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Twitter - @niteen_india 1
Niteen S Dharmawat
Website: https://aurumcapital.in
Twitter: @CapitalAurum / @niteen_india
Email: info@aurumcapital.in
Be a wise
investor…
How to screen stocks so as to avoid common
mistakes and uncommon losses
Twitter - @niteen_india 2
IMPORTANT DISCLAIMER:
The information herein is used as per the available sources of bseindia.com/nseindia.com, company’s annual reports & other
public/private database sources. Aurum Capital is not responsible for any discrepancy in the above mentioned data. Investors
should seek advice of their independent financial advisor prior to taking any investment decision based on this report or for
necessary explanation of its contents.
Future estimates mentioned herein are personal opinions & views of the analyst. Analyst Name – Niteen S Dharmawat. For
queries / grievances – support@aurumcapital.in. SEBI registration No: INA000011024
Readers are responsible for all outcomes arising of buying / selling particular scrip/ scrips mentioned here in. This report
indicates opinion of the author & is not a recommendation to buy or sell securities. Aurum Capital & its representatives have
vested interest in above mentioned securities at the time of this publication, and its partners / company have positions / financial
interest in the securities mentioned above.
Aurum Capital, or its associates are not paid or compensated at any point of time, in last 12 months by any way from the
companies mentioned in the report.
Aurum Capital, or its representatives do not have more than 1% of the company’s total shareholding. Ownership of the stock:
may have advised to clients. Served as a director / employee of mentioned companies in report: No. Any material conflict of
interest at the time of publishing report: No
The views expressed in this post accurately reflect the author’s personal views about any and all of the subject securities or
issuers; and no part of the compensations, if any was, is or will be, directly indirectly, related to specific recommendation or
views expressed in the report.
Twitter - @niteen_india 3
About OUR company:
Aurum Capital is a SEBI registered investment advisory services company. Started
by Jiten Parmar and Niteen Dharmawat, who together have more than 4 decades
of experience investing in equities and guiding and mentoring fellow investors.
This rich industry background helps us understand companies, complexities of
business and tipping points that make or break a company. Our approach is not
limited to just number crunching but going beyond. We focus on the business,
strategic direction, the competitive landscape, the governance process, the
background of the promoters, turnarounds, to name a few. Often these are more
critical items than just numbers. Jiten and Niteen have successfully waded through
multiple bear and bull market cycles.
Twitter - @niteen_india
Agenda
4
 We get tips (or interested to get tips)
 Quick screening to avoid major mistakes
 What are the parameters that you must see
 How to generate your owns stock list
 Delayed gratification: Most important quality
Twitter - @niteen_india
Timing the market
5
Misconceptions
1) Bear markets are bad
2) Bull markets are all rosy
Twitter - @niteen_india
The Wealth Creation Formula
6
Right Focus – Right results
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Which stock would you buy for 5 years?
7
Stock B
Rs 9785
Stock A
Rs 27
Twitter - @niteen_india
Price v/s Value?
8
Penny stock mentality:
How much it will fall from here?
Do you know the name of this stock and current price?
Bad Hint: Service industry, tyres and fuel important for this.
Rs 27 in Feb2012
Rs 7 in Aug 2012
Ever high Rs 290 in Dec 2007
Rs 9785 in Feb2012 Rs 11000 in Aug 2012
Expensive stock mentality:
How much it can go up from here?
Do you know the name of this stock?
Hint: Tyres manufacturer and crude is a critical item. 
Ever high Rs 80800 in Jul 2018
Stock B
Stock A
Now 0
Now 71400
Source: Google graph, screener/ace database
Twitter - @niteen_india 9
Year 2000: A repetitive grim reality
Date Price Shares
2-Feb-00 1,549 119,642
3-Feb-00 1,673 68,309
4-Feb-00 1,807 82,375
7-Feb-00 1,855 3,126,844
8-Feb-00 1,877 2,358,212
9-Feb-00 1,817 2,394,038
10-Feb-00 1,848 1,788,398
11-Feb-00 1,842 1,570,270
14-Feb-00 1,875 1,336,249
15-Feb-00 1,823 975,591
16-Feb-00 1,791 808,272
17-Feb-00 1,841 843,279
18-Feb-00 1,948 2,350,699
21-Feb-00 2,104 528,893
22-Feb-00 2,272 1,301,678
23-Feb-00 2,090 1,424,987
24-Feb-00 1,952 1,454,274
25-Feb-00 1,810 1,469,617
28-Feb-00 1,770 879,915
29-Feb-00 1,628 2,157,518
1-Mar-00 1,759 1,030,278
In year 2000
Low of 200 Rs
High of 2000+
Time V/S Return V/S Valuations
Rs 0.28
Twitter - @niteen_india 10
Year 2020: Nothing changes
Investors lost 34K+ Crores in last 2 years in these 15 stocks…
Company Name
Market cap
declined by
Cox & Kings 99%
Talwalkars Healthclubs 99%
Reliance Home Finance 97%
Reliance Capital 96%
Sintex Plastics Technology 96%
Mcleod Russel India 96%
Kridhan Infra 96%
Sical Logistics 95%
Dewan Housing Finance 94%
Sintex Industries 93%
Jet Airways 90%
Jain Irrigation Systems 89%
Reliance Communications 89%
Reliance Power 86%
PC Jeweller 86%
Total 34,435 Crore
Majority of these end
up in retail portfolio
Please note: this is not an opinion/
recommendations of any sort on
any of the stocks. This is just for
education purpose.
Source: ACE DatabaseThe market value decline is taken from 52 week high to price as on 13 Feb 2020
Twitter - @niteen_india 11
Before you put in money…
 Make an Excel sheet (Detailed PPT/Word doc even better)
 Write the name of the script, buy price
 Write very briefly the reasons for investment: it could be your
research finding or someone recommended you to buy
 Also, your expectations from the investment
Commitment
Twitter - @niteen_india 12
Classify your portfolio… My way… You may evolve yours
 Portfolio A: 70-90% funds
 High conviction
 Long term: 3-5 Years
 Not more than 5-10 stocks
 Portfolio B: 10-20% funds
 Still unsure about Long term
 Want few more quarters, ratify investment thesis
 Medium term: 1-3 years, move to A else drop
 Portfolio C: 0-10%
 Tips /Respect quota
 Time duration: 1min-1year
 If develops conviction based on research move to B
Discipline is the key
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Annual Report
13Image Source: Google
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Key sections
14
Annual Reports
1. Financial statements
• Cash flow statement (most important, least understood)
• P&L
• Balance-sheet
2. Chairman / CEO’s statement & Management Discussion and Analysis
3. Others
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Annual Report
15
Chairman / CEO’s statement and Management Discussion and Analysis
 Must read the first two and last two paragraphs in detail.
 Find the answer for:
 Is management staying focused?
 What are the management’s stated plans to take the business forward:
Expanding capacity, Rationalizing underperforming areas, Introducing new
products /services to existing customers, Investing to raise margins (e.g.
new product features, service add-ons) via R&D, marketing, etc
Twitter - @niteen_india 16
 Negative list: flowery language, away from the reality like throwing big industry
numbers/future growth
 Positive list: clearly elaborating risks while talking about opportunities,
conservative in approach,
 Look for: The results of operations, Changes in financial condition and Risk
management strategies
Annual Report
Chairman / CEO’s statement and Management Discussion and Analysis
Warning: These days Annual Reports are also written by the
IR companies. They may use the language/terminologies
that is liked by the investors. So beware. Important to see
what was said in previous years and what has really been
delivered the company management.
