Safal Niveshak

Value Investing Made Simple

www.safalniveshak.com

Basic Company Details

(Enter values only in red cells)
Parameters
Company
Industry
Business (As you understand it, in simple words)
Current Stock Price (Rs)
Face Value (Rs)
No. of Shares (Crore)
Market Capitalization (Rs Crore)
Promoter Shareholding (Latest Quarter)
Promoter Pledged Shareholding (Latest Quarter)

Key Financials (Last 10-Years)

Parameters
Sales Growth (10-Year CAGR)
Gross Profit Growth (10-Year CAGR)
Net Profit Growth (10-Year CAGR)
Average Debt/Equity (x)
Average Return on Equity

Warning!

wonderful tool to analyze the past. But it can be a wea

So be very careful of what you are getting into. Here

Details
BLISSGVS
PHARMA
XYZ
72
1
10
738
###
#

)
Details
19.6%
16.4%
-1.0%
0.3
###

Remember!

Focus on decisions, not outcomes. Look for d

Please!

blame me if results of this excel cause you to lose it

thinking, but you alone are responsible for your actions
I am not a sadist who wants you to do the
own. But I'd rather give you a compass instead of a ma
lose it all! All th

Excel can be a
But it can be a weapon of mass destruction to predict the future!
re getting into. Here, garbage in will always equal garbage out.

utcomes. Look for disconfirming evidence. Calculate. Pray!

It's your money. Please don't

cause you to lose it all! I've designed this excel to aid your own
ible for your actions. I want to live peacefully ever after! :-)
wants you to do the hard work by analyzing companies on your
ass instead of a map, for you can confuse map with territory and
lose it all! All the best!

Buffett Chec
Source - Buffe
Parameter

Consumer monopoly or commodity?

Understand how business works

Is the company conservatively financed?

Are earnings strong and do they show an upward trend?

Does the company stick with what it knows?

Has the company been buying back its shares?

Have retained earnings been invested well?

Is the companys return on equity above average?

Is the company free to adjust prices to inflation?

Does the company need to constantly reinvest in capital?

Conclusion

Never Forget

ead, Remember, Follow!

Mary Buffett & David Clark
Explanation

Seek out companies that have no or less competition, either due to a patent o
name or similar intangible that makes the product unique. Such companies w
typically have high gross and operating profit margins because of their unique
However, don't just go on margins as high margins may simply highlight comp
within industries with traditionally high margins. Thus, look for companies with
operating and net profit margins above industry norms. Also look for strong gr
earnings and high return on equity in the past.

Try to invest in industries where you possess some specialized knowledge (w

you work) or can more effectively judge a company, its industry, and its compe
environment (simple products you consume). While it is difficult to construct a
quantitative filter, you should be able to identify areas of interest. You should "
consider analyzing those companies that operate in areas that you can clearly
your circle of competence. Of course you can increase the size of the circle, b
over time by learning about new industries. More important than the size of th
is to know its boundaries.

Seeks out companies with conservative financing, which equates to a simple,

balance sheet. Such companies tend to have strong cash flows, with little nee
long-term debt. Look for low debt to equity or low debt-burden ratios. Also see
companies that have history of consistently generating positive free cash flow

Rising earnings serve as a good catalyst for stock prices. So seek companies
strong, consistent, and expanding earnings (profits). Seek companies with 5/1
earnings per share growth greater than 25% (alongwith safe balance sheets).
indicate that earnings growth is still strong, look for companies where the last
earnings growth rate is higher than the last 10-years growth rate. More import
the rate of growth is the consistency in such growth. So exclude companies w
volatile earnings growth in the past, even if the "average" growth has been hig

Like you should stock to your circle of competence, a company shou

invest its capital only in those businesses within its circle of competen
This is a difficult factor to screen for on a quantitative level. Before inv
in a company, look at the companys past pattern of acquisitions and
directions. They should fit within the primary range of operations for t
Be cautious of companies that have been very aggressive in acquisit
the past.

Buffett prefers that firms reinvest their earnings within the company,
provided that profitable opportunities exist. When companies have ex
cash flow, Buffett favours shareholder-enhancing maneuvers such as
buybacks. While we do not screen for this factor, a follow-up examina
a company would reveal if it has a share buyback plan in place.

Seek companies where earnings have risen as retained earnin

(earnings after paying dividends) have been employed profitab
great way to screen for such companies is by looking at those
have had consistent earnings and strong return on equity in th

Consider it a positive sign when a company is able to earn above-ave

(better than competitors) returns on equity without employing much d
Average return on equity for Indian companies over the last 10 years
approximately 16%. Thus, seek companies that earn atleast this muc
(16%) or more than this. Again, consistency is the key here.

That's what is called "pricing power". Companies with moat (a

from other screening metrics as suggested above (like high RO
high grow margins, low debt etc.) are able to adjust prices to
inflation without the risk of losing significant volume sales.

Companies that consistently need capital to grow their sales and profits are lik
savings account, and thus bad for an investor's long term portfolio. Seek com
that don't need high capital investments consistently. Retained earnings must
toward maintaining current operations at competitive levels, so the lower the a
needed to maintain current operations, the better. Here, more than just an abs
assessment, a comparison against competitors will help a lot. Seek companie
consistently generate positive and rising free cash flows.

Sensible investing is always about using folly and discipline - the di

to identify excellent businesses, and wait for the folly of the market to
down the value of these businesses to attractive levels. You will have
trouble understanding this philosophy. However, its successful
implementation is dependent upon your dedication to learn and follow
principles, and apply them to pick stocks successfully.
Focus on decisions, not outcomes. Look for disconfirming evidence.

Answers

BLISS - Balance Shee

(Enter values only in red cells

L-9
L-8

Year / Rs Crore
SOURCES OF FUNDS / EQUITY & LIABILITIES
Share Capital
Reserves & Surplus
Shareholder's Funds / Equity

Minority Interest
Non-Current Liabilities
Long-Term Borrowings
Current Liabilities
Short-Term Borrowings
Trade Payables
Other Current Liabilities
Short-Term Provisions
APPLICATION OF FUNDS / ASSETS
Non-Current Assets
Tangible Assets
Intangible Assets
Capital Work-in-Progress
Non-Current Investments
Goodwill on Consolidation
Long term loans and advances
Other Non Current Assets
Current Assets
Current Investments
Inventories
Trade Receivables
Cash and Bank Balance
Short-Term Loans and Advances
Other Current Assets

na

na

na
-

na
-

LISS - Balance Sheet

ter values only in red cells)

L-7
L-6
na

na

L-5
0

L-4

L-3

L-2

L-1

10
123
133

10
156
167

10
200
211

###
248
258

10
277
287

14

38

99

88

43
3
31
4
4

60
6
40
6
8

208
56
119
18
15

190
57
82
42
9

###
-

57
13
7
8
0
29
157
12
120
18
7
0

100
36
4
6
0
53
209
1
13
129
58
8
2

222
92
3
1
0
74
51
2
360
33
257
50
17
3

229
139
1
4
0
74
9
2
354
33
215
80
24
3

na

BLISS - P&L Account

Year / Rs Crore
Net Sales
Expenditure
Increase/Decrease in Stock
Raw Material Consumed
Employee Cost
Other Manufacturing Expenses
Purchase of stock in trade
Selling and Distribution Expenses
Miscellaneous Expenses
Total Expenditure
Gross Profit
Operating Profit / EBITDA
Other Income
Depreciation
Profit Before Interest & Tax (PBIT)
Interest
Exceptional Income / Expenses
Profit Before Tax
Provision for Tax
Profit After Tax
Minority Interest
Share of Associate
Consolidated Profit After Tax (PAT)
Diluted EPS (Rs)
Interim Equity Dividend
Proposed Equity Dividend
Total Equity Dividend

