Handbook composed from PPFAS videos

Rajiv Thakkar (CIO & Director)

 1994 – 2003, was a jack of all trades (investment banking, bonds, IPOs etc).
 Terrific returns on bond funds 20%.
 10-year yield fell from 14% to 5% since then.
 Rajiv Thakkar was of the different opinion that bond yields have stabilized at 5% and
would not be the best candidate for future investment.
 Hero Honda a growing company was paying Rs 18 on Rs 180 stock price. Dividend yield
of 10%.
 2007 was extremely difficult. Stocks that were moving were commodities companies,
infrastructure, listing of Uni-tech and DFL.
 PPFAS did not participate in either of the two sectors. This led to huge
underperformance.
 They did what they understood and did not get swayed by what was popular and if
someone decided to redeem, be it.
 Why did they invest in overseas stocks?
 Parent company trading cheap compared to Indian Subsidiaries.
 Sold Pharma, FMCG to raise cash in portfolio.

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Index

Stock Market

1. Understanding stock market …………………………………..……………………………………………… 4

2. Why is investing confusing…………………………………………………………………………………..8
3. Time in the market versus timing the market …………………………………………………………14
4. Economic bubbles & business cycles…………………………………………………………………..16
5. Different kinds of holding structure of promoters………………………………………………….17
6. Aristotle & Value investing …………………………………….………………………………..…………… 19
7. Identifying the next multi-bagger ……………………………………………………………………….……21
8. Multibagger or falling knife ……………………………………………………………………....…….…… 24
9. What can value investor learn from quant …………………………………………………….……… 55
10. Index Investing…………………………………………………………………………………………………79
11. Basics of mutual funds ………………………………………………………………………………..…… 84
12. Debt mutual funds – Theory practice & rating agencies ……..………………………….….. 121

Psychology in stock market

1. Greed & Fear…………………………………………………………………………………………………………..11

2. Behavioral finance & its relevance to value investing…………………………………………12
3. Psychology of IPO …………………………………………………………………………………..……...….…. 69
4. Mental heuristics……………………………………………………………………………………………………72
5. Financial equivalents of the optical illusion …………………………………….……………………..83

Businesses

6. India consumer market ……………………………….…………………………………………………………. 27

7. Interglobe Aviation ……………………………………………….……………………………………….. 29
8. Understanding the diagnostics lab business ……………………………………………………….. 30
9. Breaking bad with chemical sector ……………………………………………………………..………….36
10. Looking back at the telecom sector + Overview………………………………………………..…… 41
11. Logistics sector in India ……………………………………………………………………..………………….. 43

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12. Tanishq v/s Tiffany ………………………………………………………………………………..….……… 47
13. Understanding the dairy industry in India ……………………………………………..….……. 58
14. Current state of the auto sector (electric cars) …………………………………………………..…… 66
15. Points to consider while investing in AMCs ……………………………………..……….…….82
16. Power Sector & its menace in India…………………………………………………………………. 86
17. Valuations of Insurance companies ……………………………………………..……………………….. 87
18. Boy who cried wolf…………………………………………………………………………………………..90
19. Retail Payments industry ………………………………………..………………………….…..….…. 97
20. Life insurance …………………………………………………………………………………………..……..….101
21. Platform companies or modern monopolies …………………………………………….….…….. 103
22. Road to Zero………………………………………………………………………………………………….. 109
23. Money & Banking ………………………………………………………………………………………………….112
24. Perils of Real estate & Gold……………………………………………………………………………….114
25. Apple – moat?.........................................................................................................117
26. Business model of ride hailing – Uber ……………………………………………………………….119
27. Amazon – the Google of e-commerce………………………………………………………………….123
28. Launch of India’s first REIT…………………………………………………………………………………. 126

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Understanding stock market (1st July 2011)

 Stock markets go up and down based on changes in sentiments. Hence, greed and fear
dominate. This is what makes markets interesting.
 It is not a zero sum game.

 Transient investors:
1. Owners without loyalty.
2. Sway between greed and fear.
3. A click changes ownership.
4. What matters is “Money”.

