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1Niteen S Dharmawat - http://dharmawat.blogspot.com/
Decoding Investment in Equity Market
Significance of Operating Cash Flow (CFO/OCF)
Niteen S Dharmawat
Blog: http://dharmawat.blogspot.com/
Twitter: @niteen_india
Slideshare: www.slideshare.net/ndharmawat/
2Niteen S Dharmawat - http://dharmawat.blogspot.com/
- Very quickly understand: What’s OCF and why it is
important
- Exception and other parameters to look for
- Case studies
What we are covering?
3Niteen S Dharmawat - http://dharmawat.blogspot.com/
Cash flow concept
4Niteen S Dharmawat - http://dharmawat.blogspot.com/
A Scooter Manufacturer… A quick example
Cash
Credit
Cash recorded in OCF
P&LSales, Profits recognized
Cash Received
Yes Bad debts
No
Warning sign: Check Receivables…
5Niteen S Dharmawat - http://dharmawat.blogspot.com/
Exceptions
- Companies that sells more and more cash through lending
- e.g.: Banks and Financial Institutions
Other helpful parameters along with OCF
- Interest paid v/s net profit
(a ratio of more than 0.4/0.5 is risk)
- Equity dilution?
- Promoters unpledged holding in the company
- Trend in receivables
- Investing and financial cash flows
Exceptions
7Niteen S Dharmawat - http://dharmawat.blogspot.com/
Case 1: A vertically integrated multinational medical
technology Group
From Rs140 to now Rs25
8Niteen S Dharmawat - http://dharmawat.blogspot.com/
Case 2: Education and training company based in Chennai
‘Darling’ of punters Several stories around the business model FII holding close to 28% (now less than 1.4%) Some prominent names on the board could also
not save it CBI caught one of the directors of the company
in a bribery case
Parameter Mar-11 Mar-10 Mar-09 Mar-08
Net Profit 67.64 45.45 22.08 13.8
CFO 16.01 25.13 -8.98 13.31
Signal
In INR Crs
Poor shareholding
pattern
From Rs350 to now Rs23
9Niteen S Dharmawat - http://dharmawat.blogspot.com/
Case 3: a leader in the Security Surveillance domain, the first
company of its kind to be
“Big names” leaving dangerously Promoters holding 21% (unpledged 8.4%) Big stories =>
poor cash flow & receivables numbers
In INR Crs
Parameter March-08 March-09 March-10 March-11 March-12 March-13 March-14 March-15
Net Profit 1.45 19.36 15.03 44.46 16.84 30.32 41.94 50.59
CFO -9.02 -40.41 0.46 -114.28 -15.53 -42.34 2.87 -51.66
Signal
Parameter March-12 March-13 March-14 March-15
Share Capital 12.7 17 17.6 20.2
Borrowings 160.37 318.3 436.82 555.7
Equity dilution +
Borrowings
From 185 to 45 in no time
10Niteen S Dharmawat - http://dharmawat.blogspot.com/
Case 4: A ‘fast growing’ Indian Pharmaceutical company
A recent casualty Analysts/research house giving aggressive
targets Several stories around the company Promoters pledged the shares
In INR Crs
Parameter Jun-13 Jun-12 Jun-11 Jun-10 Jun-09 Jun-08
Net profit 53.71 42.77 33.18 22.33 18.63 27.19
CFO -70.44 -53.43 -35.84 -28.11 -50.78 -40.46
Signal
Poor shareholding
pattern
From 75 to 11 in no time
11Niteen S Dharmawat - http://dharmawat.blogspot.com/
Case 5: Unified Supply Chain & Infrastructure Group
From Rs140 to now Rs30
Poor shareholding
pattern
12Niteen S Dharmawat - http://dharmawat.blogspot.com/
Case 6: the largest commercial real estate developers in India
Parameter Mar-08 Mar-07 Mar-06 Mar-05
Net Profit 7812.03 1933.65 411.03 86.5
CFO -1780.9 -6563.5 -873 575.4
Signal
A high profile developer with expansion in multi-sectors Brought India’s largest IPO (June 2007) At IPO price Rs525 (market cap 96K Crore) Touched Rs1200 (market cap 2Lac Crore) Jan 2008 Today Rs157 (market cap 28K Crore) Some “smart investors” searching value again
From peak price Rs1200 to below Rs160
13Niteen S Dharmawat - http://dharmawat.blogspot.com/
Case 7: India's second largest real estate investment company
Parameter Mar-10 Mar-09 Mar-08 Mar-07 Mar-06 Mar-05
Net Profit 675.05 1196.43 1661.34 1306.14 84.07 33.36
CFO -1339.5 -5.39 -975.03 -2074.5 -224.67 96.89
Signal
Another high profile developer Touched Rs500 (market cap 1Lac Crore) Jan 2008 Today Rs8 (market cap 4K Crore) 98% loss of wealth from peak
From Rs500 to now Rs8
Thank you
Email: [email protected]
Blog: http://dharmawat.blogspot.com/
Facebook: https://www.facebook.com/dharmawat
Twitter: @niteen_india
Slideshare: www.slideshare.net/ndharmawat/
Mobile: 9850571857
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IMPORTANT DISCLAIMER: Investment in equity shares has its own risks. Sincere efforts have been made to present the right perspective. This presentation/material/email/blog write-up does not give any buy/sell/hold recommendation directly or indirectly. The details should not be concluded as a recommendation for buy/sell/hold. It does not give any price targets. This is with the sole objective of taking feedback from the readers/viewers. The information contained herein is based on my study and upon sources that I consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and not intended for any investment decisions. I am not responsible for any profit or loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the discussion thread above/anywhere in communication. It is safe to assume that I, my family, friends have vested interest in any of the stock ideas discussed here and we reserve the right to take an opposite position to what we have today. Please do your due diligence and take the help of a qualified investment adviser and a registered equity analyst before you make any investment decisions. I am neither of these.
16Blog: http://dharmawat.blogspot.com/
About the presenter:
Niteen is an MBA and cleared CFA Level 2, CFA Institute USA. A firm believer in long-term financial planning, and a 20 years veteran of the stock market. He also conducts free investor awareness sessions.
He likes reading books/magazines/news papers on the topics as diverse as general management, technology, investment, fiction, marketing and the Gita.
He is a person who believes in "Everything else can stop but learning".
17Niteen S Dharmawat - http://dharmawat.blogspot.com/
- Money a company brings in from regular business
activities
- It is a part of cash flow statements
- It is more important than Net Income because Cash
flow is harder to manipulate and Cash is the King
- If company is selling at credit then can still show
net income but can’t show positive Operating Cash
Flow as the Cash is yet to be received.
- Ideal “CFO:Net Income” ratio -> Close to 1
Importance of CFO
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How to get CFO from Net Income
No calculation. Directly available…
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Cash From Operations (CFO/OCF)