L-9
-

(Enter values only in red cells)

L-8
L-7
-

S - P&L Account

lues only in red cells)

L-6
-

###
###
###
-

L-5
-

L-4
169

L-3
219

L-2
267

L-1
396

L
346

(1)
66
3
26
24
118
104
51
2
5
48
2
46
4
42
42
4.0
6
6

(1)
120
4
8
28
160
99
59
2
5
55
2
53
12
41
41
3.9
4
4
7

(1)
148
7

(6)
201
15
8.72
67
285
201
111
14
6
119
10
109
50
59
(2)
57
5.5
3
4
7

(0)
156
23
15.51
79
273
191
73
26
11
88
18
70
30
40
(0)
40
3.9
5
5

10
32
196
120
71
16
4
83
3
80
27
53
53
5.1
4
4
8

CAGR-5YRS
19.6%

23.4%
16.4%
9.2%

16.4%

11.1%
-0.9%

-1.0%
-0.96%

-3.9%

bliss - Cash Flow Statem

Year / Rs Crore
Net cash (used in) / generated from operating activities
Payment for purchase of fixed assets
Free Cash Flow or Owners Earning
Net cash (used in) / generated from investing activities
Net cash (used in) / generated from financing activities
Net increase in cash and cash equivalents

(Enter values only in red cells

L-9
-

Sample Cash Flow

MINUS

ash Flow Statement

values only in red cells)

L-8
-

L-7
###
###
###
###
-

L-6
(98)
(2)
(100)
(2)
5
(95)

L-5
18
(13)
5
(13)
(4)
1

L-4
7
(1)
6
(3)
5
8

L-3
24
(6)
17
(10)
(11)
3

ample Cash Flow Statement (from Annual Report)

L-2
36
(16)
20
(22)
26
40

L-1
6
(19)
(13)
(124)
110
(8)

L
82
(54)
29
(52)
(23)
8

Remember!
Cash flow, not reported earnings, is what determines a company's
long-term value.

termines a company's

Bliss - Key Ratios

(Don't touch any cell on this sheet, as all are calculated

Operational & Financial Ratios

Diluted Earnings Per Share (Rs)
Diluted Book Value Per Share (Rs)
Tax Rate (%)
Dividend Per Share (Rs)
Dividend Pay Out Ratio (%)

L-9
1.6
#DIV/0!
#DIV/0!

L-8
3.2
#DIV/0!
#DIV/0!

L-7
10.4
#DIV/0!
#DIV/0!

L-6
3.3
#DIV/0!
#DIV/0!

Profitability Ratios
Gross Margin (%)
EBITDA Margin (%)
EBIT Margin (%)
Net Profit Margin (%)

L-9
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L-8
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L-7
#DIV/0!
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L-6
#DIV/0!
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Performance Ratios
Return on Equity (%) or RONW
Return on Capital Employed (%)
Return on Invested Capital (%)
Sales/Working Capital (x)
Return on Assets(%)
Efficiency Ratios
Receivable Days
Inventory Days
Payable Days
Cash conversion cycle
Growth Ratios
Net Sales Growth (%)
EBITDA Growth (%)
PBIT Growth (%)
PAT Growth (%)

L-9
#DIV/0!
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L-8
#DIV/0!
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L-7
#DIV/0!
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L-6
#DIV/0!
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L-9
#DIV/0!
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L-8
#DIV/0!
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L-7
#DIV/0!
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L-6
#DIV/0!
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L-9

L-8
#DIV/0!
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L-7
#DIV/0!
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L-6
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!

L-9
L-8
L-7
#VALUE! #VALUE! #VALUE!
#VALUE! #VALUE! #VALUE!
#DIV/0! #DIV/0! #DIV/0!
#DIV/0! #DIV/0! #DIV/0!
#DIV/0! #DIV/0! #DIV/0!

L-6
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!

Financial Stability Ratios

Total Debt/Equity (x)
Debt Burden (x)
Current Ratio (x)
Quick Ratio (x)
Interest Cover (x)

peg
Market cap/sales
Compare the roe with growth and sales
key to any succesfull business Is good annual revenue,two easiest ratio to compare to understand the p
Operating expenses..
WEIGHTAGE OF DEBT
WEIGHTAGE OF EQUITY

COST OF DEBT
WACC
Sustainable growth rate of operating income
Greenblatts ROCE
Ev/Ebit(NOPAT)
Price/FCF
ev/Ebit(adjusted)

Key Ratios

heet, as all are calculated figures)

L-5
3.6
#DIV/0!
#DIV/0!

L-4
4.0
12.9
9%
0.6
14%

L-3
3.9
16.2
23%
0.7
18%

L-2
5.1
20.4
34%
0.7
15%

L-1
5.5
25.0
46%
0.7
13%

L average eps
3.9
4.5
27.8
42%
0.5
13%

L-5
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!

L-4
62%
30%
28%
25%

L-3
45%
27%
25%
19%

L-2
45%
26%
31%
20%

L-1
51%
28%
30%
14%

L
55%
21%
25%
12%

L-5
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!

L-4
31%
#DIV/0!
32%
#DIV/0!

L-3
24%
40%
27%
1.9

L-2
25%
35%
28%
1.8

L-1
22%
43%
18%
2.6

L
14%
20%
14%
2.1

L-5
#DIV/0!
#DIV/0!
#DIV/0!

L-4
-

L-5
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!

L-4
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!

L-3
200
19
52
166.52
L-3
30%
15%
15%
-3%

L-2
176
17
55
138.20
L-2
22%
20%
50%
30%

L-1
237
30
110
157.29
L-1
48%
57%
43%
8%

L
227
34
87
174.27
L
-13%
-34%
-26%
-30%

L-5
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!

L-4
0.0
0.5
#DIV/0!
#DIV/0!
23.4

L-3
0.0
0.2
3.7
3.4
25.8

L-2
0.2
1.9
3.5
3.3
26.7

L-1
0.6
(7.4)
1.7
1.6
12.2

L
0.5
3.1
1.9
1.7
4.9

2.13285173

are to understand the players within the industry are gross profit margin and net profit margin.,eps and bv is the o
0.0220264 0.0399654 0.1712213 0.37567694 0.33557684
0.9779736 0.9600346 0.8287787 0.62432306 0.66442316

na
#VALUE!

30.85%
15.63%

7.12%
13.65%

6.25%
11.71%

12.41%
14.13%

38.63%

45.68%

62.00%

48.58%
15.8766967
25.8210882

6.30%

15%

Remember!

What counts in
the long run is the increase in "per share value", not overall
growth or size of a business.

Remember!
Gross margins suggest pricing power. Higher = Better, but
also invites competition. So watch out for consistency.

Remember!

ROE = Efficiency
in allocating capital, which is a CEO's #1 job. Higher = Better.
Look for consistency.

gin.,eps and bv is the other key consistency shows better grown.