Twitter - @niteen_india 17
 Always look for consolidated numbers and not standalone
 Go through notes to the financial statements for details
 (P&L): net profits and sales are positive, rising or falling;
 (CF, P&L): operating cash flow after working capital adjustments is positive or
negative and compare with NP
 (B/S and P&L): net debt is rising or falling and interest amount;
B/S: Balance Sheet CF: Cash Flow P&L: Profit and Loss
Annual Report
Financial statements
Twitter - @niteen_india 18
 (CF, P&L): Is company paying Taxes while showing profits?
 (P&L) Component of other income? If high then see previous years/quarters’ numbers
also. If one off then remove from net profit, if consistent then dig more to find
sustainability
 (P&L) What are the main expenditure heads: employee costs, raw material
dependencies (e.g. crude prices)
 (P&L, CF): Interest paid v/s net profit v/s OCF
 (P&L, B/S notes) Inventory trends: Finished good, WIP v/s sales numbers
B/S: Balance Sheet CF: Cash Flow P&L: Profit and Loss
Annual Report
Financial statements
Twitter - @niteen_india 19
• Salary of the directors, revision in the salary, in line with the growth/profit
numbers?
• Members of audit and salary committees
• Composition of board of directors, how many of them are independent?
• Directors attendance in board meetings
• Independent auditors report
Annual Report
Others
Twitter - @niteen_india 20
Skin in the game
- Unpledged Holding
- Promoters’ Holding – Buying or Selling
- BSE Website SHP:
- Quarterly Trend
- Going in strong hand
- Corporate Announcements
Shareholding Pattern
Governance
Twitter - @niteen_india 21
Availability of data on internet/Annual Reports
Parameter Section
P/E ratio/Earning Yield Key Financial Ratios
Book Value Key Financial Ratios
Return On Invested Capital (ROIC) Key Financial Ratios
Dividend & dividend history Summary
Revenue & profits of last 5 years P&L
Inventories trend of last 5 years Balance sheet
Current Assets & Current Liabilities Balance sheet
Statements of the company
executives
Company websites/media reports
Promoters’ Holding (Buying or
selling)
Corporate announcements in NSE/BSE
websites
Twitter - @niteen_india 22
What are the free/paid resources for quick screening
 bseindia.com / nseindia.com
 Screener.in, researchbytes.com, reportjunction.com,
Moneyworks4me.com, stockflare.com, capitalcube.com, paid database
like CapitalMarket/ACE, free apps like StockEdge
 Brokers websites for financial data
 Annual reports (most important)
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What are the free resources for quick screening
23
Standard summary
Customized summary
Screener.in
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P&L
24
1) Sales trend
2) Operating performance
3) Interest component
4) Depreciation
5) Tax paid
6) Dividend payout ratio
Screener.in
Draw top 6 conclusions in
120 seconds and move on
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Quarterly results
25
1) Sales trend
2) Operating performance
3) Interest component
4) Depreciation
5) Tax paid
Screener.in
Draw top 5 conclusions in
90 seconds and move on
Twitter - @niteen_india
Balance Sheet
26
1) Equity Dilution
2) Share capital (equity / preferential)
3) Borrowings (ST/LT) v/s interest component from last quarter
Screener.in
Draw top 3 conclusions in
60 seconds and move on
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Cashflow
27
1) CFO v/s NI
2) WC changes
3) Taxes Paid
4) CFI trend
5) CFF trend
Screener.in
Draw top 5 conclusions in
60 seconds and move on
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Reports and announcements
28
Screener.in
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Query Builder
29
Screener.in
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Fate of two infra companies
30
Jo jita wohi sikandar…
Quarter
Percent
Holding
Pledged %
Unpledged
% holding
Dec-19 44.66% 23.68% 34.09%
Sep-19 44.13% 23.96% 33.56%
Jun-19 44.13% 23.96% 33.56%
Mar-19 44.13% 23.96% 33.56%
Dec-18 44.12% 23.96% 33.55%
Sep-18 43.94% 31.58% 30.06%
Jun-18 43.94% 31.58% 30.06%
Mar-18 43.94% 31.58% 30.06%
Quarter
Percent
Holding
Pledged
%
Unpledged
% holding
Dec-19 55.17% 0 55.17%
Sep-19 55.17% 0 55.17%
Jun-19 55.17% 0 55.17%
Mar-19 55.17% 0 55.17%
Dec-18 55.38% 0 55.38%
Sep-18 55.38% 0 55.38%
Jun-18 55.38% 0 55.38%
Mar-18 55.38% 0 55.38%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
CFO -7 14 -1 -28 118 100 -25 59 64 -22 265 83
PAT 20 33 70 74 68 76 84 94 98 107 137 177
Share
Capital
21 21 28 28 28 28 28 32 38 38 38 38
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
CFO 133 41 66 89 3 239 78 246 366 221 256
PAT 31 44 66 58 47 49 60 70 112 115 243 271
Share
Capital
28 28 28 28 28 28 28 28 28 28 28 28
• Both listed sometime in 2008-09
• Survived post 2009 correction in infra cos
• Both had excellent execution track record. In fact, the first
one enhanced capabilities in new areas so had the second
• Keeping every valuation parameter aside, first co used to
be at 150-200 and second at 100-130. This difference
continued for a very long time.
• First co trades today ~150 and second at ~300.
• Fist is subdivided into 1:2 and second 1:5. Pre division
price would be 300 and 1500 respectively.
Source: screener/ace database/trendline
Company A Company B
Company A: 3X
Company B: 15X
Twitter - @niteen_india 31
Manufacturing and exporting Public Address Systems - Woofers, Amplifiers, Computer
Speakers, Personal Speaker System, Headphones, and Earphones
• Some prominent investors in IPO/Post-IPO
• Widely discussed/pushed in SM/WhatsApp groups
• Promoter absconding now
• Debt taken from Banks/FIs: NPA
Listing At: NSE SME
Issue Open: May 9, 2018 - May 11, 2018
Issue Price: ₹140 Per Equity Share
Issue Size: 46.66 Cr
CMP: Trading banned
• The Company also trading in the fabric???
• Strong presence in African Continent, UAE, South America,
Singapore, Dubai, Bangladesh, Vietnam, Nepal
• Products sold in 56 countries across 6 continents
• In India, 17 States, dealer network of more than 240
• Opened showrooms in Dehradun, Saharanpur, Chomu, Guwahati,
Jeopur, Patna, Raxaul, Bhagalpur, Calicut and Hyderabad which
are run by dealers.
Source: company website, publically available info
Board of directors
Source: Google graph, screener/ace database, company website
Twitter - @niteen_india 32
One of the fastest growing private sector dairy companies with a new range of innovative
products and enjoys a large presence in Northern India.
