Hi,
I often receive reports in my mailbox from various sources. These reports are
prepared by independent analysts or by so called expert companies including
investment banks, brokerage houses, rating agencies, dedicated research
companies etc. One thing I found common in all these reports, they all give
'buy' calls and seldom a sell/exit call.
Should we really trust these reports and base our investment decisions on them?
If you are doing so then I would like to place caution for you.
Zylog report by CRISIL:
I would like to sight one example of an old CRISIL report (my ex-employer) of
June 2011 where they have rated Zylog 'good' on fundamental grid. As per report
the stock was at Rs 406 and CRISIL report suggested a Fair Value of Rs 656. CRISIL
started Zylog coverage from June 2010.
In March 2012, while publishing another report the fundamental rating 'good' and Fair Value Rs 656 were retained. When this report of March 2012 was published,
the Zylog stock was trading at Rs535. Also note that Fair Value is not Sell Value. It has been
taught that equity investments are for long term. So even if the price has gone up it does not give us an exit call.You must be interested to know what happened thereafter with Zylog stock? After 9
months of March 2012 report, the stock just crashed and could never recover
thereafter. It is now trading at Rs 11 (adjusted for a split of 1:1 in May 2012).
Unfortunately, I did not find any reports which would have helped investors to
take corrective actions. This reminds me about Milton Friedman's famous quote: “There's no such thing as a free lunch…”
What common investors (including
analysts) should do/should have done:
A) Check Shareholding Pattern: If the report was of March 2012 then we must be having the visibility of
December 2011 Shareholding Pattern (SHP), assuming that the report is written
in Feb 2012. A simple cross check about the shareholding pattern would
have revealed that promoters have pledged 76% of their holding.
B) Check consolidated balance sheet and P&L numbers: If these
SHP numbers are looked along with the equity dilution, operating cash flow v/s net profit, and interest payment then it would have revealed what is cooking in the company.
You would experience that the above two points are more than sufficient to save you from falling in traps in most of the cases. As we can see it does not require any financial modeling, calculations or understanding complex set of
numbers. If promoters have pledged the shares then it is as good as sold unless
they revoke pledging. If the promoters have sold the shares then they themselves
do not have confidence in the company then why do we have an eagerness to show that confidence?
Past experience: I am sharing below some of the cases where I had given exit calls to my friends who asked my opinion about these companies. They were in the process of either buying or holding it after seeing strong buy/hold recommendations from "highly visible" analysts. These calls were dot on. There are several other companies where I could save myself from investing using these parameters.
1) Exit call on Arshiya Int (at ~Rs135) was given based on the above parameters.
2) Exit call on Opto
Circuits (at ~Rs140) was given based on the above parameters.
A presentation is
uploaded on slideshare and you may use the below link to see the details
further. http://www.slideshare.net/ndharmawat/why-opto-circuit-and-arshiya-international-should-burst
3) Recent exit
call on 8K Miles. I am of the opinion that everything is not rosy in
this company. The details about this case can be seen here: http://www.slideshare.net/ndharmawat/quiz-response
It is not that
all these reports are junk and people are doing bad job. However, it will be
prudent on our part to do quick self study and background check before we take any
investment decisions after all it is our “hard earned” money and not “hardly earned”
money. Also as I said earlier "whenever you go behind a ‘tip’ it takes you
to a ‘pit’, the reverse of ‘tip’."
Reference reports:
CRISIL
report June 2011: https://www.crisilresearch.com/CuttingEdge/Content/IERs/ZylogSystemsQ4FY11.pdf
CRISIL Updates Mar 2012: http://www.moneycontrol.com/news/crisil-research/crisil-revises-zylog-systems-valuation-grade-to-45_675451.html
As always, I invite your feedback on this article. I would be glad to learn or correct myself if something is missing here or wrongly represented.
Regards,
Niteen S Dharmawat
Blog: http://dharmawat.blogspot.com/
Twitter: @niteen_india
Facebook: https://www.facebook.com/dharmawat
slideshare: www.slideshare.net/ndharmawat/
IMPORTANT DISCLAIMER: I have no role
in preparing this Zylog report. The example was
sighted with an objective to place caution for common investors and analysts
who start basing their investment decision without doing some basic groundwork.
It would be appropriate to understand the risk we are entering into before we
take our financial decisions. Investment in equity shares has its own risks.
Sincere efforts have been made to present the right investment perspective. The
information contained herein is based on analysis and upon sources that I
consider reliable. I, however, do not vouch for the accuracy or the
completeness thereof. This material is for personal information with an
objective to initiate discussion and I am not responsible for any loss incurred
based upon it & take no responsibility whatsoever for any financial profits
or loss which may arise from the discussion above. I sincerely request you to
do your homework before you take any position whatsoever. Disclosure: No holding in any of the companies discussed above.