Bliss: 2-Stage DCF

Figures in Rs Crore | Enter values only in red cells
Initial Cash Flow

29

Years
FCF Growth Rate
Discount Rate
Terminal Growth Rate

1-5
12%
10%
0%

Shares Outstanding (Crore)

Net Debt Level
Year
1
2
3
4
5
6
7
8
9
10

6-10
8%

10
65
FCF
32
36
41
46
51
55
60
64
70
75

Growth
12%
12%
12%
12%
12%
8%
8%
8%
8%
8%

Final Calculations
Terminal Year
PV of Year 1-10 Cash Flows
Terminal Value
Total PV of Cash Flows
Number of Shares
DCF Value / Share (Rs)

75
303
290
593
10
51

Why DCF?

value of a business is simply the present

of cash that investors can take out of t
business over its lifetime.

Present Value
30
30
31
31
32
31
31
30
29
29

The
siness is simply the present value
at investors can take out of the
siness over its lifetime.

Bliss - Buffett Valuation Spreadshe

Source - Buffettology by Mary Buffett & David Clark | (Enter val

Date of Analysis: 17/Feb/15
Current Stock Data
Price:
71.6
EPS:
3.9
DPS:
0.5
BVPS:
27.8
P/E:
18.4
Earnings Yield:
5.4%
Dividend Yield:
0.70%
P/BV:
2.6
pe ratio by average eps=
Govt. Bond Yield:
8.0%

15.99

Historical Company Data

Year
L-9
L-8
L-7
L-6
L-5
L-4
L-3
L-2
L-1
L

EPS
4.0
3.9
5.1
5.5
3.9

DPS
0.6
0.7
0.7
0.7
0.5

BVPS
12.9
16.2
20.4
25.0
27.8

Price
High
40
47
37
45
44
77

Annually Compounded Rates of Growth

Factor
4-Year Growth
4-Year Growth

EPS
-1.0%
#DIV/0!

DPS
-3.9%
#DIV/0!

BVPS
High Price
19.9%
13.9%
#DIV/0!
#DIV/0!

Projected Company Data Using Historical Earnings Growth Rate

Year
L (Current)
L+1
L+2
L+3
L+4
L+5
L+6

EPS

DPS
3.9
3.9
3.8
3.8
3.7
3.7
3.7

0.6
0.6
0.6
0.5
0.5
0.5
0.5

3.5
5.9
31
37
-6.3%

L+7
L+8
L+9
L+10

3.6
3.6
3.6
3.5

0.5
0.5
0.5
0.5

Projected Company Data Using Sustainable Growth Rate

Year
L (Current)
L+1
L+2
L+3
L+4
L+5
L+6
L+7
L+8
L+9
L+10

BVPS
27.8
33.4
40.1
48.1
57.7
69.2
83.1
99.7
119.6
143.5
172.2

EPS

DPS
6.5
7.8
9.4
11.2
13.5
16.2
19.4
23.3
28.0
33.6
40.3

0.9
1.1
1.4
1.6
1.9
2.3
2.8
3.4
4.0
4.9
5.8

40.3
30.2
357
387
18.4%

aluation Spreadsheet
David Clark | (Enter values only in red cells)

5-Year Averages
Return on Equity: 23.4%
Payout Ratio: 14.5%
P/E Ratio-High: 11.5
P/E Ratio-Low: 6.2
P/E Ratio: 8.9
Sustainable Growth of EPS 20.0%

Price
Low
9
32
19
20
25
39

P/E Ratio
High
Low
#DIV/0!
#DIV/0!

ROE
#DIV/0!

Payout Ratio
#DIV/0!

#DIV/0!
#DIV/0!
#DIV/0!
11.7
9.3
8.8
8.0
19.7

#DIV/0!
#DIV/0!
#DIV/0!
31.3%
24.4%
25.1%
22.1%
14.0%

#DIV/0!
#DIV/0!
#DIV/0!
14.5%
17.7%
14.6%
12.6%
12.8%

#DIV/0!
#DIV/0!
#DIV/0!
7.9
4.8
3.9
4.5
10.0

Low Price
33.2%
#DIV/0!

Earnings after 10 years

Sum of dividends paid over 10 years
Projected price (Average P/E * EPS)
Total gain (Projected Price + Dividends)
Projected return using historical EPS growth rate

[(Total Gain / Current Price) ^ (1/10)] - 1

Earnings after 10 years (BVPS * ROE)

Sum of dividends paid over 10 years
Projected price (Average P/E * EPS)
Total gain (Projected Price + Dividends)
Projected return using sustainable growth rate

Warning!

Past is no predictor of
the future. So be careful using numbers in this sheet - that are
based on past numbers - into your fair value calculations. Of
course past can give some indications of the future, but the future
is never always the same.

Bliss - Fair Value Calculation

Year
Diluted EPS (Rs)
Stock Price - High (Rs)
High P/E (x)
Stock Price - Low (Rs)
Low P/E (x)
Average P/E (x)
Valuation - Different Methods (Rs)
Graham Number
Avg P/E Ratio Valuation
EPV
DCF
Historical Earnings Growth
Sustainable Earnings Growth

L-9
#DIV/0!
#DIV/0!
#DIV/0!

53
40
28
51
12
137

Fair Value Range (Rs/Share)

High End
Low End
Margin of Safety (MoS)
Fair Value after MoS
Current Mkt. Price (CMP, Rs)
Premium / (Discount)

54
32
50%
21
72
236.1%

(Enter values only in red cells)

L-8
L-7
L-6
###
#DIV/0! #DIV/0! #DIV/0!
###
#DIV/0! #DIV/0! #DIV/0!
#DIV/0! #DIV/0! #DIV/0!

r Value Calculation

lues only in red cells)

L-5
40
#DIV/0!
9
#DIV/0!
#DIV/0!

L-4
4.0
47
11.7
32
7.9
9.8

L-3
3.9
37
9.3
19
4.8
7.0

L-2
5.1
45
8.8
20
3.9
6.3

L-1
5.5
44
8.0
25
4.5
6.2

L
3.9
77
19.7
39
10.0
14.9

Remember!

Give importance to a
stock's fair value only "after" you have answered in "Yes" to these two questions - (1) Is this busine
simple to be understood? and (2) Can I understand this business?

Don't try to quantify everything. In stock research, the less non-mathematical you are, the more
simple, sensible, and useful will be your analysis and results. Great analysis is generally "back-o
the-envelope".

Also, your calculated "fair value" will be proven wrong in the future, so don't invest your savings ju
because you fall in love with it. Don't look for perfection. It is overrated. Focus on decisions, not
outcomes. Look for disconfirming evidence. Pray!

