Professional Documents
Culture Documents
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 avg
RONW 10.5% 9.5% 13.8% 14.1% 14.3% 28.6% 18.8% 21.0%
ROCE
debt/equity (incl AP /
Accrued expenses etc) 0.6 0.5 0.42 0.78 1.3 1.1 0.82 0.47
Fixed assest T.O 0.7 0.7 1.1 0.9 1.1 1.4 1.6 1.5
W cap T.O 1.8 1.8 2.6 1.8 1.8 1.8 1.9 1.8
Inv T.O 2.3 2.4 2.6 2.5 2.4 2.6 2.55 2.20
Recievables TO 4.3 3.8 3.7 3.4 3.3 3.4 3.31 4.80
Total asset T.O 0.48 0.50 0.75 0.62 0.67 0.80 0.87 0.95
OPM ( EBIT/Sales)
NPM 10.5% 9.6% 10.0% 10.5% 12.1% 15.9% 10.5% 15.4%
Salesgr 6.8% 54.9% 6.7% 37.3% 46.7% 17.7% 12.2%
OP gr
NP gr -2.6% 61.3% 12.5% 57.3% 93.7% -22.7% 65.1%
Interest cost 8.6% 6.7% 2.4% 2.1% 3.0% 3.2% 3.1% 2.3%
Overhead % 42.1% 40% 33.5% 39.7% 39.7% 36.4% 33.5% 37.4%
RM Cost %of sales 42% 43% 34.0% 35.4% 38.9% 37.3% 40% 37.8%
Manpower cost 10.8% ### 7.8% 12.6% 12.2% 10.1% 10% 8.8%
Tax % of PBT 11% 8% 20.9% 21.1% 31.6% 21.4% 36% 8%
current ratio 1.39 1.54 3.0 3.2 4.0 4.0 3.4 4.4
Dividend ratio (DPS/EPS) 21% 21% 21% 22% 18% 23% 32% 22%
Depriciation (% of sales) 5% 6% 3.8% 4.3% 4.1% 3.3% 3.0% 2.9%
Avg Capex ( % of sales)
FCF (% of sales)
Net cash from ops/ net
profit
Investment / share
Sales 3249 3469 5374 5735 7877 11558 13609 15263
Seasonality analysis
Cash on books (Crs)
Interest income as % of cash
Key no brainer questions
Debt
Does the company have > 0.7 times debt (unless it is a bank / finance institution)
Will the company be able to finance/ renew the debt without equity dilution or bankruptcy
Is the debt non-recourse or recourse ?
Does the company have contigent / off balance sheet liabilities ?
Does the company need borrowed money for funding a critical aspect of the business ?
Corporate governance
Is the management hoarding cash with raising dividend or reinvesting it ?
Has the management allocated cash rationally and returned excess cash to shareholders ?
Is the management putting cash in other non core areas which has no relevance to the core biz ?
What is the % of non core income (other than operations). Is it more than 10%, does it look fishy ?
Has the management been reprimanded by SEBI or other bodies. Does the management has bad governance
history with other firms ? (check watchoutinvestors.com)
Is the management lending excess cash to sister firms via loans and advance, sometime even below market
rates ?
Does the management make more than 3% of net profit as salary
Is the management buying or selling shares of the company?
Has the management does accquisitions in the past at high valuations and did they work out successfully ?
Has the record been good ?
Does the company have an MNC management which has worked against shareholder interests in the past ?
Competition
Does the company face intense competition in its segment from some new competitor ?
Does the industry have a history of intense competition in the past ?
Does the company operate in a segment which could see severe competition from a large competitor ?
Is the company getting impacted or will get impacted by low cost imports ?
Business economics
Is the company in commodity type biz with poor pricing poor and is not lowest cost mfg
Has the recent FCF or performance been due to bubble/ Cyclical high or am I looking at cylical earnings ?
Does the company operate in a business with poor ROE, high competiton, low barriers to entry and typical
commodity economics - i.e does it have sustainable competitive advantage
Does the company have product obsolesence ?
Are the NPM and Return on capital numbers comparable with other companies in the sector, if not why ?
Does the company have average ROE above WACC for 10 yrs ?
