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IDENTIFYING MULTIBAGGERS

Q1. What is the Objective of this exercise?


Ans. To identify Multibaggers - Buy till die stocks - the ones which can go upto 100x (no upper limit th

Q2. Any modification of this objective?


Ans. Yes. While I started with the objective of identifying 100x - I stumbled upon a method which is m

Q3. So where do we stand on the 1st Objective - 100x?


Ans. a. I have started reading the book called 100x - not completed yet.
b. Have some vague thoughts on these 100x - buy to die stocks -
- At 20% compounding - it will take 25+ some years to make 100x. See the sheet titled compoun
- Precedents of 100x stocks in US - Apple, Google, Monster Beverages, Berkshire Hathway, Amaz
Exceptional products, Honest and Intelligent Management)
c. Since, 2x to 10x approach is more predictable and can be achieved faster - currently am focusin

Q4. Do you have reliable source - which has achieved this fete and also outlined the process of doing
Ans. Yes. The Valuepickr forum - is an outstanding source of learning the Art of Investing - and can bo
for achieving it.

Q5. Lets begin. We start with the all important Question of what drives a Stock Price?
Ans. There are Multiple factors -
a. Growth - Actual & Expected (Sales and Profits)
b. Absolute Undervaluation - Stock battered down due to - bad overall markets / some temporary
c. Relative Undervaluation - Stock is cheaper than it's peers / than it's potential valuation - as mk
d. Market Sentiments - the "P" in the PE is often due to sentiments - while earnings are more or le
There could be many more - but seem to have covered the most obvious ones.

Q6. So how do I build / evaluate conviction in a company


Ans. Analyse it on following parameters
a. Business Quality - BQ
b. Management Quality - MQ
c. Industry Position & Track Record - IPTR
d. Fundamentals - F
e. Growth Prospects - GP

Q7. Superb - these are good pointers - Do you have a detailed checklist for the same
Ans. Yes. Pls refer to the sheets titled "Donald Checklist" and "Hitesh Checklist". There is one Rohit Cha
It is kept in the VP Folder for reference.

Q8. Following the above exercise will land us with a few set of stocks we would like to invest in. How d
In short can we separate Wheat from the Chaff? Can we classify them into a Quality pedigree?
Ans. Super question and the answer is equally superb. I shall enumerate views of VP members as to w
Pls note - Valuation is a separate issue - Great business may not be great investment if acquired a
addressing what is a great business (and not great investment).

A Great businesses are the ones having following characteristics


a. Monopoly / Oligopoly businesses
b. Moat Companies (Significant Competitive Advantage - this can be seen in Negative working cap
c. Pricing Power
d. Opportunity Size is huge
e. Higher predictability of future cash flows
f. Asset Light business - ones which can increase their sales without too much incremental capital
g. Management with high level of integrity and pedigree

B One way to classify these businesses can be


A. PROCESSOR COMPANIES -
Ones which take some raw material as input - processes it and produces an output. E.g. Mayur, S
B. VALUE ADDITION COMPANIES -
These companies donot simply process an input into output - but undertakes some kind of intellec
and thereby adds significant value. (Piramal Healthcare, Shilpa Medicare etc.)
C. OLIGOPOLY BUSINESSES -
Often exist due to small market size - so big players are not interested. Hence investment should
D. CYCLICALS -
Ideally bott when valuations are cheap and cycles are beginning to turn. Sugar, Cement, Infra etc

C I would look for a business that is able to grow at reasonably high rate for a long period of time b
on invested capital mostly financed through internal accruals.
Business is able to grow at reasonably high rate for a long period of time:
We can compute the ratio Opportunity Size/Current Revenue -
Second - how fast is the industry expected to grow
generating consistently high rate of return on invested capital:
Ones growing with a balanced mix of Capital Turnover and Operating Margins
mostly financed through internal accruals.
Low levered business
D Businesses could be classified based on it's Quality Pedigree. Best businesses are the A+
Businesses with strong Quantitative matrix - and consistent performances - (Mayur, Atul CERA)
Businesses with consistent performance with some intellectual property (Kaveri / Shriram Transpo
Businesses with consistent performance, intellectual property and high visibility of CAGR growth fo
Businesses with consistent performance, intellectual property and high probability of disproportion