Give importance to a
ns - (1) Is this business
ness?

al you are, the more

is generally "back-of-

nvest your savings just

us on decisions, not

BASANT MAHESHWARI RATIOS

BOOK VALUE:
Cost of Capital:
Dividend Yield:
Discounted cash flow statement:
Enterprise value:
Economic Value Added :
Free Cash Flows:
Growth in stock prices Vs Growth in earnings
Inventory Growth Vs Sales
Market Capitalization:
Market PE:
Market cap to sales:
Over priced stock
PEG
Percent of Sales
Price to book value:
Profit Margin
Return on Equity (ROE):
Return on market cap:
Undervalued stock:
Altman z score

L-5

L-4

L-3

L-2

12.91449 16.15416 20.42408

15.63%
13.65%

#VALUE! 17.95657 28.22653

L-1

25.01493 27.81404
11.71%
14.13%
0.70%
802.4867
21.54364 0.890652

2.132852

Checklist - Key issues highlighted in red, Important positives in green

Company type analysis

Company type
a. Fast grower with competitive advantages
b. slow or no growth with competitive advantages
c. Turn around situation (fundamental performance)
d. cyclical company in a downturn - with clear catalyst in 6-12 months

Fast grower with durable competitive advantage - Is the valuation more than 20 times earnings ?
Slow or no growth with durable competitive advantages (blue chip) - Does the company sell below median PE fo
undervalued due to recent weak performance ?
Turn around situation (fundamental performance) - Is the company facing a temporary issue due to macro or du
business issue ?
cyclical company in a downturn - Is it a cyclical company (50% drop in profits or more from peak) and facing the
cycle

Business economics
Does the company have ROA=ROE, is ROA greater than WACC ?
Does the company have average ROE above WACC for last 10 yrs ?
Is the FCF less than 0.8 times earnings on average for last 5+ yrs ?
Has the recent 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 com
it have sustainable competitive advantage

Does the company face intense competition in its segment from some new competitor or other large competito
Does the industry have a history of intense competition in the past ?
Does the company enjoy entry barriers to maintain high growth and high ROE ?
Does the industry have a duoploy or limited no. of big companies (top 5 account for more than 60%) ?
Is the market share change among top 5 companies less than 2-3% ?
Are the NPM and Return on capital numbers comparable with other companies in the sector, if not why ?
Is the company getting impacted or will get impacted by low cost imports ?
What is the level of change in the end product service ? Is it a fast cycle product (rapid changes such as cell ph
(consumer good like soap etc) ? How does the product cycle impact Competitive advantage

Scalability/ Multi-bagger evaluation

Is the current market/ future market for the company growing at 10%+ in volumes ?
Can the company grow @ 15%+ and maintain ROE in excess of 20% for next 10 yrs ?
Can the company improve its ROE/ROCE and how will it do it ?
- improve margins (and how)
- Improve asset turns (FA or reduce Wcap) - due to scale or outsourcing ?
Is the company increasing / improving its competitive advantage ?

Liabilities
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 in excess of annual profits ?
Does the company need borrowed money for funding a critical aspect of the business ?
Does the company have FCCB (foreign currency borrowing). % of total borrowing > 30% ?
does the company have foreign currency demoninated borrowings ?
Does the company have a currency exposure in excess of 100% of annual sales ?

Value trap analysis

Is the management hoarding cash and not growing business ?
Is the trend coming to an end (for example stagnation in subscriber growth in telecom ?)
Is the company undergoing technological disruption ?
Is there a power shift in the value chain ?
Is the company in an industry with deterorating economics ?
Is there a new business model or change in biz model happening ?
IS the company a 3rd or fourth tier company in cyclical industry or an also ran in winner takes all ?
Does the company have incompetent management with poor ethics and poor capital allocation skills ?
General

Do all the stakeholders of the company benefit or is the company predatory with some stakeholder, for ex: selli

Does the product involve high incentive for the employee to sell, but traps customer in a long term deal with ba

What are the regulatory risks ? Does the government decide the cost of RM, Pricing of final produc
business such as spectrum, mkt access etc ?
Does the high returns depend on the regulatory approval/ current regulations being maintained by government
Will the company being analysed be impacted in terms of fundamentals and price by fairly same factors as othe

Does the company have a weak business unit which will destroy the value of the rest of company in due time ?
Is there only 5 years of history of good performance, i.e is there insufficient past history of performance

Fast grower with competitive advantages

Fast grower with shallow competitive advantages. Cannot value it at more than 20 times
NA
NA
NA

No, ROA is lower than ROE due to debt. ROA is greater than WACC (at least 15% or more)
No, improvement from 2006 onwards
No
No
Business has low ROE, low entry barriers and lots of small competition. The company benefits by having advant
of scale, large mfg and distribution network and large range of products and technologies
Yes, from other large and small competitors
Yes
Yes, company is likely to keep increasing scale and products range and maintain a decent ROE
No, industry characteristed by lots of small companies and un-organized sector
NA
No, company has much better ROE and margins due to the wide range of products
Yes, currently facing competition from low cost imports from china
Yes - fast life cycle products. New products have to be introduced regularly to maintain margins

Yes - market grows at around 1.5 times GDP

5% inflation and market growth of around 10%, can give company 15% growth. Can maintain ROE at margins o
and above
Improve margins - by reducing overheads and interest costs
Asset turns may show minor improvements
Yes, company has improved its competitive advantage by increasing the range of products, increasing mfg and
distrbution scale

No
Yes
Re-course
No
No
No
around 50% of borrowing (99 Crs ) is foreign borrowing, should be able to absorb currency impacts
No

No
No
No
No
No, industry is characterised by unorganized sector and a lot of smaller companies
No
No
No - management has allocated capital intelligently in the last 6 years

No
No
No
No
No
No
No

Management checklist
Management performance
Has the management invested incremental cash at 15%+ levels ?
Is the management hoarding cash without raising dividend or reinvesting it ?
Has the management does accquisitions in the past at high valuations and did they work out successfully ?
(Check goodwill write offs, has book value increase been lesser than retained earnings ?)
Has the management used aggressive accounting in the past to manage results ?

Fraud analysis (more than 2-3 of below should lead to rejection of company)
Has the management been reprimanded by SEBI or other bodies. Does the management has bad
governance history with other firms ? (check watchoutinvestors.com)
Does the company have a lot of subsidairies with no details on these subsidiaries ?
Has the company been lending large sums of money to subsidiaries and related parties for no logical
reason ?
Does the company has opaque transactions with subsidiaries (check related party) and transaction size is
big ?
Large loans and advances transactions with no details (greater than 10% of net profit)
Are fixed assets much higher in proportion to sales compared to other companies in industry ?
Is depreciation less than 3% of fixed assets ?
Has the dividend been stopped for no reason ?
What is the % of non core income (other than operations). Is it more than 10%, does it look fishy ?
Does the management make more than 3% of net profit as salary
Does the company have an management which has worked against shareholder interests in the past ?
Check the board composition - how many as % is promoter or family ? Does the family perform any useful
role in management ?
Has the management pledged more than 20% of shares, why the pledge ?
check special resolutions for the last 5-8 yrs. Any resolution which are anti-shareholder ?
Insider buying
What is % holding by promoters/ management
Has there been insider buying in the last 3-6 months. If yes, what % of outstanding ?
Why should the insiders be buying ?
- low holding ?
- Go private ?
- possible increase in value ?
- Promotional / ulterior motives ?

Valuation and growth

Does the company sell @ PE >20
Does the current valuation assume growth in excess of the past or the same as past above average growth ?
Does the company sell at huge discount to market or to other companies in the industry ? Why ?

