Lupin & Wockhardt

Below is the warning letter that FDA sent to Wockhardt for the same facility that the UK regulator MHRA banned the imports from in 2013. It looks like Wockhardt has had warning letters in 2006, 2008, 2010 and 2012 from either FDA or MHRA across its global facilities. A little bit of research would have saved investors a lot of pain.... (below is the performance of Wockhardt in the last 6 months)

http://www.accessdata.fda.gov/scripts/warningletters/wlSearchResult.cfm?qryStr=wockhardt&webSearch=true

Public Health Service Food and Drug Administration
	Rockville, MD 20857

Warning Letter

Via FedEx

WL: 320-06-01

FEB 21 2006

Mr. Raju Krishna Swamy
Vice President - Manufacturing
Wockhardt Ltd
L-1, MIDC Area, Chickalthana
Aurangabad - 431 210
India

Dear Mr. Swamy:

We have completed our review of the inspection of your pharmaceutical manufacturing facility in Walju, Aurangabad, India, by Investigator Alicia Mozzachio, Microbiologist Raymond Oji and Chemist Felix Maldonado, during the period of November 8-11, 2005. The inspection revealed significant deviations from U.S. Current Good Manufacturing Practices (CGMP) in the manufacture of drug products and active pharmaceutical ingredients (API's). The deviations were listed on an Inspectional Observations (FDA-483) form, issued to you at the close of the inspection. These CGMP deviations cause your drug products and API's to be adulterated within the meaning of section 501(a)(2)(B) of the Federal Food, Drug, and Cosmetic Act.

Our review also included your December 7, 2005 response to the FDA-483 observations . We believe the following deficiencies need more comprehensive corrections.

1) Written production and process control procedures were not always followed and documented at the time of performance. 21 CFR 211.100 (b)

A. The process Validation protocol of [redacted] tablets was not followed. (Observation #5 on the FDA-483) The protocol states [redacted] which results in a sample range of [redacted] to [redacted] mg. The samples that were taken were documented as 115g, 3.5g and 115g, which are all outside the range allowed in the protocol. Your response to this deficiency is not adequate in that it states that the 3.5g sample was erroneously documented, and was actually a 35g sample . This does not address the taking of excess amounts of material for testing. The investigators also noted that it was unclear in the [redacted] individual samples were maintained separately or combined. Please demonstrate tot us that this protocol is accurate or that a new protocol was carried out correctly. Also, pleas provide corrective action for not following approved protocols.

B. The locations of [redacted] used for environmental monitoring during the execution of Protocol [redacted]were not documented until eight months after the execution of the record. (Observation #3 on the FDA-483)

Your response states that a drawing of the locations of the [redacted] during the [redacted] effectiveness study was prepared for the investigator; however, this drawing was pre are d from memory. The observation is citing failure to define or document the location of the [redacted] prior to or during the study. Your response also did not address the issue of preparing and approving validation protocols which lacked this important information. Relying on the recollection of an employee eight months after the protocol was executed is not good practice. Further, no preventative actions were submitted for future protocols and studies.

2) Control records do not include complete and accurate information relating to the production and control of each batch. 21 CFR 211.188

A. The [redacted] preparation record did not include documentation to confirm the addition of [redacted] to the[redacted] used for environmental monitoring . (Observation #4 on the FDA-483)

Your response states that the SOP for "Storage, preparation and sterilization of the [redacted] has been revised. Although the of the SOP addresses this problem going forward, revision response does not explain how your firm knows whether [redacted] was added to the [redacted] prior to the revision. The lack of documentation supporting the addition of [redacted] the environmental monitoring calls into question whether or not this addition did indeed occur, especially since other additions to the [redacted] during inspection documented. Documentation reviewed during this inspection as well as the last inspection showed extremely low counts on your environmental monitoring. Without the [redacted] addition to the [redacted] the [redacted]nature of the drug many not have been inhibited. Please demonstrate that the environmental monitoring of your [redacted] products is representative and accurate, and includes accurate documentation for these products prior to shipment.

B. The [redacted] logbook did not contain complete and/or accurate documentation. (Observation #1 on the FDA-483)

Your response indicated that the SOP cited was updated to include the signature of the person performing the operation. We expect that all entries in logbooks, batch records, laboratory documentation and all other documentation be signed by the person who performed the operation. Having a supervisor sign does not give the same level of accountability. Your response did not contain a global evaluation of other logbooks where entries may be performed similarly.