Mar
2007
Mar
2008
Mar
2009
Mar
2010
Mar
2011
Mar
2012
Mar
2013
Mar
2014
Mar
2015
Mar
2016
Mar
2017
Mar
2018
TTM
Sales 149 329 577 1,048 1,604 2,394 3,692 4,578 5,268 5,658 6,131 6,725 556
Interest 2 5 12 21 37 65 93 114 136 151 172 235 68
Depreciation 1 1 1 2 4 8 10 13 25 23 22 126 86
Tax % 34% 34% 33% 40% 24% 2% 11% 16% 17% 34% 30% 51%
Net Profit 4 5 9 18 46 91 97 127 141 135 164 71 -2,073
Mar
2007
Mar
2008
Mar
2009
Mar
2010
Mar
2011
Mar
2012
Mar
2013
Mar
2014
Mar
2015
Mar
2016
Mar
2017
Mar
2018
CFO -1 -11 -42 -96 -139 -135 -71 19 192 9 238 55
Mar
2007
Mar
2008
Mar
2009
Mar
2010
Mar
2011
Mar
2012
Mar
2013
Mar
2014
Mar
2015
Mar
2016
Mar
2017
Mar
2018
Sep
2019
Share
Capital
18 18 18 18 20 20 20 20 22 22 24 24 24
Borro
wings
15 34 91 219 425 667 881 1,072 1,098 1,335 1,508 1,699 1,829
Recei
vables
24 64 154 261 414 656 930 1199 1151 1419 1373 1700 49
Gross
Block
17 19 21 32.2 59.74 89.14 108.31 147.38 119.3 146.16 532.31 667.23 -
• Very low depreciation number, small gross
block, no major change YoY
• Still company’s debt going up, equity
dilution happening, receivables numbers
going up, company showing huge revenue-
profit growth
• Promoter pledging going up….
• CFO consistently negative
• Now a NCLT case
Milking the investors
Source: Google graph, screener/ace database
Twitter - @niteen_india 33
A vertically integrated multinational medical technology Group
From Rs140 to
now Rs3
Rs 244
on Jan 4 2008*
As on Dec 2007
• FII holding 25.49%
• MFs holding 4.3%
Rs 221
on Feb 17 2012*
As on Dec 2012
• FII holding 37.34%
• MFs holding 0.07%
• Strong FII holding
• Increased holding by 12% in 5
years (equity dilution)
Year Mar 2008 Mar 2009 Mar 2010 Mar 2011 Mar 2012
Share
Capital
94 161 183 186 242
Source: Google graph, screener/ace database
Twitter - @niteen_india 34
A Small Cap company operating in Gas & Petroleum sector
TIPs take you to PITs: after reading Google news/Forums
• Someone I know bought few lac
shares, despite my warning,
believing Google news with a target
price of 100 in next few years.
2006 2007 2008 2009
CFO 0.12 1.12 -27.87 112.69
2006 2007 2008 2009
Capital 5.03 5.03 794.00 794.00
2006 2007 2008 2009
Sales 0.02 0.03 0.08 0.03
• Corporate Insolvency filed
• SEBI barred 8 entities from securities market for 10
years in the case of manipulations related to GDR
issuance, while two have been asked to return
'unlawful gains' of $92 million
Source: Google graph, screener/ace database
Twitter - @niteen_india 35
A leader in the Security Surveillance domain, the first company of its kind
 “Big names” leaving dangerously
 Promoters holding 21% (unpledged 8.4%)
 Big stories =>
poor cash flow & receivables numbers
In INR Crs
Parameter March-08 March-09 March-10 March-11 March-12 March-13 March-14 March-15
Net Profit 1.45 19.36 15.03 44.46 16.84 30.32 41.94 50.59
CFO -9.02 -40.41 0.46 -114.28 -15.53 -42.34 2.87 -51.66
Signal
Parameter March-12 March-13 March-14 March-15
Share Capital 12.7 17 17.6 20.2
Borrowings 160.37 318.3 436.82 555.7
Equity dilution
+
Borrowings
From 185 to 3 in no time
Source: Google graph, screener/ace database
Twitter - @niteen_india 36
A specialist across the varieties of cables
Parameter Mar 2010 Mar 2011 Mar 2012 Mar 2013 Mar 2014 Mar 2015 Mar 2016
Net Profit 10.59 15.22 23.81 57.91 100.09 159.99 163.48
CFO 4.81 4.47 14.81 31.12 20.89 -46.69 21.57
Signal
 Fast growing cables manufacturer
 High double digit growth in Profit and Sales
 High 20s ROE and ROCE numbers
From Rs235 to Rs29 in one month
• Promoter holding 41.19%
• 100% pledged 
From Rs6 to now Rs235 in four year
From 235 to now Rs0
Source: Google graph, screener/ace database
Twitter - @niteen_india 37
Education and training company based in Chennai
 ‘Darling’ of punters
 Several stories around the business model
 FII holding close to 28%
 Some prominent names on the board could also not save it
 CBI caught one of the directors of the company in a bribery case
Parameter Mar-11 Mar-10 Mar-09 Mar-08
Net Profit 67.64 45.45 22.08 13.8
CFO 16.01 25.13 -8.98 13.31
Signal
In INR Crs
Poor
shareholding
pattern
From Rs350 to
now Rs0
The company has gone into liquidation in 2016
Source: Google graph, screener/ace database
Twitter - @niteen_india 38
Education sector proved to be a perfect educator for investors…
Source: Google graph, screener/ace database
Part of a large corporate
Claim to be tech savvy
Now a part of a large corporate
• Contingent liabilities of Rs.524.89 Cr.
• Promoters have pledged 82.74% of their holding
Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19
CFO 26.99 16.69 17.02 32.34 -79.28 -65.4 -44.17
PAT 18.05 21.03 29.72 32.35 5.84 -131.83 9.12
Signal
• Poor cashflow
• Pledging by the promoter
Twitter - @niteen_india 39
Education sector proved to be a perfect educator for investors…
Source: Google graph, screener/ace database
• Part of that highly visible
Modern Education club of 4
• Rest 3 are defunct
From 1101 to 1
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
CFO 13 13 52 191 224 284
PAT 14 29 71 133 276 337
Signal
• Poor shareholding pattern
• Story led growth
• Growth funded through debt, no cash flow backing
Has shown Chand-taare to investors
From Rs621 to Rs75
Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19
CFO -31.01 -67.42 42.73 -17.52 38.15 32.41 38.95 38.62
PAT 14.69 32.34 42.34 26.85 46.57 61.26 107.08 -66.92
Signal
Twitter - @niteen_india 40
Let’s learn from the history: Everything becomes rosy when peak comes: a case study of news
analysis vs reality check
Risks to understand when such news comes
• Big acquisitions
• Foreign country
• Such news with a frenzy behaviour more often
lead to disappointment later, need to be very
very careful
Please note that this is not a recommendation of any sort. This is just a case study for education purpose.
Source: Google graph, media reports
Twitter - @niteen_india 41
The top and the results
From 424 to now 2.35
Please note that this is not a recommendation of any sort. This is just a case study for education purpose.
11 Jan 2008
Source: Google graph, media reports
Twitter - @niteen_india 42
Imagine we have a time machine and we are going back to June 2007 with FY’07 numbers to
understand if we can see the upcoming problems
Please note that this is not a recommendation of any sort. This is just a case study for education purpose.
Description 200903 200803 200703 200603 200503 200403 200303 200203
Cash Flow from Operations -1223.75 1204.30 737.23 -354.02 118.15 11.83 -10.56 -6.03
PAT 428.87 1017.15 864.80 760.52 365.12 144.92 37.21 111.67
Signal
Source: ACE Database
Twitter - @niteen_india 43
We have a time machine and we are going back to June 2007 with FY’07 numbers to
understand if we can see the upcoming problems
Please note that this is not a recommendation of any sort. This is just a case study for education purpose.
