Pattern of Success in Quality Investing

One pattern in itself not relevant.
Look for
Lollapalooza effect of more than one factor.
Look for changes which are evident in numbers

to some extent. Either in Sales or PAT or ROE
numbers....Sales 3 CAGR . nominal GDP rate
and ROCE > 10% for last three years...
Greatest gains in a stock are usually made as a

business is developing its competitive
advantage rather than after it already has
developed one.
Tailwinds are very very important
ContrarianValueEdge.wordpress.com
Friendly Middlemen
Time Arbritrage
Toll Roads
B2B business
Low price Plus

Promoters\Mgt
Premiumization
Niche business in commodity business
Commodity Business
Market share gainers
Emerging Moats
Corporate culture
Spin off or demerger
Value Migration
Market panic
Cera
Astral Examples
Unorganized to Organized segment
Industry consolidation
Companies focused on customers pain points,
Aspirations and Needs
Miscellaneous
Long term trends

Industry facing disaster
Brand Power
Pricing Power
Dominance
Which increases margins or sales
Great teams are able to respond to a world which changes in Continuous new products or incremental improvements not
ways which cannot be foreseen. necessarily disruptive one
Intelligent Fanatics Innovation culture
Dominant share of R&D expenditure as % of Sales/Profits in its
narrow sub-sector
Minimum scale requirements Forward integration gives companies more influence over
customer experiences. eg Apple owned stores
infrastructure to support franchisee
Franchising Selling and promoting products in the right location cements a
Financial strength for A&P company’s brand
ONLY FOR ESTABHLISHED BRANDS... Companies that control their own stores and infrastructure
Forward integration by powerful brands/ depend less on the kindness of strangers
Huge opportunity size established companies Direct to consumer [online sales] can add material logistics and
infrastructure complexities for a manufacturer
Increases benefit from acquisition of small brands

Wholesale distribution and/or retail presence Value of acquisition increases substantially as it can be
distributed through company wide distribution network
Under assessment of Long runway of quality
businesses
High Quality co which has grown nominally for

3-4 years
Mispriced B2B businesses which are
enormously profitable but remain below the
radar
Niche business in commodity business
Emerging moat that is growing slowly over time
Jump in operating margins

Increase in asset turnover
Reduction in debt
After several years of pain FUNDAMENTAL Improvement in working capital
change in Industry ROE > 15% for > 3 Years

Moving up value chain
Gain in market share
change in management,
Beneficiary of some growing trend
a new acquisition,
closing an unprofitable division Small obscure company which is leader in its

small niche
Change in product Among first in their industry

Keep trying hard despite no huge traction for 10-15Y
First generation entrepreneur
Company formed less than 20Y back
When price drops due to non-fundamental
reasons
Full scale panic in entire sector
Cyclical downturn not STRUCTURAL
Is inventory turn better
AVG revenue per store or capacity utilisation better Slow or high growth both ok
High ROE or ROA reflects better economics.... Unit economics
higher SSS growth or higher capacity utilization Better RM prices
Trust imp. so Advertisement

Lower prices than unorganized segment Any economies of scale for Organized players
Better training to improve productivity
Convenient locations
Convenient timing
Benefits to customers > Capital efficient than unorganized player
Better choice
Superior buying experience
If a business is not solving a genuine customer
problem in a unique and compelling way and in
Driven by demographic change
a manner that is defendable via a moat, a
business is unlikely to succeed.
Increased income
Unorganized to organized Pharma migrating to India
Private banks
Companies which accept their mistake and
avoid them in future.
Frank in communicating bad news too....
Focus on LT sustainable growth and ROE
Continued capacity building, R&D and A&P in

slowdown too....focus on LT and ST profitability
LT focus easy in family owned companies...
Products with social status or providing health
benefits
Product differentiation most important
Consumers seeking affordable but decent

fashion or decorative items that are less
standardized (like jeans or sofas) will be
influenced by factors such as fit and quality.
[less by price alone as long as within budget]
Scale is essential
Low-cost squared companies construct a