Complete, true and accurate records are the foundation for good GMPs. Reliable documentation is a control which raises assurance of the quality of the product manufactured. Violations concerning inadequate documentation are serious and should be handled as such.

We are also concerned that the two previous inspections also noted failure to maintain complete and accurate records, and that your firm may not have taken this type of discrepancy seriously and thus has not corrected the documentation practices of your employees. In addition, during a regulatory meeting with your firm on May 7, 2004, management indicated to us that inappropriate documentation practices have occurred at your facility . Practices such as back dating and signing for actions not performed are serious violations.

Failure to correct these deficiencies may result in FDA denying entry of articles manufactured by your firm into the United States . The articles could be subject to refusal of admission pursuant to Section 801(a)(3) of the Act in that the methods and controls used in their manufacture do not appear to conform to Current Good Manufacturing Practices within the meaning of Section 501(a)(2)(b) of the Act.

Please respond to this letter within 30 days of receipt. Your response should include data collected in your correction to the deficiencies cited as well as copies of procedures not already included. Please identify your response with FEI 3004540156 . Until FDA can confirm compliance with CGMP's and correction to the most recent inspection deficiencies, this office will recommend disapproval of any new applications listing your firm as the manufacturer of Active Pharmaceutical ingredients and finished pharmaceutical drug products . Please contact Carole Jones, Compliance Officer, at the address and telephone numbers shown below, if you have any questions, written response or concerns regarding these decisions.

U.S. Food & Drug Administration
CDER HFD-325
11919 Rockville, Pike
Rockville, MD 20852
Tel : (301) 827-9054; FAX (301) 827-8909

To schedule a re-inspection of your facility, after corrections have been completed and your firm is in compliance with CGMP requirements, send your request to: Director, Division of Field Investigations HFC-130, 5600 Fisher's Lane, Rockville, MD, 20857. You can also contact that office by telephone at (301) 827-5655 or by fax at (301) 443-6919.

Sincerely,

/s/

Nichalos Buhay
Acting Director

Division of Manufacturing and Product Quality

Center for Evaluation and Research

We added Lupin to our portfolio in Jan 2013. Since then, it has gone up about 46%. Above, is the performance in the last six months

Below is the warning letter that FDA sent to Lupin in 2009. The charges seem to be serious. While the facility survived repeated re-inspections from FDA and MHRA, little information is available on how the culture in the plant was changed to be totally complaint now. There has not been many 483's or warning letters to Lupin since then.... but it is the nature of the letter below that continues to concern us....

We are carefully looking at the stock again. Permanent risk of capital is not a risk we are interested in.... The onus is on us to make sure that Lupin is not the next Ranbaxy or the next Wockhardt....


http://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2009/ucm162745.htm

Public Health Service Food and Drug Administration
	CENTER FOR DRUG EVALUATION AND RESEARCH Office of Compliance International Compliance Team 10903 New Hampshire Avenue, WO Bldg 51 Silver Spring, MD 20993

Warning Letter

Via FedEx

WL: 320-09-05

May 7, 2009

Dr. Desh Bandhu Gupta
Chairman
Lupin Limited
Plot No. C-25, Laxmi Towers
"G" Block, "C" Wing, 4th Floor, Bandra Kurla Complex
Bandra (East) Mumbai, India 400 051

Dear Dr. Gupta,

This is regarding an inspection of your sterile and non-sterile pharmaceutical manufacturing and sterile active pharmaceutical manufacturing facility (Mandideep), in Bhopal, India by Investigator Michael R. Goga and Microbiologist Parul M. Patel during the period of October 31 - November 12, 2008. The inspection revealed significant deviations from U.S. current good manufacturing practice (CGMP) regulations (Title 21, Code of Federal Regulations, Parts 210 and 211) in the manufacture of finished drug products.

