Are you buying this stock after it has gone up 438%?

Mar 3, 2010

In this issue:
» Next burst of steel capacity creation
» Financial reforms have a sealed fate
» New banks have a tough road ahead
» Best protection against currency devaluation
» ...and more!!

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Here's a quick riddle for you...There are three birds on a tree and two decide to fly away. How many birds are still there on the tree? The answer that comes almost immediately to the minds of most readers will be 'one'. The correct answer is three as two have only decided to fly away and not flown away yet. However, our brain tries to process the problem in the quickest way and in most cases loves to follow the herd. This can be suicidal when it comes to stock investing.

Take the latest headline in several business papers for instance. You find many of them screaming about the opportunity to make money by buying the stock of Tata Motors. Some of the big brokerage houses have recently released their Buy reports on the stock. Not that we do not like Tata Motors as a company. Infact we had recommended the stock to our premium subscribers in December 2008 when it was trading at about Rs 150. However, what puts us off is the timing of such reports. Asking unsuspecting retail investors to buy a stock which has already run up a whopping 438% from its lows and has little upside left is not something we agree with.

The fundamentals of the stock leave us all the more clueless about what kind of upsides are the brokerages foreseeing from here. The company has already had a dream run in terms of sales growth and margins in the past few quarters. The upsides of JLR acquisition have already been factored in. The 'Nano potential' is now an oversold story. Rating agencies like Moody's have already announced an upgrade of Tata Motor's credit rating. Hence unless India's GDP grows at 10%+ per annum over the next few years, the likelihood of the stock moving up substantially from the current levels is abysmal. However, your broker would love to induce you to follow the herd on the pretext of marginal short term gains, if any. You could choose to follow such herd mentality at your own peril. Or do your own research to find stocks with reasonable margin of safety.

 Chart of the day
"Power is the new telecom" says Mr. Rajiv Lall, the MD of IDFC which finances nearly a fifth of PPP (public private partnership) projects in the country. It is estimated that US$ 20 bn a year will be spent on new power plants over the next four years, adding at least 30% to India's power generating capacity. If the incremental investments in the power sector are anything to go by, the sector is set to surpass telecom in terms of growth in the medium term. As today's chart shows, the inflow of bank credit as well as private placement of debt was much higher in the power sector as compared to the telecom sector in the past two fiscals.

Data source: Economic Survey FY10

One of the defining features of the global steel industry is its tendency to build excess capacity. Not so when it comes to the Indian steel industry. As it is well known, China and India both began at the same level when India won Independence. But now, the dragon nation has leapfrogged us and gone so far ahead that comparisons sound ridiculous. In the last 6 years, China added a whopping 300 m tonnes when we added a mere 20 m tonnes. Not that India cannot make up for lost time. After all, we are blessed with abundant raw material, especially in the Eastern part of the country. The problem is delays over land acquisition and mineral rights. More transparency and professionalism could help overcome that.

In fact, there are several 10 to 12 m tonnes capacity greenfield ventures lined up. Investors have rushed in to sign as many as 222 memoranda of understanding for building 276 m tonnes of new steel capacity. Not that all of them are willing or able. But the serious players have hung around despite the recent financial crisis. ArcelorMittal and Posco are still keen on India. And so are Tata Steel, JSW, JSPL and Essar. Little wonder then that the steel minister believes that India can become the second largest steel producer in the world by 2015, next only to China. But it is high time the government started helping these players and stopped dragging its feet.

We, as the denizens of India, know firsthand what it feels to be delayed and denied important reforms by the government. Reforms in various fields have been deferred and postponed by the government for a long time now. And we continue to pay the price for the same in the form of a slower rate of growth and a lower quality of lifestyle.

But for the most meaningful reforms to pass through the filter of politics and vested interests is surely not an India specific problem. Take the US. It still hasn't recovered completely from the credit crisis. A crisis that arose almost directly from the excesses and commercial malpractices of large financial companies. The average American's angst against these companies is well documented. However, noted economist Paul Krugman recently offered his grim view that all momentum for serious banking reform has been lost in the US. This is because opposition from the Republicans along with lobbying from the large and resourceful financial companies will make it very tough for the bill to pass through the Senate in the current form. He expects not more than a vitiated, watered-down version of the bill to make it through. Looks like despite the intensity of the credit crisis, strong financial reform might just turn out to be not more than a distant dream.

Picture the US the way it stands now. The economy is still grappling with recession, unemployment has soared and the deficit has ballooned what with billions poured into the financial system. All this should be reason enough for the dollar to nosedive. But that has not been the case. The dollar has infact gained against the euro in recent weeks. What is more, the former Federal Reserve Chairman Paul Volcker believes that the US dollar's role as the world's reserve currency is not likely to be in jeopardy. This is because there is no other currency that can yet replace it. The euro was touted as a likely successor but with many nations in the Eurozone on the verge of committing sovereign defaults, the euro will be relegated to the sidelines for now.

In the meantime, Volcker has warned central bankers to keep an eye on inflation and not react too slowly when prices start to rise again lest another bubble starts forming. We are also of the view that the dollar will maintain its status as of now. However, the country will have to take the necessary steps to bring down its deficit, as that would surely put pressure on the dollar if not in the near future then in the longer term.

