Wednesday, May 31, 2017

Should we Hold Rural Electrification Shares after 10% Price Fall?

REC Company Logo

Dear Friend!

Rural Electrification Corporation (REC) Ltd. is a wonderful company.

I too own 564 shares as on date at an average holding cost of Rs.125.07.

Last week, while I was on vacation in Goa, I received two sms alerts informing me that the scrip has corrected by 5.58 and 5.08%, respectively.

Many people might have been spooked by such alerts, but not value investors. I did not panic at all, for I kew very well that REC is a wonderful company and nothing could go fundamentally wrong with it so suddenly.

After returning from the holiday I investigated the cause for the steep and sudden fall.
I was relieved to fund out that the cause for the market panic was a fairly large provision for contingency of Rs.616.19 crores (most likely towards bad debts) and consequent dip in the quarterly profit after tax to the extent of 24.80% compared to the previous quarter.

Tighter regulations and close monitoring of ‘Non Performing Assets (NPAs)’ from the last couple of years is forcing all financial institutions to come clean on their NPAs. Banks especially public sector banks have been making huge provisions for many quarters in the past. REC and PFC also have been making such provisions, though to a lesser extent.

Please see the following table for the provisions made in the last three quarters:

Table showing profits and profitability of REC for last 3 quarteres

You can see for yourself that though fairly large, this provision is certainly not alarming, nor is the dip in the profits. REC continues to maintain very strong PBT and PAT margins of over 32% and 22% respectively.

In conclusion let me reiterate that the fundamentals of REC are intact, that there is no need to panic, please do hold the shares you already have and continue to buy as the scrip is available at discounted prices with a price to earnings (PE) ratio of 6.02 and a price to book value ratio of 0.65.

Thank you,

With Best Regards,


Tuesday, May 30, 2017

What is the Meaning of Small Cap Stock?

Small Tree and Small Cap Tag

Small-Cap stocks means those stocks with a small market capitalisation. Market capitalisation means the market value of all shares ((outstanding) of a company. 

There is no single, precise definition of small cap. It varies from country to country as well as between various brokerages within the same country.

For example, as per Investopedia a company that has a market cap of US$ 300 million to 2.00 billion (approximately Rs.1800 – 12000 Crores).  However, the Economic Times, the popular financial newspaper in India, defines small cap as a company having market cap of less than Rs.2000 crores.

Let us examine how the Bombay Stock Exchange (BSE) deals with the subject. BSE Small Cap Index comprises of small cap companies listed on the BSE. The small cap companies constituting the index and occupying the top five ranking and weight are as follows with market cap of quite different sizes:

Table showing top five BSE Small Cap Stocks

In conclusion small cap stocks means those stocks with small market capitalization or market cap. There is no precise definition for what actually constitutes small, though.

Saturday, May 27, 2017

Can we Buy a Stock Because it is Going Up?

A Stupid Rejoicing Business Man Drawing Graph

"For some reason, people take their cues from price action rather than from values. What doesn't work is when you start doing things that you don't understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it's going up."

Warren Buffett

Thursday, May 25, 2017

How to Choose the Stockbroker?

Stockbroker and Lady Investor

Actual Question:

Which is better for a long-term investment, Geojit or Zerodha?


Dear Friend!

You have raised a very important question which needs serious consideration. The question I presume revolves around the brokerage fees charged by the stock broker firms. I am sticking to cash delivery here, since I do not indulge in intra-day-trading and also because when you said long-term it should mean for taking delivery and holding the stocks for long.

I have an online trading account with Kotak Securities. The declared brokerage charges for cash delivery is 0.5%. But many times after seeing the big difference between the total value of securities I had purchased and the amount debited from my account, I had wondered whether I am being charged 5% and not 0.5%!

To be honest with you, so far I have not attempted to investigate the matter of brokerage charged by Kotak Securities thoroughly and completely. I strongly believe that they will charge only 0.50% that they have shown on their website.