Does the company operate in an industry with ample growth opportunities ?
Portfolio setup
Will the company being analysed be impacted in terms of fundamentals and price by fairly same factors as
other ideas in the portfolio
General
Do all the stakeholders of the company benefit or is the company predatory with some stakeholder, for ex:
selling credit to poor customers
Test of competitive advantage
Strong competitive advantages create entry barriers for incumbents, preventing entry of competition and enables incumbents
Production advantage factors 1. Process economies (resulting in lower cost of production for
- resulting in moat (cost based incumbent)
advantages). Weaker than customer a. Indivisibility lead economies
based advantages expect in case of b.complex , linked activities
patents or government regulation (like c. learning curve process cost
licenses ). d. patent/ copyright/ R&D advantage
- indicator is high asset turns e. resource uniqueness
based advantages expect in case of
patents or government regulation (like
licenses ).
- indicator is high asset turns
1. Scale economies
a. In demand
b. Distribution
c. purchasing
d.production
e. R&D
f. Informational economies of scale such as in advertising would
give prevent new competitor
Customer advantage - creates more 1. Habit forming and High Differentiation - No. 1
durable competitive advantage 2. Experience goods (brand effect, trademarks) - No. 2
- more common, indicator is high 3. High switching cost (Lock-in) - No. 3 (for ex : change of
margins business software by a co. such as SAP ERP etc)
4. High search cost ( where it is diffcult, expensive and risk for
custom to look for alternative ) like case of doctor or lawyer
4. Network effect (related to switching cost - network effect
increases switching cost)
1. License
Government/ Regulation based advantage 2. Tariff / quota/ regulation
Moat analysis - does company has deep 1. Does co have multiple demand side advantages ?
competitive advantage or weak one ? 2. Does company has scale advantages - absolute advantage is
Customer advantages are more not necessary. Local or product specific advantages are enough
sustainable ! 3. Does the company has cost advantages with or without scale
Answer to these 3 questions decides whether competitive
advantage is strong or not
Franchise Analysis - Competitive advantage analysis ( part repeat of the previous tab
Key factors of competitive advantage Drivers
Barriers to entry 1. Patent
2. Governmental License
3. Consumer demand Preference (Brands / Trade marks)
Enduring Low cost position 1. Due to technology / Processes - not so enduring
2. Due to management skill - good but may not endure the
current management
Distinctive capability analysis applied to specific market (product or geographic create the customer based or production based
Analysis of Distinctive capability for the firm
Type Description
Relationships with all stakeholder / systems / process / Knowledge
Architecture base
Distribution network / Customer relationships / plant / license
Strategic assets monopoly / natural reserve /Patents / Media Properties/ Network
Innovation effects / Switchinghistory
R&D / Innovation costs /NPD
Cost Enduring Low Cost position
Strong Balance sheet
Finanical strength
Brands / trademarks
Reputation
The value chain analysis can be used to identify the key distinctive capabilities and how unique the capabilites are and strengh
How much
Checklist
Economics models
Does the industry have good economics - a) High return on capital , Less price wars,
barriers to entry. Chk industry returns for last 10 years and see if the indsutry returns
have been high or characterised by high competition
Does the industry have scale - characterised by large competitors or a large no. of
small firm and intense competition - indicator of low Fixed cost and hence lower
competitive advantage
Does the company operate as monopoly / duopoly / intense competition
Is the industry RM intensive / sensitive ( 40-50 % ) total cost and hence has low
Variable costs - hence high operating leverage ?
Does the industry have high Capital intensity ( sales / FA+NWCA <1.5 )
Can the company increase prices freely ahead of inflation/ Does it have untapped
pricing power ( VV IMP )
What is the earning power of the company through the complete business cycle (level
of cyclicality )
Does the industry have a high degree of change and obsolesence ?
Are they regulatory or technology shifts happening in the industry which will migrate
value to a different set of industry participants ? Does it impact the company ?
What is the % of installed capacity being used ? Will the company require substantial
capex ?
Accounting checklist
Options grant as a % of O/s shares
Future dilutions due to ESOP
FCCB borrowing resulting in dilution (Indian companies)
Is sales booked agressively ?