E More refined and Best definition of all


Business
Category Differentiating Characteristics

B+ Excellent long term track record, but open to cyclicality


A Great execution, well managed but laborious business - future end game isn
A+ High Value in Intangibles Business - some disproportionate future can be vis
A++ Multiple Optionalities, Disproportionate Future is quite certain - some eviden

Q9. Having classified the great businesses - is there a way to Value them?
Ans. Technically, Value of Business = Sum total of all cashflows generated during the life time of the co
Simpler way - consider you purchased an asset, say a computer - The value of the computer = su
it's life, discounted to present value. This method is called Discounted Cash Flow (DCF).
GREAT BUSINESSES ARE THE ONES WHICH - FOR A GIVEN INVESTMENT - GENERATE HIGHER FR
HIGHER THE FREE CASHFLOWS - HIGHER THE VALUE.

Q10. How is Value different from Price of business?


Ans. Value is what we get and price is what we pay. In the earlier e.g. say a laptop costs you rs 50K an
can generate cashflows as discounted to present value which is more than Rs 50K - the asset wil

Q11. What is Discounting Rate?


Ans. You invested rs 50K in the laptop - You could have invested in FD fetching 8%p.a. risk free / equi
capital. Ideal discounting rate must be associated with returns expected from assets with similar r

Q12. So what drives the Value of a business?


Ans. DCF says, Value = discounted value of free cash flows. Hence, what drives cashflows must also dr
DCF clearly says that an investment adds value if it generates return > the opportunity cost of ca
the Cost of Capital - will have higher value. But ROIC is not the only driver of Value. Say for e.g. C
(12%). But Co B invests twice as much as compared to Co A. Co B will obviously have higher valu
Co A Co B
100 200
RoIC (-) CoC 8% 8%
ROIC (Rs) 8 16
Total Net worth 108 216
Total Value 108 216

Hence - Growth & RoIC are both drivers of Value.

Q13. What are the drivers of RoIC?


Ans ROIC = NOPAT / Invested Capital
NOPAT = Net operating Profits after Taxes = Operating Earnings before Int and tax x (1 - Tax rate
So , RoIC = ( EBIT / Invested Capital ) * (1 - Tax Rate)
Now, EBIT / Invested Cap = EBIT / Revenues x Revenues / Invested Capital
So, EBIT / Invested Cap = Operating Profit Margin x Capital turnover
Assuming Tax is the same for all - the company is likely to have higher RoIC, if it has higher oper
Thus drivers of RoIC
- OPERATING PROFIT MARGIN
- HIGH CAPITAL TURNOVER
Invested Capital = Working Capital + Net Fixed Assets
Note - Working capital must specifically exclude Excess Cash and Marketable Securities - as they
One must get a general idea of the amt of cash required for day to operations and can be estimat

Q14. Is crunching such numbers sufficient to identify multibaggers? Can they tell the whole story?
Ans. No & No. Numbers are neither sufficient nor do they tell the whole story. But they can certainly le
The question we are trying to identify here is
- Which businesses are more efficient than the others? Which businesses have superior economic
- Given that both businesses are likely to grow at healthy pace - where should I allocate more ca

Q15. Introducing another concept - Economic Profit Added. What is Economic Profit Added?
Ans. Value of company = Invested Capital + Present Value of projected Economic Profit.
Economic Profit = Inv. Capital x (RoIC - CoC)
Economic Profit translates the 2 drivers of Value, RoIC & Growth, in Rupee Terms.

Q16. How does Economic Profit help understand more about value drivers?
Ans. As explained above - Economic Profit = Inv. Capital x (RoIC - CoC)
If ROIC of business is below the CoC, too much capital investment, will destroys value. The more
If Inv Capital in the business is too low, though RoIC is high - it would mean missed opportuntiies
The key therefore lies in understanding and building conviction that the company will b
Q17. What about return on incremental capital? That tells us how much the company is earning on incr
Ans Yes. Great ratio. RoIIC = Increase in EBIT / Increase in Capital Invested. Tells you how much extr
Pls Note - Both the above ratios need to be computed over 3 to 5 yr CAGR -to even put the impac

Example of EPA, MVA & RoRC.


