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Friday, November 21, 2014


Operating Cash Flow: Better Than Net Income?

Courtesy : Investopedia

Operating Cash Flow is the lifeblood of a company and the most important barometer that investors have. Although many investors gravitate toward net income, operating cash flow is a better metric of a company's financial health for two main reasons. First, cash flow is harder to manipulate under GAAP than net income (although it can be done to a certain degree). Second, "cash is king" and a company that does not generate cash over the long term is on its deathbed. 

But operating cash flow doesn't mean EBITDA  (earnings before interest taxes depreciation and amortization). While EBITDA is sometimes called "cash flow", it is really earnings before the effects of financing and capital investment decisions. It does not capture the changes in working Capital (inventories, receivables, etc.). The real operating cash flow is the number derived in the statement of cash flows.
Overview of the Statement of Cash Flows
The statement of cash flows for non-financial companies consists of three main parts:

  • Operating flows - The net cash generated from operations (net income and changes in working capital).
  • Investing flows - The net result of capital expenditures, investments, acquisitions, etc.
  • Financing flows - The net result of raising cash to fund the other flows or repaying debt.
By taking net income and making adjustments to reflect changes in the working capital accounts on the balance sheet (receivables, payables, inventories) and other current accounts, the operating cash flow section shows how cash was generated during the period. It is this translation process from accrual accounting   to cash accounting that makes the operating cash flow statement so important.
Accrual Accounting vs. Cash Flows
The key differences between accrual accounting and real cash flow are demonstrated by the concept of the cash cycle. A company's cash cycle is the process that converts sales (based upon accrual accounting) into cash as follows:

  • Cash is used to make inventory.
  • Inventory is sold and converted into accounts receivables (because customers are given 30 days to pay).
  • Cash is received when the customer pays (which also reduces receivables).
There are many ways that cash from legitimate sales can get trapped on the balance sheet. The two most common are for customers to delay payment (resulting in a build up of receivables) and for inventory levels to rise because the product is not selling or is being returned. 
 For example, a company may legitimately record a $1 million sale but, because that sale allowed the customer to pay within 30 days, the $1 million in sales does not mean the company made $1 million cash. If the payment date occurs after the close of the end of the quarter, accrued earnings will be greater than operating cash flow because the $1 million is still in accounts receivable. 
Harder to Fudge Operating Cash Flows 

Not only can accrual accounting give a rather provisional report of a company's profitability, but under GAAP it allows management a range of choices to record transactions. While this flexibility is necessary, it also allows for earnings manipulation. Because managers will generally book business in a way that will help them earn their bonus, it is usually safe to assume that the income statement will overstate profits.

An example of income manipulation is called "stuffing the channel" To increase their sales, a company can provide retailers with incentives such as extended terms or a promise to take back the inventory if it is not sold. Inventories will then move into the distribution channel and sales will be booked. Accrued earnings will increase, but cash may actually never be received, because the inventory may be returned by the customer. While this may increase sales in one quarter, it is a short-term exaggeration and ultimately "steals" sales from the following periods (as inventories are sent back). (Note: While liberal return policies, such as consignment sales, are not allowed to be recorded as sales, companies have been known to do so quite frequently during a market bubble.)
The operating cash flow statement will catch these gimmicks. When operating cash flow is less than net income, there is something wrong with the cash cycle. In extreme cases, a company could have consecutive quarters of negative operating cash flow and, in accordance with GAAP, legitimately report positive EPS. In this situation, investors should determine the source of the cash hemorrhage (inventories, receivables, etc.) and whether this situation is a short-term issue or long-term problem.
Cash Exaggerations
While the operating cash flow statement is more difficult to manipulate, there are ways for companies to temporarily boost cash flows. Some of the more common techniques include: delaying payment to suppliers (extending payables); selling securities; and reversing charges made in prior quarters (such as restructuring reserves).

