I read it with a lot of interest.

 

I particularly liked the reference to dummy export incomes....

 

I have often found myself asking why an India growth story needs to boost it's incomes through exports..

 

Reliance power is another company that is suggested.

 

Useful Stuff on Cooking the Books in this article in Businessworld by Rajesh Gajra. http://www.businessworld.in/index.php/Markets-Finance/Ghosts-Balance-Sheets.html - Please go through it in your spare time - key summary pasted below.

The five metrics that we used to run our check:

Booking Revenues In Advance: Are a company’s Cash Flows from Operations (CFO) growing as fast as its Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA)? The formula: Calculate the percentage rise in CFO and EBITDA from one financial year (FY) to next. Compare the two to see by how much percentage is EBIDTA outgrowing CFO. The higher this result the more the chance of the company booking revenues without corresponding cash flows.

Shoring Up Operating Revenues: This metric asks, “Is a company’s ‘other income’ growing more or less in line with its investment assets?” The formula to apply is: Calculate the proportion of Other Income (OI) to Cash Investments (CI) for a FY. Do the same for previous FY. Compare the two to see whether the former has fallen drastically compared to the latter. The higher the fall the more the chance of a possible diversion of ‘non-core’ revenues to topline revenues.

Disbursement Of Loans To Related Parties: This metric directly looks at the quantum of a company’s loans disbursed to related parties. As a general thumb rule, if more than 1 per cent of loans or advances given out are to such related parties then there is a case to ask the question “Is cash being pulled out of the firm by the promoter?” The formula: look at Loans and Advances figure in the balance sheet. Get the loans to related parties figure from the notes to accounts in the annual report. Find the proportion of the latter to the former.

Shifting Expenses Away From The Current Period: This metric asks “Has a company’s ratio of depreciation to Gross Block of Assets changed significantly in a given FY from the previous one? If so, is the company using depreciation to ‘manage’ earnings?” Calculate the depreciation rate of a FY by dividing the Gross Block of Asset with the Depreciation Charged. Do the same for previous FY. Subtract the former with the latter. If the difference is negative and significant it raises a red flag to dig deeper.

Mis-match Between Quarterly Un-audited Figures and Annual Audited Figures: Do the audited annual FY Sales and Profit After Tax (PAT) reported to the stock exchanges tally with the quarterly sales and PAT reported earlier at the end of each quarter? Except for minor variations or variations due to demergers or other major corporate restructuring they should. Add Q1, Q2, Q3 and Q4 Sales and PAT figures for a given FY. Get the final audited figures for Sales and PAT. Compare the two.

Manipulation is possible in purchase & sales. A dealer may be involved in purchase of raw materials and assets. Same way sole selling agent may be involved in sales. These middle men are of promotor's Pvt. Ltd companies or their partnership firms which suck the profitability.

In Engg industry, old equipments are surveyed off after expiry of life and these equipments are sold to promotor's companies at throw away price. But, it is to mention that those machines are sold at a very high profit by promotor's group companies later.

Scrap sales is another vital area where promotors make good money. All Engg companies generate lot of scraps which are sold only to promotor's companies at very cheap price.

Promotors also manipulate share price, with the help of operators & media as floating stock of these companies very low in the market. They do this in boom period of the market. With out strong fundamentals, share price will keep going up on the report of brokers and reporters.

Age old Engg companies own lot of fixed assets in the form of land and building. But, balance sheet will not show the true picture of the market value of these assets. Promotor used to sell these assets partially to their group companies and show a little profit in the Balance Sheet on account of sale of these assets.

So there is no point in discussing on these silly activities of most of the promotors. Mr. Basant has rightly mentioned in 'my investment strategy' that Integrity of Management is the first thing to be rated. He has given the example of Infosis, TATA. That is 101% correct.

We may discuss on 'criteria for sound management and how to find out the right management in right business to fetch good return in future'. 

Hi a few simple tricks I use while checking the firm

-is the firm held by the promoter directly or through a holding firm. If it is through a holding firm and that is privately held, it is difficult for us to know about it and it is a minus.

-what are related party transactions - if there are sales subtract the related sales,if costs add the costs then take the adjusted intrinsic value

-has the company given any deposits or taken loans from subsidiaries or holding companies

-does the company pay a very large royalty to parent firm just like that

-is the promoter salary ex of dividend {because this is shared with shareholders} rising faster than profits

-who are the independent directors are they on reputed firms.

-is the promoter a page 3 type, big minus though this is my personal view

-is the promoter unnecessarily pledging shares and is interested in real estate

-have they been fined for frauds etc in watchoutinvestor database.

