment - found an investment (cant recall the name) which had been written down and was sold at 3 times written value for a gain of around 40 Mn - investment in MBS and other such instruments which could be profitable in future. - berkadia : i think we can safely assume that this will do well and is definitely worth more than book The more i read about the company, the more i realise there is hidden value which could get unlocked in time. either that or i am getting too optimistic about the company :)

I recently started analysing the company (had never looked at it before) and found a few things, which i am trying to figure if i have the math wrong or these guys are really this amazing - 100 Mn Fortesuce notes which gives 4% of the revenue from the mines (after royalty and other expenses). the company made 68 Mn in 6 months and in the lastest quarter recieved a gross payment of 172 Mn. any interest not paid accrues at 9.5%. No wonder Fortesuce is trying to wriggle out of this deal - Investment in keen which was done at a distressed price of 15 Mn for 50% stake where this company could easily be worth 300 Mn or more (provided gas doesnt permanently stay below 4$) -CLC mines where the 30% stake could be around 500 Mn+ in terms of NPV there seem to be a lot such attractive pieces all over the place. i am still digging and trying to figure it out and wondering if i am really missing something obvious

same here rohit

myth465 you make a very good point. If you look at the cash flow statement for the last 6-7 years, the company has returned almost 140 Bn to shareholders via dividends and share re-purchases. now some of this is definitely to offset options related dilution (which is around 1% per annum), still they are returning close to 80% of annual cash flow to investors. I think it is likely that they will continue with it. At the same time, the company has always had a big cash hoard so the management has definitely pissed some amount of the cash away ...no doubts about it . we can attribute it to management's stupidity or the nature of the tech business itself where some amount of investments in hindsight appear a complete waste of effort, but has to be done to flank your current products or atleast not concede without a fight :) or maybe just keep the troops busy and excited. I think we expect some amount of cash flow to be wasted on all kinds of new trends - mobile OS, search etc. however all this spend (which has happened in the last 10 years too) should not dent the overall cash flows too much - unless they do some big and stupid accquisition. to your point of overanalysing the data :) ..guilty as charged. you see, i have only recently started investing in the US market (have invested in indian stock markets till now). as a result i am overcautious to a certain extent.

I have doing some analysis of MSFT myself and wanted to check if the perceptions about Microsoft match up to the reality. I have listed some numbers and some of my conclusions from these numbers. Some of the numbers especially before 2004 are not exact as the company has changed the segment classifications over the year. However I think they are close enough for some general conclusions. i have restricted the data till 2003 as i can get the formating right. the direction of the trend is the same Sales Division performance 2003 2004 2005 2006 2007 2008 2009 2010 Windows and Windows live 10394 11546 12234 13089 14972 17211 14974 18491 Microsoft biz division 9113 10653 13520 14486 16396 18899 18910 18642 Server and tools 7192 8538 8367 9652 11175 13195 14191 14866 Online services 1953 2216 2344 2299 2474 2198 2121 2199 Entertainment and devices 2,748 2,876 3,515 4,756 6083 8459 8035 8058 Total 33403 37833 41985 46288 53107 61970 60240 64266 Windows franchise as %total 58% 59% 61% 60% 59% 58% 56% 58% Windows franchise growth 11.0% 14% 16% 7% 14% 15% -6% 10% Operating margins Division performance 2003 2004 2005 2006 2007 2008 2009 2010 Windows and Windows live 7960 8654 9442 10297 11603 12422 9982 12977 Microsoft biz division 6389 7410 9116 9620 10838 11859 11664 11776 Server and tools 1160 1418 2072 3035 3900 4149 4803 5491 Online services -573 87 402 -74 -732 -578 -1652 -2355 Entertainment and devices -1191 -1220 -539 -1284 -1892 445 108 679 Total 15748 18353 22498 23600 25724 30305 26914 30578 Windows franchise 91% 88% 82% 84% 87% 80% 80% 81% A few points standout from the above tables pulled from the 10-K The windows franchise (windows + MSoffice) has grown at a slightly lower rate as expected, but not as bad as one would expect. The operating profit contribution from the windows franchise has come down. This is good as it means the company is now making some money from the other businesses – notably the server and tools biz. Also the entertainment and devices biz (XBOX etc) is now making some money. The online services biz is losing a boat load of money mainly due to the launch of bing and other initiatives. The entertainment and devices and the online service biz have complete dogs and money sucking pits for years now. Income before tax 2005 2006 2007 2008 2009 2010 International 6822 6858 7199 11132 14292 15438 US 9806 11404 12902 12682 5529 9575 International as % of total 41% 38% 36% 47% 72% 62% The table above shows that growth and profits are coming from the international markets which is a good sign for future growth. The company can easily do 20 Bn post tax if the burn rate in the online business reduces. I think the core biz of the company is still growing at a decent clip. The major growth is from the foreign markets where PCs and laptop penetration is still low and growing. Key risks I think the key risk comes more from the migration of laptops and PC to lower cost OS especially in international markets. The operating margins for such OS (windows or others) is bound to be low and will hurt the company a lot. Also with an install base of 1 billion + for windows, I think the threat from ipads and such devices is overstated. The other key risk is how the management will spend the huge cash, now almost 40+ bn. The past capital allocation decision beyond the windows franchise have been very poor. A buyback and dividend plan will reduce the damage the management can do. Would welcome counterpoints to my arguments