Some view the selling of receivables for cash - usually at a discount - as a way for companies to manipulate cash flows. In some cases, this action may be a cash flow manipulation; but I think it is also a legitimate financing strategy. The challenge is being able to determine management's intent.
Cash Is King
A company can only live by EPS alone for a limited time. Eventually, it will need cash to pay the piper, suppliers and, most importantly, the bankers. There are many examples of once-respected companies who went bankrupt because they could not generate enough cash. Strangely, despite all this evidence, investors are consistently hypnotized by EPS and market momentum and ignore the warning signs.

The Bottom Line
Investors can avoid a lot of bad investments if they analyze a company's operating cash flow. It's not hard to do, but you'll need to do it, because the talking heads and analysts are all too often focused on EPS.

Thursday, November 20, 2014


Mold-Tek Packaging recommended as a BUY @ Rs.78 about three months back .Currently this stock is trading around Rs.225 . Now company informed BSE that , it is planning to start three new manufacturing  facilities with IML Technology  , one in UAE and two plants in India. In addition to this , company expanding its existing manufacturing facilities.

Link to BSE filing HERE

Recommendation Link HERE

Still Recommending to HOLD this stock.

Wednesday, November 19, 2014


  In my initial posting about this company , I mentioned the reason for non trading of this stock in BSE.In an interview published in ' Business Line ' Today , MD of  the company  clarified that they are initiating steps to revoke suspension of  trading from BSE and expecting the same in near future  .Company also decided to pre-pay  the bank term loan  to achieve debt free  status in near future .He also outlined company's various  plans to be implemented going forward .

To read full text of this article click HERE


Yesterday I received lot of queries about SKM Egg Products , seeking the reasons for lower circuit in this stock. To avoid repeating replies , I believe it is better to reply through a general posting  below ...

In my option , there is mainly two reasons for Yesterday’s lower circuit

#    An inevitable correction after a sharp run up. During the past few weeks SKM appreciated substantially and it reached a stage were a correction and consolidation is must for its further movement. Whatever be the quality of a company ,no stock will turn as multi bagger in one stretch if the movement is genuine and not manipulated. ( For example ,before reaching Rs.300 level from Rs.12  , Arrow coated closed in lower circuits at  multiple times) . These are price points where  weak hands and short term players are exiting and new investors getting chances to enter in. 

#      I know , you may raise your eyebrows for a posting like this and ask why this separate posting is necessary  if I feel there is nothing special in this correction.Yes , there is something special .Some section of investors are speculating on a possible negative impact on company due to Japanese recession  and a bird flue case reported in Netherlands . The recession in Japan is not a new news and they are reporting negative growth in last six months . But SKM reported its best ever business during this period which indicating least impact on its business.Management’s efforts to expand business to various countries will reduce dependency of any one or two countries and help to de-risk in the case of geographic concentration. The bird flue case reported from Netherland seems as an isolated one and I  believe this will not negatively affect SKM in any way but may be some positive impact . Netherland is the largest exporter of  poultry products to global markets. Any restriction of export of poultry products from Netherlands may  result in sharp spike in product prices in global markets and this may even give windfall gains for companies exporting products  from  unaffected countries.

This is my few words in the current situation.As retail investors , we are always in search of ‘multi baggers’ and many multi baggers  slipped from our hands in the past only because of our tendency to make some quick bucks by  trading with our holdings. To avoid such temptations one should learn more and more about the company in which we have investment and try to generate strong conviction rather than looking into trading screen each and every minute.Some readers even requested to indicate ‘ where this correction will end ?’ . I don’t think anyone can give an accurate answer for this and it is purely depends on supply –demand equations. But I strongly believe , this is one stock  one can hold with a long term view without bothering much about corrections which is healthy and unavoidable in any market.

Disc: Since I am holding the shares of SKM , my views may be biased . Suggesting to take investment decisions only after own due diligence .

Tuesday, November 18, 2014


Bharat Rasayan recommended as a  BUY @ Rs.80/-.  Today stock hits its life time high  and closed around Rs.915 .Earlier suggested to sell 20 % of your original holdings around Rs.750 .Those not interested to take higher level of risk may sell further 30 % at current level.

Recommendation Link HERE

Saturday, November 15, 2014




Financial muscle of many companies badly affected due to prolonged recession of our economy in last few years. A cut in advertisement cost was the first initiative taken by many companies to combat with this situation. Because of this reason , performance of many media companies were muted in recent past. At the time of some revival in offing let us look into one media company which not only survived but continuously improved its business and surprisingly with improvement in profit margins too in past for years.