Description 200903 200803 200703 200603 200503 200403 200303 200203
Cash Flow (Consolidated)
Cash Flow from Operations -1223.75 1204.30 737.23 -354.02 118.15 11.83 -10.56 -6.03
Cash Flow from Investing activities -6844.55 -4636.70 -3719.91 -380.46 -270.18 -108.57 -37.90 -49.24
Cash Flow from Finance activities 3396.56 8814.06 3969.49 1131.51 238.43 108.83 59.32 -1.95
Free Cash flow -6521.94 -2041.85 -718.65 -906.74 -161.16 -123.75 -19.12 -68.76
Cash flow (Standalone)
Investment in Subsidiaries -2678.71 -4114.22 -527.02 0.00 0.00 0.00 0.00 0.00
Loans & advances given to subsidiaries / partnership firms etc. -709.91 -113.49 -269.43 -106.26 14.94 -45.31 -16.90 -8.60
Balance sheet (Consolidated)
Equity Paid Up 299.66 299.39 287.76 287.53 86.92 24.35 12.17 12.17
Total Debt (Long Term plus Short Term) 14869.57 9934.59 5162.04 450.70 395.81 238.36 103.61 38.86
Balance sheet (Standalone)
Loan To Subsidiaries 1655.79 556.35 442.87 162.14 55.88 70.82 25.50 8.60
P&L
Total Income 26530.54 14001.79 8089.88 3915.49 1965.91 875.47 269.71 533.35
Total Expenditure 23290.18 11649.84 6673.48 2961.80 1473.40 713.07 228.17 399.73
PBIDT 3240.36 2351.95 1416.40 953.69 492.51 162.40 41.54 133.63
PBIDT % 12% 17% 18% 24% 25% 19% 15% 25%
PAT 428.87 1017.15 864.80 760.52 365.12 144.92 37.21 111.67
Key Ratios
Debt to Equity(x) 1.74 1.23 1.51 0.17 0.44 0.61 0.40 0.16
ROCE(%) 8.55 13.31 20.98 39.32 45.94 35.28 15.17 46.58
PE (x) 26.32 37.54 32.76 48.44 0.00 0.00 0.00 0.00
Investment in Subsidiaries (Consolidated cashflow) -3700.32 0.00 -2502.64 -3.39 -9.81 0.00 -5.50 0.00
Source: ACE Database
Twitter - @niteen_india
When and how to sell?
44
 Do not sell in one go. Sell incrementally: e.g. sell 10% on every 20% rise
 You realize you made a mistake and the company is not working as you expected; give time before
you take a decision though
 Price target achieved (after re-evaluating assumptions and pricing)
 When financial parameters are at unreasonably high levels
 Over exuberance in the market (You hear buy call from all media channels, newspapers, Lift-
wala/chai-wala/paan-wala) and your stocks are quoting at unreasonable levels…
 A deterioration in the fundamentals
 A better opportunity comes along (mostly avoid for such reasons unless you do not have any other
reasons)
 When Promoters are selling (may give a false indication, so see business environment for the company
and who is buying)
Twitter - @niteen_india
How to manage risk
45
 Study by CFA Institute (number of stocks in the portfolio and diversifying risk)
 Strict about the buy and sell pricing; esp. buy
 Never run behind the stocks; if something is gone let it go; don’t crib let others
earn too
 Always study the company, business model and if you do not understand do not
invest
 Follow the rule of 3 parts of portfolio (A, B and C) covered initially
 Keep a buy range; similar to sell range. If stock going below buy range reevaluate
your assumptions/if anything fundamentally wrong with the company?
Twitter - @niteen_india
Recommended (MUST) reading
46
 The Intelligent Investor – Benjamin Graham (1949)
 Value Investing & Behavioral Finance: Insights into indian stock market
realities – Parag Parekh (2008)
 Security Analysis – Benjamin Graham & David Dodd (1934)
 Common Stocks and Uncommon Profits – Phil Fisher (1958)
 Value Investing Today – Charles Brandes (2004)
 Letter written by Warren Buffet to Shareholders (1977-till date)
Twitter - @niteen_india 47
The Test of Impulse Control/Will Power
The Stanford Marshmallow Experiment
Twitter - @niteen_india
The Test of Impulse Control/Will Power
48
https://vimeo.com/6591011
Click to play
video
The Stanford Marshmallow Experiment
Twitter - @niteen_india 49
About OUR company:
Aurum Capital is a SEBI registered investment advisory services company. Started
by Jiten Parmar and Niteen Dharmawat, who together have more than 4 decades
of experience investing in equities and guiding and mentoring fellow investors.
This rich industry background helps us understand companies, complexities of
business and tipping points that make or break a company. Our approach is not
limited to just number crunching but going beyond. We focus on the business,
strategic direction, the competitive landscape, the governance process, the
background of the promoters, turnarounds, to name a few. Often these are more
critical items than just numbers. Jiten and Niteen have successfully waded through
multiple bear and bull market cycles.
Twitter - @niteen_india
Thank you
Email: info@aurumcapital.in
Twitter: @niteen_india
@CapitalAurum
50
Twitter - @niteen_india
IMPORTANT DISCLAIMER:
The information herein is used as per the available sources of bseindia.com/nseindia.com, company’s annual reports & other
public/private database sources. Aurum Capital is not responsible for any discrepancy in the above mentioned data. Investors
should seek advice of their independent financial advisor prior to taking any investment decision based on this report or for
necessary explanation of its contents.
Future estimates mentioned herein are personal opinions & views of the analyst. Analyst Name – Niteen S Dharmawat. For
queries / grievances – support@aurumcapital.in. SEBI registration No: INA000011024
Readers are responsible for all outcomes arising of buying / selling particular scrip/ scrips mentioned here in. This report
indicates opinion of the author & is not a recommendation to buy or sell securities. Aurum Capital & its representatives have
vested interest in above mentioned securities at the time of this publication, and its partners / company have positions / financial
interest in the securities mentioned above.
Aurum Capital, or its associates are not paid or compensated at any point of time, in last 12 months by any way from the
companies mentioned in the report.
Aurum Capital, or its representatives do not have more than 1% of the company’s total shareholding. Ownership of the stock:
may have advised to clients. Served as a director / employee of mentioned companies in report: No. Any material conflict of
interest at the time of publishing report: No
The views expressed in this post accurately reflect the author’s personal views about any and all of the subject securities or
issuers; and no part of the compensations, if any was, is or will be, directly indirectly, related to specific recommendation or
views expressed in the report.
Twitter - @niteen_india 52
Cash flow concept
Twitter - @niteen_india 53
A Scooter Manufacturer… A quick example
Cash
Credit
Cash recorded
in OCF
P&L
Sales, Profits
recognized
Cash
Received
Yes Bad debts
No
Warning sign:
Check Receivables…
Twitter - @niteen_india 54
Exceptions
- Companies that sells more and more cash through lending
- e.g.: Banks and Financial Institutions
Other helpful parameters along with OCF
- Interest paid v/s net profit
(a ratio of more than 0.4/0.5 is risk)
- Equity dilution?
- Promoters unpledged holding in the company
- Trend in receivables
- Investing and financial cash flows
Exceptions
Twitter - @niteen_india 55
- OCF = Net Income + Depreciation & Amortization – Working Capital Investment
- Positive OCF by decreasing inventory/receivables (non cash working capital) or
increasing in payables
- Decrease in inventory, receivable numbers
- liquidating items like inventory, receivables (you are supposed to get this from
your customers and sell it off in the market at some discount) or
- Increase in payables numbers
- Supposed to pay to suppliers but don’t pay at the time of preparing the Cash
flow
- These are not sustainable items
Can OCF be manipulated?
