How to screen stocks: updated

Twitter - @niteen_india
Aug 2017
1
How to screen stocks
(Basic work to avoid TIPs -> PITs)
A presentation by: Niteen S Dharmawat
Be a wise
investor and
not a day
trader…

Twitter - @niteen_india 2
IMPORTANT DISCLAIMER: This presentation is prepared solely to provide
information about this company/ies and take feedback from the
readers/participants. This presentation is NOT meant for equity investment. It
should NOT be construed as an investment advice for buy/sell/hold or
anyother form of recommendation. This presentation does not recommend
any price or price target for the company discussed. Investment in equity
shares has its own risks. 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
companies/stocks discussed/presented here. Please do your due diligence
and take the help of a qualified advisor before you take any financial decision.

Agenda
3
 We get tips (or interested to get tips)
 Quick screening to avoid major mistakes
 What are the parameters that you must see
 How to generate your owns stock list
 Delayed gratification: Most important quality

Timing the market
4
Misconceptions
1) Bear markets are bad
2) Bull markets are all rosy

The Wealth Creation Formula
5
Right Focus – Right results

Tips: after reading Google news/Forums
6
TIPs take you to PITs
Someone I know
bought few lac shares,
despite my warning,
believing Google news
with a target price of
100 in next few years.

Tips: after analyst reco/FII holding
7
TIPs take you to PITs
• Strong FII holding
• Increased holding
by 12% in 5 years
(equity dilution)
Rs 244
on Jan 4 2008*
As on Dec 2007
• FII holding 25.49%
• MFs holding 4.3%
Rs 221
on Feb 17 2012*
As on Dec 2012
• FII holding 37.34%
• MFs holding 0.07%

Which stock would you buy for 5 years?
8
Stock B
Rs 9785
Stock A
Rs 27

Price v/s Value?
9
Penny stock mentality:
How much it will fall from here?
Do you know the name of this stock and current price?
Bad Hint: Service industry, tyres and fuel important for this. 
Rs 27 in Feb2012
Rs 7 in Aug 2012
Ever high Rs 290 in Dec 2007
Rs 9785 in Feb2012 Rs 11000 in Aug 2012
Expensive stock mentality:
How much it can go up from here?
Do you know the name of this stock?
Hint: Tyres manufacturer and crude is a critical item. 
Ever high Rs 74000 in Jun 2017
Stock B
Stock A

Before you put in money…
10
 Make an Excel sheet (Detailed PPT even better)
 Write the name of the script, buy price
 Write very briefly the reasons for investment: it could be your
research finding or someone recommended you to buy
 Also, your expectations from the investment

Classify your portfolio… My way… You may evolve yours
11
 Portfolio A: 70-90% funds
 High conviction
 Long term: 3-5 Years
 Not more than 5-10 stocks
 Portfolio B: 10-20% funds
 Still unsure about Long term
 Want few more quarters, ratify investment thesis
 Medium term: 1-3 years, move to A else drop
 Portfolio C: 5-10%
 Tips /Respect quota
 Time duration: 1min-1year
 If develops conviction based on research move to B

What are the free resources for quick screening
12
 bseindia.com / nseindia.com
 Screener.in, Moneyworks4me.com, stockflare.com,
capitalcube.com… and many more… including Apps
 Brokers websites for financial data
 Annual reports (most important)

Annual Report
13

Key sections
14
Annual Reports
1. Financial statements
• Cash flow statement (most important, least understood)
• P&L
• Balance-sheet
2. Chairman / CEO’s statement & Management
Discussion and Analysis
3. Others

Annual Report
15
Chairman / CEO’s statement and Management Discussion and Analysis
 Must read the first two and last two paragraphs in detail.
 Find the answer for:
 Is management staying focused?
 What are the management’s stated plans to take the
business forward: Expanding capacity, Rationalizing
underperforming areas, Introducing new products
/services to existing customers, Investing to raise
margins (e.g. new product features, service add-ons)
via R&D, marketing, etc