These deviations were listed on an Inspectional Observations (Form FDA 483) issued to Vilas S. Satpute, Senior Vice President, API Manufacturing and Site Head at the close of the inspection. These CGMP deviations cause the drug products and APIs to be adulterated within the meaning of Section 501(a)(2)(B) of the Federal Food, Drug, and Cosmetic Act (the Act), [21 U.S.C. § 351(a)(2)(b)]. Section 501(a)(2)(B) of the Act states that drugs are adulterated when they are not manufactured, processed, packed, and held according to current good manufacturing practices. Failure to comply with CGMP constitutes a failure to comply with the requirements of the Act.

We have received your December 9, 2008, January 13, 2009, February 12, 2009, and March 10, 2009 written responses to the FDA-483 observations. We acknowledge that some corrections appear to have been completed or will soon be implemented. However, your responses do not adequately address some of the deficiencies. Specific violations include, but are not limited to:

1. Failure to maintain production, control, or distribution records associated with a batch of drug product for at least 1 year after the expiration date of the batch. [21 CFR 211.180(a)]

A. Numerous boxes were observed containing production, control, or distribution records in the destruction area of a separate building (Plant [(b)(4)]). For example, one of these boxes contained a Batch Packing Record (BPR) for Ceftriaxone for Injection USP lOg, Batch Number[(b)(4)], dated August 25, 2008 and August 26, 2008 was awaiting destruction as observed by Investigator Goga. Refer to FDA Form 483, Observation #2.

Your Quality Corporate Management explained during the inspection that Plant [(b)(4)] had no involvement with the Mandideep drug production facility in any way. Yet when our inspection team visited Plant [(b)(4)], they observed 20 boxes containing documents and files from the Mandideep Plant [(b)(4)] facility. Please explain the discrepancy in the information given by your Quality Management to our investigators.

You state in your December response that the documents seen by our investigators during the inspection, and referred in Form FDA 483, Observation #2, were either expired or outside the specified retention time period specified in your document retention policy. In addition, you explained to our inspection team that the 20 boxes of documents stored in Plant [(b)(4)] were being held waiting for destruction. Your December response referencing Batch Packing Records (BPRs) from 2006, does not explain why the partial BPR for Ceftriaxone for Injection USP l0g was awaiting destruction. This record falls within the storage period specified in your document retention policy. Your response should provide an explanation regarding your decision to destroy these records.

2. Failure to follow appropriate written procedures designed to prevent microbiological contamination of drug products to be sterile. [21 CFR 211.113(b)]

A. All personnel who enter the aseptic filling area are not monitored. Refer to FDA Form 483, Observation #7.

Our inspection team reviewed documents of individuals entering and exiting the aseptic fill area. Personnel such as maintenance, cleaning, supervisors, and operators (i.e.: filling machine operators, [(b)(4)] operators) were not required to follow written procedures that they be microbiologically monitored. Your December response (Attachment 15) is incomplete in that it did not specify the roles of personnel who completed training for the "Environmental Monitoring Procedure - Vial Filling facility" your firm provided. Please provide more detailed information showing the roles of employees such as maintenance, cleaning, and supervisors who completed this training.

3. The controls to prevent contamination in defined (critical) areas are deficient regarding operations related to aseptic processing of products. [21 CFR 211.42(c)(10)]

A. Smoke studies of Class [(b)(4)] in critical areas were inadequate in that they were not performed under dynamic conditions and the results were not recorded for subsequent review. Refer to FDA Form 483, Observation #5.

You included a CD ROM of the smoke study summary report with your December response. However, this CD ROM was unable to be opened for review, thus we could not read the attached documents. Re-submit the supporting documentation including the video showing the smoke study your firm conducted on November 19, 2008.

4. Failure to routinely calibrate, inspect, or check according to a written program designed to assure proper performance of automatic, mechanical, or electronic equipment, including computers, used in the manufacture, processing, packing and holding of a drug product. [21 CFR 211.68]

A. The Enterprise Resource Planning System known as the firm's Systems Applications and Products (SAP) computer database allows rejected batches of drug product to be in Unrestricted Status (to be released for distribution). Refer to Form FDA 483, Observation #3.

Please provide additional information to support that your current Enterprise Resource Planning SAP system provides limited access to only "approved QA personnel" versus warehouse or production personnel. Your December response states any correction or change in Usage Decision (UD) will require next-level QA authorization in SAP. Explain how you are able to ensure that only QA authorized personnel are changing the status of the lots in the SAP system, and how it is documented and/or tracked.