 Markets run on psychology:

 Pure finance: 1 + 1 = 2
 Finance + Psychology: 1 + 1 = 7
(Interesting and difficult to understand)

 Mind tuned to physics:

 Greed: Overconfidence and over optimism
Investors buy overpriced stocks.
 Fear: Aversion and Decision paralysis
Investors avoid underpriced stocks.
 Oil and stock markets:
Year Price per barrel of oil in $ BSE Sensex
2005 - 2007 From $40 to $100 Moved up from 6,000 to
20,000
2008 From $100 to $130 Came down from 21,000 to
15,000

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 Experts will talk on…
 Macro factors.
 Economy.
 Budget.
 Industry Trends.
 GDP projections.
 Development.
(Experts, professionals, economists, scholars, stock brokers, investment bankers and
all rush in to give an explanation after an event has happened) – Hindsight Bias.

 GDP growth:
Is it for real? Is it really possible to calculate?
Furniture making v/s degradation of forests.
Consumerism v/s indebted future generation.
Sale of cars v/s traffic jam, waste of fuel, time, productivity etc.

 Can we predict the inflation for the next week?

Week ending 10th February inflation goes down to 8%.
Can this be proven?
(Don’t try to predict what we cannot)

 More the information it distorts our thought process. More information can lead to
overconfidence. Filter not needed information.

 Trick:
 Respect the markets.
 Be-self disciplined.
 Treat the ups and downs with equanimity.
 Intelligence and wisdom will carry the day. But it is the wisdom that endures.

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 (Be greedy when others are fearful and be fearful when others are greedy)

 Financial Markets … The Reality:

 The least level of integrity.
 The only ruling ethos is how to make money out of the other guy.
 Every innovation is against the interests of the user of the said innovation.

 Participants in the market and know their interests:

 Regulator Companies
Government Mutual funds
Stock Exchanges Brokers
Banks Investors
Media Operators

 To understand markets:
 Understand investor biases.
 Understand Participants Psychology.
 Understand system and system thinking.
(A system is an entity that maintains its existence and functions as a whole through
the interaction of its parts connected directly or indirectly and a change in one part
affects all the other parts)
(System thinking is thinking in circles rather than in straight lines. The connection
between parts form feedback loops)

 How do we see the stocks today checklist?

 All available information negative/positive.
 Media reports negative/positive.
 Stocks show an uptrend/downtrend.
 FIIs investing/pulling out.

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  IPO’s have started getting oversubscribed.
 All market participants overconfident/fearful.
 Optimism/pessimism prevails all around.
(All negatives is a sign to buy, all positives is time to be cautious)

 The road ahead:

 Don’t try to predict and time the market.
 Avoid overpriced IPOs.
 Ride your winners, sell your losers.
 Don’t chase fancies of the markets.
 Value will be available in neglected sectors.
 Holding cash may not be a bad idea.
 Bottom up stocking picking may be tiring but rewarding in the long run.

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Why is investing confusing? (10th June 2011)

 Different people invest in different things,

 Larger families.
 Good education.
 Assets.
 Different investment products,
 Stocks.
 Bonds.
 Mutual funds.
 Real estate.
 Insurance.
 Precious metals.
 Commodities.
 Different … “Investment Procedures”
 Buy, hold & wait (long).
 Buy & sell (trade).
 Sell & then buy (Short-selling).
 Options (trade).
 Broking (trade no position).
 Investors are classified by their products and procedures,
 Stock trader.
 Real estate speculator.
 Collector of arts.
 Commodity future traders.
 Day trader.
 Saver having a bank deposit.
 Investing is a large subject,
 Appliances.

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  Electricity.
 Cars.
 Trading is not investing. It is a procedure or a technique.
 Investing: A personal plan: not an investment product or a procedure. Consider,
 Goals.
 Revenue stream.
 Expense milestones.
 Discipline.
 Investment planning,
 Disciplined approach.
 Asset allocation – insulates from market volatility.
 Control & flexibility.
 Clear vision.
 Investment strategy,
 Two sources of returns in the stock markets.
 Fundamentals represented by earnings and dividends.
 Speculation represented by the market valuation of these fundamentals.
 Investment versus speculation,
 Investment: 1) Preservation of capital.
2) Reasonable rate of return.
3) From own funds and not from borrowed funds.
Operations not meeting these requirements are speculative.
 Money is one form of power. More powerful is … Financial literacy.
 “Learn to use emotions to think. Do not think with your emotions”
 Is house an asset?
 A house is an asset – if the house has been bought from one’s own money and is
used to earn rent.
 A house is a liability – if the house is bought with a mortgage and monthly
installments have to be paid.

