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Overlooking a bad show

Kamya Jaiswal considers if she should sell the three poor performers in her portfolio. Find out why she holds back two...

Kamya Jaiswal        Print Edition: July 11, 2010

25th April
Procrastination is an art and I'm learning to master it. The opportunity to do so presented itself when I had to analyse the three damp squibs in my portfolio-Britannia, HCL Tech and Tata Steel. But no matter how many different aches, work commitments and household chores I conjured up to avoid peeking into my portfolio, I realised that eventually I would have to do it.

So, armed with a bagful of buttery popcorn, I spent the evening scouring for reports on the three companies. Luckily, my brokerage house had mailed some on HCL Tech and Tata Steel. However, Britannia seems to be anathema to stock analysts; the latest write-up on the company was dated 2008.

What was I thinking when I chose to invest in it? More importantly, what was the source of information? Here's another addition to my stock selection parameters-invest only in companies that are profusely written about. Too much information (even if it means sifting through a lot of junk) is better than no information.

29th April
I have changed my mind. If I choose only 'hot' stocks, I will never be able to stumble upon a great opportunity, a la Michael Moe. In 1992, the stock analyst predicted that a Seattle-based coffee shop would change the way the world hangs out.

Yes, I have been reading up on some cult investing books like Finding the Next Starbucks (by Moe), and they are not half as dreary as the real investing world. Inspired by such stories, I have figured out how to overcome the problem on Britannia-I will cull out the factors common to different industries that analysts have considered in the reports on Tata Steel and HCL Tech. Then I plan to dig out the same information on Britannia. Imitation never seemed smarter.

1st May
Always a sitting duck for pranks, I fell for not one, but three outrageous tricks today. I salvaged some pride in my intellect by devoting a couple of hours to the analysis of reports on HCL Tech and Tata Steel. Frankly, the prospect of replicating their evaluation process for Britannia seems more exciting than finding out whether I should exit them. To ensure that I do not lose sight of my primary goal, I forced myself to focus on these two companies.

HCL Technologies got a resounding thumbs up by the brokerage report. Analysts believe that in another 12 months the stock price will scale up to Rs 416. They seem most excited by the company's revenue growth, which is Overlooking a Bad Show driven by an increase in volumes. Also, HCL Tech has announced 13 new deals, demonstrating that it continues to attract more work.

Its core businesses, such as engineering and R&D services, are back to making profit, which only strengthens the argument for sticking with the company. I had bought the stock in January at Rs 375.25. If the experts have it right, I will pocket a cool 10.9 per cent gain in one year.

The verdict on Tata Steel is not so clear. Analysts have panned the stock as they expect its price to drop by 23 per cent in a year. This, despite the fact that Corus (the Anglo-Dutch steel company acquired by Tata Steel in 2007) generated profit in the last quarter and looks set to earn higher revenues due to the rise in steel prices. The good news has been offset by the company's huge debt.

What caught my eye was the interpretation of EBITDA in the two reports. Belonging to the family of profit measurements like profit after tax (PAT), EBITDA calculates a company's earnings before deducting interest, taxes, depreciation and amortisation. Even though I do not understand the nuances of this valuation tool, it is obvious that if the EBITDA of a company is improving, it is earning more.

Hence, one should hold on to the stock. Recommending selling Tata Steel even though its EBITDA has gone up over the previous quarter belies this logic. On the other hand, analysts have not let a negative EBITDA influence their positive outlook on HCL Tech. Why ignore profitability?

6th May
Midnight dilemmas regarding stocks are best tackled during the day. I read about EBITDA on various websites, but it was Professor Calculus who helped me understand the utility of this tool. If I compare, say, the PAT of two companies, the difference in their taxability, their debt to equity ratio or the way they calculate depreciation will affect the result.

So experts use EBITDA to look at just the operating profit of a company. It is best used to compare companies within the same industry. Ironically, what gives EBITDA an edge is also its Achilles heel. One must necessarily place EBITDA in context, considering the company's financial condition, growth prospects, etc, touse it accurately. This is why the debt component of Corus' balance sheet outweighed the company's growing operating profits. Similarly, the prospect of growth in revenues was more important than the dip in the EBITDA of HCL Tech.

The argument against holding Tata Steel is compelling. Yet, I don't want to sell the stock. My logic: Tata Steel is a well-managed company and the road to recovery is long. I am convinced that it will get there. Moreover, am I not a longterm investor? So I can wait for the company to get its act together.

In the meanwhile, if the stock price dips further, it is a great opportunity to buy more. The decision on Britannia will have to wait till next week. The buzz in office is that our increments are due and the prospect of having more money has overshadowed all other thoughts. Keeping my fingers crossed.

Courtesy: Money Today

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