GuestPost ValuePick

Value Pick:A qualitative analysis of Tata Sponge

The guest post below is written by Krishnaraj Venkataraman, also known as Kimi.  Kimi has been an entrepreneur, and after selling his last business, now runs an investment partnerships that seeks to invest capital in undervalued securities in India.-Raoji


Benjamin Graham begins his seminal book Security Analysis with a quote by Horace, “Many shall be restored that now are fallen, and many shall fall that now are in honor”. With Indian politicians rushing to demonstrate the latter; investors such as me search for the former. One such candidate is Tata Sponge.

The rush to sell

Tata Sponge is a small and relatively obscure firm run in an obscure place making an obscure product called Sponge Iron. Experts have prognosticated a poor outlook for steel industry – the end user of sponge iron; raw material inputs like iron ore & coal and power are either not available or shockingly priced; steel scrap, a sponge iron substitute is available cheaper. It could get worse, and the industry as such is reeling under heavy debt and low capacity utilization – the business equivalent of a gas chamber. Some will surely not survive, and many others will be hurt badly.

Shareholders are petrified and are crowding to exit; and in that they are indifferent to the value of the stock. Who would want to hold when business is sure to decline in the next quarter and foggy after that?

However, the very act of such unrestrained selling pushes price far below levels indicated by good sense.

Characteristics of the business of Tata Sponge

Tata Sponge sources iron ore fully from the mine of its parent (at a discount to NMDC rates) and imports a good part of its coal needs, eliminating uncertainty of availability. It also generates its own power eliminating another source of availability uncertainty. (Makes you wonder if India is the only large economy where availability of any economic resource is the first consideration, and its cost is a distant second)

Tata Sponge operates its plant at near full capacity; and runs it well. For instance it tries to continuously minimize the coal and power needed to make a unit of sponge iron. Further the quality of sponge iron produced is consistent in its Iron content and weight – important consideration for customers. Operating a plant at full capacity allows its fixed costs to be spread over the largest possible quantity minimizing per unit costs of sponge iron – not to mention time and costs saved from rampant start-ups and shut-downs.

The advantages above add to a few vital points in margins where the selling price is out of control. However the trump card lies in its profitable power business. Tata Sponge uses waste heat from the sponge iron making process to generate power, 2/3rds of which at full capacity is sold to the local state electricity board. The marginal cost involved is about 30 – 40% of the price at which power is sold to the grid. These profits are independent of the sponge iron prices allowing the bottom-line to escape to an extent the cyclical nature of the sponge iron business.

Further Tata Sponge has turned a profit every year in the past since 1992, even under worse economic conditions than exists today.  In other words, it is reasonable to assume that Tata Sponge operationally should do OK under trying circumstances and quite good otherwise.

There’s another vital difference that separates the best from the rest especially during periods of high interest rates, viz., capital structure. Tata Sponge is practically debt free and none of its peers seen is. A debt free capital structure allows all the operational excellence to flow through to the bottom-line. This has added qualitative advantages as well – no covenant breach, no loan restructuring and no short term measures taken to meet loan liabilities.

The outcome is an economic performance that is far superior to the average Indian company; a Return on Equity of about 30% averaged over the last 20 years!

Comparing value with price for Tata Sponge

After a reading of the above one may conclude that Tata Sponge is more valuable alive than dead but the market seems to think the exact opposite. Not only that, the market thinks that Tata Sponge is worth even much less than its value as a closed shop. There cannot be any other conclusion reached when we find that it is changing hands at 68% of its Book Value as of 11 May 2013. This, even as it uses as it uses only about 30% of its Book Value for its core business; 25% on advances for a coal block allocated to it and the remaining 45% as cash and liquid assets.

Clearly a case of fallen honor that should be restored!


  1. Sources are Annual and Quarterly Reports and Industry numbers publicly available.
  2. Reasonable and practical assumptions have been made wherever necessary. Conclusions won’t be affected by minor changes in assumptions.
  3. We have long positions in the firm.
  4. Comments welcome at




Day long call auctions hurting the Indian markets

The guest post below is written by Pratyush Mittal from Dalal-Street and developer of Screener-Raoji


SEBI holds our highest regards for they have been the backbone in the revolution of Indian equity markets. SEBI revolutionized the markets with various changes including NEST, quick settlements, demat etc., and by always maintaining a strong vigilance and discipline over the exchanges and investors.

To tap the growth in this decade, Indian markets will need a continuous investment and an encouragement to entrepreneurship. We must remember that today’s large caps come from once small cap space. These growing companies need to be nurtured and supported through free trade and participation of investors & market makers, rather than being alienated from the investing space. It is only through an active secondary markets, that the primary markets will grow. In relation to this, the recent call auction mechanism has raised various concerns for market participants:


  1. Running the call-auctions throughout the day at an hourly interval and cancelling the order book is a flawed concept. World-over, the call-auction mechanism is implemented only to provide stabilization to securities during the opening and/or closing sessions, to prevent freak trades due to panic and anxiety. Running it throughout the day at hourly intervals has killed the already low liquidity and thus the interest of investors in small stocks.
  2. The criteria for choosing stocks seems arbitrary as it ignores the value of transactions. The list covers almost 2100 stocks of ~3000 active companies. Many of these companies are high quality companies.
  3. We believe that low liquidity is NOT responsible for manipulations. Being investors for over 30 years, we have seen that one thing common in any stock manipulation is high liquidity. These cases, where lots of small investors lose money are usually of pump and dump. Wherein manipulators benefit only when volumes are high and material amounts are involved to trap small investors.
  4. The free markets don’t feel free and transparent any longer. It has become virtually impossible to place large orders. The moment an investor places a large buy order, the sellers disappear. Similarly, when an investor wants to exit his position from a stock, even the existing buyers go away.
  5. We are fearful, that if the mechanism in not corrected or improved timely, then it will curb a lot of investing sentiment in the country. Many SMEs might not be able to come up with IPOs and hurt the entrepreneurship in India for future.