Yes
No
No accquisition

Does not appear so

None
No
No
No
No
No
No
No
Does not appear high
Yes - almost 5% of net profit
Does not seem so
50% board is promoter family
No pledge
None

49%
None
Yes, management has increased shareholding from 44% to 49% through open market operations. Seems to
be transaction to increase holding in a value creating biz

No, around 14-15 times

No
No, looks like a premium due to better ROC of the business

Management factors

Is the management rational in capital allocation . Does management allocate capital well and above current rate
return.
Is the management investing cash in low return business (core or unrelated ? - empire building ?
What has the management done with excess cash (which cannot profitability invested in core biz)
a. increasing dividends ?
b. Buybacks
c. Lending to associate and sister companies
d. Investing in the stock market ?
E. do nothing (sitting on balance sheet in fixed income instruments)

Does the management have integrity - any anti shareholder resolutions in the past ?
related party transaction - are they harmful to the co ( rights offer, sale of promoter owned ventures to the comp
at high price)
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?)
salary as % of sales
Has the management issued warrants below or at market cost in the past ?
Does the management / CEO have substantial ownership in the company ?
Tax as a % of PBT ( is it too low , < 15%, why ?)
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
? How is their execution track record
Past history of CEO / top management team. Describe their experience

Yes
No

Management has invested excess cash into business at an incremental rate of 30%,
increased dividend and also executed buyback at an opportune time.
No
No
Yes
around 5% of net profit, on the higher side
.4% of sales
No
Yes
No

No
No
Minimal, seem to be successful
No
Yes
Current management has run the company for 40+ yr. This is their only company and seem
to be focussed on it

Test
One of the Dominant firms in product or geo segment ? (is it an oligopoly or
duoplogy - indicator of competitive advantage)
Limited number of companies in the sector with stable market share (list top 5
companies) and not much change in top 5 in the last 5 years ? If google search does
not give the names easily, chances are the mkt is fragmented
Market share stability (Will entry of a new player or incumbents caused a major,
permanent erosion of market share ?) - has the market share changed by more than
5% for companies - if yes, then no CA
High ROE (> 15% ?) for last 10 years and the same is being maintained ? If yes,
displays persistence of returns and hence CA
Has the dominant firm maintained ROE > 15% for a long period of time ?
Does the company have customer or production advantage
- analyse ROC and check if Margins > 10% of Asset turns in excess of 1.
- If high margins, in excess of 10-12% then customer advantage, if high asset turns
then production advantage. If both are high then both advantage.

Low entry / exits ?

Does the company has pricing power - ability to raise prices ahead of inflation :
check if the price/ unit or tonne has kept pace with inflation or ahead of inflation ?

Source of competivite advantage

Strong competitive advantages create entry barriers for incumbents, preventing entry of competition and enab
Production advantage factors
- resulting in moat (cost based advantages). Weaker than customer based
advantages expect in case of patents or government regulation (like licenses ).
- indicator is high asset turns

Customer advantage - creates more durable competitive advantage

- more common, indicator is high margins

Government/ Regulation based advantage

Moat analysis - does company has deep and wide competitive advantage or
weak one ?
Customer advantages are more sustainable !

Franchise Analysis - Competitive advantage a

Key factors of competitive advantage for
Barriers to entry

Switching costs

Enduring Low cost position

Distinctive capability analysis applied to specific market (product or geographic create the customer based or p
Analysis of D
Type
Architecture

Strategic assets

Innovation
Cost
Finanical strength
Reputation

List of the drivers/ factors (internal / external )

Driver
Sales growth
Operating margins

Value driver
Sales

Operating margins

Re-investment rate

Test of competitive advantage

The company is among top 3 players in almost each segment it operates
1. Time technoplast
2. Sintex
3. Atral poly
The industry is characterised by a large number of small companies in organized and unorganized sector
Market shares are stable in most segments with the larger players gain share over the un-organized ones

No, has happened in the last 6-7 years as the company has achieved scale

Margins less than 10%, but have expanded from 3 to 8% levels. May approach 9% at best
Asset turns have been above 2 and now @ 4 times, indicating production side scale advantages

Yes
Yes - company is able to change price based on changes in RM prices

Source of competivite advantage - production advantage / customer advantage factors

enting entry of competition and enables incumbents to earn high returns
1. Process economies (resulting in lower cost of production for incumbent)
a. Indivisibility lead economies
b.complex , linked activities
c. learning curve process cost
d. patent/ copyright/ R&D advantage
e. resource uniqueness

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

1. Habit forming and High Differentiation - No. 1

2. Experience goods (brand effect, trademarks) - No. 2
3. High switching cost (Lock-in) - No. 3 (for ex : change of 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
5. Network effect (related to switching cost - network effect increases
switching cost)
1. License
2. Tariff / quota/ regulation
1. Does co have multiple demand side advantages ? - absence or minimal
demand side advantages mean weak or no moat
2. Does company has scale advantages - absolute advantage is not necessary.
Local or product specific advantages are enough
3. Does the company has cost advantages with or without scale
Answer to these 3 questions decides whether competitive advantage
is deep and wide or shallow/ narrow

nalysis - Competitive advantage analysis ( part repeat of the previous table ) only to be read again
Drivers
1. Consumer demand Preference (Brands / Trade marks) or customer
relationships
2. Key assets - distribution network, Logistics, access to key RM or knowledge
base, patents
3. Scale advantages (due to high fixed costs already incurred)
4. Govt regulated monoploy
1. Switching cost to other supplier
2. Network effect - benefits are high in the current network ( like telecom , emails, e-bay etc)

1. due to economies of scale advantages

2. Due to management skill - good but may not endure the current
management
3. Due to technology / Processes - not so enduring

aphic create the customer based or production based advantages

Analysis of Distinctive capability for the firm
Description
Relationships with all stakeholder / systems / process / Knowledge base
Distribution network / Customer relationships / plant / license monopoly /
natural reserve /Patents / Media Properties/ Network effects / Switching costs

R&D / Innovation history /NPD

Enduring Low Cost position
Strong Balance sheet
Brands / trademarks

ers/ factors (internal / external ) for the Superior Economic returns ( ROE > 15 % )
Driver
Sales growth
Operating margins

Value factors
Sales volume
Price and mix

Trigger
Y
Y

Operating cost
Operating leverage
Economies of scale

Y
N
Y

Investment efficiency
Asset intensity

N
N

rates

in organized and unorganized sector

ain share over the un-organized ones

d scale

y approach 9% at best
ction side scale advantages

dvantage factors
1. Process economies resulting from
a. Linked activities
b. Learning curve process costs

1. Scale economies from

a. Distribution
b. purchasing
c. Production
d. Mktg and advtg

Customer advantage
a. small brand effect in some, in some cases brand and quality is important
(pipes etc)
b. Small switching cost in some cases for OEM

None
1. Limited demand side advantages in some products and higher in other
product lines
2. Company has mainly scale advantages at product/ local level
Company has shallow and narrow moat on which it has to keep working hard
and operates efficiently and on scale

table ) only to be read again

Analysis for the company
1. Customer relationships
2. Key assets - Distribution network, customer relationships and brands
3. Scale advantages

None

Mainly due to economies of scale and management skill

Details for the firm

Relationships with customers and supplier of RM and tech/ Process base and
knowledge
Distribution network/Customer relationship/ Plants/ License for some products/
Small switching costs

Mainly purchased technology

Yes
Yes
Some brands/ trademarks

OE > 15 % )
Influenced by
New products, increasing consumption
Economies of scale

