Wednesday, November 18, 2009

Rico Auto Ltd .....A case in study.....Updated....

One reader asked me how Rico Auto is fundamentally sound and how I recomended it as a next multibagger.
According to him there are many negatives.
1).Sales growth rate is very less in the last couple of years.
2)Even the operating profit is coming down.
3)Debt is high when compared to equity.
4)Book value is at 21 because of new equity in 2006, otherwise it would have been very low.
5)Operating profit margin is coming down at an alarming rate.
6)Even interest coverage is less than 1 in 2009.Current ratio is less than 1, debt equity ratio is more than 1.
7)Earnings per share is coming down from 2005 onwards

These are the negatives he has find out from the Co.
I know many readers are more good then me.Like Natraj, rama,Barat,Mtiz,Vasanth, Vikas and many more.They are in real sense have more knowledge then me and I accept that.I have always said I am not an analyst or an economic or commerce student.
See, when I recomended Rico Auto I was not knowing about all these because I don't know how to see it.
Now what I would like to ask here to my readers is, why still I say that Rico Auto is a buy .......Let all give reason why I would still say it is a buy......
What I am going to discusss is perhaps discuss in IIM or MBA in Harvard University , USA or something like that.Maybe it may not at all discuss this whole subject the way we are going to discuss......
So I would like all readers to participate in this discussion and write what they think about negatives which "rama" wrote and after reading that why I am still sticking that it is multibagger in making.....


As MVS Raju rightly pointed out

"If all the fundamental variables of the company are good at this point of time would you be getting this stock at the current price?"

That is the question one needs to ask to themsleves.

Well,these question needs not be asked with stocks which have poor management or with less sales.See, there are certain things that ones needs to judge very well.
If we try to ask such question for cos which are still growing then its makes no sense.But here the sales is already there, the client list is excellent,the production capacity is excellent,the products are excellent, they are OEM,the gr is excellent,the collobaration is excellent...what just needed is tightening of belts by management and that can come any time.
So as Raju rightly pointed out if the variables are good as one needs to see, then can stock be available so cheap?
Market always sees the future.
and then Uno wrote:
"none of the competition has this variety in portfolio and cover all sectors. or do they?"
that is replacement theory.If one needs to create a capacity of Rico Auto plant how much money will be neededand how much time it will take?How many compititors have such type of varity of products.....and adding to that they have many subsidiaries with them which I have already pointed out.
I have pointed out the production capacity as well.
I have tried to point out almost all pros and cons for Rico Auto.Now it is on individual to take a call.
See,this type of discussion is not possible for each and every stock by me.Hence I always write the stock name and some insight then readers has to take the decision.....


  1. Dear Rajeev,

    I had to reread ur message twice to make sure you actually even wrote that i am better than you. HOW MODEST OF U or are you actually pulling my leg.

    You are doing a wonderful job. Actually i sumtimes wish that i have an indefinate supply of money so that i can invest in each one of our picks. They are simply too good.

    I informed you in my last message itself that for me u are no less than warren buffet or rakesh jhunjhunwala.

    Infact in many ways for me u r better than them as atleast i can interact with you and know where i am going wrong.

    You have been a very good teacher and have led us to some wonderful stocks.

    You have the gift of seeing the future of a stock while the so called big analysts are deciphering EPS and PE and Cash Flow etc.

    What ultimately leads to multibagger returns is not the past or present earnings of a company but its potential future performance and that is ur strong domain.

    Thank you for everything and hope to receive your guidance for a long time to come so that all of us together can make those multibagger returns.

  2. Rajeev,
    By this post,once again it becomes so crystal-clear that what a GEM of a person you are. Believe me people like you are difficult to find in this world. You do all the hard-work to search these pearls from the ocean (which have the potential to become Multi-Baggers), but you are so humble to give credit to all fellow-bloggers. HATS OFF TO YOU! As Mitzz says you have the gift of seeing the future of stocks.
    Ok. I take this opportunity to tell everybody few MUST-READ books.( I know Rajeev, you dont like reading books)
    1-The Intelligent Investor- Benjamin Graham
    2-The New Buffettology - Mary Buffett & David Clark ( I personally use ideas from this book for my investments)
    3- Value Investing & Behavioral Finance- Parag Parikh (Good Indian Perspective)
    4- Common stocks and uncommon profits- Philip Fischer

    Other one is Security Analysis again by Benjamin Graham. Frankly I didnt understand much from it. May be financial people will be able to understand.

    And now about Rico Auto- Yes, I am not jumping straightaway on this one.My concerns are same as Rama. But with the amazing & envious client list and turning cycle of Auto-Industry, It can be a multi-bagger.This is my opinion. If any body want to further discuss, they can.
    With Regards,

  3. Dear Rajeev,
    I am not an analyst.I am just learning the basics.I am followed your recommendations and made good amount of money.But about this one i am not sure whether i am correct or not. But want to know whether one should look at those fundamentals or not.I feel these should be observed to say a company is fundamentally good

  4. I am none in front of anyone of u. But from my observations, these are the +ve points.

    Auto sector : Since they have almost all 4 wheeler companies as customers, any good thing in auto sector is going to reflect on Rico auto.

