Analyzing Sectors And Industries

Basic Economy Stocks, Diversified Businesses and Spinoffs


This section begins with a discussion on evaluating low P/E stocks that are closely related to the basic economy, as well as a note on the specific characteristics of stocks from industries such as agriculture, auto, auto ancillary, fertilizers, seeds, cement, power, hotels, infrastructure, capital goods, and real estate. It concludes with advice on how to evaluate diverse businesses and comprehend spin-offs.


Coffee, according to the author, is a pure commodity play, with one exception. If the company begins to brand its products and create value products. For eg:- CCL Products India ltd. 


They are expanding into the branded business. They are making freeze-dried, spray-dried, and pre-mixed products, among others. Similarly to the textile industry, obtaining a high valuation is difficult unless the company enters the branded business.


The author advises against investing in companies whose sales are reliant on others. Munjal Showa, for example (a leader in the manufacture of shock absorbers). The power sector is highly regulated, it is difficult for the company to generate high returns. As a result, if you want to play the power sector theme, you should bet on equipment manufacturers.


Analyzing Companies with Cash on Balance Sheet: 

The following section examines companies with cash on balance sheets and the key features of their analysis. The author discusses why the market discounts cash - Because of doubts about the existence of cash. The suspicion has increased after the Satyam Computers debacle where the company went bust after showing cash of more than ₹5361 Cr out of which ₹5040 Cr was fictitious. It saves one during a bear market but drags one down during a bull market.


Analyzing Banks and Non Banking Finance Companies (NBFCs) 

This section goes into detail about analyzing banks and NBFCs and what to look for when evaluating these businesses. 


  • Investors of financial stocks should focus on companies who are good with their risk management than the ones who are only focused on growing their business through loan book and network expansion. 
  • Investors should focus on asset quality, the NPA ratio remains the lead indicator of the asset book. The gross NPA tells investors about the overall level of negligence, the net NPA tells the amount of bad loans waiting to be written off from the books of accounts.
  • Investors should also look at CASA ratio as it indicates the extent of low cost deposits.
  • One should buy banks that dilute equity at a higher price to book value. 
  • While analyzing NBFCs one should evaluate Net interest margin, Return on Asset, Return on Equity, Price to book value, and the P/E ratio giving more stress on ROE as it is the truth. 

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