How much should it change to cause the PE to increase

Continue at current 20% +growth rate
Drive OPM to 17%+

Drive OPM to 17%+

Yes - key driver of higher margin

Already at 4 times

Y/N
ENTRY BARRIER - No. 1 Factor for Competitive advantage analysis
1 Asset specificity
2 Economies of Scale
3 Proprietary Product difference
4 Brand Identity
5 Switching cost
6 Capital Requirement
7 Distribution strength
8 Cost Advantage
9 Government Policy
10 Expected Retaliation
11 Production scale
12 Anticipated payoff for new entrant
13 Precommitment contracts
14 Learning curve barriers
15 Network effect advantages of incumbents
No. of competitors - Monopoly / ologopoly or intense competition
(concentration ratio ) - high concentration mean high likelihood of entry
16 barriers
Total (average)
SUPPLIER POWER
17 Differentiation of input
18 Switching cost of supplier
19 Presence of substitute
20 Supplier Concentration
21 Imp of volume to supplier
22 Cost relative to total purchase
17 Threat of forward v/s Backward integration
Total (average)
BUYER POWER
18 Buyer conc. v/s firm concentration
19 Buyer volume
20 Buyer switching cost

M
M
M
H
L
H
L
NA

N
N
Y
N
N
L

L
L
L

21 Buyer information
22 Ability to integrate backward
Total (average)
Substitute product
23 Price sensitivity
24 Price / Total Purchase
25 Product difference
26 Switching cost
27 Buyer propensity to Subsititute
Total (average)
RIVALRY DETERMINANT
28 Industry growth
29 Fixed cost / value added
30 Intermittent overcapacity
31 Product difference
32 Informational complexity
33 Exit Barrier
34 Industry concentration
35 Demand variability
Total (average)
Total
Grand Total average

H
N

H
M
H
L

L
M
H
M
M
L

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
Plastic piping
Packaging products
Consumer products
Industrial products

Mkt share
0.1

Remarks (go beyond low moderate and high and give explaination for each point)
Points
Entry barriers mainly from distribution network, brands and economies of scale
Moderate
Important driver of margins
Low
Moderate
Low
Moderate
High - key differentiator
High - key differentiator
None
High
High
Moderate
High
High
Low

Y
Y
Y
Y
Y

High levels of competition in most product segments

#DIV/0!
Low as the main RM is polymers which are dependent on Oil prices
Low
Moderate
None
High
Moderate
High
None
#DIV/0!
Low power as the company sells to a wide range of customers
Low
Moderate to low
Low

Key CA factor

High
None
None, products are actually substitutes of metal based products

Moderate to high rivalry in several segment. commoditization levels are quite high
High
high
Low
Low
Low
Low
Low
Moderate

have to be managed to create a sustainable CA

Y
Y

#DIV/0!
#DIV/0!
#DIV/0!

Key companies in each segment

Finolex, Chemplast sanmar, Kriti industries, Tulsi extrusions, Astral polytechnik
Several large and un-organized players
Nilkamal
Tata Auto comp, sintex industries, Time technoplast, Nilkamal

Sales revenue accounting (topline)

Is sales booked agressively ?
- recording revenue before completing obligation
- Recording revenue in excess of work completed
- recording revenue when payment is still uncertain
Is the sale a long term sale with front loading of revenue ?
Is sales got through liberal financing - AR is increasing as % of sales
Are the payment terms more generous than competition ?
Has the company changed revenue recognition policy which has increased revenue and growth in the
recent past
Does the management use a revenue recognition approach which is different from others in industry ?
Does company use percentage of completion accounting although its industry does not
Does the company consider a high residual value in a lease arrangement (check with average of
others in the industry)
Is the cash flow lagging net income more than 10% for last 5 years ? / Does the CFFO lag net income ?
Does the company record revenue for shipments to distributors ?
Does the company have a high returns % of sales ?
Does the company record too much upfront revenue on long term contracts ?
Has the revenue recognition policy been changed and revenue growth changed as a result ?
Does the company record revenue with parties where there isnt an arm's length distance ? Is it to a
related party, JV or affiliated party ?
Recording cash from a lender, partner or vendor as revenue ?
Use of an appropriate or unusual revenue recognition policy ?
Does the company consider grossed up revenue instead of net revenue (like the priceline case)
Unusual increase or decrease in liability reserve account ?
Does the management show one time event as revenue ?
Has the management held back revenue before accquisition? See proforma growth for before period
and after period - has it increased a lot?
Sudden increase or decline in deffered revenue ? Why?
Has management shown income increases due to lease assumption changes in the last few quarters ?

Expense accounting
Does the company lease product on financial / operating leases on market terms ?
Has the company start capitalizing new expenses in the last 2-3 years. Chk if there is an increase as %
of sales in AR, inventory or some other non PPA asset account?
For tech companies - check the software capitalization policy. Is the asset for the software
capitalization increasing as % of sales in the last 5 years ?
Does management record restructuring charges regularly - every year for last 5-7 yrs?
Does the management shift losses to discountinued operations ?
Has management improperly classified normal operating expenses ?
Has the capitalization policy changes or accelerated ?
Sudden increase in capex ?
Decrease in obsolesence or bad debt expense (critical for banks) ?
Unusual decrease in reserve for warranty or warranty expenses ?
Has management created large reserves (write offs, bad debt, accquisition related etc) to release later
into revenue ?

Has the management aggresively written off expenses, created reserves well in excess of required and
then released them in future ?
Large write off on arrival of a new CEO ?
Large writeoffs before accquisitions ?
Gross margin increase after inventory write offs ?
Big write off of any kind of deferred expense ?
Large write off of intangible assets to boost future income ?

Cash flow accounting (update from cash flow accounting book)

Does the management missclassify investing or financing cash flow into the operating sectio to boost
operating cash flows ?
Has the management recorded bank borrowing as cash inflow ?
Has the management boosted cash flow by selling recievables, with recourse or by financial
recievables (bank notes?)
Has management classified operating cash flow as investments - and shifted to investing section ?
unusual increase in capex as % of sales with no corresponding logical reasoning
has management recorded inventory purchase as investing outflow?
Does management do a lot of accqusition ? Operating inflow are inflated as they consist of the
accquired companys cash flow too, but outflow moves to investing section (accounting quirk)
Declining FCF when cash flow is increasing ?
New categories of cash flow, not followed by others in industry ?
Has management boosted cash flows temporarily by
- collecting AR rapidly or prepayments ?
- increase in AP cycle days - paying vendors slowly?
- one time reduction in inventory ?

Options accounting
Options grant as a % of O/s shares - is it greater than 1% p.a ?
Future dilutions due to ESOP (evaluate adjust - important for Tech companies)
Calculate annual dilution % for impact on fair value (see MSFT example)
Has the management repriced options in the past ?

Pension accounting
Does the management have aggressive pension accounting ? (% of income, per employee)
do the provident fund charges look correct (PF amount / employee - compare with other companies
Does management has aggressive pension asset assumptions (expected return > 7-8%?)
Has the management taken down the pension return rates based on low market returns in the past 2-3
yrs?
Does the company has a large pension income (@ > 5% of the reported net income?)