Is sales got through liberal financing - AR is increasing as % of sales
Are earning managed by modifying reservers/ special charges ? - Retained earnings >
increase in book value
Does the management have aggressive pension accounting ?
Interest income as % of cash (looks correct ?)
do the provident fund charges look correct (PF amount / employee - compare with
other companies
Any MTM losses on the balance sheet or 'Shareholder' equity statements ? Due to
derivative instruments
Is the loan and advances too high and growing year on year ?
Does the company lease product on financial / operating leases on market terms ?
chk for losses in the loan portfolio (banks)
Management factors
Is the management rational in capital allocation . Does management allocate capital
well and above current rate of return. If the management has excess capital, is it
giving it back to shareholders ?
Is the management having integrity
Does the management discuss both negative and positives of the company
performance candidly .
What is the compensation levels in the co. Is the CEO/owner being compensated
heavily (cash or options?)
Does the management / CEO have substantial ownership in the company ?
salary as % of sales
related party transaction - are they harmful to the co ( rights offer, sale of promoter
owned ventures to the company at high price)
Tax as a % of PBT ( is it too low , < 15%, why ?)
Plans for cash ?
Has the management been reprimanded by SEBI or other such govt bodies ? Does
they have any past cases or issues in other companies ? - check google and stock
boards such as moneycontrol , TED etc
Is the cash held in foreign banks ?
Has the management done accquisitions in the past ? What is the track record of
these accquisitions ?
Has the management done restructuring and taken such charges on a regular basis ?
What is the management track record in the last 10 yrs ? Have they followed through
on their statements in the past ? How is their execution track record
Physcological models
Am I working with recency bais - giving more wieght to recent data ( check if the
projections based on recent data or averages )
Am I working with Hindsight bais - thinking that fact was obvious beforehand ( check
if the -ve factor was noted before hand )
Am I framing issues correctly and in different manners - trying to look at situation
using varying models
Is there a data framing bais - influenced by the way data has been presented.
Am I too overconfident on the situation - assuming over familiarity , associating
positive unrelated feeling, too high wieght to optimistic scenario ( familiarity due to
work / association with the industry )
Have I done probability analysis for all negative factors
Am I having too much loss aversion - overwieghing negative factor
Am I working with sunk cost mentality - trying to average down the cost
Am I slow in changing opinion - not responding to negative news
Describe negative thesis for the company
Bais from commitment and consistency tendency - Make this spreadsheet hence
committed to buy ?
Pavlovian association - correlation being considered as cause effect relationship
social proof bais - stock being recommended by various analyst
Incorrect / low weightage of existing/ new negative information or even positive
information
Status quo bais - unwilling to sell existing holding ( review discount to intrinsic value
and sell based on that )
False consensus bais : confirmation bais ,selective recall, baised evalution ( check all
information against you investment thesis and evalute objectively )
Have you questioned the consensus
Has the analysis been done with reverse thinking (working the problem forward and
backward)
Catalyst
Shift of demand/supply to favor company ( relevant more for commodity company )
Change in the business cycle / economic cycle- imp for commodity business
Regulatory changes
Management action - Buy back, Bonus etc
Asset conversion - buyback / LBO/De-merger/Accquisitions - critical if the business is
a holding company or reason for buying is discount to asset
Value creation through access to capital market on very favorable terms
Sale / buying of any asset
Unexpected earnings increase
Time - Catalyst if self assesment of CAP is higher than market. With time market
realises the higher CAP and will give higher valuation
(value - Poor management not interested in enhancing value)
Other models
What are the key no-brainer questions ?
Any combination of factor effects
Biomodels
Will the business survive/adapt into a niche or is it a dominant player
Does the business have practise evolution
Describe how the company operates as part of the ecosystem - dominant firm or
small firm in a niche ?
Hidden assets
Does the company have subsidiary which are carried at cost and is worth more
Does the company has real estate which is at cost and worth more
Does the company have investments which are worth more than the cost
Hidden liability
Forex/ derivative liability
ESOP liability
Pension liability
Equity dilution via FCCB
Contigent liability as % of Net worth and annual profit (concern ?)