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 Definition of assets & liabilities,
 An asset is something which will produce an income for the owner.
 A liability is something that creates future expenses for the owner.
 People stay in middle class because their expenses rise faster than income.
 Lack of financial literacy makes you do what the masses do.
 What differentiates the middle class from the rich?
 Cash flows of the rich.
Assets are owned

Income is earn from the assets

Expenses are met from this income

Balance is used to create more assets.

 The best way to invest is to own a business. If you can’t own a business, become a part
owner through stocks.
 What is the right way?
 Delay gratification.
 Think long term.
 There are no shortcuts in life.

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Greed & Fear? (3rd October 2012)

 When you hope for riches, you start buying stocks thinking prices will go up. When
markets are going down you think of poverty, you start selling stocks. A human mind is
always oscillating between hope and fear.
 When markets are booming, your hope for riches increases, and fear for poverty starts
receding.
 The voice of hope was loudest during technological boom of 1999 – 2000 irrespective of
fundamentals or management.
 It’s hard to escape hope & fear but it’s about how to balance them. Going against the
crowd ultimately counts.
 We sell our winners too fast and hold on to our losers for long.
 Cognitive errors,
 Mental accounting: Money is actually fungible but we deal with it in a different
way. We accord different values to money depending on the quantum of money,
depending on efforts undertaken to earn that money or how that money is
coming to us. And in our mind we treat money very differently.
 Hindsight bias: Going backward to think if decision was right or wrong rather
than foresight. This depends on our self-control and self-discipline.
 Regret aversion: When you buy a stock and if it falls, you regret. When you avoid
a stock and it rises, you regret.
 Paper loses do make us feel stupid. We wait for stock prices to recover even though
they may not. This feels stressful every time you look at it. Why? Because you opened a
mental account in your mind. It makes you look stupid. Going backwards to identify the
mistake is hindsight bias this lead to regret aversion.
 Loss is a fact, profit is an opinion.
 Gains will always amplify your pride, losses will always increase the pain of regret.
 Stocks can go up and down for many reasons. Sometimes no reason.

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Behavioral finance & its relevance to value investing (24th June 2011)

 A value investor should not worry about GDP numbers, FII & DII numbers or which
government is getting elected.
 Value investing is looking at the activity of buying equity share in a company as
partnering with promoters in running the business. What should matter are prospects of
the business, true value of that business.
 There is no use of psychology in valuing a government bond in which cash flows are
certain. It is hard to predict cash flows in equities and even estimating the intrinsic value
of a business.
 Heuristics: Shortcut that our mind takes
 Availability: We tend to focus on headlines or what is widely known.
 Representativeness: IT boom. If a company had dot com in the end, stock would
keep going up.
 Overconfidence: Hard to predict financial statements but analysts still do.
 Anchoring: Sticking to the prices you bought stocks at. You will tend to value at
the same prices even though prospects may have changed. Let’s say you entered
a shop with flower pots costing 2 lakh rupees. Then you see other pots costing
20,000 rupees. You will consider them cheaper even when true value is just
2,000. This is anchoring.
If a stock is trading at 100x earnings, analysts tend to believe stocks in similar
industry trading at 80x are cheaper.
 Loss aversion: Most people are not risk averse, they are loss averse. This is why
they average on stocks.
 Social proof: If everyone is going to engineering school, I shall do the same.
 Investor bought a stock at 1000. Price last month went to 3000. Currently it is 2000.
Prospects have worsened but investor will wait to sell it at previous high of 3000. This is
counting on hope. Such biases could prove harmful and complete wipe out of principle.
When prospects change investors must change their mind.

