How to screen stocks

Niteen S Dharmawat - http://dharmawat.blogspot.com/
June 2017
1
How to screen stocks
(Basic work to avoid TIPs -> PITs)
A presentation by: Niteen S Dharmawat
Be a wise
investor and
not a day
trader…

Niteen S Dharmawat - http://dharmawat.blogspot.com/ 2
IMPORTANT DISCLAIMER: This presentation is prepared solely to provide
information about this company and take feedback from the readers. This
presentation is NOT meant for equity investment. It should NOT be construed
as an investment advice for buy/sell/hold or anyother form of
recommendation. This presentation does not recommend any price or price
target for the company discussed. Investment in equity shares has its own
risks. The information contained herein is based on my study 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 and not
intended for any investment decisions. I am not responsible for any profit or
loss incurred based upon it & take no responsibility whatsoever for any
financial profits or loss which may arise from the discussion thread
above/anywhere in communication. It is safe to assume that I, my family,
friends have vested interest in any of the companies/stocks
discussed/presented here. Please do your due diligence and take the help of
a qualified advisor before you take any financial decision.

Agenda
3
 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

The Wealth Creation Formula
4
Right Focus – Right results

Tips: after reading Google news/Forums
5
TIPs take you to PITs
Someone I know
bought few lac shares,
despite my warning,
believing Google news
with a target price of
100 in next few years.

Tips: after analyst reco/FII holding
6
TIPs take you to PITs
• Strong FII holding
• Increased holding
by 12% in 5 years
(equity dilution)
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%

Before you put in money…
7
 Make an Excel sheet (Detailed PPT 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

Classify your portfolio… My way… You may evolve yours
8
 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: 5-10%
 Tips /Respect quota
 Time duration: 1min-1year
 If develops conviction based on research move to B

What are the free resources for quick screening
9
 bseindia.com / nseindia.com
 Screener.in, Moneyworks4me.com, stockflare.com,
capitalcube.com… and many more… including Apps
 Brokers websites for financial data
 Annual reports (most important)

Annual Report
10

Key sections
11
Annual Reports
1. Chairman / CEO’s statement & Management
Discussion and Analysis
2. Financial statements
• Cash flow statement (most important, least understood)
• P&L
• Balance-sheet
3. Others

Annual Report
12
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

Annual Report
13
Chairman / CEO’s statement and Management Discussion and Analysis
 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
14
Financial statements
 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
15
Financial statements
 (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
16
Others…
• 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

Shareholding Pattern
17
Governance
Skin in the game
- Unpledged Holding
- Promoters’ Holding – Buying or Selling
- BSE Website SHP:
- Quarterly Trend
- Going in strong hand
- Corporate Announcements

Shareholding Pattern
18
Governance
XYZ Industries
Who Month # of Shares % holding
Promoters Mar-07 48,94,544 35.28%
Promoters Dec-06 47,78,994
Total Change 4 months 1,15,550
Date Acquired Who
15-Mar-07 10,000 Managing Director
06-Mar-07 20,050 Managing Director
28-Feb-07 8,000 Managing Director
28-Feb-07 17,500 Managing Director
14-Dec-06 60,000 Director
Total Buy 1,15,550
100 Crs market cap in 2008
800 Crs market cap in 2017

Trader v/s investor
19
Time V/S Return
KNR Industries in 2011
Fundamental Analyst 100 Day Trader 100
5 years target 200 5 hours target 105
You bought They sold
Today = Rs 1025 + Dividend =>
Total valuation including dividends =
Rs 205*5 KNR + Rs 14 Dividends => 1029
10 times return that of original investment
KNR Case study from 2008-2017: https://goo.gl/PR3gCe
A case study of how slow and steady wins the race
10 bagger in 6 years…
v/s
5% (?) of a trader

Year 2000: A repetitive grim reality
20
Time V/S Return V/S Valuations
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+

21
 bseindia.com / nseindia.com
 Screener.in, Moneyworks4me.com, stockflare.com,
capitalcube.com… and many more… including Apps
 Brokers websites for financial data
 Annual reports (most important)
Free Resources

Availability of data on internet/Annual Reports
22
Free Resources
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/read newspapers
Promoters’ Holding (Buying or
selling)
Corporate announcements in NSE/BSE
websites

23
Screener.in
Standard summary
Customized summary

Quarterly results
24
Screener.in
Draw top 5 conclusions in
90 seconds and move on
1) Sales trend
2) Operating performance
3) Interest component
4) Depreciation
5) Tax paid

Annual results
25
Screener.in
1) Sales trend
2) Operating performance
3) Interest component
4) Depreciation
5) Tax paid
6) Dividend payout ratio

Balance Sheet
26
Screener.in
1) Equity Dilution
2) Share capital (equity / preferential)
3) Borrowings (ST/LT) v/s interest component from last quarter

Cashflow
27
Screener.in
1) CFO v/s NI
2) WC changes
3) Taxes Paid
4) CFI trend
5) CFF trend

Reports and announcements
28
Screener.in

Query Builder
29
Screener.in

Quiz…
30
Two questions
1. Identify this legend?
2. Where is this portrait kept?
If you know answer to 2nd question,
you would also know who presented
this portrait?

