Welcome to todays lesson on - Understanding activities of a company

As an investor (or prospective investor) of the company, it is important that we

understand the activities of the company.
There are several sources to get this information but the official website of th
e company is the best place to get the information.
From an investor's point of view, there are three ways in which a company can do
business.
1. Operational activities (OA)
2. Investing activities (IA)
3. Financing activities (FA)
Almost all companies will be engaged in all three activities in one form or the
other.
Let us discuss about these in detail.
1. Operational activities (OA)
These are activities that are directly related to the daily core business operat
ions are called operational activities.
Typical operating activities include sales, marketing, manufacturing, technology
upgrade, resource hiring etc.
Example: The business of a Engineering company is to execute projects involving
construction of buildings, laying roads etc.
So, a company like L&T for instance would have a lot of operational activity.
Example 2: A company rebrands with a fresh logo, new packaging of its products o
r new advertisements on TV. The expenses incurred to the activity will be OA rel
ated.
Example 3: Talwalkars has opened Gyms in Sri Lanka as a part of its business exp
ansation. This is an OA activity.

2. Investing activities (IA)

These are activities pertaining to investments that the company makes with an in
tention of reaping benefits at a later stage.
Examples include parking money in interest bearing instruments, investing in equ
ity shares, investing in land, property, plant and equipment, intangibles and ot
her noncurrent assets etc
Large companies have a separete treasury department that constantly keeps an eye
on the cash flow of the company. When the company has excess funds temporarily,
they invest in bank FDs or other debt mutual funds for short duration.
Companies like Piramal have invested money in Vodafone for a short duration and
later got good returns on it.

3. Financing activities (FA)

Activities pertaining to all financial transactions of the company such as distr
ibuting dividends, paying interest to service debt, raising fresh debt, issuing
corporate bonds etc
Example
A company has taken a debt for 10% interest with a financier. A bank now offered
to take over the loan for a 8% interest. The Investment Committee of the compan
y approved the transaction. This is a FA.
If you observe, there will be an impact on the cash flow of the company for all
the activities above.
At the same time, the balance sheet of the company will be affected.
For instance, when a new factory was built, some expenses will be incurred.
In the balance sheet, this will result in the creation of a new asset.
Similarly, when a company invests in another company, cash goes out for the owne
rship.
Even this will be noted in the balance sheet in the form of creation of an asset
.
In this manner, all activies of the company will impact the cash flow of the com
pany.
Relationship between Cash Balance and the Asset / Liability
If you observe, there is a relation between the Cash Balance and the Asset / Lia
bility of the company.
For instance,
When Reliance Industries built an oil refinary, an asset i.e factory got creted.
But to build the factory, cash is to be used. So cash reduces.
So cash decrease = asset increase
Now consider this example:
Infosys sold an overseas subidary company for $1 million.
So, the company got cash. i.e Cash levels increase.
At the same time, the subsidary, which is a part of the company, goes away. So i
ts asset decreased.
So cash increase = asset decrease
The above conclusion is the key concept while constructing a cash flow statement

.
Understand that each activity of the company be it operating activity, financing
activity, or investing activity either produces cash (net increase in cash) or
reduces (net decrease in cash) the cash for the company.
Forumula for Cash Flow
Cash Flow of the company = Net cash flow from operating activities + Net Cash fl
ow from investing activities + Net cash flow from financing activities
We can download the cash flow statement of the company from its Annual Report (o
r the Balance sheet).
When you come across the report, look for sections called:
I. Cash Flow from Operating Activity
II. Cash Flow from Investing Activity
III. Cash Flow from Financing Activity
The Statement of Cash flow is a useful addition to the financial statements of a
company because it indicates the company's performance.

Question
*Can we consider Textile as a good sector?*
We cannot live without food, clothes and shelter.
But there are too many listed textile companies. And most of them have heavily s
pent money for building factories. Yet, the returns of such companies is not tha
t encouraging compared to other businesses.
So, I think Textiles cannot be a core sector but can be held for short term or a
s and when opportunities come.