Caution: if you notice marked changes in these numbers from last year’s numbers

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How to screen stocks so as to avoid common mistakes and uncommon losses

  • 1. Twitter - @niteen_india 1 Niteen S Dharmawat Website: https://aurumcapital.in Twitter: @CapitalAurum / @niteen_india Email: info@aurumcapital.in Be a wise investor… How to screen stocks so as to avoid common mistakes and uncommon losses
  • 2. Twitter - @niteen_india 2 IMPORTANT DISCLAIMER: The information herein is used as per the available sources of bseindia.com/nseindia.com, company’s annual reports & other public/private database sources. Aurum Capital is not responsible for any discrepancy in the above mentioned data. Investors should seek advice of their independent financial advisor prior to taking any investment decision based on this report or for necessary explanation of its contents. Future estimates mentioned herein are personal opinions & views of the analyst. Analyst Name – Niteen S Dharmawat. For queries / grievances – support@aurumcapital.in. SEBI registration No: INA000011024 Readers are responsible for all outcomes arising of buying / selling particular scrip/ scrips mentioned here in. This report indicates opinion of the author & is not a recommendation to buy or sell securities. Aurum Capital & its representatives have vested interest in above mentioned securities at the time of this publication, and its partners / company have positions / financial interest in the securities mentioned above. Aurum Capital, or its associates are not paid or compensated at any point of time, in last 12 months by any way from the companies mentioned in the report. Aurum Capital, or its representatives do not have more than 1% of the company’s total shareholding. Ownership of the stock: may have advised to clients. Served as a director / employee of mentioned companies in report: No. Any material conflict of interest at the time of publishing report: No The views expressed in this post accurately reflect the author’s personal views about any and all of the subject securities or issuers; and no part of the compensations, if any was, is or will be, directly indirectly, related to specific recommendation or views expressed in the report.
  • 3. Twitter - @niteen_india 3 About OUR company: Aurum Capital is a SEBI registered investment advisory services company. Started by Jiten Parmar and Niteen Dharmawat, who together have more than 4 decades of experience investing in equities and guiding and mentoring fellow investors. This rich industry background helps us understand companies, complexities of business and tipping points that make or break a company. Our approach is not limited to just number crunching but going beyond. We focus on the business, strategic direction, the competitive landscape, the governance process, the background of the promoters, turnarounds, to name a few. Often these are more critical items than just numbers. Jiten and Niteen have successfully waded through multiple bear and bull market cycles.
  • 4. Twitter - @niteen_india Agenda 4  We get tips (or interested to get tips)  Quick screening to avoid major mistakes  What are the parameters that you must see  How to generate your owns stock list  Delayed gratification: Most important quality
  • 5. Twitter - @niteen_india Timing the market 5 Misconceptions 1) Bear markets are bad 2) Bull markets are all rosy
  • 6. Twitter - @niteen_india The Wealth Creation Formula 6 Right Focus – Right results
  • 7. Twitter - @niteen_india Which stock would you buy for 5 years? 7 Stock B Rs 9785 Stock A Rs 27
  • 8. Twitter - @niteen_india Price v/s Value? 8 Penny stock mentality: How much it will fall from here? Do you know the name of this stock and current price? Bad Hint: Service industry, tyres and fuel important for this. Rs 27 in Feb2012 Rs 7 in Aug 2012 Ever high Rs 290 in Dec 2007 Rs 9785 in Feb2012 Rs 11000 in Aug 2012 Expensive stock mentality: How much it can go up from here? Do you know the name of this stock? Hint: Tyres manufacturer and crude is a critical item.  Ever high Rs 80800 in Jul 2018 Stock B Stock A Now 0 Now 71400 Source: Google graph, screener/ace database
  • 9. Twitter - @niteen_india 9 Year 2000: A repetitive grim reality Date Price Shares 2-Feb-00 1,549 119,642 3-Feb-00 1,673 68,309 4-Feb-00 1,807 82,375 7-Feb-00 1,855 3,126,844 8-Feb-00 1,877 2,358,212 9-Feb-00 1,817 2,394,038 10-Feb-00 1,848 1,788,398 11-Feb-00 1,842 1,570,270 14-Feb-00 1,875 1,336,249 15-Feb-00 1,823 975,591 16-Feb-00 1,791 808,272 17-Feb-00 1,841 843,279 18-Feb-00 1,948 2,350,699 21-Feb-00 2,104 528,893 22-Feb-00 2,272 1,301,678 23-Feb-00 2,090 1,424,987 24-Feb-00 1,952 1,454,274 25-Feb-00 1,810 1,469,617 28-Feb-00 1,770 879,915 29-Feb-00 1,628 2,157,518 1-Mar-00 1,759 1,030,278 In year 2000 Low of 200 Rs High of 2000+ Time V/S Return V/S Valuations Rs 0.28
  • 10. Twitter - @niteen_india 10 Year 2020: Nothing changes Investors lost 34K+ Crores in last 2 years in these 15 stocks… Company Name Market cap declined by Cox & Kings 99% Talwalkars Healthclubs 99% Reliance Home Finance 97% Reliance Capital 96% Sintex Plastics Technology 96% Mcleod Russel India 96% Kridhan Infra 96% Sical Logistics 95% Dewan Housing Finance 94% Sintex Industries 93% Jet Airways 90% Jain Irrigation Systems 89% Reliance Communications 89% Reliance Power 86% PC Jeweller 86% Total 34,435 Crore Majority of these end up in retail portfolio Please note: this is not an opinion/ recommendations of any sort on any of the stocks. This is just for education purpose. Source: ACE DatabaseThe market value decline is taken from 52 week high to price as on 13 Feb 2020
  • 11. Twitter - @niteen_india 11 Before you put in money…  Make an Excel sheet (Detailed PPT/Word doc even better)  Write the name of the script, buy price  Write very briefly the reasons for investment: it could be your research finding or someone recommended you to buy  Also, your expectations from the investment Commitment
  • 12. Twitter - @niteen_india 12 Classify your portfolio… My way… You may evolve yours  Portfolio A: 70-90% funds  High conviction  Long term: 3-5 Years  Not more than 5-10 stocks  Portfolio B: 10-20% funds  Still unsure about Long term  Want few more quarters, ratify investment thesis  Medium term: 1-3 years, move to A else drop  Portfolio C: 0-10%  Tips /Respect quota  Time duration: 1min-1year  If develops conviction based on research move to B Discipline is the key
  • 13. Twitter - @niteen_india Annual Report 13Image Source: Google
  • 14. Twitter - @niteen_india Key sections 14 Annual Reports 1. Financial statements • Cash flow statement (most important, least understood) • P&L • Balance-sheet 2. Chairman / CEO’s statement & Management Discussion and Analysis 3. Others
  • 15. Twitter - @niteen_india Annual Report 15 Chairman / CEO’s statement and Management Discussion and Analysis  Must read the first two and last two paragraphs in detail.  Find the answer for:  Is management staying focused?  What are the management’s stated plans to take the business forward: Expanding capacity, Rationalizing underperforming areas, Introducing new products /services to existing customers, Investing to raise margins (e.g. new product features, service add-ons) via R&D, marketing, etc
  • 16. Twitter - @niteen_india 16  Negative list: flowery language, away from the reality like throwing big industry numbers/future growth  Positive list: clearly elaborating risks while talking about opportunities, conservative in approach,  Look for: The results of operations, Changes in financial condition and Risk management strategies Annual Report Chairman / CEO’s statement and Management Discussion and Analysis Warning: These days Annual Reports are also written by the IR companies. They may use the language/terminologies that is liked by the investors. So beware. Important to see what was said in previous years and what has really been delivered the company management.