Non banking companies that were hopeful of cashing in on their new bank licenses will have to temper down their expectations. For the Finance Ministry is now tightening its purse strings after making announcement of new licenses in the Budget speech. New entrants in the banking sector may now be allowed to open branches only in rural areas for the first two years of operation. Also, the subsequent spread will depend on the basis of their direct lending to the agriculture sector, opening of no-frill accounts, and other financial inclusion criteria. Moreover there will be stricter norms in terms of capital provisioning. This will act as an entry barrier and will also ensure adequate risk cover. We believe this is a very good move to ensure that the additional bank licenses do not attract players wanting to enter the banking space without long term interests in mind.

Warren Buffett's latest letter to shareholders was out this weekend. Soon after, he gave an interview to CNBC where viewers could ask him questions. A series of interesting questions related to what might be termed as his global macro strategy. Buffett was asked which currency he would pick if he had to move out of the US Dollar. He chose the Swiss Franc. Not that he is about to anytime soon but the reasoning behind it was interesting.

In his opinion, the value of a currency is a function of government action. Also, all currencies lose value over time. In his own lifetime, Warren Buffett has seen price levels rise by 15 times in the US. Hence, the question to ask is where it is likely to depreciate the least. Given the large deficits, he believes the value of the US Dollar will decrease over time. So will that of the Euro and of the British Pound. But it is very difficult to predict which will decline more. As for the Japanese Yen, he calls it a mystery he doesn't even try to solve. In our view, there is an immensely useful takeaway for investors in all this. What is the best protection against currency devaluation? Invest in your own talent. After that, invest in good businesses. Both of them will retain their values no matter what the governments do.

Indian markets today continued to add to the strength seen since the start of the week as heavyweights across sectors elicited investor interest. Stocks from the power and commodity sectors were particularly in the limelight. The benchmark index, the BSE-Sensex was up by around 177 points (1.0%) at the time of writing, while its smaller peers, the BSE- Midcap and the BSE- Smallcap indices were up by 1.3% each. India is currently the lead gainer amongst Asian markets.

 Today's investing mantra
"Stick with businesses whose profit picture for decades to come seems reasonably predictable." - Warren Buffett

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14 Responses to "Are you buying this stock after it has gone up 438%?"


Mar 6, 2010

New banking licences are being given for operation in rural areas only for first 2 years. That is good. Also the existing private and foreign banks should be told to open atleast equal no of rural branches as in towns and metros within next 2 years, as well as meet minimum business in priority and agricultural and non corporate sectors. Will ANZ Grindlays which wants to come back will also be subject to this condition and opening rural branches? Are they have a seperate rule?



Mar 4, 2010

Tata motors has gone up 438%. In other words it has gone up 4.38 times from its recent lows.

SAIL was trading at Just Rs 5/- in 1999, if I remember it correctly.
It's trading around 235 now. It's 47 times of what it was 10..11 years ago.

Not just 4x, or 10x,25x,50x
Stocks tend to move beyond one's imagination...

Here I'm not trying to say that TATA MOTORS will move up further..
may or may not go...

But one cannot rule out the possibility of running another 10-15 % from these levels in short term.

Extracting Juice to the last drop....
Not a Bad idea at all....



Mar 4, 2010

Tata Motors is undoubtedly a good scrip but no shrewd investor, who is closely watching the day-to-day price movements in the stock market, will venture to buy it at its present price. As rightly pointed out by you, there is no reasonable chance of its price going futher up in the prevailing circumstances. I fully concur with your views in this regard.



Mar 4, 2010

This not done... what is the logic here...



Mar 4, 2010

If your recommendations will have a horizon of 2-3 years, how exactly can we judge your efficacy in just 30 days ? Is it going to be about the language, logic, analytical depth, pursuasiveness of your recommendations etc. of your reports ?

By the way, I really liked the flawless language and the organised presentation. Impressive indeed !



Mar 4, 2010

Interesting & engrossing.



Mar 3, 2010

hmm.. there's a Ben Graham follower out there , someone rare to find in the financial services industry. The writing style & language as seen in Tata motors case is clearly Graham-like.


N.M.R Shreedhar

Mar 3, 2010

Hi Equitymaster,
really appreciate yr thoughts on Tata Motors--the stock price seems to be vastly inflated and is now due for a correction.Hats off to equity master for steering away from the populist thought and giving sound financial advice.


A k sinha

Mar 3, 2010

N0.Icame to know stratgy of the stock market investers with the help of ur teaching.



alka bharat bhagat

Mar 3, 2010

Definately, i would not buy stock like TATA MOTORS which has gone us 438%, but i m also surprise to see your today's reco on midcap where you are suggesting to buy one stock which was trading around same price in dec' 08 like TATA MOTORS which per chance also trading today at same leval of TATA MOTORS & now you are are recommanding for further higher ups ! Amazing. fundamentally your new reco may be correct but what is point in buying the stock which has run up so much. awaiting reply.

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