*Company Management as a fundamental factor*

Consider this example:
We are comparing two companies A and B
A is a small player compared to B
A's financial numbers are small and poor compared to B
However, A appears to be much sought after company compared to B.
What should we do?
Answer: In fundamental analysis, we should not always go by the numbers. We shou
ld also consider the views and work of the management. It is important to visit
the company websites and collect any information that might be of importance for
us. Management needs to be strong, good and a consistent in taking the company
business forward. They should have some views as to how to take the company forw
ard.
In the above example, A = Trident; B = Welspun India

Question:
Can we invest in stocks like SYNCOM FORMULATIONS and Goenka Business?
First being penny stock + BSE only and the second being BSE-only
Our present focus is for long term investing.
So when a stock is for review, or when we are picking a stock, we shd view it fo
r the long term only
not for short term or definetly not for intraday
We need to focus on good quality stocks only. And this is not an easy task
It is like searching for diamond in the mud
so always remember the rules of the game.
No to penny stocks
No to BSE-only scripts
No to thinly traded stocks

So when someone asks you, can i buy xyz company. It is just Rs. 6. It can double
in 3 months time etc.
To convince you, the come with some interesting points
charts are showing a Cup and Handle formation
or the company is going to get good order
or what ever
Personally, i would skip the opportunity than to risk such stocks
The reason being, investing is not a single day activity.
We may buy some qty in this penny stock
It goes up few days boosting our conviction
What goes up, has to come down some day
and when it begins to fall, we put more money into it assuming what came down wi
ll go up some day
and that day might not come soon
and in a week or so, your cash dries out
or u get tired with averaging
and then the stock just comes down by a ruppee
never goes up nor comes down
and u will be stuck with it for years
Neither can sell and exit nor buy and average
The market has thousands of stocks.
Why get stuck with those that are not fundamentally fit?
the same money, for instance, put in a worse largecap share would be better
Atleast they give some sort of capital protection
As we move from largecaps to midcaps to smallcaps to microcaps, the number of pp
l interested in the share gets fewer
For instance, Nifty 50 is the most sought index
Not just by Indian investors but by FIIs and foreigners too
They often follow indices such as MCSI Indices
These are US based indexes of stocks from Asia Pacific etc
There is more chance of Reliance Industries being listed in their index than, sa
y, Kellton
If a share is held by more, it is more liquid
And becomes less influenced by operators
and so less prone to manipulation
Stock markets are a risky playground
We need to have a proper balance between risk and reward
If you take more risk, there might be more reward too
But if more reward dosent comes, you will loose more too
For instance, i gave Assignment 11: Karturi Global in the Eq Portfolio group tod
ay
Read the assignment, think what u would be doing in such a situation and then gi
ve a solution.
Yesterday,. we left our class at the topic of portfolio
We said, for long term investing 5 to 8 stocks will be sufficient
5 being core
3 being non-core
usually to take up short term or upcoming opportunities
To build a good portfolio, select 2 large caps + 3 mid caps
the 2 largecaps are give stable performance for the pf
while 3 midcaps give higher growth at the cost of an increased risk
In our classes, we discussed two terms
IPO and FPO
IPO means ?
Initial Public Offering
IPO means Initial Public Offering.
If a company wants to raise money for some large scale project and wants to ask

retail investors in the form of offering shares, it is called an IPO process.

