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Atul

This is one of the more cautious investments that I made as follows:

08/04/2016 : Bought 40 shares at ₹1,694

The current market price is ₹2,924.

Overall profits to date : 73%.

Company : The company is an integrated chemicals company catering to a wide range of industries from pharmaceuticals to agriculture and cosmetics (aromas). Further information about the company is available on their website.

My rationale : I invested in this company primarily on the strength of its core business areas. Their products are sold across a variety of industries. A slowdown in one of those industries does not single handedly impact on Atul’s performance. It is very unlikely that all their customer industries will slowdown at the same, resulting in a poor revenue performance.

 

I evaluated the financials as follows :

  • Revenues : Same as your monthly or annual salary.

YoY (year on year/annual) Revenue growth : 2014/2015/2016/2017 has been 19%/7%/-3%/10%

The revenue for this purpose is the total revenue for the company.

Takeaway : The company has been able to maintain a steady growth rate for the last 4 years, with an exception in 2016. For now, the stability and consistency of their revenue performance looks probable in future.

  • Total cost for the company : similar to your expenses (rent, Uber, Ola, petrol, food, etc) to earn the salary.

Cost growth 2014/2015/2016/2017 has been 15%/7%/-6%/11%

Takeaway :The company’s yearly expenses growth has been more or less in line with their revenue growth. This is particularly reflected in 2016, when the expenses growth was -6%, with a revenue growth of -4%. The company’s biggest cost item is their cost of raw materials. This defines the company’s yearly bottom line performance. This will be my focus while doing a follow up investment in this stock.

  • Profit/Loss before tax : Similar to your savings at the end of year (Annual Savings = Annual salary – Annual expenses). A difference is that you pay the tax before the monthly salary reaches you.

Growth 2014/2015/2016/2017 has been 54%/5%/26%/2%

Takeaway : The profit growth for the company is highly dependent on their cost of raw materials. For now, there is no clear direction of where the future numbers will land. For 2017, although the raw materials costs were higher than 2016, all the other costs were more or less constant at 2016 level, except depreciation. If the company can focus on better raw material pricing, it will have a direct and positive impact on the bottom line (profits)

  • Cashflow : The companies are allowed some non cash expenses (e.g. depreciation) to help them replace those assets at the end of their useful life. A cashflow statement provides you with the information on how the yearly cash profit is used in following :
  1. Investing activities : investing in different options to help them excess money grow
    • This is similar to you investing your extra cash in PF, PPF, mutual funds, equity shares ULIPs etc to have interest income or principal appreciation.
  2. Financing activities : shows if the company is repaying or getting more finances (a negative number might mean that the company is repaying its debt and hence reducing its interest payments for next years)
    • This is similar to you repaying your car or home loan during the year from the Bonus or increment during the year. 

The company has been using its profits from operations as follows :

  • Investing activities :the company invests majority of its yearly cash profits into investments. This is a positive since the cash is not sitting idle in the bank and generates substantial interest other incomes in addition to their regular revenues,
  • Financing activities : the company paid down 208cr worth of financing in 2017. This is significantly higher since 2013. The last highest payment was in 2015 of 125cr. This is also a positive since the company is trying to reduce its debt financing and hence, avoiding interest payments for the future.
    • Financing costs for the company has reduced from 35cr in 2013 to 25cr in 2017.

Other things to note when buying a stock:

  • Trading volume : the number of share bought or sold on a given day.

Note : The higher the trading volume, the better it is. If you are not comfortable with the investment, it allows you to sell it easily.

  • Price charts : these are simple line charts, showing the price movement for a period of time.

Note : This is a simple line chart, as most of you probably use in your daily work. It is recommended to track the price for a long time period (1-3 years) to have a more consistent performance outlook.

  • Quarterly results : the revenue, costs, profit before tax analysis can also be replicated for the company’s quarterly performance analysis. Very similar to how you have a mid year performance review in your jobs.

 

Why did I invest : This company has a core business area which is required in a variety of industries and products. This provides a natural diversification of business risk for the organisation. On the financial parameters, the company does well when it can control its costs. This presents the best potential for this stock. If the company can manage its raw materials costs as well as it manages its revenues and cashflow, the stock pricing will surely reflect it.

Other useful pages :

Online resources for Industry research

Online resources for Consumer research

Online resources for miscellaneous trends

Mutual Fund series : Why mutual funds?

 

This is a personal investment strategy that I have used for myself. The investment made is real with my own personal money. The purpose of this post is to educate the reader on how to evaluate the financials of a stock and make informed decisions for his investments. All investment decision carry financial risk and you should consult with an investment professional before making any investment decision

Stocks

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