In addition, your December response in Attachment #4, "Performance Qualification Report for SAP R/3 Enhancement", shows lots that can be "Partially Approved" without selecting a Usage Decision. Provide an explanation as to what "Partially Approved" is defined as, who has the authority to make this decision, how it is documented, and why this status is "not applicable" in the Usage Decision status.

B. Failure to retain original calibration data for [(b)(4)] used in the re-qualification of the [(b)(4)]. Refer to Form FDA 483, Observation #4b.

During the inspection, you provided our FDA investigators a spreadsheet that you stated contained data for calibration of [(b)(4)], however, you were not able to provide the raw calibration data. In addition, the calibration data for the [(b)(4)] that you provided in your December response in Attachment #9 do not correspond to the[(b)(4)] observed by our FDA investigators. The [(b)(4)] observed during our inspection had a different manufacturer, tag number, and temperature range than the [(b)(4)] for which you provided data in your response. Please explain this discrepancy.

C. Written records of calibration were not adequately verified. Refer to Form FDA 483, Observation #9.

The inspection team was shown internal calibration certificates for [(b)(4)] that were performed at readings of[(b)(4)], yet the raw data does not document these readings. This data was verified and signed by a second individual and calibration certificates were generated. In addition, the calibration of a [(b)(4)] shows incorrect entries on the Instrument Calibration record. Yet this record was also verified and signed by a second individual. Your response do not show that investigations were conducted. Please provide the investigation reports.

Your December response states all data is now concurrently verified by immediate supervisors, however this is not stated in your attached, revised procedure, "[(b)(4)], Calibration of Instruments." In addition, you stated in your response that calibration records will be routinely reviewed by QA. Provide the relevant written procedure(s) to reflect this review is conducted.

5. Failure to follow written procedures describing the receipt, identification, storage, handling, sampling, testing, and approval or rejection of components and drug product containers and closures. [21 CFR 211.80(d)]

A. Approximately [(b)(4)] bulk empty glass vials were not labeled with any identification such as an item code, material code, SAP code, lot number or acceptance status. These vials were located in a separate building - Plant [(b)(4)] Refer to Form 483, Observation #1.

Your December response stated that these vials were segregated due to minor cosmetic defects and were labeled with an item code. Yet the inspection team reported that they did not observe any type of identification on the vials or the containers. Please explain how you determined which vials were destined for the Indian market without an item code. Include an explanation of the [(b)(4)] vials [(b)(4)] Type ([(b)(4)]) that were "approved" that were stored in Plant [(b)(4)]. Please provide supporting documentation showing that the defective vials were dest1byed as stated in your written response. Your December response states that the[(b)(4)] vials had been stored in Plant [(b)(4)] due to storage space constraints in the main warehouse. Your responses do not address whether you will continue to use Plant [(b)(4)] to store drug components, including drug containers and closures.

6. Documentation of each significant step in the manufacture, processing, packing or holding of the batch was not performed by the persons performing each significant step in the operation. [21 CFR 211.188(b)(11)]

A. The batch production records for the system simulation (Batch#: [(b)(4)]), do not document the results by the individual who performed the actual visual inspection of the media fill vials in Phase [(b)(4)]. Refer to FDA Form 483, Observation #6.

Your written responses state Quality Assurance (QA) is now responsible for recording the observations of the media fills. Please provide further details on the microbiological qualifications and GMP training of the QA personnel who will be recording the media fill results.

7. Failure to maintain buildings in a clean and sanitary condition used in the manufacture, processing, packing, or holding of a drug product. [21 CFR 211.56(a)]

A. The inspection team observed a collection of water with black residue in the surrounding area underneath and in the area adjacent to the [(b)(4)]. Refer to FDA Form 483, Observation #12

Your responses did not address the investigation conducted or the identification of the black residue. Provide in your response the investigation report with your findings including the cleaning methods you performed. Please provide the location of this sampling port and the equipment surrounding it. Also, explain if any drug processing, holding, or repackaging is conducted in this area.

In addition, the inspection team observed an accumulation of water on the floor in the [(b)(4)] treatment plant which can become a source of [(b)(4)] contamination. A greenish film was observed in the bottom of the water drain channel in the [(b)(4)] plant. Refer to Form FDA 483, Observation #8.