With the IPO, any company to get listed on stock exchanges.
But some companies, even after getting listed, needs more money.
If the company again wants to raise money (usually few years after the IPO) from
the public, it will give a Follow on Public Issue (FPO).
But FPOs are rare and few. Companies generally do not go to public every now and
then to raise money. It gives a bad image in the eyes of the stakeholders.
Since 5 stocks from 5 different sectors need to be picked, we need to be extra c
areful
For this, we need to know the names of Sectors and the sub-sectors that come und
er that
For instance, if you take NBFC as a sector, there are several type of companies
Housing finance
Vehicle finance
General financing companies
leasing companies
long term lending companies etc.
Similar if you take Chemicals, there are commodity chemicals, speciality chemica
ls, agri chemicals etc
We need to pick a stock that is the biggest / sector leader
We took the example of preferring TCS over Tanla even though both are IT space
TCS being a diversified IT Software company compared to Tanla which develops sof
tware only for telecom companies
[9:26 PM, 8/23/2016]Svineeth:
So our company should cater to a diversified customers than to build products /
offer services to select few
I asked to take a print of Top 100 companies
and identify the sector to which they belong
This is an important task for every investor
[9:27 PM, 8/23/2016]+91 98495 19188:If i give a stock name, u shd be able to tell
the sector to which it belongs to
[9:27 PM, 8/23/2016]+91 98495 19188:and if i give a sector name, u shd recall atle
ast 5 companies from that sector
[9:27 PM, 8/23/2016]+91 98495 19188:Think for a minute and give me 5 power sector
companies
[9:27 PM, 8/23/2016]+91 98495 19188:I will wait for ur list
[9:28 PM, 8/23/2016]+91 98495 19188:u can type here directly
[9:28 PM, 8/23/2016]MM SuryaNaresh:Ntpc, power grid, nhpc, Tata power, essar
[9:30 PM, 8/23/2016]+91 98495 19188:Any one else?
[9:30 PM, 8/23/2016]Svineeth:Same sir
[9:30 PM, 8/23/2016]MM SuryaNaresh:Rec 
[9:30 PM, 8/23/2016]Svineeth:Reliance power
[9:30 PM, 8/23/2016]+91 98495 19188:Essar?
[9:31 PM, 8/23/2016]MM SuryaNaresh:Esssr company having oil and power business
[9:31 PM, 8/23/2016]+91 98495 19188:Okay. I will replace Essar with Reliance Power
, the latter being a bigger and clear example
[9:32 PM, 8/23/2016]+91 98495 19188:Nice work Surya!
[9:32 PM, 8/23/2016]Svineeth:Essar is in steel I guess
[9:32 PM, 8/23/2016]MM SuryaNaresh:I think, I not sure , you asked 5 stocks but I
got only 4, so I used my knowledge 
[9:32 PM, 8/23/2016]MM SuryaNaresh:
[9:32 PM, 8/23/2016]+91 98495 19188:Essar group has several businesses. We shd be
more precise with the stock names so that we do not get confused between Essar O
il and Essar Steel
[9:32 PM, 8/23/2016]MM SuryaNaresh:Hmm
[9:33 PM, 8/23/2016]Svineeth:Okie
[9:33 PM, 8/23/2016]+91 98495 19188:I dont know the power company of Essar. Essar
Oil is refinery - oil and petroleum products