  • 17. Twitter - @niteen_india 17  Always look for consolidated numbers and not standalone  Go through notes to the financial statements for details  (P&L): net profits and sales are positive, rising or falling;  (CF, P&L): operating cash flow after working capital adjustments is positive or negative and compare with NP  (B/S and P&L): net debt is rising or falling and interest amount; B/S: Balance Sheet CF: Cash Flow P&L: Profit and Loss Annual Report Financial statements
  • 18. Twitter - @niteen_india 18  (CF, P&L): Is company paying Taxes while showing profits?  (P&L) Component of other income? If high then see previous years/quarters’ numbers also. If one off then remove from net profit, if consistent then dig more to find sustainability  (P&L) What are the main expenditure heads: employee costs, raw material dependencies (e.g. crude prices)  (P&L, CF): Interest paid v/s net profit v/s OCF  (P&L, B/S notes) Inventory trends: Finished good, WIP v/s sales numbers B/S: Balance Sheet CF: Cash Flow P&L: Profit and Loss Annual Report Financial statements
  • 19. Twitter - @niteen_india 19 • Salary of the directors, revision in the salary, in line with the growth/profit numbers? • Members of audit and salary committees • Composition of board of directors, how many of them are independent? • Directors attendance in board meetings • Independent auditors report Annual Report Others
  • 20. Twitter - @niteen_india 20 Skin in the game - Unpledged Holding - Promoters’ Holding – Buying or Selling - BSE Website SHP: - Quarterly Trend - Going in strong hand - Corporate Announcements Shareholding Pattern Governance
  • 21. Twitter - @niteen_india 21 Availability of data on internet/Annual Reports Parameter Section P/E ratio/Earning Yield Key Financial Ratios Book Value Key Financial Ratios Return On Invested Capital (ROIC) Key Financial Ratios Dividend & dividend history Summary Revenue & profits of last 5 years P&L Inventories trend of last 5 years Balance sheet Current Assets & Current Liabilities Balance sheet Statements of the company executives Company websites/media reports Promoters’ Holding (Buying or selling) Corporate announcements in NSE/BSE websites
  • 22. Twitter - @niteen_india 22 What are the free/paid resources for quick screening  bseindia.com / nseindia.com  Screener.in, researchbytes.com, reportjunction.com, Moneyworks4me.com, stockflare.com, capitalcube.com, paid database like CapitalMarket/ACE, free apps like StockEdge  Brokers websites for financial data  Annual reports (most important)
  • 23. Twitter - @niteen_india What are the free resources for quick screening 23 Standard summary Customized summary Screener.in
  • 24. Twitter - @niteen_india P&L 24 1) Sales trend 2) Operating performance 3) Interest component 4) Depreciation 5) Tax paid 6) Dividend payout ratio Screener.in Draw top 6 conclusions in 120 seconds and move on
  • 25. Twitter - @niteen_india Quarterly results 25 1) Sales trend 2) Operating performance 3) Interest component 4) Depreciation 5) Tax paid Screener.in Draw top 5 conclusions in 90 seconds and move on
  • 26. Twitter - @niteen_india Balance Sheet 26 1) Equity Dilution 2) Share capital (equity / preferential) 3) Borrowings (ST/LT) v/s interest component from last quarter Screener.in Draw top 3 conclusions in 60 seconds and move on
  • 27. Twitter - @niteen_india Cashflow 27 1) CFO v/s NI 2) WC changes 3) Taxes Paid 4) CFI trend 5) CFF trend Screener.in Draw top 5 conclusions in 60 seconds and move on
  • 28. Twitter - @niteen_india Reports and announcements 28 Screener.in
  • 29. Twitter - @niteen_india Query Builder 29 Screener.in
  • 30. Twitter - @niteen_india Fate of two infra companies 30 Jo jita wohi sikandar… Quarter Percent Holding Pledged % Unpledged % holding Dec-19 44.66% 23.68% 34.09% Sep-19 44.13% 23.96% 33.56% Jun-19 44.13% 23.96% 33.56% Mar-19 44.13% 23.96% 33.56% Dec-18 44.12% 23.96% 33.55% Sep-18 43.94% 31.58% 30.06% Jun-18 43.94% 31.58% 30.06% Mar-18 43.94% 31.58% 30.06% Quarter Percent Holding Pledged % Unpledged % holding Dec-19 55.17% 0 55.17% Sep-19 55.17% 0 55.17% Jun-19 55.17% 0 55.17% Mar-19 55.17% 0 55.17% Dec-18 55.38% 0 55.38% Sep-18 55.38% 0 55.38% Jun-18 55.38% 0 55.38% Mar-18 55.38% 0 55.38% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 CFO -7 14 -1 -28 118 100 -25 59 64 -22 265 83 PAT 20 33 70 74 68 76 84 94 98 107 137 177 Share Capital 21 21 28 28 28 28 28 32 38 38 38 38 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 CFO 133 41 66 89 3 239 78 246 366 221 256 PAT 31 44 66 58 47 49 60 70 112 115 243 271 Share Capital 28 28 28 28 28 28 28 28 28 28 28 28 • Both listed sometime in 2008-09 • Survived post 2009 correction in infra cos • Both had excellent execution track record. In fact, the first one enhanced capabilities in new areas so had the second • Keeping every valuation parameter aside, first co used to be at 150-200 and second at 100-130. This difference continued for a very long time. • First co trades today ~150 and second at ~300. • Fist is subdivided into 1:2 and second 1:5. Pre division price would be 300 and 1500 respectively. Source: screener/ace database/trendline Company A Company B Company A: 3X Company B: 15X
  • 31. Twitter - @niteen_india 31 Manufacturing and exporting Public Address Systems - Woofers, Amplifiers, Computer Speakers, Personal Speaker System, Headphones, and Earphones • Some prominent investors in IPO/Post-IPO • Widely discussed/pushed in SM/WhatsApp groups • Promoter absconding now • Debt taken from Banks/FIs: NPA Listing At: NSE SME Issue Open: May 9, 2018 - May 11, 2018 Issue Price: ₹140 Per Equity Share Issue Size: 46.66 Cr CMP: Trading banned • The Company also trading in the fabric??? • Strong presence in African Continent, UAE, South America, Singapore, Dubai, Bangladesh, Vietnam, Nepal • Products sold in 56 countries across 6 continents • In India, 17 States, dealer network of more than 240 • Opened showrooms in Dehradun, Saharanpur, Chomu, Guwahati, Jeopur, Patna, Raxaul, Bhagalpur, Calicut and Hyderabad which are run by dealers. Source: company website, publically available info Board of directors Source: Google graph, screener/ace database, company website
  • 32. Twitter - @niteen_india 32 One of the fastest growing private sector dairy companies with a new range of innovative products and enjoys a large presence in Northern India. Mar 2007 Mar 2008 Mar 2009 Mar 2010 Mar 2011 Mar 2012 Mar 2013 Mar 2014 Mar 2015 Mar 2016 Mar 2017 Mar 2018 TTM Sales 149 329 577 1,048 1,604 2,394 3,692 4,578 5,268 5,658 6,131 6,725 556 Interest 2 5 12 21 37 65 93 114 136 151 172 235 68 Depreciation 1 1 1 2 4 8 10 13 25 23 22 126 86 Tax % 34% 34% 33% 40% 24% 2% 11% 16% 17% 34% 30% 51% Net Profit 4 5 9 18 46 91 97 127 141 135 164 71 -2,073 Mar 2007 Mar 2008 Mar 2009 Mar 2010 Mar 2011 Mar 2012 Mar 2013 Mar 2014 Mar 2015 Mar 2016 Mar 2017 Mar 2018 CFO -1 -11 -42 -96 -139 -135 -71 19 192 9 238 55 Mar 2007 Mar 2008 Mar 2009 Mar 2010 Mar 2011 Mar 2012 Mar 2013 Mar 2014 Mar 2015 Mar 2016 Mar 2017 Mar 2018 Sep 2019 Share Capital 18 18 18 18 20 20 20 20 22 22 24 24 24 Borro wings 15 34 91 219 425 667 881 1,072 1,098 1,335 1,508 1,699 1,829 Recei vables 24 64 154 261 414 656 930 1199 1151 1419 1373 1700 49 Gross Block 17 19 21 32.2 59.74 89.14 108.31 147.38 119.3 146.16 532.31 667.23 - • Very low depreciation number, small gross block, no major change YoY • Still company’s debt going up, equity dilution happening, receivables numbers going up, company showing huge revenue- profit growth • Promoter pledging going up…. • CFO consistently negative • Now a NCLT case Milking the investors Source: Google graph, screener/ace database