Your responses did not address if an investigation was conducted or confirmation that the green color on the bottom of the drain was identified as paint or if it was biofilm. Provide the investigation report and supporting documentation.

8. Failure to investigate the failure of a batch or any of its components to meet any of its specifications. A written record of the investigation shall be made and shall include the conclusions and follow-up. [21 CFR 211.192]

A. The QA monthly report dated 01 JAN 08 included one finished product sample that failed, however there is no record that an Out-of Specification investigation was performed. Refer to Form FDA 483 Observation #13.

You explained in your December response that the OOS reported in the January 2008 Monthly Quality Report was a typographical error. Please provide the documentation for the investigation you performed to make this conclusion.

Please provide further explanation regarding your position that QA monthly reports are not subject to GMP requirements, given that the reports include information such as testing summary, Out of Specification results, audits, complaints, and changes implemented. At the end of the inspection. you explained to our inspection team that the QA monthly reports were considered [(b)(4)] reports and not GMP documents. We have reviewed the information collected and agree with our inspection team that the QA monthly reports are subject to GMP requirements. Your December response to Form FDA 483, Observation #13 states the monthly report "is used as a management tool only." In addition, your response states this document is prepared and issued to your Corporate Management to apprise them of potential adverse quality trends.

GENERAL COMMENTS:

Regarding your written responses to FDA Observation #4:
In your December response, Attachment #7 describes the Performance Qualification (PQ) Validation Plan for the [(b)(4)] Mapping Plan of the [(b)(4)]. The validation plan of the [(b)(4)] describes [(b)(4)] studies, however does not include any [(b)(4)] Test (single run for l0ml vial). Since the [(b)(4)] is used for [(b)(4)] provide the justification as to why an [(b)(4)] test was not performed as part of your PQ. In addition, for other size vials shipped to the U.S. market, explain the justification to perform your PQ using a single run for the l0ml vial.

In addition, your firm stated in your responses that you compared the [(b)(4)] logger data obtained using your new data logger with the data from the earlier qualification reports and found the new and old data to be comparable (Attachment #8). Provide an explanation with supporting documentation as to the actual raw data generated from the older data loggers used in the earlier qualification reports and how you compared the older data with the data from the new data logger.

Regarding other documents observed in Plant [(b)(4)]:

The [(b)(4)] logbooks 2006-2007 and Operational Log for Air Handling Unit 2007 are documents that pertain to equipment usage. Your December response states that these documents were not required to be retained by the previous record retention policy. These logbooks maintain information relating to system functioning, prior, during, and after the manufacture of drug products, and need to be retained. Please provide further explanation as to the reason for their planned destruction and which other production-related documents are destroyed under this policy.

There were additional files observed in different locations of Plant [(b)(4)], referred as "corridor boxes", but not mentioned in the FDA Form 483 such as Daily Observation and Complaint file, Raw Data Cleaning Validation, Environmental Monitoring Record for the year 2006, [(b)(4)] Analysis Reports, Manufacturing Differential Pressure Monitoring Record, to name a few. When this observation was discussed at the end of the inspection, your management did not provide our investigators information as to the final disposition of these records, or why they were being held at Plant [(b)(4)] for destruction and not Plant [(b)(4)].
Please explain.

The CGMP deviations identified above or on the FDA-483 issued to your firm are not to be considered an all-inclusive list of the deficiencies at your facility. FDA inspections are audits, which are not intended to determine all deviations from CGMPs that exist at a firm. If you wish to continue to ship your finished drug products and APIs to the United States, it is the responsibility of your firm to assure compliance with all U.S. standards for current good manufacturing practices.

Until all corrections have been completed and FDA can confirm your firm's compliance with CGMP, this office will recommend disapproval of any new applications or supplements listing your firm as a manufacturing location of finished dosage forms and APIs. In addition, shipments of articles manufactured by your firm are subject to refusal of admission pursuant to Section 801(a)(3) of the Act in that the methods and controls used in their manufacture do not appear to conform to Current Good Manufacturing Practice within the meaning of Section 501(a)(2)(B) of the Act.

Please respond to this letter with requested documents translated in English within 30 days of receipt and identify your response with FEI# 3002807511. Please contact Yumi Hiramine, Compliance Officer, at the telephone number shown below, if you have any questions or concerns regarding this letter.