roundball100 JNJ may not be a multibagger over a 5 yr time frame. however considering the economic headwinds and opportunities outside US, it should do well. a drop in the dollar could help too Also, if they can keep doing a few smart accqusitions once in 2-3 yrs, we may get a good upside in the long run

I analysed JNJ sometime back and wrote a small note on it. posting it below ..hope you will find it useful About Johnson and Johnson (JNJ) is a US based pharma and healthcare company. The company has three primary business segments – consumer products, pharmaceuticals and medical devices. The company had a revenue of 63 billion USD in 2008. The Consumer segment includes a broad range of products used in the baby care, skin care, oral care, wound care and women’s health care fields, as well as nutritional and over-the-counter pharmaceutical products. The Pharmaceutical segment includes products in the following therapeutic areas: anti-infective, antipsychotic, cardiovascular, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology etc. The Medical Devices and Diagnostics segment includes a broad range of products such as Cordis’ circulatory disease management products; DePuy’s orthopaedic products; Ethicon’s surgical care products; Ortho-Clinical Diagnostics’ professional diagnostic products and Vistakon’s disposable contact lenses. The company operates globally in a predominantly decentralized structure with over 118000 employees. Financials The consumer segment had a global sale of 16 Billion in 2008 with a 10.8% growth. The company also acquired the consumer healthcare business of Pfizer in 2007. The consumer segment had an operating profit of 16.7%, an increase of 1% over 2007. The pharma segment had a sale of 24.6 billion in 2008, a decrease of around 1.2% over 2007. This business saw an increase in operating profit from 26.3% to 31% mainly due to write downs in 2007. The medical devices segment had sales of 23.1 billion with an increase of 6.4% over 2007. The operating profit increased from 22.3% to 31.2% in 2008 partly due to some litigation settlements in 2008 and some restructuring charges in 2007. The company has maintained a high level of R&D investment (around 10% of sales or higher) during this period. This efficiency of this investment is evident from the drug pipeline of the company which consists of around 18 drugs filed or approved and almost 25 in the stage III trails. On an aggregate basis, the company has a very steady performance in the last 10 years and more. The ROE has ranged between 26-30% during this period. This improvement has been driven by an improvement in net margins from around 15% to 20%. The various asset ratios such as working capital turns have improved from low teens to around 30. The fixed asset turns has improved during this period too. The company has maintained a healthy cash flow during this period and has had a dividend payout of almost 40% during this period. The balance cash has been used to pay off the small amounts of debt, invest in assets and make targeted accquisitions.The company is a zero (net basis) debt company and has a cash flow rate in excess of 10 billion per annum. Positives JNJ has several key positives as a business and over other pharma companies - The company derives around 30-32% of its revenue and around 40-45% of operating profits from the pharma business segment. Although the company faces the risk of its top performing drugs going off patent, the company has a healthy pipeline to manage this risk - The company has a medical devices division which does not face the generic or patent risk of the pharma division and is fairly profitable. - The company has a consumer products division with strong brands and an extensive distribution network which act as a hedge to the other segments. - The company has a deep moat in all its business segments and sustainable competitive advantage. - The company has a decentralized operating structure with 250 operating companies across 57 countries across the globe. - The company has strong balance sheet and consistent cash flows. The net profit and cash flow has grown at around 16% per annum for the last 10 years. In addition the company has improved its ROE and other asset rations Risks The company faces the following key risks - Several key pharma brands (in excess of 1 bn sales) such as risperdal and Topamax have lost patent protection in the recent and will face drop in sales and profits due to generics. Success of new drugs is not a given and only a few drugs in the pipeline may replace these blockbusters. In addition, there may be short to medium term dip before the new drugs replace the loss in sales. - The global slowdown is likely to impact the topline and bottom