Tax accounting
Is tax as % of PBT below 25%. If yes why ?
Is the cash tax below taxes on book by more than 10% (last 5 yrs) and is there a corresponding
increase in deferred taxes ? - find reason

Derivative accounting
Check in detail MTM and derivative accounting (especially for companies with large export sales)
Has management used AS11 in the past and hidden derivative losses in the balance sheet instead of a
pass through P&L
Does management use too much derivatives to smooth results ? More in proportion of sales or more
compared to others in industry ?
Does the company have large gains from ineffective hedging ?
Consolidation accounting
Has the accquired company created reserves before accquisition and released later after the merger ?

Asset / Liability accounts

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 ?
chk for losses in the loan portfolio (banks)
Are they new asset account, sudden increase in soft assets relative to sales ?
Amortizting or depreciating costs (related assets) too slowly ?
Failure to record expense of imparied assets - such as AR, loan accounts etc ?
Jump in inventory as % of sales (chk inventory turns)
Decrease in loan loss reserves for credit loss (% of loans and as % of bad loans)
Decrease accuruals, reserves, or soft liability accounts ?
Failing to highlight off balancesheet obligations ?
Has management failed to write off impaired investments ? Impaired investments exist but are still
carried on books at cost value

Key metrics
Has the definition of a key metric of the industry been changed by the management (such as same
store sales in retail, bookings or backlog etc)
Does management highlight a misleading metric as surrogate for revenue or other performance
factor ?
Unusual definition for organic growth sales ?
Difference in earnings between 10-Q and release ?
Does management pretend that recurring charges are non recurring in nature ?

Does management pretend that one time gains are recurring and includes in earnings ?
Has management distorted AR turns, suddenly reduced AR to present a better picture ?
Has management moved inventory to other parts of balance sheet, use a distorted metric to hide
inventory turns deteoration ?
Does management distort debt metric to hide liquidity issues ?

Others
Any critical qualifications by the auditors ?
Have the auditors been changed in the last 5 years. If yes, why ?
Are the auditors a reputed firm, or is it a small unknown company. Chk on their background
Is the compensation of the auditors excess (subjective criteria)
Check if the accounting has changed during topline and bottom line slowdowns in the past ?
FCCB borrowing resulting in dilution (Indian companies)
Interest income as % of cash (looks correct ?)
Are earning managed by modifying reservers/ special charges ? - Retained earnings > increase in book
value
Has the income been boosted by a one time event ?
Does the company take too many restructuring changes frequently and report it below the line ?
Does the company record proceeds from selling a biz into revenue ?
Analyse the JV accounting closely ?
Has the disclosure details been changed or reduced from last quarter as the performance has slowed
(especially if industry is in a down cycle)

Comments
No - sales is booked when shipped to distributor/ customer

No
No - very low AR
No
Does not seem so
No
No
NA
No, cash flow has been higher than profits with Wcap becoming negative
Not clear
No
No
No
No
No
No
No
No
Yes - sale of property is being shown as revenue
NA
No
No

Comments
No
No
NA
NA
No
No
No
No as planned
NA
None
NA

No
No
No
No
No
No

Comments
No
No
No
No
No
No
NA

No
No
No - improvement mainly by controlling inventory and AR

Comments
none
none
none

Comments
no
on lower side @ 5% of salary
No
no
no

Comments
No
No. cash taxes roughy equal to taxes on book

Comments
Company has hedging for around 200 Cr, no losses accumulated on books
NA
no
no
Comments
None

Comments
No
No
NA
No
No - around 2-3% of sales looks ok
no
no
NA
NA
No
no

Comments
no
no
no
NA
no

have included real estate sales in regular revenue. This is not ongoing revenue
No
No

Does not liquidity issue, but has highlighted buyer credit as current liability in past. Buyer credit is short term de

Comments
No
No - same auditor
Small firm
not high
no
NA
NA
No
Yes - will be when the sale of real estate happens
No
Yes - will be when the sale of real estate happens
NA
no

Checklist

Economics models - general

Does the industry have good economics - a) High return on capital , Less price wars, barriers to entry. Chk in
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 co
indicator of low Fixed cost and hence lower competitive advantage

Describe the nature of the industry

- close monopoly (1 or at best 2 companies ?)
- Oligopoly (3-4 companies have 70% mkt share)
- monopolisitic competition ( 10+ companies with low mkt share and high competition)
- Perfect competition ( 25+ companies with un diffferentiated product)
Does the industry/ category have high growth opportunity (1.5X GDP growth) with a few consolidated player
entry barriers ) - this ensures value will remain with these players
Is the industry RM intensive / sensitive ( 40-50 % ) total cost and hence has low Variable costs - hence high
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
industry participants ? Does it impact the company ?
What is the % of installed capacity being used ? Will the company require substantial capex ?

Summary - Does the industry have good economics and does the company in turn have good economics (in
due to the industry). Analyse each factor and summarize here. How has economics changed in the last 10 y
Summary - What is the nature of the business : pure competition, monopoly or oligopoly. Summarize here w
company lies in the continium

Economics models - demand/ supply and cost curves

Does the Industry have high fixed cost

Does the Industry has a low marginal cost ?
How does the company's marginal cost compare with the best in industry?
How does the Average total cost of the company compare with the best in the industry?
How much will the current price have to drop for the company to lose money at operating level (related to v
cost)
Commodity company analysis
Is the Company a Low cost producer or among low cost producers (especially commodity ), if yes why ?

Does the industry have an inelastic supply curve ?

How long does it take to add new capacity or plant (brownfield or greenfield). This is critical for commodity c
as this will define period of supply squeeze and hence high profits/ stock price

Does the industry have an inelastic demand curve ?

- Is the commodity or product a small % of the total cost of end product (less than 20%) ?
- does the commodity or product have easy substitutes ?
- At what price will the end user start reducing the usage ?
Impact of the demand and supply curves
- how long will it take for the shortage situation to resolve (in commodity industry) via demand reduction an
increase for prices to drop ?
Has the company made above cost of capital ROE over a complete business cycle ?

Business model checklist

Are the net margins higher than competition ? Why ?
Is the company strengthening its CA, if yes - how ?
Does the company have a recurring revenue stream
Is company gaining share in the industry profitably
Does the company have high concentration of sales with few customers
Does the company have a strong MKt/Sales organisation
Is the business model becoming less asset intensive and increasing the ROC
Does the company have high demand growth due to
a) growth in exisitng product/ market
b) growth in exisiting product / new market
c) growth in new product / existing market
d) growth in new product / new market

Is the company reducing the amount of capital invested ? i.e is the company freeing up capital or increasing
Does the company have investment which are expensed such as Advtg, R&D. how effective have been thes
'investments'
Does the business have intangible assets - brands, trademarks, patents, customer relationship etc ?
Is the business catching some wave or trend and can ride with it for sometime

Knowledge economy models (creating consumer advantage)

Does the Business have network effects

Does the business have a lock in - once the product is bought the tendency to continue is high
Are switching cost high
Is company increasing the service component
Summary - What is the key nature of the company's customer advantage. Has the company enhanced the s
last 10 yrs ?

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 ?
Will the company succeed by out competing others in a narrow or broad segment ?
Will the company succeed by co-operating with others in the same or complementry ecosystems ?
Summary - Any models which in combination with economics model will create a very large upside ?

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
Summary - Any value which should be used to raise the valuation upwards ?