-is the company involved in government projects etc especially in states like Bihar, North East etc

-type company and promoter name with words like problem, fraud, default etc type negative adjectives in google

-check equitydesk old threads

-does the management suffer from title inflation. For example does everybody have a title starting with Chief or President. For e.g in Pantaloon they had a Chief Belief Officer who used to tell ACK stories

-is the company giving dividend even when debt is high (e.g HCC}

-does the promoter focus more on capital structure timepass rather than improving operations e.g Munna Mobile

 

unfortunately none of these would help us with Satyam types, but I guess someting is better than nothing. And after some time this does not take more than 15 mins per company guaranteed.

Oh ya title inflation is quite common. if the person is heading a separate P&L or spinoff and reporting directly to CEO the chief stuff is ok , otherwise the company does not have a mind of its own and as Charlie Munger said it is unlikely to be candid in other areas especially reporting poor financial performance.

A more general example , I was watching an old video of Britains Got Talent a music show, one of the very good guys was a Michael Jackson duplicate. At least in India we call them duplicate especially of film stars. He was http://www.youtube.com/watch?v=gp_hJYp6Ego - introduced as a tribute artist .

Coca Cola now has a Chief Blogging Officer. http://www.economist.com/node/16423358 - Some more stuff here

 

some more promoter / manager check items that might be useful

-what is the salary of the top guys as a % of total manpower expense

-what is the % of total salary in equity at reasonable option prices, higher is better i.e more equity, less cash

-calculate the salary with stock options as an expense, this will change automatically from IFRS next year but even then for the moment it should be added

-unnecessary loans being given by company to promoters/mgmt

-how many of the guys are organically growing with the company, how many of them are fly in fly out types etc

-is the company registered in tax havens like- e.g Jet Airways for some strange reason is listed in Isle of Man. Mauritius can be excluded because we have some specific tax advantages that allows companies from there.

-is the auditor changing every year (from Alok Bholaji's excellent observation on Micro Technologies.

this is of course a list that I use, might not work for everyone so pick choose what you guys think works.

vinvestor2010,

 

What's wrong with govt projects in Bihar ,NE? Glodyne Technoserve has a large e-gov project from Bihar govt. The stock is in a solid long term uptrend. should this stock be avoided?

 

Munna Mobile - who's that?

Manoj ji I should have stated areas with geographical and governance risks

 

If the Bihar project is 1% of order book no issue, however if it is 50% of order book you should demand extra margin of safety in the form of low debt,lots of cash good execution record etc.

This is because

-Bihar is undergoing an election this year, the project may face implementation risks due to code of conduct, policy uncertainity etc.

-Look at the 284 cr from a margin perspective and an NPV value basis is it that big.

-Projects on a BOOT basis for Govt are Capex heavy because the company has to buy servers etc and operate for govt, this reduces margins.

-I have cousins in Bihar and am originally from there and honestly government contracts there are a difficult business.

 

Additional comments I had put are http://www.theequitydesk.com/forum/forum_posts.asp?TID=2694 - here . Also, this is a cursory view I do not track Glodyne in great detail.

 

Another recent example is Punj Lloyd, because one of their projects in Libya which I think is 41% of order book and is delayed, the whole company is being punished.It will recover but many investors are suffering.

 

Also as I stated , this is my personal view, and you need to look at these factors in combination. For example if TCS, Infy were doing this and the project was even 3000 crores it would be very different.

 

Munna Mobile is one of the superheroes in a very entertaining thread, you need to find it yourself

 

 

Hi a related excellent post on equity desk only earlier on http://www.theequitydesk.com/forum/forum_posts.asp?TID=1964 - Accounting adjustments.

If you read it with this thread together can be useful.

forgive small companied???????????

 

What about the even smaller shareholder.

 

I mean what about the cheated?????

 

 

Originally posted by nav_1996 Let us forgive small companies. It may be question of existence for these fellows. Looks at what Munjals and Ambanis are doing.

 

Is there a way I can bookmark certain posts? While I do follow most of the posts as much as possible, some post are just too interesting to miss. Please let me know if there is a way to bookmark/subscribe to certain posts interestng to me.

 

Thanks!

 

Ignoring past history of promoters is risky.

 

One can cite examples to the contrary but it could lead to big losses.

Just read that Subhiksha promoter had an entity which was banned twice from the market.

 

Should Premji's firm have invested with such a promoter?

 

After reading more:

 

Premji Invest had always intended to flip the stock during an IPO.

 

Serves them right.

 

ICICI guys conned them into making the investment in a hurry by convincing them that the IPO could happen any minute.

 

Good stunt by ICICI Guys.

 

Remind me of Murthy's firms investment in SKS.

 

Quick smarty gains can often lead to permanent losses.

 

Thanks for the point Basant Sir. I'll remember this one esp since I'm hooked with the Piramals

 

well, 220 cr went missing in a short while