Mayur Uniquoters 2013E
Revenues 398.52
EBIDT 67.75
Depreciation 5.11
EBIT 62.64
EBIT Margin 15.72%
Working Capital 33.98
Net Fixed Assets 70.33
Net Other Assets
Invested Capital 104.31
Capital Turnover 3.82
EBIT/Invested Capital 60.05%
RoIC 40.23%
WACC (Assumed) 12.00%
Economic Profit Added (EP) 29.45
Mkt Cap (Mar End) 500
Market Value Added (MVA) 257.77
RoRC 52.80%
5 yr RoRC 80.43%

Q18. ROIC = Operating Margin x Capital Turnover. Which one them is more controllable and therefore
Ans. Yes. Of the 2 parameters Capital Turnover seems to be more sustainable due to the following
a. High Operating Margin Businesses often face competition thereby posing a threat
b. Operating Margins are dependent on number of factors - and many times beyond the control of
Having understood that High margins are difficult to sustain - High capital turnover businesses be
Hence, Asset light companies - ones which are able to generate high turnover without too much in
Asset heavy ones - even if the Asset heavy businesses have high margins.
For e.g. Co A (Op Margins 15% x Capital Turnover 1 time) & Co B(Op Margins 5% x Cap Turn 3 ti
So, for every 1 of Invested capital - Co A can generate 1 Rs of Sales, whereas Co. B can generate
Now, for every 1% increase in margins - Co A can increase RoIC by 1% vs 3% for Co. B
Revised ROIC Co A = (15% + 1%) x 1 = 16%
Revised ROIC Co B = (5% + 1%) x 3 = 18%
Pls note - it works adversely as well if the margins drop.
Also, Asset light businesses, generally fund their capex through internal capital and hence are less

Q19. Having identified great companies to invest in - How do we allocate capital to set of stocks identifi
Ans. Great - lets address capital allocation using the following model

Sr. Under
No. Valued Conviction Allocation

1 High High Highest Allocation


2 High Medium Normal Allocation
3 Medium High Normal Allocation
4 Medium Medium Nibbling Allocation
5 Screaming Highest Invest additional funds

* % Allocation given above are flexible and based on the individuals risk appetite

a Meaning of Undervalued in table above is - absolute / sheer under valuation and not relative to m
b Conviction - Means the level of homework / research / understanding of businesses company you
c Conviction should be such that one can explain the stock idea in a few phrases
d How do you tackle illiquidity - Illiquidity in fundamentally good stocks with high growth has actual
this is a long term Portfolio - Illiquidity should not be much of a concern
e Capital Allocation model should always provide for ability to take advantage of massive fall in the

Q20. This way I will be running 2 portfolios - long term and short term. How do I allocate capital across
Ans. Follow the Mental Model below.

Big Picture Allocation Characteristics Expectation

Portfolio 1 100% Concentrated bets Doubling in 2-4 years

Portfolio 2
Emerging bluechips 50% long term compounding Doubling in 2-3 years
Opportunistic 50% short term mispricing upwards of 50% in <1 yr
Cash incl. in above Averaging down on bets not missing out on unexpected
Q21. What if one stock fares better on conviction and other on valuation. How do I allocate capital in su
Ans. Total Rating (TR) = Weights (w) x Conviction Rating (CR) + Weights (w) x Valuation Ra
One can decide the weights based on preferences - Donald prefers higher weights to Conviction (6
E.g. Stock A has 8 on CR and 6 on VR, whereas Stock B has 6 on CR and 8 on VR.
Stock A TR = 0.6 x 8 + 0.4 x 6 = 7.2
Stock B TR = 0.6 x 6 + 0.4 x 6 = 6
Stock A gets higher ranking than stock B - so allocate more.

Q22. Valuing Intangibles - Is it necessary? Is it possible?


Ans. Yes - it is necessary but may not be possible to put a numerical figure to it. It is useful, if you wis
as it forces u to think - What's so special about the co - How do I value it's Brands, Patents, Intell
and building blocks for disproportionate future growth.
EVEN THOUGH WE MAY BE MAY NOT BE ACCURATE IN IT'S ASSESSMENT - THE IMPACT OF THES

Q23. But why is it important for us as Investors?


Ans. It is very important - as it will help us build conviction to hold on to extraordinary and seemingly r
Even if Not for sale - we need to estimate how desperate a new owner would be to acquire it.