[9:33 PM, 8/23/2016]+91 98495 19188:Anyways, do this practise when u get time
[9:33 PM, 8/23/2016]+91 98495 19188:For instance, u shd be able to name 5 midcap F
MCG companies etc
[9:33 PM, 8/23/2016]+91 98495 19188:The combinations and examples are endless.
[9:34 PM, 8/23/2016]+91 98495 19188:All u have to do is put some effort into this
kind of activities
[9:34 PM, 8/23/2016]+91 98495 19188:In our classes, we discussed about Sectoral /
Thematic Indices
[9:35 PM, 8/23/2016]+91 98495 19188:These are indicies with stocks from specific s
ectors only
[9:35 PM, 8/23/2016]+91 98495 19188:S&P BSE Basic Materials
S&P BSE Consumer Discretionary Goods & Services
S&P BSE Energy
S&P BSE Fast Moving Consumer Goods
S&P BSE Finance and so on
[9:35 PM, 8/23/2016]+91 98495 19188:Such indices helps us ease our stock selection
process
[9:35 PM, 8/23/2016]+91 98495 19188:because if i want to invest in a IT stock, ins
tead of looking in Nifty 50 or Sensex 100, i would rather start with S&P BSE Inf
ormation Technology index
[9:36 PM, 8/23/2016]+91 98495 19188:Both NSE and BSE have sectoral indices
[9:36 PM, 8/23/2016]MM SuryaNaresh:Sir ji, Did you list out 5 good sectors having
bright future in next 5 to 10 years
[9:36 PM, 8/23/2016]+91 98495 19188:Yes. Not with a time frame like 5 or 10 years
but evergreen stocks
[9:37 PM, 8/23/2016]+91 98495 19188:Can someone name the sectors pls?
[9:37 PM, 8/23/2016]MM SuryaNaresh:Pharma
[9:37 PM, 8/23/2016]Svineeth:Power
[9:38 PM, 8/23/2016]+91 98495 19188:Guys recall ur 5 chosen stocks and give the se
ctor names
[9:38 PM, 8/23/2016]Svineeth:Banking
[9:38 PM, 8/23/2016]Svineeth:IT
[9:38 PM, 8/23/2016]Svineeth:Infrastructure
[9:39 PM, 8/23/2016]MM SuryaNaresh:Oil and gas
[9:39 PM, 8/23/2016]Sjignesh:Auto
[9:39 PM, 8/23/2016]+91 98495 19188:Yes: the 5 are Autos, Banking, IT, Power, Oil
[9:39 PM, 8/23/2016]MM SuryaNaresh:Pharma?
[9:40 PM, 8/23/2016]+91 98495 19188:Anything other than 5 could be added provided
we have sufficient cash to invest using our chosen averaging method
[9:40 PM, 8/23/2016]+91 98495 19188:Pharma is a core one too but since we have 5 s
lots in core, i would move it to 6 (1st non-core)
[9:41 PM, 8/23/2016]+91 98495 19188:the choice of sectors depends on the idea and
understanding of the sector by the investor's
[9:41 PM, 8/23/2016]Svineeth:Sir Wat about infra /engineering
[9:41 PM, 8/23/2016]Svineeth:Since India is a developing country
[9:41 PM, 8/23/2016]+91 98495 19188:Yes Vineeth: Make it 7th. But do we have that
much cash to invest and time to track ?
[9:42 PM, 8/23/2016]+91 98495 19188:To make our search much broad, u may take Phar
ma + Health
[9:42 PM, 8/23/2016]Svineeth:That has to be considered
[9:42 PM, 8/23/2016]+91 98495 19188:Banking + Financing companies
[9:42 PM, 8/23/2016]+91 98495 19188:Oil + Refineries
[9:42 PM, 8/23/2016]Svineeth:Better to stick with 5
[9:42 PM, 8/23/2016]+91 98495 19188:Autos + Auto Ancillaries
[9:42 PM, 8/23/2016]+91 98495 19188:etc.
[9:43 PM, 8/23/2016]+91 98495 19188:Then after chosing the sectors, we went to pap
er investing
[9:43 PM, 8/23/2016]+91 98495 19188:We started with the Dollar Cost Averaging meth
od
[9:44 PM, 8/23/2016]+91 98495 19188:We took several examples and saw how the cost

