I have now closed this call. I will revisit this stock if this presents more value.
Archive:
Carbon Credits (or CERs) are being traded on the European Climate Exchange, at the current price is 22 Euro per CER.
SRF, in its various quarterly reports, have announced sales of CERs either as amount recovered or sales made. Assuming about 20 euros per CER and a conversion rate of 55, I calculated that SRF has sold about 51 lakh CERs to date. They still have 35.6 lakh CERs available to sell, and with prices looking up the current stock should yield about Rs. 392 cr. in the market.
Given that they are looking at being issued about 38 lakh CERs every year, they should have an inventory of about 74 lakh CERs, which can yield about 830 cr. as revenue - for this, we can assume around 40% margin (giving 60% to costs for future CER generation) - meaning that additions to profits would be 332 cr, or Rs. 49 per share.
They made Rs. 43.2 EPS in FY 2007, and going forward just the CER inventory looks good generate a good growth. Now I don't know if SRF will continue to sell CERs and generate revenue, or if the CER market will remain this buoyant. But SRF looks poised to earn bumper profits from just CER sales, apart from its regular belting, refrigerant gases and technical textile business (where it is a major player in India and the world).
The current price (which shot up today to Rs. 171) gives SRF a trailing P/E of 4, and the growth prospects look good enough to move the EPS to beyond 50 at least. The current spike in the price is not on very big volumes, but the stock moved in the later half of the day and is worth looking at.
There are some negative stories about the management of this stock which portray them as not the nicest to other shareholders. I don't know if there is any truth in them. But the stock seems to be showing some momentum, which I believe should lead to a target of Rs. 300 in a year.
I must present a more detailed study, but at least the carbon credit story is a start.
Disclosure: I hold this stock.
You need a broker. You will never know WHO you buy from or sell to - the stock exchange takes care of those details. What you do is place an "order" to buy or sell shares, and the exchange looks for people on the opposite side willing to deal with you at that price. The order is automatically effected if the prices match.
You can't deal directly with the exchange, so you use a broker who is registered with the exchange. The broker will place an order on your behalf and the shares will be moved once the order is complete.
Demat account
Earlier, shares used to be only in paper form - a piece of paper called a share certificate that designated your ownership. When you sold shares, you would sign the back of the share certificate and your broker would then send this paper to the company, which would then approve the transfer, and send the certificate over to the person that bought it. This was called "materialised" trading.
This is obviously cumbersome. So companies and the exchange decided to "dematerialise" shareholding in electronic form so that your shares were no longer on paper, they were held in electronic form in a database with a "depository". When you sold shares, the depository would reduce your share quantity and the buyer's depository would increase his. Being "dematerialised", such depository accounts are called demat accounts.
Currently, almost all trading is mandatorily in demat form. Even if you hold physical share certificates, you must "dematerialise" them before selling them. (How do you do this? You can get a form from your depository with details on the process.)
Brokerage account
Once you have a demat account (I will explain how you get one later), you must then use a broker to transact. If you place a "sell" order with the broker you must then give your broker a "depository transfer form", or a "DP Transfer Form" which will transfer shares from your DP acccount to the buyer's account - some brokers first transfer it to their account and then on to the buyer's account.
Once you sell, the shares are transferred on the Next Day (T+1, mean Trade Day plus one day). You get the money on T+3 - three days after the trade. This can change anytime as rules get better and better. (Earlier there were times when you got the money on T+7!)
What about when you buy shares? You give money to your broker (through a cheque or DD) and he places a buy order for you. The money is given out on T+1, and the shares come into your account on day T+3.
This sounds simple but in order for you to transact with the broker on a regular basis you must open a "brokerage account". This confirms, among other things, your brokerage, guidelines to work together and so on. Brokers may also specify that you keep a certain amount of "margin" money with them to cover for any trades that you may execute. Further the broker may let you sell shares and have the proceeds available in your brokerage account (not sent to you)- this money can then be used to buy more shares. Saves the effort of first him issuing a cheque to you and then you having to give him a cheque.
Dealing with your friendly neighbourhood broker: You walk up to them, fill up a form for a brokerage account and you can start. They will help you open a demat account as well.
Online brokers and demat accounts
Dealing with such "offline" brokers can be cumbersome - firstly you usually need signatures for each trade and then you may have to physically visit the broker for investing and so on. Plus you tend to get a lot of advise which may not be to your advantage.
You can then get yourself an "online" account - which is offered by a number of brokers now. Typically they bundle a demat and brokerage account together, and allow you to buy and sell online, with no signatures required. When they open an account they make you sign a deal which gives them the right to debit or credit your accounts when you send the messages online.
They will give you a user id and password to log on to their site. SEBI has mandated a password change every 14 days to prevent misuse, so expect to keep changing your password.
You can then log on, check your demat holdings, and buy or sell.