HINDUSTAN MEDIA VENTURE ( HMVL)  – is the company publishing famous Hindi daily “HINDUSTAN” which is currently standing at the second position(all India basis)  in all Hindi dailies,  next to Dainik Jagran ( As per IRS Survey 2013) and the fastest growing Hindi Daily .Company also publishing two monthlies – Kadambini (Cultural and Literacy magazine)  and Nandan (exclusively for children) and running Hindi news website LiveHindustan.com. Since the business is simple and easy to understand, I am not explaining much about that side. At present “Hindustan” is publishing from 19 locations and at the top position in Bihar and Jharkand . As in the case of any daily , company’s income is coming through subscription charges and advertisement income. Almost 2/3 part of income is coming from advertisement and the rest from subscription charges. In developed countries print media industry is showing negative growth trend due to increasing popularity of  Internet and mobile. But in India , print media is growing at a healthy pace and considering the huge population of currently illiterate and non techno savvy people, growth is expected to continue for many more years. Government’s sincere efforts for illiteracy eradication programmes will positively impact the growth of print media in India in coming years.In order to capitalize any shift of trend in future ,company already entered in web based business through its news website LiveHindustan.com.

Among the many listed media companies , Hindustan Media Venture catching our attention mainly due to the strength of its balance sheet and the resilience it showing during tough business environment. For the last four years company reported steady growth by all parameters and such a growth during the most tough  business environment is really commendable. During this period HMVL ‘s bottom line expanded from Rs.53 Cr to Rs.111 Cr ( More Details in the below Table)


                                       CLICK ON THE IMAGE FOR A BETTER VIEW 

Promoters are holding about 75 % stake in HMVL and another 13 % by mutual funds and big investors .Company’s balance sheet is strong with negligible debt and robust operating cash flow . In addition to this, about Rs.400 Cr available as Cash or cash equivalents with the company  . Company can use this huge amount for growth  either through organic or  inorganic expansion or reward its stake holders through share buy back ..etc in future . Considering the strong growth in circulation, possibility of increase in advertisement charges  going forward , stability in raw material cost and above all a very strong balance sheet ,HMVL remaining as one of the preferred pick from media space and I believe  there is lot of value in it and suitable even for law risk investors who are ready to show patience for steady growth.

Hindustan Media Venture ( HMVL) is listed in both exchanges and trading around Rs.187.

Link to Company website HERE

Link to Latest  Annual Report HERE

Disc: It is safe to assume that I have vested interest in HMVL 

Friday, November 14, 2014


This stock recommended around Rs.62 and currently trading around Rs.220 . Today company informed BSE that they are planning for a plant shut down  for a period of about 75 days .( Read Details HERE) . This may impact company's near term growth . Those without high risk appetite may book profit at current price and re-entry may consider once some clarity emerges on upcoming de-listing norms.

Recommendation Link HERE


This is one stock recommended  once @ Rs.35 and again  @Rs.40 ( Link HERE) .Yesterday Company reported very good numbers for its last quarter  ( Company's accounting year ending in September quarter) .For the full year ,company reported an EPS of Rs.8.86 against Rs.4.73 in the same period of last year.

Link to Result HERE

Company also declared a dividend of 15 %

Currently stock is in upper circuit @ Rs.79 , Still recommending to HOLD it

Tuesday, November 11, 2014



V2 Retail Ltd   recommended @ Rs.14 , is currently trading around Rs.35..Today , post market hours ,company reported very good numbers for the September quarter as follows .

                                                  QUARTER ENDED SEPTEMBER 2014

                                             HALF YEAR ENDED SEPTEMBER 2014

Considering the seasonality of business due to festival season ,company may report even better numbers in December quarter.Still recommending to Hold it for long term.

Link to Recommendation HERE


 TCPL Packaging   recommended @ Rs.55, is currently trading around Rs.366.Company reported very good numbers for September quarter as follows:

Recommendation Link HERE


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