Hidden liability
Forex/ derivative liability
ESOP liability
Pension liability
Equity dilution via FCCB
Contigent liability as % of Net worth and annual profit (concern ?)

Company classification

Is the company a slow growing company with high competitive advantage - returns to come from valuation
?
Is the company a cyclical stock currently cheap due to down turn - returns to come from cycle upturn in the
?
Is the company a moderately priced mid/small cap with decent biz model and competitive advantage - retur
from growth and high ROE?
Is the company a sector/ market leader suffering from temporary biz or sector specific distress - returns to c
market recognizing true value of company and sector ?
Is the company a cheap, graham like stock (extremely cheap by PE, asset based valuation) - returns to come
valuation gap closure ?
Summary - how will the undervaluation correct itself ?

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 r
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
higher valuation
(value - Poor management not interested in enhancing value)
Summary - Which catalysts will work and how long will it take ?

Probability / options models

Does the industry have high level of change - results in a larger no of real options
Does management has capability of identifying and utilising the real options
What are the low probability event which can kill the company. What is the probability of that happening ?

Physcological models

Am I working with recency bais - giving more wieght to recent data ( check if the projections based on recen
averages / look at 10-12 yrs data)
Am I working with Hindsight bais - thinking that fact was obvious beforehand ( check if the -ve factor was no
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, to
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 (give three reasons against the idea)

Bais from commitment and consistency tendency - Make this spreadsheet hence committed to buy ?
Have I looked at the base case for the industry - have majoritiy of the companies in the industry created we
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 yo
investment thesis and evalute objectively )
Have you questioned the consensus
Has the analysis been done with reverse thinking (working the problem forward and backward)
Summary - Of the factors impacting me, what can I do to counter-act them ?

Other models
What are the key no-brainer questions ?

Any combination of factor effects

Are there one or two key variables, which if focussed by management will account for a major success of the
business ?
What factors will cause the intrinsic value to rise ?
At what rate can we assume that the intrinsic value will grow ?

Munger Model
1. Solve the big no brainer points in the thesis - find the key points of the idea which define success/ failure
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 poin
hidden factor not being considered and can cause it to fail ?
5.Properly consider results from a combination of factors or lollapalooza effects
6. What are the few key factors the maximizatio of which will make the company succeed ?
7. what additional factors to point 6 if done well will add to success

Exceptional upside possible ?

Huge external opportunity with ability of company to scale ?
Value migration to this company ?
Change in govt regulation causing value to migrate to the company ?
Demand curve inflection (drop in price or income increase causing an inflexion in demand)
Competitive landscape change causing share for the company to rise
unexpected turnaround
Discontious corporate action such as M&A, huge capex, business model change ?
Management with high ability not recognized
Extremely pessimism with the sector/ company

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
Will the returns come from Earnings growth or PE expansion ?
Will earnings triple in 5 years ?
What factors will contribute to this high earnings growth or hinder it ?
Any reason why the terminal PE should be 12 times earnings (higher than current ?)
If PE expansion, what factors will cause it

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
List all factors or evidence, the presence of which will invalidate the bullish argument for the id
cause the rejection of idea). Search for the evidence

Execution filters
What is the price and volume action of the stock ?
Are there any short term : 3-6 month events which will drive the price up or down ?

Remarks
Read AR/ Google to answer questions on various models

No, industry is characterised by low returns on capital, price wars and low barriers to entry

A large no. of small firms - unorganized sector earning low return on capital indicating low competitive adva

25+ companies in most low end products. However some major products have a 8-10 companies with 70%
No, growth will be 2X GDP, however constant entry of new competition will result in regression of returns
Yes
No
Yes, supreme is able to increase price consistent with inflation
20%+ for the business cycle
Yes, new products are constantly being introduced and becoming commoditized
No
Yes - companyies require constant capex to grow.Capex not too expensive and take 2-3 yrs (with high IRR)

The industry as a whole has average economics. Company has superior profitability due to focus on new pro
extensive distribution network/ customer relationships
Pure competition in several products. Limited oligopoly in the newer products/ technology

No
No - RM and overheads account for 80% of cost
Yes
Yes
around 15-18%
NA

With 1-2 % of competition

Yes - by expanding distribution, adding new products and adding new customers
Yes
Yes - mainly from unorganized sector and from substitution effect
No
Yes
Yes - has done in the past. Now at the upper limit of the same

a. Existing product/market
c. New products in existing market
d. New product/ new market - smallest (composite cylinder)
Yes - mainly reduced Wcap turns and improved Asset turns too
Not too high
Mainly customer relationships
Yes - movement to higher plastic usage and replacement of metals

No
Small effect
Low
Yes - by providing better distribution and total solution in packaging products
Mainly by providing wider distribution, high quality products and new products

Dominant player in specific niches

Yes
Dominant player in specific niches
In broad segments
Co-operate with other in the ecosystems such as Auto OEM, contractors etc
None apparent

No
yes
No
around 10% of Mcap will come from selling the real estate

None
None
None
None
around 40% of annual profit - not too high

No
No
Yes
No
No
Stock does not have undervaluation. Returns should be commensurate with increase in intrinsic value

No
Yes
No
No
No
No
No
Yes
Yes
Stock does not have undervaluation. Returns should be commensurate with increase in intrinsic value

Yes
Yes - has constantly dropped low margin products and introduced new products. Now expanding into CPVC
A 20% drop in economy which is a very low probability event, can cause serious damage to company

Yes giving wieghtage to the last 6-7 years of data more. However this seems to be appropriate
No
yes - analysing the downside and comparing with industry performance
No

No
Yes
No
No - just started position
Not yet

1. commoditization proceeds faster than expected and impacts margins and ROE
2. Growth of new products is lesser than expected, resulting in lower overall margins
3. Oil price shock causes the margins to suffer
Not yet
Yes
Not influenced by the recommendations
No
New position
attempting to avoid
Yes - seem to concur
yes, doing so in the worksheet
Need to avoid confirmation bais, commitment and consistency tendency on this idea

1. Will the company be maintain growth and margins in the products in pipe and packaging segments
2. How will the new composites based products perform in the future
3. Any import threats ?
Continued migration to plastics product (substitution) and from un-organized to organized
Continued focus on expanding distribution and new products
Organic growth in the industry
1. Expand distribution and new customer relationships (including expand existing relationship)
2. Introduce new high margin products (exit the lower margin products)
3. Focus on cost efficiences
Continued ROE at existing level and 15% (10 % volume growth) growth in profits will cause the fair value to
around 15%

Will the company be able to maintain margins via new products and on existing high margin products
Will the company get extra profitable growth via exports ?
Volume growth = 2XGDP - around 14-15% value growth for industry + new product and expansion should gi
value growth. Company should be able to maintain current margins and thus deliver a bottom line growth of
Done
All considered

Yes
No
No
No
Yes - move from unorganized to organized
No
No
No
No

Mainly from earnings growth

Yes

Growth in usage of plastics, new products and migration from unorganized to organized / from metals to pla
ROC is 30% and company should grow atleast at GDP rate
maintain ROC @ 30% and growth @ 20%

No
Yes
No
Yes - very likely
Competition resulting in lower margins and ROC could make this a poor investment

50% increase in the last 6 months due to continued good performance

continued good performance at the fundamental level