U.S. Food & Drug Administration
Center for Drug Evaluation and Research
Division of Manufacturing and Product Quality
International Compliance Branch
Building 51
10903 New Hampshire Avenue
Silver Spring, Maryland 20993
Tel: (301) 796-4166

To schedule a re-inspection of your facility, after corrections have been completed and your firm is in compliance with cGMP requirements, send your request to: Director, Division of Field Investigations HFC- 130, 5600 Fisher's Lane, Rockville, MD 20857. You can also contact that office by telephone at (301) 827-5655 or by fax at (301) 443-6919.

Sincerely,

/s/

Richard L. Friedman
Director
Division of Manufacturing and Product Quality
Office of Compliance
Center for Drug Evaluation and Research

Nestle India

Nestle India has generated great returns for its investors in the last five years.

It is time to consider this.

As of last Friday, it was trading at 52x last year earnings and 6.5X sales. Dividend yield is about 0.4%. Nestle grew its profit 5.5 times in the last ten years. Even if one assumed that it does the same in the next ten years, it would be trading 10 times 2023 earnings (which makes no sense)

If it was trading 30 times earnings, it would worth about 150,000 crores or $ 25 Billion in 2023. That is a 11.6% growth over the next ten years....

As against the perception of the users that Nestle India can provide a risk free return, I think this scrip will probably have more return free risk!!! Investors must be drinking a lot of kool aid to buy into this story and become part owners at this stage. I think the best days are behind it at these valuations.... unless investors are betting that Nestle will buyback shares similar to GSK and HUL at these low levels of INR

Make no mistake about it... it is a terrific, terrific franchise with a great management and sticky brands but it is not worth an infinite price. 

Ranbaxy Fraud and Wockhardt

Lots of investors have been looking closely at what is happening at Wockhardt for the last few months.

The parallels between the Ranbaxy story and the Wockhardt story is too hard to miss!!

A great article http://features.blogs.fortune.cnn.com/2013/05/15/ranbaxy-fraud-lipitor/ on Ranbaxy was published by fortune and is a must read for all Pharma investors.

A prime case as to why management quality is important for investing in India 

Berkshire Holding

We are going to use a series of posts to talk about some of our holdings.

Berkshire is the single largest holding at Beowulf Capital and we have bought at three separate occasions and sold once. (Green circles are buys and red circles are sells)

Everyone knows the Berkshire story and it has been a good stock to own at Beowulf as well. We have been following it for years now and have  acted only occasionally on it.

The first occasion when we bought the stock, it was fairly evident that BRK was going to get included in the S&P index but the market was shrugging it off and not pricing it in the stock. We thought it was a great opportunity and a chance to get even with the efficient market thesis guys and bought a fair amount of the portfolio at that time and we sold shortly after making a tidy sum!

The second occasion was in the Aug / Sep time frame in 2011 when Berkshire was trading at book value and I started buying the stock as I was comfortable with the assets I was getting at that price. Three days after we bought it at about $66 to $68 / share, Warren announced a buyback that immediately took the price up. We bought some more but not a lot. (Thanks Warren for nothing because if the prices had gone down further, we would have built a bigger position)

There was an event that happened in between. I attended the Berkshire Annual meeting in Nebraska in 2012. I recall concluding at the end of the meeting that this was a company I wanted to be associated with for a longer period of time but I was uncomfortable with the price. Later in the year, Warren's book 'Tap dancing to work' by Carol Loomis came out. In one of the articles, an reporter in 2002 asks Berkshire, 'Is it a good price to buy Berkshire now?' (Not exact words but along the same lines) Warren's reply was approx. 'Mumble... Mumble... Not now... It was a singing endorsement when I offered to buy back in 1998/9'

We made a mental note to buy Berkshire the next time we got an endorsement from Warren. We kept our intrinsic valuations regularly updated but never got comfortable on our own with the price.  It was a high quality asset but we wanted it at book value or at a value with the same deal terms as Warren.