averaging works in different price conditions

[9:44 PM, 8/23/2016]+91 98495 19188:We observed that it is the best and simplest p
rocess for a new investor
[9:45 PM, 8/23/2016]+91 98495 19188:We just have to fix a monthly budget and a dai
ly buget and do investments to the extent of the daily budget every day irrespec
tive of the market conditions
[9:45 PM, 8/23/2016]+91 98495 19188:We said, we need to invest atleast for two qua
rters to build a decent volume
[9:45 PM, 8/23/2016]+91 98495 19188:We started paper buying Rs. 5000 of them (Rs.
1000 for each of the 5 shares)
[9:45 PM, 8/23/2016]+91 98495 19188:And then we prepared an Excel file and named i
t CostAverging
[9:46 PM, 8/23/2016]+91 98495 19188:We took certain precautions in naming the file
and sheets
[9:46 PM, 8/23/2016]+91 98495 19188:We created 5 sheets, one for each of the stock
[9:46 PM, 8/23/2016]+91 98495 19188:we entered the headers / fields
[9:46 PM, 8/23/2016]+91 98495 19188:and as we went on paper buying, we entered the
transactions in our Excel
[9:46 PM, 8/23/2016]+91 98495 19188:Then over weekend, we created a summary sheet
[9:47 PM, 8/23/2016]+91 98495 19188:we used pointers in the summary sheet to point
to certain cells in the 5 sheets
[9:47 PM, 8/23/2016]+91 98495 19188:The summary sheet is our decision making sheet
s
[9:47 PM, 8/23/2016]+91 98495 19188:it tells us in which stock, we invested morer
and in which one we invested less
[9:47 PM, 8/23/2016]+91 98495 19188:which stock is giving more profit and which on
e is contributing loss etc
[9:48 PM, 8/23/2016]+91 98495 19188:once u put real data into the sheet, u will un
derstand how important it is
[9:48 PM, 8/23/2016]+91 98495 19188:because, in real investing, we do not get time
to think much
[9:48 PM, 8/23/2016]+91 98495 19188:we want quick and easy decision making
[9:48 PM, 8/23/2016]+91 98495 19188:and the summary sheet headers are designed for
that
[9:48 PM, 8/23/2016]+91 98495 19188:u may add addditional fields so as to suit ur
needs
[9:49 PM, 8/23/2016]+91 98495 19188:In one of our class, we discussed various type
s of professionals in the market
[9:49 PM, 8/23/2016]+91 98495 19188:Like hedge fund managers, asset managers, port
folio manager etc.,
[9:50 PM, 8/23/2016]+91 98495 19188:Each of them will be in the market with a cert
ain mindset
[9:50 PM, 8/23/2016]+91 98495 19188:Long Only professions focus on buying good sto
cks that can sustain all market conditions.
[9:50 PM, 8/23/2016]+91 98495 19188:We said, for cost averaging to work properly ,
we need a discount broker
[9:51 PM, 8/23/2016]+91 98495 19188:preferably a broker with 0 brokerage for inves
ting transactions
[9:51 PM, 8/23/2016]+91 98495 19188:of course, statutory charges will be the same
wth any broker
[9:51 PM, 8/23/2016]+91 98495 19188:We said: In general practise, you need to keep
3 months of budgeted money readily available.
One month of investment money in your trading account
Two more months of investment money in your bank account
[9:51 PM, 8/23/2016]+91 98495 19188:Any questions so far?
[9:53 PM, 8/23/2016]MM SuryaNaresh:Question related to auto sector
[9:54 PM, 8/23/2016]MM SuryaNaresh:Shall i?
[9:54 PM, 8/23/2016]+91 98495 19188:Sre

[9:54 PM, 8/23/2016]+91 98495 19188:Sure

[9:55 PM, 8/23/2016]MM SuryaNaresh:In auto sector which one is the major autp sect
[9:56 PM, 8/23/2016]+91 98495 19188:Didnt understand the questio
[9:57 PM, 8/23/2016]MM SuryaNaresh:In auto sector we have
2 wheelers
4 wheelers
Auto ancillaries
Heavy vehicle
Passenger vehicles
Among all which points is the major sector
[9:58 PM, 8/23/2016]MM SuryaNaresh:*Which one
[9:58 PM, 8/23/2016]+91 98495 19188:Rather from that view point, it would be bette
r to pick the one with the largest market cap
[9:58 PM, 8/23/2016]+91 98495 19188:First check the top Auto stock.
[9:59 PM, 8/23/2016]+91 98495 19188:Tata Motors. Review it. If is okay. we can sto
p,
[9:59 PM, 8/23/2016]+91 98495 19188:Else go for the second one. Maruti
[9:59 PM, 8/23/2016]+91 98495 19188:then M&M, Bajaj Auto and so on
[9:59 PM, 8/23/2016]MM SuryaNaresh:Ok.. Will check it late
[9:59 PM, 8/23/2016]MM SuryaNaresh:Later
[10:00 PM, 8/23/2016]+91 98495 19188:Yes. A good starting point for such sector sp
ecific details is the sectroal indices of BSE and NSE
[10:00 PM, 8/23/2016]+91 98495 19188:http://www.moneycontrol.com/stocks/marketstat
s/indexcomp.php?optex=BSE&opttopic=indexcomp&index=20