Munger Model
1. Solve the big no brainer points in the thesis - find the key points of the idea which
define success/ failure for the idea
2. Use math to support the reasoning the supporting/ opposing points for the idea
3. Think the problem forwards and backwards - find causes which will cause the
company to fail
4. Use multidisciplinary approach - analyse the idea based on models on this page.
Any specific models point to a hidden factor not being considered and can cause it to
fail ?
5.Properly consider results from a combination of factors or lollapalooza effects
Other questions
Based on DCF what factors would improve the CAP and growth further
Based on DCF what factors will cause a deterioration in performance
List 3-4 reasons why the idea will fail ?
Failure analysis (list factors which will cause the company/idea to fail) - describe
High debt level
Cyclical high in terms of margin
Management competency
Competition
Remarks
Read AR/ Google to answer questions on various models
not much
yes
yes
none
chk
chk
yes
no
chk
chk
no
none
none
none
none
none
chk
yes
chk
no
no
no
no
appears so
yes
yes
chk
yes
chk
chk
yes, keeps swinging up and down
none ..being invested in biz
no
no
yes
no
no
TBD
no
no
no
ROE not too high, needs constant capital to grow. Asset turns not high and hence 4-5% is maintenance
capex. Hence fresh capital needed for growth
possible
NA
no
TBD
no
no
yes. Consensus does not consider the improved performance
TBD
Yes
Yes
None
None
None
None
None
Possible
None
yes, a bit
none, consolidated numbers being considered
no
no
none
none
none
Low, Bad - 1
Med - 2
High, Good -3
Low CA = < 30
Med 30< , <50
High CA > 50
The Industry structure helps in identifying the critical competitive factors which have to be managed to create a sustainable CA
Industry mapping
Key segments Size Key companies in each segment
Single segment - graphite electrodes HEG
Key Demand Drivers Impact Remarks
Demand from steel industry High
Growth in international markets - germany / EU
Positive factors
decent balance sheet
Decent pricing stenght inspite of recession
Questions to be explored
What is the industry economics in india.
Why does this company have decent ROE inspite of being in a
moderately attractive indsutry
Valuation ( neutral ) actual
detail 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
PBDIT 0 0 0 0 0 836 792 1010 1128 1774 3187 3061 3321 16000 16400 17000 18000
excpl item & non operating inc.
Less :TAX 0 0 0 0 0 40 30 140 160 270 600 800 180 4191 4324 4491 4765
Less : Wcap change 0 0 0 0 0 1842 82 176 1050 1350 1800 1000 1400 -8700 0 0 0
Less : Capex 0 0 0 0 0 6752 138 270 2150 2381 2749 1204 3002 2354 500 500 1000
Less : Capex ( maint) ** 0 0 0 0 0 2186 430 530.2 1481 1853 2370 1584 2096 -7230 1505 1540 1610
FCFF- normal $$ 0 0 0 0 0 -7798 542 424 -2232 -2227 -1962 57 -1261 9455 11576 12009 12235
FCFF(Mn) 5 0 0 0 0 0 -1390 332 339.8 -513 -349 217.2 677 1045 19039 10571 10969 11625
shares ( mn) 0 0 0 0 0 1404 2802 2790 2726 3000 3398 3316 3154 3150 3150 3150 3150
fcff/ share #DIV/0! ### ### ### ### -5.55 0.193 0.152 -0.82 -0.74 -0.58 0.017 -0.4 3.0 3.7 3.8 3.9