In December 2012, Warren offered to buyback around $1.3B of stock from an owner at 1.2X Book. The key was the board authorized Warren to buy unlimited amount of stock at or below 1.2X book for an unlimited time. This time, we leapt at the chance. Close to 25% of our portfolio in the US markets were re-directed to Berkshire. We were not disappointed! (Thanks Warren)

What are we doing in a mega-cap company run by a 82 year old?

a. We don't care whether it is a small cap, medium cap, large cap etc. The market run-up in the last couple of years have dried up opportunities that we are ready to settle for acceptable rates of return from high quality assets irrespective of their asset class. We have bought only one other stock in the US since we purchased BRK in December.

b. We are not worried about the succession plan. Berkshire has a lower risk profile than other similar large cap companies. We actually know more about Berkshire's second line managers than at other large cap companies.

c. Quality of the assets are good and will continue to deliver acceptable rates of return.

However, it must be noted that we continue to be concerned with the run-up in the markets in the last one year. We do not plan to do anything with our Berkshire holding. If there is a downturn, Berkshire will put the massive cash-pile to work and come out stronger. With such a high concentration of Berkshire and cash in our portfolio, we actually wish for a downturn.

However, our wish has got nothing to do with what the market will do.Six months ago, we would not have predicted the markets would have run-up this much by today. To now claim that we have a clue what will happen in the next 12 months is foolhardy. If markets are up now, they will go down in the future (don't know when), if they are down now, it will go up in the future. Basically, we have no clue about the market. We only act on stocks we know at a price we understand.

YES Bank -- Red Flag!

From the Economic Times a few days ago ---

Shagun Kapur Gogia can't succeed her father on the board: YES Bank to Bombay High Court

RanaKapoor-led YES BankBSE 1.28 % on Monday told the Bombay High Court that only a living person has the right to nominate directors, in response to the plea filed by MadhuKapur.

The Kapur family had moved court to establish its claim as an equal business partner to MD and Chief Executive Rana Kapoor. The court will now hear the case on Friday, as the bank's lawyers sought more time to amend their petition.

"The bank is not willing to recognise Shagun Kapur Gogia as the Indian partner after the death of her father Ashok Kapur. This is the point of contention," said a person following the court tussle.

Usually, as minority shareholders, we do not pontificate on all matters however, this is something that caught our attention.

a.    A stock holder is a part owner of the business. A stock is not a piece of paper but part ownership in a business. Shagun Kapur owns about 12% of the stock. She own one-eighth of the bank. One-eighth of every branch, every loan, every deposit belongs to her (net of liabilities)

b.    If a person who owns one-eighth of the bank does not get a voice in the board, who does?

c.    Part of the duty of the board is to protect and shepherd the management towards returning value to shareholders. If big owners are not part of the board and not heard to, where does that leave small minority shareholders?

d.    What is the purpose of the bank if not working for the shareholders?

e.    Apart from Rana Kapoor, who owns a chunk of the shares, what is the incentive for the other directors to take the right decisions for the shareholders? Are they there to protect their jobs or that of the shareholders?

Joys of Compounding!

Joys of Compounding.pdf by balajisridharan9651

ICRA meeting comments

As a small retail investor, I often write to the investor relations trying to talk to them, typically in order to improve my understanding of the business. I have had varied success with this approach.

Last week, I had the opportunity to have a call with the rating officer at ICRA. Readers will be familiar with the skepticism we have with the business model of the credit rating agencies that we blogged about last december.

The rating officer openly admitted that they did not want to commit in writing, so the phone call. So here is the gist of the conversation

a. IRB Model is definitely a threat to the credit rating agencies
b. The advisory business of ICRA is working with the big banks to help to the IRB model.
c. Banks can apply for the internal models from 2014
d. 2 Years of parallel testing between the bank's model and the credit rating agencies model. The higher of the CAR will be adopted for the banks. After this, if the the RBI is satisfied, they will let the big banks move to the new model.
e. 2014 through 2016 is parallel testing period. So no threat for another three years.
f. All Basel II loans are eligible for internal rating. From annual reports, 2011 and 2012, 45% of all loans rated were Basel II loans.

If you are a long term investor and wondering about whether it is a good idea to invest in this.... caveat emptor....

Last few weeks

The last 3 to 4 weeks, the emerging markets stock indices have been underperforming the developed world.

In particular, the Indian stock market which crossed 20K briefly this year is back to the high 18's. While this is not a significant downturn, it is a correction that also caused a carnage among the mid-cap stocks.

