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This biggest risk to your stock is often the most ignored...

Nov 17, 2014

In this issue:
» How large are Indian markets in terms of market cap?
» Brand India still a matter of worry
» All is not well in the world economy...
» and more....

The benchmark Indian indices are hovering around all-time highs. Many stocks in the smallcap space have witnessed multi-fold rise in their stock prices in a matter of just months. This may cause investors looking for "value buying opportunities" to dig into stocks that haven't seen much action yet... stocks that are trading at multi-year lows... or probably stocks that are prospective turnaround stories...

Well, we won't say either of these screening approaches are wrong. For instance, successful turnaround stocks can be immense wealth creators for shareholders. In fact, our most recent Hidden Treasure stock recommendation has been a very compelling turnaround story that we believe has solid fundamentals and attractive future growth prospects.

But successful turnaround stories are few and far between. Many ailing businesses caught up in a downward spiral, often lose the strength to recover.

So if you are looking for some seemingly cheap stocks that will, hopefully, get resurrected by Mr Modi's magic wand, then you are probably headed the wrong way. The low valuations could indeed be justifiable for many troubled businesses.

There is this one very big risk factor that many investors tend to undermine, especially while investing in smallcap companies. It is the risk of the business becoming unviable and closing down.

In this context, we would like to share with you an interesting case of a fast-growth company that is currently trading about 85% below its all-time high of January 2008.

This company grew its sales from Rs 6,438 million in FY07 to Rs 63,042 million in FY14. That is almost a ten-fold rise over a seven-year period. Not many businesses can grow at such phenomenal rates without a single year of de-growth.

What is even more interesting is that the company has grown its domestic passenger market share at a fast clip too. As of September 2014, the company's market share stood at 18.6%, making it the third largest player. In recent months, the company has also achieved the highest capacity utilization rates in the industry.

Does this stock sound interesting to you? Shouldn't it have been part of your investment portfolio? Are you curious to know which company we are talking about?

The name of the company is SpiceJet Ltd, India's third largest domestic airline carrier.

This is where the bubbles bursts and all good things come to an end.

Topline growth alone has very little value. What really matters from a shareholder point of view are earnings. And this is where the company has been an absolute disaster.

Between FY07 and FY14, the company has incurred heavy losses in all except two years (FY10 and FY11).

The worst shocker came in recently in its latest quarter result filing. With losses continuing to mount, the company is now sitting on a negative net worth of Rs 14,597.3 million. This is what the airline's auditors S. R. Batliboi & Associates LLP have pointed out in their audit review report:

"...the Company has incurred a net loss of Rs 31,044.6 lakh during the quarter ended September 30, 2014, and as of that date, the Company's total liabilities exceed its total assets by Rs 145,973.0 lakh. These conditions, along with other matters as set forth in Note 7, indicate the existence of a material uncertainty that may cast significant doubt about the Company's ability to continue as a going concern."

In simple words, there is a risk that the company may become financial unviable to continue it business operations and may have to be shut down. In fact, as per several news artlces, about 40 SpiceJet pilots including commanders have quit the airline during the past six months.

We believe there is a big lesson here for investors. Let us warn you that many such seemingly cheap stocks may not be cheap at all. The biggest risk to such companies could be the risk of shutting down. And that could mean a complete wipeout of your capital.

This is the reason we believe it is better to pay a fair price for a quality business rather than buying seemingly cheap stocks that may have huge risks attached.

Name three stocks that you believe are trading cheap, that bear low risk and have ample scope for shareholder gains. Let us know your comments or share your views in the Equitymaster Club.

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 Chart of the day
The India share markets have been scaling new highs. The S&P BSE-Sensex has crossed the 28,000 mark. As the Indian markets continue their ascent, it would be interesting to know how the Indian markets stand in comparison with other global markets in terms of market capitalisation. Here is an interesting piece of data that we came across in a financial daily that we would like to share with you. Among all major global stock indices, the Indian markets have been the biggest gainers in the year so far. The Indian markets have finally entered the top 10 list of the world's largest stock markets in terms of market capitalisation.

As you can see in the chart below, the US stock markets are the largest in the world with a market capitalisation of US$ 23.8 trillion. It is worth noting that the US stock markets account for about 37% of the total world market capitalisation. After US, the other top 9 countries rank in the following order: Japan, China, Hong Kong, UK, Canada, France, Germany, India and Switzerland. At US$ 1.6 trillion, India's market capitalisation is a tad lower than the Gross Domestic Product. It accounts for just 2.5% of the total world market capitalisation.