fcff / share ( maint) #DIV/0! ### ### ### ### -0.99 0.119 0.122 -0.19 -0.12 0.064 0.204 0.331 6.0 3.4 3.5 3.7
discount ( 1.15 or 1+ WACC ) 1 1 1 1 1.1 1.2 1.3 1.5
NPV ( maint) -0.12 0.064 0.204 0.331 5.5 2.8 2.6 2.5
terminal value : note 1 24 Above FCFF should exclude income from cash if cash is being added back to valuation
Intrinsic value estimate 48
Equity value / share : note 2
MICAP calculation
Terminal value 3 38 39 41 43
total = terminal value+ cum of value 4 47.4 51.4 56.3
MICAP years
current price
Notes :
1. FCF ( n+1 th year )/ Wacc - g Wacc : weighted cost of capital , g - long term growth / economy growth
2. Equity value = IV - ( LTD+STD-cash - cash equivalent ) + Non operating asset- ESOP value - contingent liability
3. Terminal value = current year NOPAT / WACC /(1.15 ^ no. of year)
4 cum of value = total of discounted fcff till year in question
5. FCFF adjusted for maintenance capex
$$ - adj for normal capex
** - capex for maintenance
11.11
plan
2015 2016 2017 2018 2019 2020
19000 19600 20600 21400 22600 24000
45 47 49 51 54 57
60.8 59.15 60.898 62.293 64.774 67.63
HIGH PROBABILITY - NEUTRAL
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
sales 3249 3469 5374 5735 7877 11558 13609 15263 80000
Sales Gr #DIV/0! 6.8% 54.9% 6.7% 37.3% 46.7% 17.7% 12.2% 424.1%
Operating cost 2413 2677 4364 4607 6103 8371 10548 11942 64000
% of sales 74.3% 77.2% 81.2% 80.3% 77.5% 72.4% 77.5% 78% 80%
PBDIT 836 792 1010 1128 1774 3187 3061 3321 16000
% Gr #DIV/0! -5% 28% 12% 57% 80% -4% 8% 382%
% of sales 25.7% 22.8% 18.8% 19.7% 22.5% 27.6% 22.5% 21.8% 20%
depriciation 175 198 205 246 321 377 410 440 2100
dep %sales 5.4% 5.7% 3.8% 4.3% 4.1% 3.3% 3.0% 2.9% 2.6%
dep % FA 3.6% 4.0% 4.1% 4.0% 4.5% 4.6% 4.9% 4.4% 10.0%
Interest 279 231 128 118 233 370 428 351 1200
% of sales 8.6% 6.7% 2.4% 2.1% 3.0% 3.2% 3.1% 2.3% 1.5%
Tax 40 30 140 160 270 600 800 180 4191
% of PBT 10.5% 8.3% 20.7% 20.9% 22.1% 24.6% 36.0% 7.1% 33%
% of sales 1.2% 0.9% 2.6% 2.8% 3.4% 5.2% 5.9% 1.2% 5.2%
Net Profit 342 333 537 604 950 1840 1423 2350 8509
% Gr #DIV/0! -3% 61% 12% 57% 94% -23% 65% 262%
% of sales 10.5% 9.6% 10.0% 10.5% 12% 15.9% 10.5% 15.4% 10.6%
wcap 0 1842 1924 2100 3150 4500 6300 7300 8700 0
Inc Wcap 1842 82 176 1050 1350 1800 1000 1400 -8700
wcap % of sales 56.7% 55.5% 39.1% 54.9% 57.1% 54.5% 53.6% 57.0% 0.0%
Inc Wcap % of inc sales 56.7% 37.3% 9.2% 290.9% 63.0% 48.9% 48.8% 84.6% -13.4%
capex 6752 138 270 2150 2381 2749 1204 3002 2354
Capex as% of sales 207.8% 4.0% 5.0% 37.5% 30.2% 23.8% 8.8% 19.7% 2.9%
Capex ( Maint ) 2185.7 429.62 530.2 1481.2 1853.4 2369.8 1584.1 2096.2 -7230
Capex ( Maint ) % 67.3% 12.4% 9.9% 25.8% 23.5% 20.5% 11.6% 13.7% -9.0%
fixed asset 4910 4966 5060 6160 7191 8140 8344 9946 21000
Sales /FA 0.7 0.7 1.1 0.9 1.1 1.4 1.6 1.5 3.8
Debt
EPS 0.2 0.1 0.2 0.2 0.3 0.5 0.4 0.7 2.7
Cash
TA 6752.0 6890.0 7160.0 9310.0 11691.0 ### ### ### ###
Sales/ TA 0.5 0.5 0.8 0.6 0.7 0.8 0.9 0.8 3.8
ROC 5% 5% 8% 6% 8% 13% 9% 13% 41%
cash / share
No. of shares 1404 2802 2790 2726 3000 3398 3316 3154 3150
Projections
2012 2013 2014 2015 2016 2017 2018 2019 2020
