Random thoughts


I am sitting 50% on cash and trying to find companies to invest in. I have been researching on:

Vinati Organics

Symphony Comfort systems (which has shot up by 30% in a week to my dismay – a case of a runaway stock and I have almost suspended analyzing it)

I have not been able to find many bargains in the last 1 month. I am not sure whether I am not searching hard enough or whether bargains have reduced due to the run-up in stock prices.

Some questions which I have been thinking about related to businesses:

1. Why do I differentiate between investments in working capital vs investments in fixed capital to the point where I try to avoid investing in -ve CFO companies but would not mind much when it comes to investing in -ve FCF companies. Should I look at maintenance working capital investments as different from growth working capital investments i.e. how much working capital the company needs to operate at the same level vs the amount of working capital needed for growing the sales?

2. Will a 15% growth be better for a company than a 30% growth? Is the company doing the right thing by growing at 30% rather than at 15%? When will it be good for a company to grow slower rather than faster?

Some different scenarios related to the 2nd question:

– The company will be FCF+ve for a 15% growth but not for 30-50% growth. It may pile on debt to invest or completely use it’s CFOs to invest back. An example of this type is Bharti Airtel. It has maintained high ROEs, grown at a very fast rate in last 10 years, but has not generated any +ve FCF. At a stage when it would have generated +ve FCFs, it is now entering into Africa which would mean it would not be able to generate FCFs once again. Though the Indian market is now mature and hence new investments may not be needed (except maybe for 3G, not sure about this) it is entering into African Market where new investments have to be made.

– Vishal Retail, which almost or did file for bankruptcy, grew its topline at a rate of 56% yoy between 2004 and 2009. It piled on debt like anything from a D/E ratio of less than 1 to 5 now in 5 years. Should it have grown slower? Its stock price has fallen from 650 to 65 Rs in 3 years.

Another thought:

I meet a lot of people these days who feel that investing in real estate is the in thing since they so smartly invested in it long time back and their holdings went up by 10x in that period etc. They laugh at people who did not invest in real estate then. Though, I do agree, that it was a smart thing to do, I wonder what portion of the returns was due to insightful analysis and what portion of it was due to plain luck by being at the right place at the right time. This reminds me of Ninad Kunder’s post on luck. I think it would take a lot more analysis these days to generate excess returns in real estate than it took in 2003 since many these days know of the excess returns real estate can generate and are hence bidding up prices like anything.


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