May be I have written so much about stocks which did not do well, asset classes (like Gold) which are certain to destroy investor wealth and about other negative biases about investing that I have started receiving mails like this:
Sir – I follow your blog regularly but over the past few weeks you have written that gold should not be in your holding, power and infrastructure stocks have high levels of debt and that we should stay away from E-commerce companies in India. Can you tell any stocks we can buy?
– Ganpathi
For a change I thought I will write about picking value stocks and talk about what I consider to be one of my best stock purchase decision. We recommended this stock in February 2014. Today I am making that recommendation public – CLICK HERE TO ACCESS OUR STOCK OF THE MONTH FOR FEBRUARY 2014, with full consent of the analyst who worked on it.
Investors who purchased this stock back then will understand why we said this (and I quote from the report):
Strong Dividend Stock . . . . . . . . “In future, once the Company becomes debt free, we believe that dividends will increase substantially or that the company will accumulate ample cash piles to invest in new ventures”. . . . . .
The Company – Noida Toll Bridge Company Limited. This had value written all over it. Perhaps because I live in Delhi and use this bridge often that I was absolutely convinced that this bridge will be a revenue generating machine for many years to come.
Why I Will Never Sell this Stock
For those who notice our track record page will see that we closed our call on Noida Toll Bridge on the 10th of November 2014. after it generated a 75% capital appreciation in 10 months. In addition the stock paid a dividend of Rs. 2.50 during the year. That takes the absolute return to over 87%. Given that on my website, subscribers want to see returns in strict percentage terms, it was only right to close this call.
That said, think about it, why will I ever sell this stock? I purchased 10,000 shares for approximately – Rs. 2,10,000/- I have so far received a tax free dividend of Rs. 25,000/-. That is a dividend yield of 12%. Where else can I get tax free 12% p.a.? Further, this is hopefully not the end of story. I am convinced that the company will pay higher dividends going forward, taking my dividend yield even higher. of course this is if I do not factor in a fixed rate of appreciation on my capital.
Assuming that the company increases its dividend payouts by 0.50 ps per year. I will cover my Rs. 20.85 initial investment in approximately 4.5 years as tax free dividends. Whatever price the share is trading at 4-5 years from now will just be a bonus for me. Personally, even at the current dividend yield of 12%, I am happy to hold on to this forever.
About Picking Value Stocks: What Was Special About this Stock Back Then (and Indeed Now)
Noida toll bridge is a road construction company with one flagship project generating almost its entire revenue – the Delhi Noida Toll Bridge (DND Flyway). It commenced operations in the year 2001. 13 years on and the amount of traffic on the bridge has grown many times. This is despite the Delhi Metro and alternate routes coming up during this time. I guess India is just getting more and more crowded. The number of cars are increasing and the trend is likely to continue in future. All roads are good roads. I would actually pay 3 times over the current toll to use a road which helps me cut the Delhi traffic in the evening. Further, the steel and concrete bridge is in top shape and fit to generate higher toll revenues going forward.
Factoring-in toll pilfering, alternate routes and everything else that can go wrong it still seemed like a value stock. It sure seems like one today as well.
Second and the more important point, a first look at the financial statements of the company tells a story. Look at how the company has reduced its debt over the past 10 years:
| Noida Toll Bridge Company (amount in Rs. Crore) | |||||
| Year | 2005 | 2006 | 2007 | 2008 | 2009 |
| Debt | 358.52 | 323.52 | 185.99 | 217.83 | 198.11 |
| Year | 2010 | 2011 | 2012 | 2013 | 2014 |
| Debt | 169.00 | 107.25 | 75.37 | 23.15 | 19.69 |
What do you expect the company to do with its toll collections once it pays of its entire debt which it incurred in constructing the bridge? May be pay higher dividends or build another bridge? I am happy with the higher dividends option which is why I purchased it in the first place. As for the second, I am convinced that roads and highways have an ever growing market in India.Given the amount of pollution in Delhi I wish this was not the case !
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but if you check payout ratio: its 70% while in your earlier articles u said, if payout ratio is > 60% then that is nt right as company is giving much its profits and have nothing in reserve to fight lean time?? Please explain..!!
Yes. I still maintain that. Ideally, companies which have a DPR of over 55-60% should be examined on :
(1) Do they have healthy reserves to withstand slowdowns;
(2) Their need for cash in future.
The best companies are the ones which have a high dividend yield and at the same time have managed to maintain a low DPR.But again, companies which sit on huge cash reserves should in the absence of any capital expenditure plans certainly pay out higher and higher dividends. It is for this reason that I believe Noida Toll will keep increasing its dividend once it becomes fully debt free. The company has sufficient reserves + no immediate capital expenditure plans. In such a situation even a 80-100% dividend payout will not be suspect.
Also ROE is very poor for past 3 years.. <10% which is not a good sign. I don't get the point of you telling your buying point value and no of shares u bought while the financial are not that attractive..just one positive that it is getting debt free but that doesn't mean it is managed properly..poor ROE and ROCE and decreasing promoter holding YOY basis shows this.
I love the way u explain things but Please don't misguide by saying things which make it sound like that it is the dream Stock (also u have vested interest because of your investment)
Happy that you have been reading regularly.
Now, why is the ROE Poor?
For a minute just think about this …..what will the ROE be if the company pays its entire reserves & Surplus to shareholders as dividend.In that case the ROE will jump to 22% (PAT/Net Worth * 100). So if the company wants to improve its ROE and ROCE there is an easy way – Increase dividend payouts (i.e. reduce reserves).
Secondly, if the company pays of its entire debt, profitability will increase further since finance costs will disappear. In that case ROE will increase to 30%. As I always say- never judge a company based on the strength of a single ratio, see this post – http://www.sanasecurities.com/ratio-analysis-financial-statements.
Yes I hold shares in the company. I have disclosed that adequately. Base your decision to buy/sell independently.