Annual Report
16
Chairman / CEO’s statement and Management Discussion and Analysis
 Negative list: flowery language, away from the
reality like throwing big industry numbers/future
growth
 Positive list: clearly elaborating risks while
talking about opportunities, conservative in
approach,
 Look for: The results of operations, Changes in
financial condition and Risk management
strategies

Annual Report
17
Financial statements
 Always look for consolidated numbers and not
standalone
 Go through notes to the financial statements for
details
 (P&L): net profits and sales are positive, rising or
falling;
 (CF, P&L): operating cash flow after working capital
adjustments is positive or negative and compare with
NP
 (B/S and P&L): net debt is rising or falling and interest
amount;
B/S: Balance Sheet CF: Cash Flow P&L: Profit and Loss

Annual Report
18
Financial statements
 (CF, P&L): Is company paying Taxes while showing profits?
 (P&L) Component of other income? If high then see
previous years/quarters’ numbers also. If one off then
remove from net profit, if consistent then dig more to find
sustainability
 (P&L) What are the main expenditure heads: employee
costs, raw material dependencies (e.g. crude prices)
 (P&L, CF): Interest paid v/s net profit v/s OCF
 (P&L, B/S notes) Inventory trends: Finished good, WIP v/s
sales numbers
B/S: Balance Sheet CF: Cash Flow P&L: Profit and Loss

Annual Report
19
Others…
• Salary of the directors, revision in the salary,
in line with the growth/profit numbers?
• Members of audit and salary committees
• Composition of board of directors, how many
of them are independent?
• Directors attendance in board meetings
• Independent auditors report

Shareholding Pattern
20
Governance
Skin in the game
- Unpledged Holding
- Promoters’ Holding – Buying or Selling
- BSE Website SHP:
- Quarterly Trend
- Going in strong hand
- Corporate Announcements

Shareholding Pattern
21
Governance
XYZ Industries
Who Month # of Shares % holding
Promoters Mar-07 48,94,544 35.28%
Promoters Dec-06 47,78,994
Total Change 4 months 1,15,550
Date Acquired Who
15-Mar-07 10,000 Managing Director
06-Mar-07 20,050 Managing Director
28-Feb-07 8,000 Managing Director
28-Feb-07 17,500 Managing Director
14-Dec-06 60,000 Director
Total Buy 1,15,550
100 Crs market cap in 2008
800 Crs market cap in 2017

Trader v/s investor
22
Time V/S Return
KNR Constructions in 2011
Fundamental Analyst 100 Day Trader 100
5 years target 200 5 hours target 105
You bought They sold
Today = Rs 1114 + Dividend =>
Total valuation including dividends =
Rs 220*5 KNR + Rs 14 Dividends => 1114
11 times return that of original investment
KNR Case study from 2008-2017: https://goo.gl/PR3gCe
A case study of how slow and steady wins the race
11 bagger in 6 years… CAGR of 50%
V/S
5% of trader

KNR Constructions: Who?
23
History and background
 Incorporated in 1995
 A history of executing infra projects before time and
earning bonuses from the customers
 Conscious about maintaining margins (EBITDA and Net
profits)
 Very focused and conservative management
 Inventory of construction equipment
 Never diluted balance sheet to raise funds, say through
QIPs.
 The asset light model helped them avoid debt burden
while they continued to grow modestly.

Why I got interested in KNR Constructions?
24
 I am curious in stocks from the sector “hot in demand”
• Power, Infra and Reality in 2006-2008
• ICT stocks (IT, Communication and Telecom) in 1998-2000
 During such time of over exuberance, prices get distorted.
When they crash again prices get distorted on the other side
 Offers opportunity to buy good companies with sound
fundamentals, solid management and most importantly at
attractive valuations.