Coming back your specific question of whether Geojit or Zerodha is better, presently Zerodha does not charge any fees on cash delivery. I believe that Geojit charges 0.30% for delivery based trading. Therefore obviously Zerodha is better, for every penny saved is two pennies earned. 

If you already have a trading account with any stockbroker, it is difficult to have another trading account as you must give a power of attorney (POA) to the stockbroker and giving two POAs creates conflicts. Zerodha had admitted to me that when two trading accounts are involved, I could only buy through Zerodha and any sale of securities can be effected only through my first broker, Kotak Securities.

An online trading account is a long term relationship and should not be based purely on freebies

Further and most importantly, a 0.50% or 0.30% or 0% is not going to have any significant impact on the long-term investments. What is important for making the important decision who is:

Size, Sponsor:
During great market crashes, many of the customers of stockbrokers, especially those indulging in margin trading become bankrupt and default. As a result, small brokerage firms’ financials get impacted severely and sometimes they also default. Therefore large firms sponsored by equally large organisations are preferable.

For example, Kotak Securities is sponsored by Kotak Mahindra Bank, might be in a position to honor its financial commitments.

Companies that have been in existence for a very, very long time are preferable.


Their long existence gives an indication that they had successfully weathered many severe financial storms in the past and may reasonably be expected to be resilient in the future.

Zerodha being a recent entrant does not have a long vintage.

Financial Means:
The stockbroker must have a strong, stable and reliable financial strength. You are entrusting your life’s savings with your stockbroker. There are two components of financial assets you are entrusting the broker with:

Hard cash you deposit in advance to buy stocks and lying with the broker. This is relatively a small sum though.

The value of stocks, which will surely amount millions in the case of serious investors over long periods of time.

In case the broker becomes bankrupt, your life’s savings are under serious risk.

Reliable Service:
  • The software platform and other services should be reliable.
  • The software should have minimum downtime.
  • The broker  should provide reliable support through telephone, email and persoanl visits as and when required.

In conclusion, selecting a broker is not simply based on brokerage fees charged but a serious matter as the fate your hard earned savings and investments are in the hand of your stockbroker.
Thank you,
With Best Regards

Wednesday, May 24, 2017

Sunday, May 21, 2017

Stock Market is Only to See If Anybody is Acting Foolish

Fool with Stock Market Screen Background

"The market is there only as a reference point to see if anybody is offering to do anything foolish. When we invest in stocks, we invest in businesses."
Warren Buffett

Saturday, May 20, 2017

Why the Net Assets Value (NAV) of Mutual Fund Units Falls After Dividend?

Actual Question:

Why does MF NAV drop after paying dividend?
I assume dividend paid by MF is the dividend paid by stock-companies.


Dear Friend!

Your question has two parts as follows:
  1. Why the NAV drops after paying Dividend?
  2. Is the dividend paid by the mutual fund is the same as paid by the companies in whose stocks the mutual fund invested the money.

Let's examine them one by one.

Why NAV of Mutual Funds Falls after paying Dividends:

Till the time the dividend is paid the value of the dividend gets accumulated and reflected in the NAV and once the dividend is paid out, naturally the NAV comes down. Please see the example below:

Table showing the decrease in value of NAV after dividend

In the case of stocks also the same things happen. The price of the share falls after the record date fixed for dividends. Then people popularly term the phenomenon as the stock has become ex-dividend.

Is the dividend paid by the mutual fund is the same as paid by the companies?

Under normal circumstance this should be the case, which is the prudent, conservative and correct policy. However, it is not uncommon for mutual funds to pay more dividends than actually earned, by dipping into the capital sum invested. This is obviously to please/ impress the investors that the fund had earned and paid handsome dividend, when it is not actually the case. Please see the following example:

table showing how dividend paid from capital by mutual funds

In conclusion, when dividend is paid, cash accompanied by value is lost and therefore the NAV of the mutual fund unit drops. Many a time funds pay dividends out of capital which is very objectionable practice.

Thank you,

With Best Regards