business model, organization, and culture that
drives low cost in each step of every process
throughout the operation. The depth of cost
consciousness adds protection that ordinary
cost-minimization tactics do not. It is not the
individual steps alone but their combination
that creates the competitive advantage.
Eg. Ikea, Southwestern Airlines, Amazon etc...
Wide product availability, technical support , Middlemen role can be positive or negative
incentive to middlemen , training of middlemen
etc...
Eg. Electrical or plumbing contractors.
Customers tend to focus on the provider’s
Middlemen insensitive to price as customer hourly rate and minimize that rather than
pays the bill. inspect brand offerings and haggle over those
prices.
For complex products or those that are difficult
to install or consume, professional training is a Reliable customer service imp. as otherwise
compelling lock-in strategy. middlemen takes the blame...
rapid urbanization and need to provide
affordable housing
number of people who will go abroad on

packaged holidays or travel within India will
grow many times
Sell products to an aspiring and growing middle

class
Identifying the next big trend is all about

looking for the ‘new’ whether it is a new sector,
new stock, new high, new promoters
Whether the business has done well anywhere

else in the world
Most companies that start a new trend are

incubated by first generation entrepreneurs
As penetration levels go up, industry grows at an abnormally

high rate
Currently low penetration but high probability Once category penetration levels are high > 70-80%
of penetration increasing going forward.... incremental growth will be challenging.
Driven by demographic change
Increased income
If a business is not solving a genuine customer

problem in a unique and compelling way and in
a manner that is defendable via a moat, a
business is unlikely to succeed.
Spinoff 2002
Unorganized to organized
Aspiration - Middle class
B2C
Microcap - niche focus
Heavy Adv for brand image...
Considered commodity product
China dumping
Misconceptions Impact of real estate slowdown...
Underestimating power of distribution & brand
Only three major Indian Players...

Not much competition
Continous product innovation
Plumbers
Easy for plumbers to install pipe less time
Friendly middlemen
Plumber make decision customers pay
Distribution network
leader in niche market
After several years of pain FUNDAMENTAL
change in Industry
Gold companies 2012-14

Micro-Finance Oct 2010 -13
Industry shocks
Multiplex 2011-13
Capacity expansion done & Not in price
Intelligent fanatic - TRUSTING ONE PERSON
Next generation take over and previous management was

corrupt
New CEO appointment Change in management
the market’s inability to treat as exceptions, the

great capital allocators who create well-
managed, and highly profitable diversified
conglomerates over time.
The market’s propensity to misunderstand the

integrity of an entrepreneur;
Market’s inability to forgive an entrepreneur

“learning machine” who has learnt very
important lessons from his or her past mistakes
Look for those who will survive....
Walmart
Marriot hotel Business becomes less dependent on macro
Examples economic variables
Subtopic 3
Intelligent fanatic Larger budget from advertising to R&D
Numbers should speak Distributors consider them more important

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Pattern of Success in Quality Investing

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One pattern in itself not relevant.

Look for changes which are evident in numbers

Greatest gains in a stock are usually made as a

Tailwinds are very very important

Low price Plus

Long term trends

Increases beneﬁt from acquisition of small brands

High Quality co which has grown nominally for

Jump in operating margins

After several years of pain FUNDAMENTAL Improvement in working capital

change in Industry ROE > 15% for > 3 Years

closing an unproﬁtable division Small obscure company which is leader in its

Change in product Among ﬁrst in their industry

Cyclical downturn not STRUCTURAL

Trust imp. so Advertisement

Superior buying experience

Frank in communicating bad news too....

Focus on LT sustainable growth and ROE

Continued capacity building, R&D and A&P in

LT focus easy in family owned companies...

Consumers seeking aﬀordable but decent

Low-cost squared companies construct a

Eg. Ikea, Southwestern Airlines, Amazon etc...

number of people who will go abroad on

Sell products to an aspiring and growing middle

Identifying the next big trend is all about

Whether the business has done well anywhere

Most companies that start a new trend are

As penetration levels go up, industry grows at an abnormally

If a business is not solving a genuine customer

Aspiration - Middle class

Microcap - niche focus

Heavy Adv for brand image...

Considered commodity product

Misconceptions Impact of real estate slowdown...

Underestimating power of distribution & brand

Only three major Indian Players...

Continous product innovation

leader in niche market

Gold companies 2012-14

Next generation take over and previous management was

the market’s inability to treat as exceptions, the

The market’s propensity to misunderstand the

Market’s inability to forgive an entrepreneur

Intelligent fanatic Larger budget from advertising to R&D

Numbers should speak Distributors consider them more important

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