KNR: IPO days (Jan 2008-Mar 2011)
25
 KNR came with IPO in Jan 2008 at Rs170 per share
 Promoter holding post IPO in March 2008 was 71.52%
 IPO performed well, but post listing, the “hot sector”
experienced a burst
 KNR stock came down as low as Rs20 in 2008 itself
IPO at 170 in 2008
Rs20 in 2008

KNR: Initial Post IPO days (Jan 2008-Mar 2011)
26
What did promoter do?
 The promoters started buying from the open market:
• From Jan 2008 to Mar 2009: added 2,92,574 shares (1.04%)
• From Apr 2009 to Mar 2010: added 1,99,817 shares (0.71%)
• From Apr 2010 to Mar 2011: added 2,08,740 shares (0.74%)
 Reached the upper cap of 74%. So they couldn’t add
anymore
 Management buying was a reflection of commitment to the
company and confidence that it will perform
 KNR promoters had zero pledge, excellent track record in
project execution and displayed extreme conservatism in
managing the balance-sheet during all these years

27
What did MFs/FIIs do?
 Consistent sellers
 Beaten down by Infra/Reality/Power bug
 Sold almost 7% of total company equity
 Holding down from 14.58% March 2008 to 7.74% in
March 2011

28
Company performance
 As of Mar 2011
• Revenue 793Crs
• 131CRs EBITDA
• 57Crs Net Profit
• Gross block (Plant & Machinery) Rs 399Crs
 Market cap Rs 280Crs for a company with the
conservatively managed balance sheet

KNR: Second wave (Apr 2011 – Mar 2014)
29
 I starting buying sometime in 2011 at around Rs100
 Came down to Rs45 in 2013 and Rs68 in 2014
 Remained below its IPO price most of the time
 Promoters holding
• At the upper cap of 74% so they could not add anymore
 FIIs/MFs holding
• Increased their stake marginally to 8.77% by March 2014 from 7.74% in March
2011
Rs68 in 2014
Rs45 in 2013

KNR: Second wave (Apr 2011 – Mar 2014)
30
Company performance
 Toughest period for entire infra industry
 KNR’s revenue (sales) and profits both came down
• Revenue 688Crs in 2013 v/s 793Crs in 2011
• Net profit 52Crs in 2013 v/s 57Crs in 2011
• Order book: 1296Crs in 2014 v/s 1443Crs in 2011
 Brighter side: its ability to execute projects
on/before time

KNR: Third wave (Apr 2014 onwards)
31
 After 2014 it started its upward journey, from 100 to 1100,
and never looked back
 FIIs and MFs started coming back and increased their
holding
 Market cap went up from around 280Crs to Rs3100Crs
Rs1100 (Rs220X5) in 2017
Rs121 on 16th May 2014

KNR: Third wave (Apr 2014 onwards)
32
 The promoters holding
• Came down during from 74% (Mar 2014) to now 57.38% (June 2016 quarter)
• Who bought this 16% shares?
 FIIs/MFs holding
• Increased 23.3% from 8.06% (Mar 2014) to 31.36 (Dec 2016 quarter).
• Taken away whatever was offered by the management but also bought from
the public
 Company performance
• Started off with an ease in their business prospects
• Order book soared with the new government awarded infra projects
• KNR continued to execute the projects on/before time
What did they do
with the money?

KNR: OCF, Equity dilution, borrowing
33
Jo jita wohi sikandar…
In INR Crs
Parameter Mar-16 Mar-15 Mar-14 Mar-13 Mar-12 Mar-11 Mar-10 Mar-09 Mar-08 Mar-07
Net Profit 161.12 73.01 60.98 52.13 52.76 56.83 50.28 43.66 29.54 19.87
CFO 256.54 36.94 133.23 1.04 130.37 81.8 33.96 116.41 43.93 32.75
Signal
Zero equity
dilution
Parameter Mar-16 Mar-15 Mar-14 Mar-13 Mar-12 Mar-11 Mar-10 Mar-09 Mar-08
Share capital 28.12 28.12 28.12 28.12 28.12 28.12 28.12 28.12 28.12

KNR: What has happened to share price?
34
Jo jita wohi sikandar…
Value of Rs 100 invested in 2008?
 KNR Constructions: INR 772.8
 Punj Lloyd: INR 5.80
 JP Associates: INR 17.49
 GMR Infra: INR 21.13
 IVRCL Infra: INR 2.66
(Rs100 invested in KNR in 2011 is Rs1060 as of 7 Aug 2017)
KNR: 11 bagger in 6 years…
(1Lac became 11Lacs)
Punj Lloyd, JP Associates, GMR, IVRCL: Lost 95-98%
(1 Lac became 2k or 5k)