Q24. What's the general opinion on - WHAT IS THE MOST VALUABLE BUSINESS?
Ans. Most think it is
- Size of Opportunity
- Integrity of the Management
- High ROCE / ROIC
- Best EPA
While the above tangibles go a long way in Valuing a business - moment you wear an acquirer's h
it is the INTANGIBLE ASSETS IN THE BUSINESS IN ADDITION TO THE ABOVE TANGIBLES - WHIC

Q25. So what can be those things which an acquirer looks for - which can be termed as Intangibles?
Ans Few thoughts
a. Evaluation of how much will it cost to re-create an existing intangible, based on original cost of
b. Something which could bring Strategic benefits to the specific buyer
Intangibles could take various forms like
- Brands and Pricing Power
- Intellectual Property
- Proprietary Products
- Customer Loyalty and concentration
- Trade Secrets and process know-how
- Skilled management and skilled employees
- Strong distribution network

Q26. Wouldn't a high ROCE / ROIC business already reflect these characteristics - wouldn't it be captur
Ans. Big No. Else a business like Mayur having an ROCE of 47-56% range would have been more valua
Mkts have always valued Astral more than Mayur. Why? Lets have a few pointer comparison
MAYUR
1. Processor Co. - No scope of differentiation except process and quality
2. Competition can really squeeze the Margin
3. Possibility of Product Substitutes and New entrants
4. Many Variables and hence higher vulnerability

Conclusion - Business Quality is far more important than numbers - once you operate ab

Q27. So what makes a company exceptional? How do we find such companies?


Ans. Buffet describes
"Leaving the question of price aside, the best business to own is the one which can deploy the mo
of return (above cost of capital) for the long period of time". So we need to focus on Companies h
- Moats - Meaning Competitive Advantage - e.g. Brand, distribution network, patents, etc
- Depth of Moat - Larger the better - It helps companies to reinvest at higher rates. ROIC (-) CoC
- Durability of the Moat - How long can the company continue to earn higher ROCE's - if the moa
- Length of Moat - Related to the Opportunity Size, Competitive Intensity, Entry barriers
E.g. of Moat Companies - HDFC Bank, Nestle, ITC

Q28. How does a company acquire sustainable competitive advantage?


Ans. There are 2 Sources
- Strategic Assets - like patents, intellectual property rights, exclusive licenses, natural monopoly
- Distinctive Capabilities - These are more intangible and therefore difficult to replicate

Q29. Please elucidate on the Distinctive Capabilities?


Ans. These are relationships which a firm has with it's customers, suppliers or employees - which cann
addition which cannot be competed away. Distinctive Capabilities can be divided into 3 categories
- Brand & Reputation
- Architecture
- Innovation

Q30. We understand Brands, Reputation and Innovation - Pls elucidate on Architecture


Ans. A dream you dream alone - is only a dream. A dream you dream together - is a reality.
It refers to a network of relationship with employees (Internal architecture), customers
group or firm engaged in related activity). It adds Value by
- helping create organizational knowledge and routines
- which helps the company respond flexibly to changing circumstances
- and allows easy exchange of information
Note - it can add value only over long term which can penalize opportunistic behaviour.
E.g. of Architecture - AMUL, Valuepickr Forum

Q31. Having a Moat is easy - but is also temporary - What makes a Moat enduring?
Ans. THE RIGHT ARCHITECTURE - IF A BUSINESS HAS THE RIGHT ARCHITECTURE, IT WILL KEEP REIN
Nothing can be enduring - if you donot keep investing in protecting your turf - whether Brands, In

Q32. How do we put a Value to these Intangible?


Ans. The effort here is not to put a number value - but establish the Value Chain of Intangibles - which
For e.g. A company involved in process re-engineering found a breakthrough improving efficiency
It does tell us about the R&D capability of these companies - though we cannot put a value to it.

Q33. Can we have a practical case study?


Ans. One of the VP members cited a great e.g. Acquisitions in IT Products companies happen primarily

a)Face book buying WhatsApp:


Network effect, competition with FB with 400 million active users. Microsoft, Google, FB all three w

b)Face book buying Instagram :


Face book had little mobile presence and pictures were important to FB and others. Here too ther

c) Microsoft buying Nokia:


Microsoft had little choice in the case of Nokia since Microsoft as presence in Mobile was only due

d) Microsoft buying aquantive:


Inability to build a competitive advertising platform against a rival like Google. Here too there was

e) Microsoftâs failed bid to acquire Yahoo for $42b:


A very strong competitor Google (65%) stifling out two smaller competitors (30% combined). Thi

The themes that emerge from the acquisition examples in technology are:
a) Multiple suitors with access to large cash.
b) Time taken in creating intangibles is very high.
c) Competitive risk arising for the acquirer in the absence of acquisition.
d) Network effect leading to no alternative to grow in a segment.