But if how do you ever buy your first share? Where does the money come from?
Transfers from bank accounts
Most online brokerage accounts will let you transfer money online from your bank accounts. Alternatively you can write them a cheque but that will take time to clear and reach your brokerage account.
Transferring from your bank account online requires you to have Internet banking - but most banks today allow that. Brokers will usually have links with many banks - Sharekhan has links with HDFC, Citi, ICICI and so on. ICICI Direct only allows you transfers from ICICI Bank accounts which they give you along with the brokerage and demat account.
Withdrawing money
When you sell shares, the money stays in your online brokerage account. The online web site will usually have a method to transfer money back to your bank account - either by sending you a cheque or by directly putting money into your bank account which you linked them with.
Types of transactions
Most brokers will let you transact on the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE). There are two kinds of transactions if you are an individual:
Brokerage
You will be charged some money to let you buy and sell shares through them; this amount is called brokerage. Most brokers charge you a percentage of the total amount transacted with them - this is typically 0.5% of value, or what is called "50 paisa" - the amount you get charged per Rs. 100 of transactions. You can negotiate and get good deals, based on your transaction volume.
Reliance Money and RK Global have a "flat" brokerage structure. You pay a certain amount of brokerage - Reliance money charges Rs. 2,500 a year - and you can transact any quantity of shares upto a certain limit (Rs. 60 lakhs delivery for Reliance Money and unlimited for RK Global).
Brokerage will vary for different types of transactions - intraday, delivery, F&O etc. will have different brokerage structures. You should ensure that your brokerage is agreed upon in written and signed before you transact.
Remember also that service tax (12.36%) is charged on the brokerage you pay.
Transaction charges
Both NSE and BSE charge you transaction costs - there's something called "stamp duty" and "turnover tax". This again varies for the type of transaction (F&O, intraday, delivery).
You will also pay "Securities Transaction Tax" (STT) when you buy and sell equities. This is fixed by the government but different for different types of transactions.
You will see all these charges on your contract note.
What is a contract note?
To ensure your broker doesn't cheat you the exchange specifies that every day that you transact, the broker must provide you a note of complete details of how many stocks were bought/sold, what brokerage and contract note numbers exist etc.
The exchanges allow you to verify each trade you do, giving some details that will be available on your contract note. For instance, here's where you can verify your NSE equity trades.
Here's how you might be charged (an example).
My experiences
I have accounts with Sharekhan and Reliance Money. In both cases, I have demat and brokerage accounts, and I transfer money to and from my internet banking account. I've been fairly happy with both, given that I transact about once a week, but you can find others that suit your investment style.
Online brokers
Sharekhan
Reliance Money
Religare
ICICI Direct
RK Global
5 paisa
Other articles
Traderji forum: Brokers and Demat Matters
Rediff: Want an online broker?
But how do you go about investing in stocks? This post will be a collection of links to posts about investing in equity.
Introduction
Fundamental Analysis
Technical Analysis
Some fundas: Open means I still own the investment, Closed means I've sold everything at a loss. And my losses are based on the average buy price and the average sell price of a stock.
Stock: Marksans Pharma
Lost: 50%
Period: 6 months
Status: Closed
Why I invested: Sharekhan, where I have a brokerage account, released a report on this company stating the growth prospects in March 2006. I purchased the stock around Rs. 230, for a target of Rs. 360 according to Sharekhan. The company was formed merging Tasc Pharma and Glenmark Labs, with huge manufacturing orders from companies abroad, in bulk drugs. The company also had a research model that was working on a male contraception molecule. At a P/E of 42, it was expensive, but the growth looked like it would contract the P/E and result in a revaluation.
What happened: The stock hung around Rs. 230 level for a while, and in the big kahuna crash of May 2006, plummeted down to Rs. 100 or so. I held on, because I was stupid enough not to have a sell rule, plus I called it "long term" since I only bought in july. A sell rule would have helped me exit the stock at about 190 but I didn't do that.
Then the stock held on for about three months in the 100-140 zone. It announced dismal results in Q4 2006, after which Sharekhan released an update effectively telling me not to worry and that growth was still intact. I held on.
I then configured my sell rules for a 20% loss (max). This prompted me to look for an exit for this stock, which I decided would be around 120, and the stock was quoting at 115 at the time. Within a few days I managed to sell out all my stock at 118.
The situation today: The stock is at Rs. 56 today. It has had a series of mediocre results and has never rebounded. Sharekhan still has it on their "recommended" list but has not provided an update since July 2006. Here's the stock chart.
Fundamentals wise: the last four quarters have been very ordinary, and the last quarter 07 has actually shown a loss. The current P/E is 20, and income has dropped massively. Does not look attractive even at this rate.