About the presenter:
Niteen is an MBA and cleared CFA Level 2, CFA Institute USA.
A firm believer in long-term financial planning, and a 20
years veteran of the stock market. He also conducts free
investor awareness sessions.
He likes reading books/magazines/news papers on the
topics as diverse as general management, technology,
investment, fiction, marketing and the Gita.
He is a person who believes in "Everything else can stop but
learning".

Thank you
Twitter: @niteen_india
Blog: http://dharmawat.blogspot.com/
Mobile: 9850571857
Also on: Slideshare, Facebook

33Niteen S Dharmawat - http://dharmawat.blogspot.com/
Cash flow concept

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…

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

Case Studies

Case 1: A vertically integrated multinational medical
technology Group
From Rs140 to
now Rs25

Case 2: Education and training company based in Chennai
 ‘Darling’ of punters
 Several stories around the business model
 FII holding close to 28% (now less than 1.4%)
 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 Rs23

Case 3: a leader in the Security Surveillance domain, the first
company of its kind to be
 “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 45 in no time

Case 4: A ‘fast growing’ Indian Pharmaceutical company
 A recent casualty
 Analysts/research house giving aggressive
targets
 Several stories around the company
 Promoters pledged the shares
In INR Crs
Parameter Jun-13 Jun-12 Jun-11 Jun-10 Jun-09 Jun-08
Net profit 53.71 42.77 33.18 22.33 18.63 27.19
CFO -70.44 -53.43 -35.84 -28.11 -50.78 -40.46
Signal
Poor
shareholding
pattern
From 75 to 11 in no time

Case 5: Unified Supply Chain & Infrastructure Group
From Rs140 to
now Rs30
Poor
shareholding
pattern

Case 6: the largest commercial real estate developers in India
Parameter Mar-08 Mar-07 Mar-06 Mar-05
Net Profit 7812.03 1933.65 411.03 86.5
CFO -1780.9 -6563.5 -873 575.4
Signal
 A high profile developer with expansion in multi-sectors
 Brought India’s largest IPO (June 2007)
 At IPO price Rs525 (market cap 96K Crore)
 Touched Rs1200 (market cap 2Lac Crore) Jan 2008
 Today Rs157 (market cap 28K Crore)
 Some “smart investors” searching value again
From peak price Rs1200 to below Rs160

Case 7: India's second largest real estate investment company
Parameter Mar-10 Mar-09 Mar-08 Mar-07 Mar-06 Mar-05
Net Profit 675.05 1196.43 1661.34 1306.14 84.07 33.36
CFO -1339.5 -5.39 -975.03 -2074.5 -224.67 96.89
Signal
 Another high profile developer
 Touched Rs500 (market cap 1Lac Crore) Jan 2008
 Today Rs8 (market cap 4K Crore)
 98% loss of wealth from peak
From Rs500 to now Rs8

'Piotroski Score'
44
Interpretation: In the range of 0-9
• 8-9: considered to be strong
• 0-2: considered to be weak
Calculation: 9 specific criteria from financial statements each with 1 point else 0
• Profitability
1. Positive ROA in the current year
2. Positive operating cash flow in the current year
3. Higher ROA in the current period compared to the previous year
4. Cash flow from operations are greater than ROA
• Leverage, Liquidity and Source of Funds
5. Lower ratio of long term debt to in the current period v/s previous year
6. Higher current ratio this year compared to the previous year
7. No new shares were issued in the last year
• Operating Efficiency
8. A higher gross margin compared to the previous year
9. A higher asset turnover ratio compared to the previous year
Strength of a firm's financial position
Should not be applied to
Financial Services/Banks

'Altman Z-Score'
45
Interpretation
• Below 1.8 means the company is probably headed
for bankruptcy,
• Above 3 are not likely to go bankrupt
Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E Where:
• A = working capital / total assets
• B = retained earnings / total assets
• C = earnings before interest and tax / total assets
• D = market value of equity / total liabilities
• E = sales / total assets
Score for bankruptcy
Should not be applied to
Financial Services/Banks

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