Year 2000: A repetitive grim reality
35
Time V/S Return V/S Valuations
Date Price Shares
2-Feb-00 1,549 119,642
3-Feb-00 1,673 68,309
4-Feb-00 1,807 82,375
7-Feb-00 1,855 3,126,844
8-Feb-00 1,877 2,358,212
9-Feb-00 1,817 2,394,038
10-Feb-00 1,848 1,788,398
11-Feb-00 1,842 1,570,270
14-Feb-00 1,875 1,336,249
15-Feb-00 1,823 975,591
16-Feb-00 1,791 808,272
17-Feb-00 1,841 843,279
18-Feb-00 1,948 2,350,699
21-Feb-00 2,104 528,893
22-Feb-00 2,272 1,301,678
23-Feb-00 2,090 1,424,987
24-Feb-00 1,952 1,454,274
25-Feb-00 1,810 1,469,617
28-Feb-00 1,770 879,915
29-Feb-00 1,628 2,157,518
1-Mar-00 1,759 1,030,278
In year 2000
Low of 200 Rs
High of 2000+

36
 bseindia.com / nseindia.com
 Screener.in, Moneyworks4me.com, stockflare.com,
capitalcube.com… and many more… including Apps
 Brokers websites for financial data
 Annual reports (most important)
Free Resources

Availability of data on internet/Annual Reports
37
Free Resources
Parameter Section
P/E ratio/Earning Yield Key Financial Ratios
Book Value Key Financial Ratios
Return On Invested Capital (ROIC) Key Financial Ratios
Dividend & dividend history Summary
Revenue & profits of last 5 years P&L
Inventories trend of last 5 years Balance sheet
Current Assets & Current Liabilities Balance sheet
Statements of the company
executives
Company websites/read newspapers
Promoters’ Holding (Buying or
selling)
Corporate announcements in NSE/BSE
websites

38
Screener.in
Standard summary
Customized summary

Quarterly results
39
Screener.in
Draw top 5 conclusions in
90 seconds and move on
1) Sales trend
2) Operating performance
3) Interest component
4) Depreciation
5) Tax paid

Annual results
40
Screener.in
1) Sales trend
2) Operating performance
3) Interest component
4) Depreciation
5) Tax paid
6) Dividend payout ratio

Balance Sheet
41
Screener.in
1) Equity Dilution
2) Share capital (equity / preferential)
3) Borrowings (ST/LT) v/s interest component from last quarter

Cashflow
42
Screener.in
1) CFO v/s NI
2) WC changes
3) Taxes Paid
4) CFI trend
5) CFF trend

Reports and announcements
43
Screener.in

Query Builder
44
Screener.in

When and how to sell?
45
 Do not sell in one go. Sell incrementally: e.g. sell 10% on every 20% rise
 You realize you made a mistake and the company is not working as you expected;
give time before you take a decision though
 Price target achieved (after re-evaluating assumptions and pricing)
 When financial parameters are at unreasonably high levels
 Over exuberance in the market (You hear buy call from all media channels,
newspapers, Lift-wala/chai-wala/paan-wala) and your stocks are quoting at
unreasonable levels…
 A deterioration in the fundamentals
 A better opportunity comes along (mostly avoid for such reasons unless you do not
have any other reasons)
 When Promoters are selling (may give a false indication, so see business
environment for the company and who is buying)

How to manage risk
46
 Study by CFA Institute (number of stocks in the portfolio and
diversifying risk)
 Strict about the buy and sell pricing; esp. buy
 Never run behind the stocks; if something is gone let it go;
don’t crib let others earn too
 Always study the company, business model and if you do not
understand do not invest
 Follow the rule of 3 parts of portfolio (A, B and C) learnt
initially
 Keep a buy range; similar to sell range. If stock going below
buy range reevaluate your assumptions/if anything
fundamentally wrong with the company?