What I learnt: While you might think I blame Sharekhan, I don't - the mistake was entirely mine. I did not have a proper stop loss rule. When the stock runs away downwards, you should sell it. My problem was - isn't this is a buying opportunity since the prices are lower?
That was mistake no. 2: Fundamentals had changed. The company showed a bad quarter and the stock went spiralling down. I ignored the fundamental changed based on Sharekhan's report, but I should have done some research myself.
One other thing I did was ignore this stock. In the May-June 2006 period, stocks were hammered down so I was looking at buying opportunities (I had cashed some of my stocks already). I completely ignored this stock because it was "for the long term". When you make 50% losses, the stock has to rebound 100% for you to just break even! I should have sold this stock immediately - "long term" is just running away from booking the loss.
That's investing psychology, actually - that people hate to say they have lost, so they stay in the game hoping that they will, at the very least, break even. The market is a great leveller - you have to learn to be humble, accept your mistakes and move on. And, as I learnt the hard way, much before you lose your shirt.
EPS for the year 06-07 as grown 33.66%, from Rs. 9.15 a share to Rs. 12.23 per share.
Other significant moves:
Revenue up from Rs. 2,80.37 cr. to Rs. 3,17.47 cr. (Up 13.23%)
Profit after tax up from Rs. 59.42 cr. to Rs. 79.43 cr. (Up33.67%)
Cash and Cash Equivalents of Rs. 1,83.45 cr. as on March 31, 2007, a value of Rs. 28.14 per share.
They paid Rs. 3.5 per share as dividend on March 13; at this time the price of the stock was Rs. 113, and the yield would have been about 3%. Since then, the price has moved to Rs. 201 today.
Balaji has a serial called "Khwaish" coming out in the middle east in June, and has another serial "Kayamath" that they launched last quarter. In addition they have set up a fully owned subsediary which will make films (not that great a business in my opinion, it's a lot of luck and money). But guess what, the first release of their film "Shootout at Lokhandwala" is on May 25, 2007 and that might boost visibility as well.
They also have a JV with Star to make regional channels. Not just content but the channel as well. Given that the biggest viewership in India is regional, this bodes well for the company.
I could go on forever about the prospects of this company. But remember that such virtues only exist on paper. Despite the company clocking 20-30% annual growth every quarter, there was no recognition of this and the price went down to nearly Rs. 100! Obviously people in the markets are blind to the fundamentals - there is no rocket science involved; for a company that would have a Rs. 12 EPS, a 33% consistent growth, paying less than 10 P/E when other media companies were valued at 40 P/E + was fairly senseless.
Yet, the company was undervalued. The fact that it got recognised is good, but it could have stayed this way for another couple years! How do you know that a share is being recognised? Price breakouts, and volume breakouts are one answer.
I had noticed a quick move to 160 and a spike upmove to 180 which was perhaps an indication that someone somewhere knew about these results - possibly so. But the company has delivered quite good results earlier too, and there was no price movement at these kind of levels, so there's something more in the offing.
Either ways, what to do now?
Ride your profit. From now on, maintain a trailing stop loss with Balaji. A 10% trailing stop loss means if it falls 10% from its highest close, you should sell. Today the stock closed at it's highest, Rs. 201. So the stop loss is around Rs. 180. If the stock moves up, say to Rs. 250, your new trailing stop loss will be Rs. 225 (10% below the highest value).
There's no "loss" here - you probably make profits selling now, or 10% below now. The idea here is to ride a "trend" - the trailing stop loss ensures that if this stock moves out of favour, you get out before it really goes down.
You may say: But the company has such good prospects! Why are you asking us to sell?
But didn't it always have good prospects? What has happened here is the market has recognised it. Tomorrow, just as easily, the market can forget it. You are just protecting yourself. In fact, if you sell at 180 and it comes back down to the 120 levels, buy it again, because it's now value all over again.
The worst situation is: if the stock moves down to Rs. 170, and then goes back up to Rs. 250! If you're afraid of that you can increase your trailing stop loss to 15%, but remember you will lose more money on a downturn.
The trailing stop loss is a good way to ride your profits. Don't book them just because the stock is up - wait for the trend to reverse against you, confirm the reversal and then sell. If you are a long term investor, you can even do this in 5 minutes every day by looking at the closing values. No need to keep tracking the stock every minute.
Happy investing. I will post a message if Balaji's trailing stop is breached.
Jim Cramer, a maverick trader, reveals how hedge funds can manipulate the futures market very easily and with very little money.
"It doesn't take much money" he says, saying that $5 million to $10 million can move a stock in the US. We are a much smaller market, and I'd say even amounts like 10 crores can move stocks - don't you think enough "smart money" people have 10 crores to move a stock?
Pure fundamentals may not move a stock price up because of such manipulation. But then how do you know manipulation is going on? If the prices of something move rapidly on "non-events" or simply for the heck of it - there is some level of manipulation.