    Construction, engineering: If infra is going to good, then since all construction need construction equipments, Rico is still going to do good.

    2-wheelers : "Aluminum Alloy Wheels". If you look at any new 2-wheeler bikes, they all have alloy wheels, so it is also going to help Rico.

    Correct me if I am wrong

  5. Definitely those are good observations for the sector. But how can this is better than others within this sector.The company is not even earning for the interest it has to pay.

  6. rama,
    I donno how u r looking at the results.
    The OP(operating profit)is more then interest of 10.8 cr according to last qr results, June 09!
    Just relook at it......because profit before depreciation but including Interest is 13.9 cr.So that means that even after interest is taken out still the OP is at 13.9 cr.
    How you have come to the conclusion that Rico Auto is even not earning as much as the interets it pays?
    These figures I have taken from bse site....if you have any question , revert back .....

  7. Rajeev I admire your ability to pick stocks , it is difficult for me to express myself. I just take your words and feels like your every word is true.I am already in Rico auto when i first heard it from you in MMB sometime back when you say that Rico auto is looking good. Their are some negative in stocks like loss at singur , strike but this is for small time. And after reading latest by RJ that you dont Don’t emphasise too much on analysis of profits in small time . so i agree with you. One more information is that their are lot of mutual funds who are buying at this rates or averaging it at 25 level.

  8. Mitz,
    This is not legpulling.I really mean it.
    The way people like you and others diggin ,I am nowhere near to you.
    Well, I donno the basics as well as rama wrote.
    I don't know anything and that is a fact.....

  9. I believe that a multibagger is identified on future potential rather than the current statistics.
    If all the fundamental variables of the company are good at this point of time would you be getting this stock at the current price?

  10. Ram,
    I have looked at the peers from moneycontrol site. From my understanding none of the competition has this variety in portfolio and cover all sectors.
    or do they?

  11. Dear Rajeev bhai

    Did anybody knew about the fundamentals or growth prospects Bv, pe etc etc of Kwality dairy when recomended at mmb for just Rs. 14 or 27.

    here I would like to admit that i have benefitted from your recomendations and have been following since long time now. And have 100000% faith and I actually do not need that kind of study for your recomendation.

    It is good to study the stock he recomend but it is entirely your own decision to buy or not.

    Hve already taken small position in Rico Auto.

    Please continue your great work to help small investors.

    Thanks for advise on amtek

  12. Uno,what you said is also one of the point to become a multibagger....

  13. rama,
    you have still not reverted back to tell me whether what I wrote was correct or you misread it....rama ,this is very important.Only if you will write it here , readers will get to know what is there....
    I am just reminding you that I wrote about your question to "uno" that when Rico Auto is even not earning enough to pay for Interest, how it can be a multibagger....and I have given you the reply.....
    rama, I hope you will reply me back to let me know whether you have checked it back at bse site the results and whether you misread the results or understood the results wrongly.....
    I hope you will reply for the sake of readers....

  14. Dear Rajeev,
    Sorry for giving a late reply. I checked from the money control site for last year.I did not check for the last quarter earlier.What u said is correct.Their earnings are able to cover for the interest.I agree with many of the people that the value of stock depends on future potential.But ability of a company to capture future potential depends on present.From the BSE site companies profit in years
    05-06 344.7
    06-07 258.4
    07-08 222.5
    08-09 47.5
    09-10 Q1 16.4
    I don't think economy is in bad shape during 06-07 and 07-08.But still profits came down.Also i don't know how many of the mentioned clients are new clients.If they are existing clients rather than new then what difference it makes.Also after the case study has been started i came across this equation.
    price = (EPS/Required return)+PVGO(Present value of growth opportunities)
    if we take 08 EPS of 1.77 which is higher during the period and required return of 20% then at current market price 27 PVGO comes 18.15. That means we are assigning 67% of the price to future opportunities. This seems to be very high.Sorry for giving some technical terms.I am not saying it can't be a multi bagger. May be it can become.But i kept posting because i am learning many basics after the discussion has started.
    Thank you every one for providing their inputs and also helping me in my learning process.

  15. Dear rama,
    I will only say here now that what MVS Raju and uno wrote is what needs to be seen.
    Rest your take......

  16. Dear Mr Desai,
    Just coming on to this blog and interacting with you and all the wonderful followers of your blog is a wonderful experience. I thought let me put across this question regarding Modern Dairy to Mr Desai and all you intelligent people if it has the potential to be a multibagger, though it has been on 6-7 UCs already. Lets get thinking ladies and gentlemen. Regards to all of you thinkers and especially Mr Rajeev Desai.
    Sandeep S

  17. Dear Rama,
    Read a saying sumwhere which i felt might be of use to you ...

    "If you could tell the future from a Balance Sheet then accountants and mathematicians would be the richest people in the world"