Q34 Any template which can help evaluate the Intangibles?


Ans. Yes. Refer to the Sheet titled - Valuing Intangibles
upto 100x (no upper limit though).

upon a method which is more predictable and aims at indentifying 2x and above in a span of 3 to 5 years.

ee the sheet titled compounding.


s, Berkshire Hathway, Amazon, Microsoft - ( Highlights the importance of Opportunity Size,

faster - currently am focusing on doing this.

tlined the process of doing so?


rt of Investing - and can boast of many multibaggers - but more importantly have outlined a process

tock Price?

l markets / some temporary set-back specific to company


potential valuation - as mkts are not pricing the possible potential of the stock
while earnings are more or less stable - Price keeps on changing

r the same
list". There is one Rohit Chauhans Checklist also - far more detailed with many excels

ould like to invest in. How do I decide which is a better business -


into a Quality pedigree?
ews of VP members as to what is a great business
eat investment if acquired at very high price. We are simply

een in Negative working capital companies)

o much incremental capital investment.

es an output. E.g. Mayur, Suprajit, Gujarat Reclaim

rtakes some kind of intellectual process (sometimes difficult to replicate)

d. Hence investment should be opportunistic in these.

n. Sugar, Cement, Infra etc.

for a long period of time by generating consistently high rate of return

od of time:
est businesses are the A+ category
ces - (Mayur, Atul CERA)
y (Kaveri / Shriram Transport Finance) -
visibility of CAGR growth for 5 to 10 yrs (Astral / Amara raja) - Category A
probability of disproportionate growth (PI / Poly / MCX) - Category A+

Stable PE
Range

15 - 20
iness - future end game isn't that exciting 20 - 25
portionate future can be visualized 25 - 30
quite certain - some evidence of the end game 30 - 35

during the life time of the company, discounted to present value.


value of the computer = sum total of cashflows you will generate through
Cash Flow (DCF).
NT - GENERATE HIGHER FREE CASHFLOWS

a laptop costs you rs 50K and has a life of 5 Years. If you


than Rs 50K - the asset will add value.

hing 8%p.a. risk free / equities fetching 15% p.a. So discounting rate is your opportunity cost of
d from assets with similar risk profile as your prospective investment. So for equities say 12% / 15%

ives cashflows must also drive the business value.


> the opportunity cost of capital. So, companies which generate Return on Invested capital >
river of Value. Say for e.g. Co A & Co B - both have Same ROIC (20%) and Same Cost of Capital
obviously have higher value
e Int and tax x (1 - Tax rate) = EBIT x (1- Tax Rate)

r RoIC, if it has higher operating profit margin or higher capital turnover or both.

etable Securities - as they may represent temporary imbalances in the Cash


erations and can be estimated as a % of Sales.

ey tell the whole story?


ry. But they can certainly lead us to great companies.

ses have superior economics?


e should I allocate more capital?

ic Profit Added?
nomic Profit.

Rupee Terms.

l destroys value. The more you invest - the more you destroy.
mean missed opportuntiies - as absolute gains are less.
that the company will be able to deliver great RoIC on increased capital investment.
company is earning on incremental capital
ed. Tells you how much extra returns did the company earned for additional rupee invested.
AGR -to even put the impact of immediate Capex

2012 2011 2010 2009 2008 2007


317.48 248.56 164.73 115.05 90.24 66.26
54.2 40.87 27.92 11.78 10.57 6.67
3.87 2.67 2.08 1.59 1.39 1.52
50.33 38.19 25.84 10.19 9.18 5.15
15.85% 15.36% 15.69% 8.86% 10.17% 7.77%
29.58 33.01 22.21 12.07 11.88 13.42
49.07 31.3 23.15 22.65 21.32 15.95

78.65 64.31 45.36 34.72 33.2 29.37


4.04 3.87 3.63 3.31 2.72 2.26
63.99% 59.38% 56.97% 29.35% 27.65% 17.53%
42.87% 39.79% 38.16% 19.67% 18.53% 11.75%
12.00% 12.00% 12.00% 12.00% 12.00% 12.00%
24.28 17.87 11.87 2.66 2.17 (0.07)
242.23 137.47 77.42 12.9 22.4
104.76 60.05 64.52 -9.5
92.97% 68.34% 151.68% 79.56% 101.83%

e controllable and therefore deserve more focus?


ble due to the following
osing a threat
times beyond the control of company - unless it is able to pass on the increased cost
ital turnover businesses becomes more relevant.
urnover without too much increase in capital - are better businesses than

Margins 5% x Cap Turn 3 times) both have RoIC of 15%.


whereas Co. B can generate 3 Rs of Sales. Co. B is Asset Light than Co A.
% vs 3% for Co. B
al capital and hence are less leveraged vs asset heavy ones.

pital to set of stocks identified. Where does the valuation come into play?