  1. SEBI already has too many good tools and mechanisms to curb manipulations. For eg: moving the suspicious scrips to T group. There are various good magazines and blogs, which highlight such suspicious companies on a regular basis.
  2. Running call auction sessions only for opening and/or closing session (that is only for few hours followed by normal trading).
  3. Implementing the mechanism in a phased manner by trying it out initially for 50-100 stocks and seeing if there are any benefits or not.


The ill-affects of the mechanism have been shared by many other investors, and these are few of the coverage:

When Sebi’s outwitted at call auction – DNA

SEBI’s new baby – rules for illiquid stocks – Prof. Neeraj Marathe

Periodic Call Auctions For Illiquid Stocks – Concerns – Bosco Menezes

The need of the hour is to encourage the investors into investing rather than implementing a mass punishment. We hope that the concerns soon turns into an achievement to take the nation on a new path.

Happy Investing!!!


Analysis of Delisting of Fresenius Kabi Oncology

The delisting move of Fresenius Kabi Oncology has raised eyebrows as only a few months back the company did a OFS.

SES Governance , a non profit Corporate Governance Research and Proxy Advisory firm has shared it’s analysis of the delisting.

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Enduring Business Moats in India

Today we have a special treat.Vijay Gawde is a seasoned investor in the Indian Equity Markets and he runs Equity Growth Partners.


I had asked Vijay to write a guest post and he graciously obliged with the write up below which talks about enduring business moats in India.-Raoji




“Moat” – a medieval term, coined and popularised in business by Warren Buffett who refers it to as a durable competitive advantage. Warren Buffett always looks for companies with durable competitive advantage; businesses with deep and wide economic moat.
In capitalism, if you own a wonderful business it is like owning an economic castle. And the nature of capitalism is that people are eager to come and take your castle. It is perfectly understandable. If you are selling mobile phone handsets, there are going to be five others who are going to try and sell similar or better handsets. If you own a restaurant, competitors will come and copy your recipes and will hire your chef and so on. Capitalism is all about somebody coming and trying to take the castle.

So to protect your valuable castle (wonderful business), you need a castle that has moat (durable competitive advantage) around it. Moat can be in the form of strong popular brand, superior product, quality of service, infrastructure, size and scale of operation, distribution network, management reputation etc. All these factors individually make moat deeper and combination of factors together makes moat wider. Deeper moats are source of high profitability and wider moats protects the consistency of supernormal profitability over longer period.

So, In Indian context which are the companies that have strong and enduring business moats? Let’s have a look at some of the examples.

Asian Paints is one obvious example that comes to mind. Here is a company that has created a strong brand out of boring product such as chemical or paint. In fact the process of selecting paint hardly used to be consumer’s own decision. But this company focused on engaging the end user and created differentiated products; the strong brands backed by its hard to replicate nationwide distribution network have created a dominant market leading position for itself – enduring moat.
HDFC Bank is another prominent example where company is into a seemingly commodity business where raw material and final product is both money. The bank created a strong entry barrier (the enduring moat) with its quality of service, professional management and the most important factor in banking business – the “Trust” of its customers.
Pidilite Industries is one more example where company created a strong brand out of boring chemical adhesives. “Fevicol ka majoob jod” – is company’s enduring business moat. It enjoys near monopoly in its line of business with hardly any visible competition. Company widened its moat by entering in other lines of businesses such as water proofing compounds etc.
Titan is a company that has become synonymous with watches in India with its high quality and affordable products. The brand Titan extended its enduring moat into other areas such as jewellery, eyewear, fashion accessories etc. and has become sector leader in each of its business line – Watches(Titan), Jewellery(Tanishq), eyewear(Titan eye+) and fashion accessories (Fastrack). is India’s most successful online recruitment website. It is the only site that survived the dot com bubble. It has countered even the global competitors such as Monster, Dice etc well and has become India’s most preferred recruitment channel. The company (Info edge) extended its business moat in other areas such as matrimony (, real estate (, education ( & and host of other emerging new businesses.
One factor common in all the above companies is the possession of a strong and enduring business moat which has given them a dominant leadership position and that has resulted in creating huge wealth for its shareholders over the years.

Disclaimer: No part of this article should be inferred as an investment advice. Author may have vested interest in all the companies mentioned directly or indirectly.




Guest Post @ The Reformed Broker

Joshua Brown of The Reformed Broker has published my guest post “10 things you need to know about India’s Stock Market

TRB is one of the most popular financial blogs in the US and it is a great honor and privilege to have published there.

Josh has written a book “Backstage Wall Street”  which gives us an insider account of the shenanigans that happen in Wall Street.An excerpt of the book can be read here