line growth for the next 2-3 years - The US market accounts for almost 14 bn in sales for the pharma division and 10Bn in sales for the medical devices division. Although I have not been able to find the numbers. the profitability of these divisions in the US is fairly high. This may be at risk due to the health care reforms in the US. - The recession in the developed markets which account for major part of the sales and profit could keep the topline and bottom line subdued for the next few years. - The company faces litigation risks related to product marketing, pricing, product side effects and patent issues. These risks are detailed over 3 pages of the annual report and are not easily quantifiable. The company has accrued liabilities against these risk and has stated that these risks in aggregate will not have a material effect on the financials. Competitive analysis The main competitors for the company are the other big pharma companies and the generic firms such as Ranbaxy, Sun etc. We can apply Michael porter’s five factor model to evaluate the company Barrier to entry – All the segments of the company enjoy substantial entry barriers. The pharma and medical devices have formidable barriers in the form of patents and sales and marketing network. In addition any new drug or device requires substantial R&D expenses and infrastructure. The consumer segment has barriers in the form of Brands and distribution network Supplier power – Moderate to low in this industry. Suppliers are mainly providers of basic chemicals or contract manufacturers. The value is derived from the IPR of the drug and not from the manufacturing. Buyer power – Low in consumer goods. However in case of Pharma and the devices segments, national programs such as Medicare have a strong leverage and with escalating cost will attempt to drive down prices. Substitute product – none Rivalry – There is intense rivalry in the industry from other pharma majors who are attempting to develop a similar drug and especially from the generics where the price and profits drop by as much as 90% over the course of a few years as soon as the drug comes off a patent. In addition, the generic companies are constantly trying to challenge the patents too. Management quality checklist - Management compensation: The company has almost 215 Million outstanding options which would result in 2% dilution. The options do not appear to be excessive. - Capital allocation record: Fairly good. The management has maintained an ROE in excess of 25%, low debt and a dividend payout of almost 40%. In addition, the management has been engaged in acquiring other pharma companies to pull gaps in its drug pipeline and added to it too. - Shareholder communication: The shareholder disclosure is good with clear explanation of the benefits assumptions and IP R&D (in process R&D) calculations from the acquisitions. - Accounting practice: The overall accounting seems to be conservative. However there are some areas of concern. For example – the company has assumed long term returns on plan assets of 9%. I think that is aggressive and could result in additional charges over the years. The IP R&D (in process R&D) charges do not appear to be excessive. Valuation The company has approximately 12 Bn of cash flow and is selling at around 13 times earnings. The company has shown a profit growth of almost 15% per annum with high degree of consistency. At the same time the company has maintained a high level of ROE during this period too. One cannot assume such a high level of profit growth in the future as some part of this has come from the increase in net margins. However with a conservative assumption of 6-7% growth, discount rate of 8% and CAP period of 10 yrs, intrinsic value can be estimated to be between 80-85 (PE of around 20). The current valuation assumes a growth of 0 or worse and gives no value to the competitive advantage of the company. The company is currently selling at a 5 year low and appears to undervalued by comparative and absolute standards. Conclusion The company has performed well in the past in terms of fundamental performance. The sales and profits have grown at a double digit rate. In addition the company has a healthy drug pipeline at various stages of approval which could help in replacing the blockbuster drugs going off patent. The medical devices and consumer division provide stability to the earnings and help in reducing the risks of the pharma division. The management has been a rational allocator of capital which is visible via the high dividend payout, above average ROE and sensible acquisitions. The company appears 20-30% undervalued compared to the intrinsic value which in turn can be expected to grow at 7-10% in the future.