Max Wts Portfolio

40% Long Term


20% Short Term (Long term as conviction builds)
20% Long Term
5% Short Term (Long term as conviction builds)
15% Can overide guidelines of Long Term

100%
duals risk appetite

uation and not relative to markets or industry or historical


of businesses company you achieved and not whether everyone agrees

with high growth has actually worked to our advantage. Also, since

ntage of massive fall in the portfolio stocks - always have 20% cash set aside for such scenario

w do I allocate capital across them?

Holding Profit Booking

ubling in 2-4 years 5 years

ubling in 2-3 years 5 years Only when it can't double from here
wards of 50% in <1 yr max 1 year closely review post target/holding period
missing out on unexpected bonanzas -
ow do I allocate capital in such case?
eights (w) x Valuation Rating (VR)
her weights to Conviction (6) and lower to Valuation (4) - Quality over cheapness.
nd 8 on VR.

to it. It is useful, if you wish to acquire the co - "Value to 100% owner"


e it's Brands, Patents, Intellectual Property, Network Effects - creating entry barriers

ENT - THE IMPACT OF THESE INTANGIBLES WILL HAVE TO BE INCORPORATED IN VALUATION.

traordinary and seemingly richly valued businesses - KNOWING THESE CAN BE UP FOR SALE
would be to acquire it.

nt you wear an acquirer's hat you will realize - that


ABOVE TANGIBLES - WHICH DETERMINE THE REAL VALUE OF THE BIZ.

e termed as Intangibles?

e, based on original cost of creating it.


stics - wouldn't it be captured in these Ratios?
would have been more valuable than Astral (28 - 32% ROCE range). But
ew pointer comparison
ASTRAL
1. Processor Business but better/new product with strong distribution network.
2. Lower Competition
3. Simply add capacities and increase distribution - keeping LUBRIZOL happy
4. Much lesser Variables impacting biz.

ers - once you operate above a basic threshold.

ne which can deploy the most amount of incremental capital at high rates
eed to focus on Companies having
etwork, patents, etc
t higher rates. ROIC (-) CoC
higher ROCE's - if the moat will disappear in a few years - business is in trouble. Brand, Patents etc
sity, Entry barriers

licenses, natural monopoly etc


ficult to replicate

or employees - which cannot be replicated by competitors - thereby providing value


be divided into 3 categories

ate on Architecture
m together - is a reality.
architecture), customers and suppliers (external architecture) and networks ( relationship among
opportunistic behaviour.

ECTURE, IT WILL KEEP REINVESTING IN AND NURTURING TALENT AND TEAMS AND KNOWHOW.
ur turf - whether Brands, Intellectual Property and People.

Chain of Intangibles - which will help us evaluate the kind and durability of the Moat.
hrough improving efficiency by 10%. Then comes a company which improves it by 50%.
e cannot put a value to it.

ompanies happen primarily for intangibles and not based on ratios / numbers.

osoft, Google, FB all three were interested in WhatsApp and that drove the price significantly up.

B and others. Here too there was a bidding war between FB and Google.

nce in Mobile was only due to Nokia because most other OEMs of Windows Phone had given up on it.

Google. Here too there was a bidding war with a lot of other suitors like Yahoo and AOL interested.

titors (30% combined). This difference of 35% actually resulted in a very large ad revenues in favor of Google.
ip among
of Google.
20% 15%
Yrs Start Cap Rate Capital Yrs Start Cap Rate Capital