As always, at Beowulf Capital, we ignore macros and invest in companies that we believe will grow and thrive in the long run. As the carnage was underway, we were net adders of capital into the market. Some of these bets will take a while to make money but we always like discount sales in the stock market. We especially are tuned to discount sales of stocks on our watchlist. Volatility in the market does not bother us, we have balls of steel. We are interested only in performance and ethical management.

In the last few weeks, we have added to our positions in YES Bank, Shriram Transport Finance, Titan and initiated positions in ICRA and Voltas.

In dec, we had sold out of our positions in ICRA at about 1,450 citing concerns about the IRB model and its impact on ICRA. At 30% lower price, we think we are comfortable owning the security. We bought into the positions when the market cap was a little shy of 1,000 crores. With about 278 crores in marketable investments, a good business model is available at a fair discount. It is a small position that we have initiated and we are comfortable that it does not form a big portion of our portfolio.

In the investing world (especially the value investing world) majority of the folks tend to look at price to book for financial stocks. For a long time, we were firm believers in this logic. One cannot go very wrong with buying stocks at or under liquidation value. However, at Beowulf, we are of the opinion that growth is part of value. We like to underpay for growth as well. Whenever, we find stocks whose growth is underpriced, we look at the probabilities that the stock will be worth a lot more a few years down the line and we buy the stock. Of course, we need to be comfortable to a reasonable extent with the management as well.

Two stocks that has caught our attention are very expensive using traditional price to book ratio. Both of them trade at or around 2.5 times book value. One might argue that at these levels the growth is fully priced in. We are skeptical of it. If the last twelve months earnings are north of 20 to 25% of total book value and if the business model suggests that these level of earnings will continue in the future without taking on undue risks on the balance sheet, our hypothesis is that, 7-8 times pre tax income is a better indicator of the value of the firm. This multiple ensures that all the future growth is still available to investors. Else, the firm will end up trading at 2 to 3 times earnings, which does not make sense to us.

We deliberately tend to keep the portfolio positions in financials at a relatively smaller levels compared to our bigger stocks. Our top three positions make up around 60% of our portfolio. So, net-net, we felt comfortable adding to our positions in YES Bank and Shriram Transport Finance. Both of them are terrific franchises. We had initially initated YES Bank positions in Dec 2011, this is first time we have added to the positions since then. Shriram transport finance is another niche player with little competition that allows them to earn above average ROA. The volatility is higher on the stock but we are not bothered. We use the opportunities to add to our existing positions.

We have also initiated position in Voltas. As the stock crashed through 52 weeks low, we initiated the position and added more as it continued to drift downward. This is an opportunistic stock in a cyclical industry. We are not looking for overnight returns. With an ethical management from Tata group running the companies and with an insiders perspective on the HVAC industry (I work in it) I feel comfortable holding these stocks.

What to do in a downturn?

Not so long ago, I was working for a COO of a fortune 100 company. I learnt some of the most important lessons about business from him. He frequently used to tell executives.

What do you do in a downturn?
Answer: Prepare for the upturn. Invest deeply in key projects and products.

What do you do in an upturn?
Answer: Prepare for the downturn. Serve customers and keep the cost structure right for the downturn.

This post is dedicated to him.

Hero Majestic -- a Value Trap?

Is this company more dead than alive?

Hero Majestic Company Profile


The Company is engaged in the manufacturing of  Mufflers, Fine Blanking Components, Electricals,  Spokes, and Two Wheelers Spare Parts.

Basically a commodity manufacturer for Hero Motors. It trades at a PE of 6 and has a marketcap of 51 crores. Annual sales for 2012 was 165 crores and a profit of 20 crores. Debt to equity ratio of 1.2. 75% owned by promoters. None of these are eye popping numbers except for something on the balance sheet that caught my eye. It trades at 0.7 times book and here is the key --- there is a 7.3 crore investments on the balance sheets. These are held at cost. The market value of these investments are Rs. 324 crores. Six times the marketcap and five times the book value.

Without a management shake up, no dividend and a shareholder friendly management, this is a value trap. This is company is worth more dead than alive. The liquidation value far exceeds the value as a going concern.

For other companies like this, please look at Kalyani investments.