  • 33. Twitter - @niteen_india 33 A vertically integrated multinational medical technology Group From Rs140 to now Rs3 Rs 244 on Jan 4 2008* As on Dec 2007 • FII holding 25.49% • MFs holding 4.3% Rs 221 on Feb 17 2012* As on Dec 2012 • FII holding 37.34% • MFs holding 0.07% • Strong FII holding • Increased holding by 12% in 5 years (equity dilution) Year Mar 2008 Mar 2009 Mar 2010 Mar 2011 Mar 2012 Share Capital 94 161 183 186 242 Source: Google graph, screener/ace database
  • 34. Twitter - @niteen_india 34 A Small Cap company operating in Gas & Petroleum sector TIPs take you to PITs: after reading Google news/Forums • Someone I know bought few lac shares, despite my warning, believing Google news with a target price of 100 in next few years. 2006 2007 2008 2009 CFO 0.12 1.12 -27.87 112.69 2006 2007 2008 2009 Capital 5.03 5.03 794.00 794.00 2006 2007 2008 2009 Sales 0.02 0.03 0.08 0.03 • Corporate Insolvency filed • SEBI barred 8 entities from securities market for 10 years in the case of manipulations related to GDR issuance, while two have been asked to return 'unlawful gains' of $92 million Source: Google graph, screener/ace database
  • 35. Twitter - @niteen_india 35 A leader in the Security Surveillance domain, the first company of its kind  “Big names” leaving dangerously  Promoters holding 21% (unpledged 8.4%)  Big stories => poor cash flow & receivables numbers In INR Crs Parameter March-08 March-09 March-10 March-11 March-12 March-13 March-14 March-15 Net Profit 1.45 19.36 15.03 44.46 16.84 30.32 41.94 50.59 CFO -9.02 -40.41 0.46 -114.28 -15.53 -42.34 2.87 -51.66 Signal Parameter March-12 March-13 March-14 March-15 Share Capital 12.7 17 17.6 20.2 Borrowings 160.37 318.3 436.82 555.7 Equity dilution + Borrowings From 185 to 3 in no time Source: Google graph, screener/ace database
  • 36. Twitter - @niteen_india 36 A specialist across the varieties of cables Parameter Mar 2010 Mar 2011 Mar 2012 Mar 2013 Mar 2014 Mar 2015 Mar 2016 Net Profit 10.59 15.22 23.81 57.91 100.09 159.99 163.48 CFO 4.81 4.47 14.81 31.12 20.89 -46.69 21.57 Signal  Fast growing cables manufacturer  High double digit growth in Profit and Sales  High 20s ROE and ROCE numbers From Rs235 to Rs29 in one month • Promoter holding 41.19% • 100% pledged  From Rs6 to now Rs235 in four year From 235 to now Rs0 Source: Google graph, screener/ace database
  • 37. Twitter - @niteen_india 37 Education and training company based in Chennai  ‘Darling’ of punters  Several stories around the business model  FII holding close to 28%  Some prominent names on the board could also not save it  CBI caught one of the directors of the company in a bribery case Parameter Mar-11 Mar-10 Mar-09 Mar-08 Net Profit 67.64 45.45 22.08 13.8 CFO 16.01 25.13 -8.98 13.31 Signal In INR Crs Poor shareholding pattern From Rs350 to now Rs0 The company has gone into liquidation in 2016 Source: Google graph, screener/ace database
  • 38. Twitter - @niteen_india 38 Education sector proved to be a perfect educator for investors… Source: Google graph, screener/ace database Part of a large corporate Claim to be tech savvy Now a part of a large corporate • Contingent liabilities of Rs.524.89 Cr. • Promoters have pledged 82.74% of their holding Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 CFO 26.99 16.69 17.02 32.34 -79.28 -65.4 -44.17 PAT 18.05 21.03 29.72 32.35 5.84 -131.83 9.12 Signal • Poor cashflow • Pledging by the promoter
  • 39. Twitter - @niteen_india 39 Education sector proved to be a perfect educator for investors… Source: Google graph, screener/ace database • Part of that highly visible Modern Education club of 4 • Rest 3 are defunct From 1101 to 1 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 CFO 13 13 52 191 224 284 PAT 14 29 71 133 276 337 Signal • Poor shareholding pattern • Story led growth • Growth funded through debt, no cash flow backing Has shown Chand-taare to investors From Rs621 to Rs75 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 CFO -31.01 -67.42 42.73 -17.52 38.15 32.41 38.95 38.62 PAT 14.69 32.34 42.34 26.85 46.57 61.26 107.08 -66.92 Signal
  • 40. Twitter - @niteen_india 40 Let’s learn from the history: Everything becomes rosy when peak comes: a case study of news analysis vs reality check Risks to understand when such news comes • Big acquisitions • Foreign country • Such news with a frenzy behaviour more often lead to disappointment later, need to be very very careful Please note that this is not a recommendation of any sort. This is just a case study for education purpose. Source: Google graph, media reports
  • 41. Twitter - @niteen_india 41 The top and the results From 424 to now 2.35 Please note that this is not a recommendation of any sort. This is just a case study for education purpose. 11 Jan 2008 Source: Google graph, media reports
  • 42. Twitter - @niteen_india 42 Imagine we have a time machine and we are going back to June 2007 with FY’07 numbers to understand if we can see the upcoming problems Please note that this is not a recommendation of any sort. This is just a case study for education purpose. Description 200903 200803 200703 200603 200503 200403 200303 200203 Cash Flow from Operations -1223.75 1204.30 737.23 -354.02 118.15 11.83 -10.56 -6.03 PAT 428.87 1017.15 864.80 760.52 365.12 144.92 37.21 111.67 Signal Source: ACE Database
  • 43. Twitter - @niteen_india 43 We have a time machine and we are going back to June 2007 with FY’07 numbers to understand if we can see the upcoming problems Please note that this is not a recommendation of any sort. This is just a case study for education purpose. Description 200903 200803 200703 200603 200503 200403 200303 200203 Cash Flow (Consolidated) Cash Flow from Operations -1223.75 1204.30 737.23 -354.02 118.15 11.83 -10.56 -6.03 Cash Flow from Investing activities -6844.55 -4636.70 -3719.91 -380.46 -270.18 -108.57 -37.90 -49.24 Cash Flow from Finance activities 3396.56 8814.06 3969.49 1131.51 238.43 108.83 59.32 -1.95 Free Cash flow -6521.94 -2041.85 -718.65 -906.74 -161.16 -123.75 -19.12 -68.76 Cash flow (Standalone) Investment in Subsidiaries -2678.71 -4114.22 -527.02 0.00 0.00 0.00 0.00 0.00 Loans & advances given to subsidiaries / partnership firms etc. -709.91 -113.49 -269.43 -106.26 14.94 -45.31 -16.90 -8.60 Balance sheet (Consolidated) Equity Paid Up 299.66 299.39 287.76 287.53 86.92 24.35 12.17 12.17 Total Debt (Long Term plus Short Term) 14869.57 9934.59 5162.04 450.70 395.81 238.36 103.61 38.86 Balance sheet (Standalone) Loan To Subsidiaries 1655.79 556.35 442.87 162.14 55.88 70.82 25.50 8.60 P&L Total Income 26530.54 14001.79 8089.88 3915.49 1965.91 875.47 269.71 533.35 Total Expenditure 23290.18 11649.84 6673.48 2961.80 1473.40 713.07 228.17 399.73 PBIDT 3240.36 2351.95 1416.40 953.69 492.51 162.40 41.54 133.63 PBIDT % 12% 17% 18% 24% 25% 19% 15% 25% PAT 428.87 1017.15 864.80 760.52 365.12 144.92 37.21 111.67 Key Ratios Debt to Equity(x) 1.74 1.23 1.51 0.17 0.44 0.61 0.40 0.16 ROCE(%) 8.55 13.31 20.98 39.32 45.94 35.28 15.17 46.58 PE (x) 26.32 37.54 32.76 48.44 0.00 0.00 0.00 0.00 Investment in Subsidiaries (Consolidated cashflow) -3700.32 0.00 -2502.64 -3.39 -9.81 0.00 -5.50 0.00 Source: ACE Database