  18. So,Rajeev at last you have come up with your explanation about why Rico Auto can be a multi-bagger.
    After this explanation, I will definitely add some of it in my stocks kitty. I also have one imp. point to discuss with your kind permission.
    I know some of the things are not in our retail investors hands. but still we mat be able to judge integrity of management.
    This is regarding two stocks which I hold. One is Apcotex Industries in Synthetic rubber industry and other is Balmer Lawrie which is in industrial packaging, grease & lubricants and tea. Both companies are debt-free and having really good dividend yield. This shows they are sitting on ample amount of cash. (In fact Apcotex came with buy-back few months back, though its trading below book value) Now both companies have come up with postal ballot for venturing into new businesses. Namely Apcotex into Wind-power and Balmer-Lawrie into travel, power, mining etc.
    My post is regarding this point.
    Though I am a young person, I strictly follow conservative view. As these companies are debt free and giving good dividend,they are sitting on lots of cash. But venturing into other competitive businesses is not the way for growth. I know people say Change is equal to growth. But going into such businesses where there are n no. of dominant players and lots of tough competition doesn’t make sense to me.
    I personally believe that one bird in hand is better than two birds on the tree. So company should concentrate on what it does the best. And if company is having so much of surplus cash then it should go for buy-back / bonus / generous dividend.
    Do anybody have doubt on Infosys management. They are sitting on loads & loads of cash, but waiting for right opportunity to buy some nice, small & growing company in their own field. Infosys is not venturing in any other business where there are already set-players and lots of competition just because they have lots of cash. Other-way around, look at what ITC has done. From such an excellent cigarette business, they have ventured in already competitive FMCG business. And at consequence of it, loosing cash on huge ad campaigns just to settle down in FMCG sector. This is what Peter Lynch (one of world’s best investor) says- Too much of diworsification (its not diversification), can kill the company.
    Same thing about Unitech, which was in real estate business and recently ventured into already saturated Telecom business where there are already big players like Airtel, Reliance, Vodafone, Idea. Venturing into such tough competitive business is suicidal for sure.
    The bottom-line is to concentrate on your strong areas and don’t venture into new business where there are already set-players and lots of competition.
    So I request Rajeev and fellow-bloggers to comment on this.
    Sorry for the BIG post!
    With Regards,

  19. Hi Rajeev

    Apar Industries is consolidating for sometime now, maybe a base formation before a decisive breakout. Can it be bought at these levels. I am slightly confused. Any fundamental story in the stock, which can unfold in future.



  20. Hi Rajeev,

    Another excellent pick. Rico Auto in UC from today!!!!


  21. Thanks Mitzzz.
    I hope the statement is useful for me.
    I always follow this quote
    Never argue with a fool, onlookers may not be able to tell the difference.

  22. Dear Rajeev,
    Sorry if i had discouraged you in anyway. I don't have that intention because i don't know u and u don't know me.I am following ur blog which is very helpful to pick good stocks. I raised my points because i want to know what to look for and what not to look in picking multi baggers.I am sorry if i had hurt anyone.

  23. rama,
    I have not mind that.Healthy discussion is always welcome.But as I wrote , I can't do that for every stocks.
    Now as we have discussed on Rico Auto,I hope you must have understand what needs to be seen and what not.
    Now I hope things should get clear to your mind after so much of delibaration.
    Now if same type of questions arises then it shows lack of confidence on ones part...and that no one can infuse untill by himself....
    But, let me tell you that what Mitz has written is correct.Buying stocks is just not only looking at BS and understading it.If that is the case then all CA and MBA would have become millionare...but that is not thw case...
    The bottomline here is just don't try to read too much in BS....
    No one has got hurt for your query according to me and nor I am....

  24. Sandeep,
    I not tracking Modern Dairies....

  25. Vikas,
    What u r thinking is correct....

  26. Amit,
    I think you know more then me in Apar Ind....

  27. Dear Rajeev,

    What is your view on simmonds marshalls?

    Best Regards,

  28. Dear Deepan,
    I have already recomended here recently and I gave a call at mmb as well in last bull run....looking great.I think I have discussed it here as well.
    If you will google it, then you will find it.

  29. Thanks a lot Rajeev. I had bought based on your reco almost 2 years back at around 55 levels. It had gone to 160+ levels during the boom but I didnt sell any stock. Then during the recession it went down till 20 but I still holded the same as I had faith in this company. I had sold it couple of days back at 120.40. I have made decent profit from your suggestion. Actually I thought to re-enter Simmonds again for long term. Can you suggest some levels to enter this script? I know its hard to tell any buy rate and sell rate for a person like you.

    One thing I would like to know from you is regarding gold. Do you track? If so can you please post an article on this? I want to buy gold in an around one year for my brother's wedding.

  30. Deepen,
    I don't understand why you sold Simmond Marshall recently at Rs 120 now?Anyway it hass come down and if u buy again you gain...
    That also means that after I recomended here at 60 it went on to touch 122 which doubles it in couple of months.
    Now it is retracing it and now is at 101.
    Start buying now in SIP manner.Buy 25% and buy more if it goes down more.Even you can buy 30% and then buy more if it goes down more.But I am not seeing much downside from here.
    As the earnings are coming great.Simmond should end this year at around 20-22 EPS and hence at 100 it is quoting at even less then 5 p/ I think it is a great buy......