Am currently working on why LT is a bad investment. On why the infra behemoth has lost its sheen. Hope to get results satisfactory to make a post or two. If the results of the analysis turns out the way I expect, then it is very likely that LT stock price will take a huge dip to 2006 lows within an year's time.
Stocks for the long and short term portfolio
- Thread starter jamit_05
- Start date
Larsen and Toubro.
It is a Brand Name. It is a leader of sorts. An undisputed champion. However, there are two major points of concern. Annual Reports are screaming HIGH ALERT.
Glitch #1: Negative Operating Cash Flow for the past three years.
Companies use this trick to impress a room full of journalist and keep the attention of investors (who are in a hurry to invest) riveted.
Companies post stronger earnings from preceding years by showing higher Sales Revenues. This figure can easily be manipulated. But, another important figure which is a true reflection of a companies "Earning Power" cannot be easily tampered with. And that is Cash From Operations; This is the TRUE Nett of what cash remains of the payments received and after taking care of all expenses. EBITDA.
And this figure has been negative for LnT for the past three years and burgeoning. It has become serious now.
In 2012 LT had negative Cash From Operations of around 6200 CRORE and in 2013 it was negative 3800 Crore... highest ever in the history of LnT.
Glitch #2: Negative Free Cash Flow
LT has been posting Negative Free Cash Flow for almost a decade! This is a serious weakness. FIIs do not like this at all.
All captital Ex. is deducted from Cash From Operations to find what has remained as Free cash, which can be used for giving Dividends, expansion, paying off Debt etc.
Basically companies that are aggressively expanding have negative FCF, generally seen in mid-size companies. And when combined with huge and growing Debt then it gets really scary. Its like seeing an 80 year Old gentleman riding a bike recklessly like a college kid.
One company that I was tracking had FCF problem and fell from Rs.300 to Rs.25 within two and half years. Since, then I use this COMBO of -FCF and high Debt as a big red flag.
Glitch #3: Enourmous Debt
LT had a debt of 1600 Cr in 2004. Imagine how much debt it has now...........!
A whopping FORTY SEVEN THOUSAND CRORE. This too is highest in history of LT. (In contrast, BHEL has ZERO debt and somewhat of an unpleasant FCF).
Conclusion in next post.
It is a Brand Name. It is a leader of sorts. An undisputed champion. However, there are two major points of concern. Annual Reports are screaming HIGH ALERT.
Glitch #1: Negative Operating Cash Flow for the past three years.
Companies use this trick to impress a room full of journalist and keep the attention of investors (who are in a hurry to invest) riveted.
Companies post stronger earnings from preceding years by showing higher Sales Revenues. This figure can easily be manipulated. But, another important figure which is a true reflection of a companies "Earning Power" cannot be easily tampered with. And that is Cash From Operations; This is the TRUE Nett of what cash remains of the payments received and after taking care of all expenses. EBITDA.
And this figure has been negative for LnT for the past three years and burgeoning. It has become serious now.
In 2012 LT had negative Cash From Operations of around 6200 CRORE and in 2013 it was negative 3800 Crore... highest ever in the history of LnT.
Glitch #2: Negative Free Cash Flow
LT has been posting Negative Free Cash Flow for almost a decade! This is a serious weakness. FIIs do not like this at all.
All captital Ex. is deducted from Cash From Operations to find what has remained as Free cash, which can be used for giving Dividends, expansion, paying off Debt etc.
Basically companies that are aggressively expanding have negative FCF, generally seen in mid-size companies. And when combined with huge and growing Debt then it gets really scary. Its like seeing an 80 year Old gentleman riding a bike recklessly like a college kid.
One company that I was tracking had FCF problem and fell from Rs.300 to Rs.25 within two and half years. Since, then I use this COMBO of -FCF and high Debt as a big red flag.
Glitch #3: Enourmous Debt
LT had a debt of 1600 Cr in 2004. Imagine how much debt it has now...........!
A whopping FORTY SEVEN THOUSAND CRORE. This too is highest in history of LT. (In contrast, BHEL has ZERO debt and somewhat of an unpleasant FCF).
Conclusion in next post.
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Down with LnT
Lets see what it means to have a big negative FCF figure and why it spooks big investors.
Negative FCF essentially means, the company will require that much cash pumped into its system to keep the wheels turning. In other words, Negative FCF is the money extracted from the business due to
A. LOSS in operations.
B. CapEX.
So, LT will then have to borrow Rs.12000 Crore, which was 2013's -ve FCF. This will take its debt to over 55000 Crore. Really very scary! And the downcycle in Indian Economy is far from bottoming out!
Or it could dilute equity, which it last did in 2009. This too will drastically cut down EPS hence attracting tremendous FII selling.