  • 44. Twitter - @niteen_india When and how to sell? 44  Do not sell in one go. Sell incrementally: e.g. sell 10% on every 20% rise  You realize you made a mistake and the company is not working as you expected; give time before you take a decision though  Price target achieved (after re-evaluating assumptions and pricing)  When financial parameters are at unreasonably high levels  Over exuberance in the market (You hear buy call from all media channels, newspapers, Lift- wala/chai-wala/paan-wala) and your stocks are quoting at unreasonable levels…  A deterioration in the fundamentals  A better opportunity comes along (mostly avoid for such reasons unless you do not have any other reasons)  When Promoters are selling (may give a false indication, so see business environment for the company and who is buying)
  • 45. Twitter - @niteen_india How to manage risk 45  Study by CFA Institute (number of stocks in the portfolio and diversifying risk)  Strict about the buy and sell pricing; esp. buy  Never run behind the stocks; if something is gone let it go; don’t crib let others earn too  Always study the company, business model and if you do not understand do not invest  Follow the rule of 3 parts of portfolio (A, B and C) covered initially  Keep a buy range; similar to sell range. If stock going below buy range reevaluate your assumptions/if anything fundamentally wrong with the company?
  • 46. Twitter - @niteen_india Recommended (MUST) reading 46  The Intelligent Investor – Benjamin Graham (1949)  Value Investing & Behavioral Finance: Insights into indian stock market realities – Parag Parekh (2008)  Security Analysis – Benjamin Graham & David Dodd (1934)  Common Stocks and Uncommon Profits – Phil Fisher (1958)  Value Investing Today – Charles Brandes (2004)  Letter written by Warren Buffet to Shareholders (1977-till date)
  • 47. Twitter - @niteen_india 47 The Test of Impulse Control/Will Power The Stanford Marshmallow Experiment
  • 48. Twitter - @niteen_india The Test of Impulse Control/Will Power 48 https://vimeo.com/6591011 Click to play video The Stanford Marshmallow Experiment
  • 49. Twitter - @niteen_india 49 About OUR company: Aurum Capital is a SEBI registered investment advisory services company. Started by Jiten Parmar and Niteen Dharmawat, who together have more than 4 decades of experience investing in equities and guiding and mentoring fellow investors. This rich industry background helps us understand companies, complexities of business and tipping points that make or break a company. Our approach is not limited to just number crunching but going beyond. We focus on the business, strategic direction, the competitive landscape, the governance process, the background of the promoters, turnarounds, to name a few. Often these are more critical items than just numbers. Jiten and Niteen have successfully waded through multiple bear and bull market cycles.
  • 50. Twitter - @niteen_india Thank you Email: info@aurumcapital.in Twitter: @niteen_india @CapitalAurum 50
  • 51. Twitter - @niteen_india IMPORTANT DISCLAIMER: The information herein is used as per the available sources of bseindia.com/nseindia.com, company’s annual reports & other public/private database sources. Aurum Capital is not responsible for any discrepancy in the above mentioned data. Investors should seek advice of their independent financial advisor prior to taking any investment decision based on this report or for necessary explanation of its contents. Future estimates mentioned herein are personal opinions & views of the analyst. Analyst Name – Niteen S Dharmawat. For queries / grievances – support@aurumcapital.in. SEBI registration No: INA000011024 Readers are responsible for all outcomes arising of buying / selling particular scrip/ scrips mentioned here in. This report indicates opinion of the author & is not a recommendation to buy or sell securities. Aurum Capital & its representatives have vested interest in above mentioned securities at the time of this publication, and its partners / company have positions / financial interest in the securities mentioned above. Aurum Capital, or its associates are not paid or compensated at any point of time, in last 12 months by any way from the companies mentioned in the report. Aurum Capital, or its representatives do not have more than 1% of the company’s total shareholding. Ownership of the stock: may have advised to clients. Served as a director / employee of mentioned companies in report: No. Any material conflict of interest at the time of publishing report: No The views expressed in this post accurately reflect the author’s personal views about any and all of the subject securities or issuers; and no part of the compensations, if any was, is or will be, directly indirectly, related to specific recommendation or views expressed in the report.
  • 52. Twitter - @niteen_india 52 Cash flow concept
  • 53. Twitter - @niteen_india 53 A Scooter Manufacturer… A quick example Cash Credit Cash recorded in OCF P&L Sales, Profits recognized Cash Received Yes Bad debts No Warning sign: Check Receivables…
  • 54. Twitter - @niteen_india 54 Exceptions - Companies that sells more and more cash through lending - e.g.: Banks and Financial Institutions Other helpful parameters along with OCF - Interest paid v/s net profit (a ratio of more than 0.4/0.5 is risk) - Equity dilution? - Promoters unpledged holding in the company - Trend in receivables - Investing and financial cash flows Exceptions
  • 55. Twitter - @niteen_india 55 - OCF = Net Income + Depreciation & Amortization – Working Capital Investment - Positive OCF by decreasing inventory/receivables (non cash working capital) or increasing in payables - Decrease in inventory, receivable numbers - liquidating items like inventory, receivables (you are supposed to get this from your customers and sell it off in the market at some discount) or - Increase in payables numbers - Supposed to pay to suppliers but don’t pay at the time of preparing the Cash flow - These are not sustainable items Can OCF be manipulated? Caution: if you notice marked changes in these numbers from last year’s numbers