India 9th Largest Stock Market In The World

While global investors have given a thumbs-up to the new Indian Prime Minister Narendra Modi and are betting big on the Indian bourses, brand India is still perceived poorly in the global context. Research firm Anholt-GfK carried out its annual nation branding survey, which measures the global perception of each country. The study is based on six key dimensions on which the national image is based: exports, governance, culture, people, tourism and immigration/investment.

Of the 50 countries that the survey evaluated, Germany surpassed the US to take the first position. On the other hand, India stood at an embarrassing 31st position. It is clear that we still have a long way to go on the global stage as far as image and perception is concerned. We hope Mr Modi is taking note.

On the global economic front, here are some noteworthy updates...

As per a Bloomberg Global Poll of international investors, the world economy seems to be in the worst shape in two years. The main problem centre again seems to be the Euro zone. The Euro zone economies seem to be worsening. Deflation appears to be one of the biggest threats to the region.

But it's not the Euro zone alone. It appears that even the BRIC economies are not out of the woods yet. The slowdown in China deepened further in October 2014. Its factory output rose 7.7%, the second-weakest pace since 2009.

Japan, too, is in a precarious state with the economy sliding back into recession. As per latest news reports, the Japanese economy declined for the second quarter in a row. What did Shinzo Abe's massive quantitative easing program do to revive the Japanese economy? Isn't the ongoing recession a thumping proof that money printing is not the solution for economic revival?

After trading in the red for most of today's session, the benchmark indices bounced back and are trading firmly in the green. The Sensex is trading higher by 150 points at the time of writing. Stocks from the auto and power space were the major gainers. However, most Asian as well as European markets were trading in the red.

 Today's investing mantra
"If a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with one hell of a result.". - Charlie Munger

This edition of The 5 Minute WrapUp is authored by Ankit Shah and Richa Agarwal.

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11 Responses to "This biggest risk to your stock is often the most ignored..."

dinesh badoniya

Nov 25, 2014

1. power grid
2. zee media
3. coal india



Nov 23, 2014

The death of Discounted Cash Flows in valuing stocks
I've been struggling with this since the Fed began its fraudulent Quantitative Easing (QE). The Discounted Cash Flow (DCF) method is the correct economic way to value stocks but if the money supply in the economy is infinite, then DCF will no longer apply. The mistake being made by economists and commentators in valuing stocks with QE going on is that the so called experts look only at low interest rates as the justification for higher stock prices. Now, zero interest rates over say 5-10 years will still not justify the current high prices of stocks.
I think stocks can no longer be valued based on the cash flows they throw up. Thats because stocks are not being bought with a view to holding them for the cash flows they throw up. I can think of two existing analogies for valuing stocks:
1. Gold - Gold does not provide cash flows but people buy it in anticipation of inflation or excess money supply
2. Collectibles such as paintings, antiques, stamps - These are closer to how stocks are being bought today. Essentially an oligopoly of buyers with unlimited cash who come together to decide which item is to be bought at what price (without price fixing among themselves). Wall street banks constitute the oligopoly buyers for stocks and they will decide what price to pay for a stock. There is no pressure for them to actually generate cash from the stocks they hold since the Fed provides them with the cash they need.
thanking you.
Mohan iyer



Nov 21, 2014

What is the future prospect of Adhunik Mettalic and Tilak Nagar Industries? I should take position now or not. What do you think these stocks will perform better or not by end of 2015?

Kindly give your opinion.



Nov 19, 2014

I think Punj LLoyd stock is also one such example.... Redemption on Punj LLoyd is many zillion years away... to put a debt restructuring plan etc. Stock looks cheap..but there is nothing.

Like (2)

chaitanya samrat

Nov 19, 2014

tilak nagar industries, titan biotech, ashok leyland

Like (2)


Nov 18, 2014

Good article..Thanks.. Investors burnt their fingers with another airlines KFA and even Jet airways. All other comments seems to be not on the feedback of the article but on recommendation of scrips..

Like (1)


Nov 18, 2014

"Isn't the ongoing recession a thumping proof that money printing is not the solution for economic revival? " - True word.

Like (1)


Nov 18, 2014

NRB Bearing
Praj Industries

Like (1)

sivaram v

Nov 17, 2014

Dig through DCM has hidden 150 acres of land under development in Delhi Barahindurao area. Near Karol baug and the subsidiary pure earth has made advance payments. DCM is a very old company having weathered lot of ups and downs. I recollect Swaraj paul taking over this it is a hidden treasure....Rs.200.00 is easy target in 2 years.

Like (1)

suresh nair

Nov 17, 2014


Like (1)
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