82000 85000 90000 95000 98000 103000 107000 113000 120000
2.5% 3.7% 5.9% 5.6% 3.2% 5.1% 3.9% 5.6% 6.2%
65600 68000 72000 76000 78400 82400 85600 90400 96000
80% 80% 80% 80% 80% 80% 80% 80% 80%
16400 17000 18000 19000 19600 20600 21400 22600 24000
3% 4% 6% 6% 3% 5% 4% 6% 6%
20% 20% 20% 20% 20% 20% 20% 20% 20%
2150 2200 2300 2350 2400 2500 2800 3000 3100
2.6% 2.6% 2.6% 2.5% 2.4% 2.4% 2.6% 2.7% 2.6%
10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
1148 1190 1260 1330 1372 1442 1498 1582 1680
1.4% 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% 1.4%
4323.66 4491.3 4765.2 5055.6 5223.24 5497.14 5643.66 5945.94 6342.6
33% 33% 33% 33% 33% 33% 33% 33% 33%
5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2%
8778 9119 9675 10264 10605 11161 11458 12072 12877
3% 4% 6% 6% 3% 5% 3% 5% 7%
10.7% 10.7% 10.7% 10.8% 10.8% 10.8% 10.7% 10.7% 10.7%
0 0 0 1000 0 0 1000 0 500
0 0 0 1000 -1000 0 1000 -1000 500
0.0% 0.0% 0.0% 1.1% 0.0% 0.0% 0.9% 0.0% 0.4%
0.0% 0.0% 0.0% 20.0% -33.3% 0.0% 25.0% -16.7% 7.1%
500 500 1000 1500 -500 1000 4000 1000 1500
0.6% 0.6% 1.1% 1.6% -0.5% 1.0% 3.7% 0.9% 1.3%
1505 1540 1610 2645 680 1750 2960 1100 2670
1.8% 1.8% 1.8% 2.8% 0.7% 1.7% 2.8% 1.0% 2.2%
21500 22000 23000 23500 24000 25000 28000 30000 31000
3.8 3.9 3.9 4.0 4.1 4.1 3.8 3.8 3.9
Topline growth
NPM 5% 8% 10% 12%
8%
10%
12%
Topline growth
NPM 5% 8% 10% 12%
8%
10%
12%
ch are low probability ones
ng questions
sensitive to changes in growth or margins ?
growth or margin/ are current numbers sustainable ?
on the most probable scenario (mark it yellow)
Normalised earnings calculation
year
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Comments Normalise
d values
sales 0 0 3249 3469 5374 5735 7877 11558 13609 15263
np 0 0 342 333 537 604 950 1840 1423 2350
eps #DIV/0! #DIV/0!
0.2 0.1 0.2 0.2 0.3 0.5 0.4 0.7 15
price - low 29 31 40 41 49.5 53 54 62 62 56
Price - high 60 67 70 80 90 100 110 110
no. of shares Mn 0 0 1404 2802 2790 2726 3000 3398 3316 3154
mcap 0 0 56160 114882 ### 144478 162000 210676 205592 176624
mcap/sales #DIV/0! #DIV/0! 17.3 33.1 25.7 25.2 20.6 18.2 15.1 11.6
p/e - low #DIV/0! #DIV/0! 164.2 345.0 257.2 239.2 170.5 114.5 144.5 75.2
p/e - high 246.3 563.8 363.7 361.1 284.2 184.7 256.3 147.6
Book value
Retained earning / share
Probability Expected
value
0.15 15.0
0.65 31.3
0.2 12.0
Asset valuation
Net cash ( Debt - cash )
Any investment
Logic of analysis
Marico india has high profitability and contributes to bulk of profits. Been valued at 27 times NP
MBL - marico bangaladesh has ROE of almost 40% +. Hence been valued at 25 times NP
Kaya and sundari have almost 100 Cr of invested capital. Currently are loss making and have accumulated losses
Neutral assumes that kaya /sundari are at best worth the captial invested
Optimistic assumes that they will become fairly profitable and valued at 15 time earnings ( earnings calculated at 2
Key result of analysis - current price fully values marico india and MBL.. Upside are limited to how kaya and sundar
some additional benefits will come from nihar acquisition
SAMPLE VALUATION
27 times NP