1 1.00 0.20 1.20 1 1.00 0.15 1.15


2 1.20 0.24 1.44 2 1.15 0.17 1.32
3 1.44 0.29 1.73 3 1.32 0.20 1.52
4 1.73 0.35 2.07 4 1.52 0.23 1.75
5 2.07 0.41 2.49 5 1.75 0.26 2.01
6 2.49 0.50 2.99 6 2.01 0.30 2.31
7 2.99 0.60 3.58 7 2.31 0.35 2.66
8 3.58 0.72 4.30 8 2.66 0.40 3.06
9 4.30 0.86 5.16 9 3.06 0.46 3.52
10 5.16 1.03 6.19 10 3.52 0.53 4.05
11 6.19 1.24 7.43 11 4.05 0.61 4.65
12 7.43 1.49 8.92 12 4.65 0.70 5.35
13 8.92 1.78 10.70 13 5.35 0.80 6.15
14 10.70 2.14 12.84 14 6.15 0.92 7.08
15 12.84 2.57 15.41 15 7.08 1.06 8.14
16 15.41 3.08 18.49 16 8.14 1.22 9.36
17 18.49 3.70 22.19 17 9.36 1.40 10.76
18 22.19 4.44 26.62 18 10.76 1.61 12.38
19 26.62 5.32 31.95 19 12.38 1.86 14.23
20 31.95 6.39 38.34 20 14.23 2.13 16.37
21 38.34 7.67 46.01 21 16.37 2.45 18.82
22 46.01 9.20 55.21 22 18.82 2.82 21.64
23 55.21 11.04 66.25 23 21.64 3.25 24.89
24 66.25 13.25 79.50 24 24.89 3.73 28.63
25 79.50 15.90 95.40 25 28.63 4.29 32.92
26 95.40 19.08 114.48 26 32.92 4.94 37.86
25%
Yrs Start Cap Rate Capital

1 1.00 0.25 1.25


2 1.25 0.31 1.56
3 1.56 0.39 1.95
4 1.95 0.49 2.44
5 2.44 0.61 3.05
6 3.05 0.76 3.81
7 3.81 0.95 4.77
8 4.77 1.19 5.96
9 5.96 1.49 7.45
10 7.45 1.86 9.31
11 9.31 2.33 11.64
12 11.64 2.91 14.55
13 14.55 3.64 18.19
14 18.19 4.55 22.74
15 22.74 5.68 28.42
16 28.42 7.11 35.53
17 35.53 8.88 44.41
18 44.41 11.10 55.51
19 55.51 13.88 69.39
20 69.39 17.35 86.74
21 86.74 21.68 108.42
22 108.42 27.11 135.53
23 135.53 33.88 169.41
24 169.41 42.35 211.76
25 211.76 52.94 264.70
26 264.70 66.17 330.87
Parameters to assess business quality

1 Nature of business
(commodity, commodity processors, high-tech, cost plus, price setters, monopoly/ oligopoly, fiercely

2 Moat / Competitive Advantage


(brand plays, economies of scale, ability to pass on price, entrenched customers, long complex app

3 Sector Attractiveness / Market Fancy


(Defensives, glamour sectors, dull and boring, high growth, likely PE ranges)

4 Cyclicality
(Sales and earnings growth cycles over 5 to 10 year periods)

5 Raw Material dependence


(RM/Sales percentage, RM swings and correlation with OPM)

Parameters to assess Growth Prospects

1 Opportunity Size
There could be 2 co's each leading their niches - but size of niche may be very different - Astral

2 Ability to Scale up
a Industry Growth - (Curr Size, annual growth rates, projected CAGR)
b Company Growth - (Organic, Inorganic, Sales growth, earnings growth)
c Ability to Fund growth - (Existing D/E, Industry median D/E, previous track record, industry con
d Barrier to Entry - (From competence to manage growth, regulatory approvals, govt approvals,
economies of scale, nearest competition)
e 1 year Earnings Estimate - (TTM EPS, Half year EPS, Prev Yr YoY Growth, YoY Growth Estimate

Parameters to assess Management quality

1 Type of Management - (1st generation / Family Run / Professional)


2 Management Drive - (Stated objectives / growth & track record / domination of it's ni

3 Management Depth - (Top Management, Board Composition, Performance, Attractiven

4 Management Integrity - (Related Party transactions, Habbitually taking up stock, warr


high quality talent, auditor diff / resignations, tax payment records)

5 Disclosure Norms
(Annual reports, prompt announcement on developments, auditors qualifications)

6 Follow-Through
(Walking the talk, 5 year track plans and execution record, deliver on commitments)

7 Self confidence - ability to think and do things differently

8 Compensation - Fairness, industry standing of top management, peer comparisons, lin

9 Shareholding pattern - Promoter Holding, MF Holdig, FII Holding, Sharp changes in pr

10 Regulatory / Compliance
(SEBI strictures, penalty, fines, IT Raids, BSE NSE bans)
, monopoly/ oligopoly, fiercely competitive)

customers, long complex approval process, patents, R&D, product innovations)

may be very different - Astral PAN India Vs Vinati Org - oligopoly

us track record, industry confidence, free cash flows)


approvals, govt approvals, patents, entrenched customers, difficult to switch vendors,

owth, YoY Growth Estimate


ord / domination of it's niche)