People that attempt to use purely fundamental data to assess a situation can be massacred because it is so easy to move stocks nowadays. In february 2007, very few fundamentals had changed - yet the market fell 10%. Today, on the back of a good set of results the market is back to the 14,000 levels on the sensex.
If we all persist on investing in purely value, or purely on fundamentals, we may just have it wrong. We need to look at information beyond the obvious, like sudden changes in volume traded and how, in the past, such volume changes affected your stocks.
Sure, this can be done easily on a computer, yet there are no websites that will give you such alerts for the Indian markets. Or do you know of any?
When companies look for money for their business, they can get it in two ways - either they borrow from a bank and pay interest ("debt") or they ask people like you and me to invest and give us shares ("equity"). A share is a part of a business.
For instance, say I start a company named "Brouhaha Pvt. Ltd.". A friend named Anup and I decide to split the initial investment 50-50. We need Rs. 10 lakh to start, so I put in Rs. 500,000 and so does Anup. Now this is given to us as 'shares'. Each share has a "face value" of Rs. 10, and each of us gets 50,000 shares. Totally the company has "issued" 100,000 shares of face value of Rs. 10.
Now the company grows. We earn Rs. 10 crore in profits because of a great marketing strategy. The total number of shares remains the same at 100,000.
Then suddenly we decide that we need to expand, and we need 60 crores more money to allow us to expand faster. We can do two things - go to a bank to borrow or ask for other people to invest in the business. We decide to do the latter.
But who will have 60 crores? We can choose to find a big rich individual or company, or choose to "go public" meaning we ask a LOT of small shareholders to invest whatever they want to, and in return we will issue them shares of the company. Let's again go with the latter option.
But will they pay the face value, or Rs. 10 per share? Obviously not - the company has grown that initial amount from 10 lakh capital to a 10 crore profit, plus there are assets in the business, so the value of the company is much higher!
The exact price is a matter of "valuation". Typically this is a function of how well you can grow your company in the future, a factor called the P/E ratio which is a multiple of your net profits. So let us say that we expect a Price to Earnings ratio (P/E) of 15 on last twelve month earnings, a conservative value that we believe we can get. We go public with an initial public offer (IPO) valuing the company at Rs. 150 crores (10 cr. profit x 15 P/E ratio).
That means 100,000 shares are valued at Rs. 150 crore. That's a value of Rs. 15,000 per share. But usually such huge figures are not easy to convey to a buyer. But the profits over the last few years have accumulated as "reserves" in our balance sheet, and the company has 20 cr. reserves but only 10 lakhs as capital. So let us say we issue more shares as "bonus shares", reducing the reserves and increasing the capital. This increases the total number of current shares from 100,000 to 1 crore shares, again at a "face value" of Rs. 10. Without having to pay anything more Anup and I are now owners of 50 lakh shares each. And each share is worth Rs. 150 (150 crore total value divided by one crore shares)
To get Rs. 60 crores, we have to issue 40 lakh more shares (at a price of Rs. 150). For this we go for an IPO, which we will ask for money from anyone who wants to own a share of our business. Post IPO, we will have a total of 1.4 crore shares (1 crore earlier and 40 lakh freshly issued shares) and we will be listed in a stock market for anyone to buy and sell our shares. The shares list at Rs. 150, but because the company is expected to grow even more, the price goes up to Rs. 200 per share.
Let's say a person named Sarath wants to buy a share of this business but the company has got all the money it needs from the IPO. So there will no further shares issued, but Sarath can buy shares from the stock exchange. He will buy shares at Rs. 200. So he will own a share of the company, but he's willing to pay more than the IPO price because he thinks the company will do well.
The person who sold the share got it in the IPO - at Rs. 150. Now he makes a profit of Rs. 50. Later Sarath sells it to someone else at even higher values like 250 etc. The company doesn't really get affected because it isn't seeing the money, but the share price goes up as the company starts doing better, and as more people begin to want the shares.
Why does the share price go up? The answer is: Perceived value. I may think the company is worth 1 crore, but someone else might think it's worth 2 crores. When my shares reach my valuation I sell, but someone else will think it's a good deal and buy.
To organise such buying and selling, there are commercial "stock exchanges". BSE and NSE are some of them, though there are a number of other, smaller exchanges in India. An exchange provides a common place for people to buy or sell shares, with sales happening on an auction basis - buyers bid for shares at a price they are willing to pay, and sellers "ask" for a price from buyers. Exchanges match these prices and share exchanges happen along with payments. "Brokers" facilitate these exchanges, and you pay them a fee as brokerage, part of which goes to the stock exchange as well.
So that was about shares and stock exchanges and such. Now you still have to figure out how to buy shares, which companies to buy, and when. More on that later.
Copyright (C) Deepak Shenoy 2005-2012
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