Recommended (MUST) reading
47
 The Intelligent Investor – Benjamin Graham (1949)
 Value Investing & Behavioral Finance: Insights into indian
stock market realities – Parag Parekh (2008)
 Security Analysis – Benjamin Graham & David Dodd
(1934)
 Common Stocks and Uncommon Profits – Phil Fisher
(1958)
 Value Investing Today – Charles Brandes (2004)
 Letter written by Warren Buffet to Shareholders (1977-
till date)

The Test of Impulse Control/Will Power
48
The Stanford Marshmallow Experiment
https://vimeo.com/6591011
Click to play
video

Quiz…
49
Two questions
1. Identify this legend?
2. Where is this portrait kept?
If you know answer to 2nd question,
you would also know who presented
this portrait?

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".

Thank you
Twitter: @niteen_india
Blog: http://dharmawat.blogspot.com/
Mobile: 9850571857
Also on: Slideshare, Facebook

52Twitter - @niteen_india
Cash flow concept

A Scooter Manufacturer… A quick example
Cash
Credit
Cash recorded
in OCF
P&L
Sales, Profits
recognized
Cash
Received
Yes Bad debts
No
Warning sign:
Check Receivables…

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

- OCF = Net Income + Depreciation & Amortization – Working
Capital Investment
- Positive OCF by decreasing inventory/receivables (non cash
working capital) or increasing in payables
- Decrease in inventory, receivable numbers
- liquidating items like inventory, receivables (you are
supposed to get this from your customers and sell it off in
the market at some discount) or
- Increase in payables numbers
- Supposed to pay to suppliers but don’t pay at the time of
preparing the Cash flow
- These are not sustainable items
Can OCF be manipulated?
Caution: if you notice marked changes in these numbers from last year’s numbers

Case Studies

Case 1: A vertically integrated multinational medical
technology Group
From Rs140 to
now Rs8

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 Rs13

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 21 in no time

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 5.70 in no time

Case 5: Unified Supply Chain & Infrastructure Group
From Rs140 to
now Rs72
Poor
shareholding
pattern

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 Rs180

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 Rs7.60

Case 8: A specialist across the varieties of cables
Parameter Mar 2010 Mar 2011 Mar 2012 Mar 2013 Mar 2014 Mar 2015 Mar 2016
Net Profit 10.59 15.22 23.81 57.91 100.09 159.99 163.48
CFO 4.81 4.47 14.81 31.12 20.89 -46.69 21.57
Signal
 Fast growing cables manufacturer
 High double digit growth in Profit and Sales
 High 20s ROE and ROCE numbers
From Rs235 to now Rs29 in one month
• Promoter holding 41.19%
• 100% pledged 
A recent casualty
From Rs6 to now Rs235 in four year

'Piotroski Score'
65
Interpretation: In the range of 0-9
• 8-9: considered to be strong
• 0-2: considered to be weak
Calculation: 9 specific criteria from financial statements each with 1 point else 0
• Profitability
1. Positive ROA in the current year
2. Positive operating cash flow in the current year
3. Higher ROA in the current period compared to the previous year
4. Cash flow from operations are greater than ROA
• Leverage, Liquidity and Source of Funds
5. Lower ratio of long term debt to in the current period v/s previous year
6. Higher current ratio this year compared to the previous year
7. No new shares were issued in the last year
• Operating Efficiency
8. A higher gross margin compared to the previous year
9. A higher asset turnover ratio compared to the previous year
Strength of a firm's financial position
Should not be applied to
Financial Services/Banks

'Altman Z-Score'
66
Interpretation
• Below 1.8 means the company is probably headed
for bankruptcy,
• Above 3 are not likely to go bankrupt
Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E Where:
• A = working capital / total assets
• B = retained earnings / total assets
• C = earnings before interest and tax / total assets
• D = market value of equity / total liabilities
• E = sales / total assets
Score for bankruptcy
Should not be applied to
Financial Services/Banks

Macro and Micro factors
67
Importance in stock market
We don't look at
macro factors:
Warren Buffett
Buy value, not market
trends or the
economic outlook:
Sir John Templeton

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