Performance, Attractiveness as employer)

ually taking up stock, warrant conversion at premium / disc, ability to retain

uditors qualifications)

eliver on commitments)

ent, peer comparisons, linked to performance

ding, Sharp changes in promoter holding, pledged shares


Business Quality

1 Is the business suitable for Long Term Investing?


2 Is there ample opportunity for company to grow it's business at a smart pace over the next 3 to
3 Does the business entail excessive capex? Does the capex justify the sufficiently high returns to
4 Is there a possibility of the govt interference creating problems with the prospect of the busines
5 Is the business sensitive to raw material price volatility and can it be passed on to the customer
6 What kind of business are we looking at - Sunrise sector like (agri, water waste management, c
Neglected sector (Infra / Capital goods)?
7 How are other companies in the sector doing? If most of them are doing well - it must be a good

Management Quality

1 What is Prom Holding? Any excesscive Pledging?


2 How have management handled growth in past? Have they taken excessive risks / aggressive d
3 How have shareholders been rewarded? Div Payment is a big plus in small cap cos' is great sign
4 Unusual antics by the management - allotment of warrants do they convert them and at what p
5 Whether they are likely to take minority investors for a ride?
6 Do they have a hunger to grow? Capex Plans / Vision / Objective
7 Management remuneration - justified / excess / industry norms
8 How do they answer querries at AGM's / other interactive platforms?
9 Whether they walk the talk? They Under promise and over deliver or vice-a-versa

Fundammentals
1 Kind of Growth - Fast / Medium / Slow?
2 Whether Growth is achieved through excessive debt / equity dilution
3 ROE / ROCE /
4 Chances of sudden change in the business fundamentals for better or worse? Is the company at
5 Is the company at it's peak of earnings - and going forward the earnings are likely to slow down
6 Div Payout - Increasing div with increasing profits?
7 Free cash generation / cashflows over past few years?

Industry Position / Track Record


1 Comparison with the Peer Group. Valuations & growth
2 Not necessary to invest in industry leader - as there may be limited room to grow beyond a size
3 Is the company growing at higher than the industry average? If so why / what is separating it fr
Growth
Same as Donald - Just 1 redflag one should check - be wary of companies growing Profits witho

Valuations
1 Current Valuation I am paying for this business
2 Is there a flawed mkt perception which is giving a chance to participate in company's growth rat
3 What is the current mkt phase - bull / bear / sideways mkt
4 One should look at Enterprise Value instead of pure mkt cap
mart pace over the next 3 to 5 years?
e sufficiently high returns to justify the efforts of the capx?
h the prospect of the business?
e passed on to the customers?
water waste management, cloud computing etc) / Steady growth sector (FMCG, Consumers) /

doing well - it must be a good invest to be in.

xcessive risks / aggressive debt? Bets taken by them in past have failed / paid off.
n small cap cos' is great sign that profits are real.
convert them and at what price? Whether they sell holdings at opportune times in mkt?

r vice-a-versa

or worse? Is the company at the cusp of explosive growth?


nings are likely to slow down / show degrowth?

room to grow beyond a size. Small Nimble player with some advantage can do good.
why / what is separating it from others?
panies growing Profits without increase in Sales.

pate in company's growth rate at cheap prices


Strategic Assets Describe
- Patents
- Proprietory Knowhow
- License/Franchise
- Regulatory Framework
- First Mover Advantage
- Legal Rights
- Monopoly / Duopoly
- Oligopoly
- Natural Resource Access
- Raw Material Chain Control

Architecture/ Organisation Style Describe


- Customer Relationships
- Supplier Relationships
- Distributor Relationships
- Employee / Team Relationships
- Co-operation across Relationships

Innovation Describe
- Leader Vs Follower
- Doing Things differently
- Replicability / Catchup distance

Branding Describe
- Price Premium Vs Peers
- Branding spen - % of sales
- Time since leadership position
- Media Recognition
Ratings

Ratings

Ratings

Ratings