All in all, buying LT now will be an investment BLUNDER.
For my money's worth, I will NOT buy LT at a penny over 2006 lows of Rs.300, that too only if it gets its affairs in order.
Before I buy LT, I need to see:
I want the management to stop treating this Engineering behemoth of a company as a growth company. I want them to wake up and smell the coffee before its too late.
Lets see what it means to have a big negative FCF figure and why it spooks big investors.
Negative FCF essentially means, the company will require that much cash pumped into its system to keep the wheels turning. In other words, Negative FCF is the money extracted from the business due to
A. LOSS in operations.
B. CapEX.
So, LT will then have to borrow Rs.12000 Crore, which was 2013's -ve FCF. This will take its debt to over 55000 Crore. Really very scary! And the downcycle in Indian Economy is far from bottoming out!
Or it could dilute equity, which it last did in 2009. This too will drastically cut down EPS hence attracting tremendous FII selling.
My Conclusion
All in all, buying LT now will be an investment BLUNDER.
For my money's worth, I will NOT buy LT at a penny over 2006 lows of Rs.300, that too only if it gets its affairs in order.
Before I buy LT, I need to see:
- Get the companies to pay-up and bring the Operating Cash Flow figure being at least mildly into the positive.
- Stop your expansions for the next decade and get your FCF into the green
- Reduce The Long Term Debt Figure by at least 50%. This will show your true earning power.
- And for Christ sake!, stop paying dividends if you don't have the cash!
I want the management to stop treating this Engineering behemoth of a company as a growth company. I want them to wake up and smell the coffee before its too late.
Re: Down with LnT
Accountants are paid for a very specific job of prettying-up the Statements. Their job is to make sure that the "Popular Ratios" look good so that their company gets through majority of "Scans and Screeners".
A serious investor owes it to himself to go deeper.
For ex. it is common practice for companies to "dump invoices" near the end of F.Y. This increases sales revenue. Then the companies's media-reps go on air declaring another year of steady growth in sales. But, when times are tough, like they are now, this forced-invoicing does not readily convert into cash or payments. Hence, a responsible investor has to follow the "Real Money" and not just numbers.
Another such scam is the all-too-famous "Debt to Equity Ratio".
More on that later.
Accountants are paid for a very specific job of prettying-up the Statements. Their job is to make sure that the "Popular Ratios" look good so that their company gets through majority of "Scans and Screeners".
A serious investor owes it to himself to go deeper.
For ex. it is common practice for companies to "dump invoices" near the end of F.Y. This increases sales revenue. Then the companies's media-reps go on air declaring another year of steady growth in sales. But, when times are tough, like they are now, this forced-invoicing does not readily convert into cash or payments. Hence, a responsible investor has to follow the "Real Money" and not just numbers.
Another such scam is the all-too-famous "Debt to Equity Ratio".
More on that later.
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Investing-Research is a very interesting process.
After "Project LT" I have found motivation to go deep into the Reports of the leading Banking companies to understand their structure.
I hope, at the end of this project I will be able to, quantitatively and qualitatively, tell the difference between HDFC, ICICI, AXIS and SBI.
Much thanks for the kind words.
After "Project LT" I have found motivation to go deep into the Reports of the leading Banking companies to understand their structure.
I hope, at the end of this project I will be able to, quantitatively and qualitatively, tell the difference between HDFC, ICICI, AXIS and SBI.
Much thanks for the kind words.
If I have given an impression to have this knowledge, then consider this as an attempt to put it in the right perspective. That was a rhetoric and not a speculative suggestion. But, yes, if the Index takes a massive fall, then surely LT is is highly likely to be one of the biggest losers. So, if you are invested then rethink.
LT does not look good fundamentally. In other words, price is >> Value.
The only reason why the stock markets exists is because no one person can consistently tell when this price-value equation will balance or how it will balance. Let me elaborate.
Problem #1: Time Frame.
No one knows in how much time it will take for the equation to balance. It may even take a decade or 10 days. No one knows.
Problem #2: The Value may increase:
If the management is able to pull it off, they'd improve the fundamentals hence improving Value. And in the meantime they manage to keep the share price stable. Difficult but doable.
LT does not look good fundamentally. In other words, price is >> Value.
The only reason why the stock markets exists is because no one person can consistently tell when this price-value equation will balance or how it will balance. Let me elaborate.
Problem #1: Time Frame.
No one knows in how much time it will take for the equation to balance. It may even take a decade or 10 days. No one knows.
Problem #2: The Value may increase:
If the management is able to pull it off, they'd improve the fundamentals hence improving Value. And in the meantime they manage to keep the share price stable. Difficult but doable.
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