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 In investing people go with what is fashionable, not what is profitable.
 CAPM, alpha beta and gamma would not matter in real world finance. What matters are
your assumptions that go into spreadsheet. Keep numbers conservative and not be
overconfident.
 People put money in PPF for 15 years for their retirement planning. People stay invested
in real estate for 15 years without checking prices daily. But when it comes to equity,
people want daily returns, they want to know daily ticker prices. Why not invest for long
term?

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Time in the market versus timing the market (8th May 2014)

 Investment clubs are the product of a bull run.

 Everyone will share their success stories but not their failure.
 Investing based on advised received during parties or friends with no exposure to
markets are risky.
 Waiting for election to end and see how markets will react is timing the market.
 How long is long term?
- It depends on whom you ask.
- At least have 5 years of view.
 Investors don’t trade in and out of real estate everyday then why should one do it in
equities?
 Chase value, not returns.
 Two types of risks,
 Actual risk.
 Perceived risk.
- In 2009, perceived risk > actual risk.
- In a rising market, actual risk > perceived risk.
- In a falling market, perceived risk > actual risk.
 Bulls make money, Bears make money, and Pigs get slaughtered. Pigs are the ones who
are trying to catch the top & bottom.
 Do not chase fancy stocks like the tech boom.
 Focus on asset allocation given individuals risk appetite.
 Best thing to do at times is to do nothing.
 Buy damaged stocks, not damaged companies.
 Make volatility your friend.

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 How does an investor know which mutual fund scheme is right?
Morning star and other agencies will only rate those mutual fund companies with a
track record. Past performance is no guarantee of future performance then why rate
mutual fund schemes based on past performance?

Problem is manager remuneration is tied to asset under management. Every manager is

in the race of increasing asset under management. Because of this race for Asset under
management, performance has taken back seat. Therefore, you have multiple schemes.

For the same reason, Mutual fund companies have become marketing companies. More
focus on increased asset under management than working in best interests of
customers. They earn a fixed % of AUM and therefore the goal is to increase Asset under
management. I repeat, Present day mutual funds are marketing organizations.

What is important in selecting a scheme?

- How scheme is constructed?
- Fund manager should be able to take all opportunities existing in the market.
- Look for funds with low turnover, low expense ratio.
- Avoid sector specific funds,
- Real estate fund will only invest in real estate companies.
- Infrastructure fund will only invest in infrastructure companies.
- A small cap will only invest in small cap companies.

Because of these marketing gimmicks they have actually curtailed investment horizon of
their own fund managers.

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Economic Bubbles and business cycles (13th April 2020)

 Refers to something which is very likely given the facts (someone who consumes only
junk food and is very obese gets heart disease or hypertension).
 The timing of that is not know (it is not known precisely when the condition will occur).
 Was COVID 19 predictable?
 What do we know about the future?
 Fiscal deficits are high and will go higher.
 Interest rates are low and will stay low or go lower.
 If you do not want equities, your choice will be low interest sovereign (Corporate
debt does not make sense in the current environment).
 Past Industry specific packages to revive demand:
1. Auto bailout in the US in 2008-2009.
2. JNNURM in India.
 “Plus ca change, plus c’est pariel”.
(The more the things change, the more they remain the same).

 Most analyst focus on the future and pay attention to management commentary. While
the former is important, do not forget to focus on the past record of company through
annual reports.
 Stock prices are more volatile than underlying businesses. Use crashes as an opportunity
to add to these businesses.
 Checklist:
 Look for low debt, cash rich companies.
 Good quality management, Competent and honest.
 High return on capital, High return on net-worth.
 Pricing power.
 Predictable business.

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Different kinds of holding structures of promoters (23rd Jan 2012)

 Equity investments as partnering,

 Individual first generation entrepreneur.
 Business family.
 Anonymous.
 Government.
 Overseas parent.
 Did you know?
The entire funding for Reliance infocomm came from Reliance industries. This funding
was in the form of low-interest earning preference share, not equity share. Most of the
equity of Reliance infocomm was kept with the promoters. This was out only because
two promoters fought otherwise the whole company should have belonged to the
shareholders of Reliance industries. Such unfair behavior towards minority shareholder
is wrong.
 Charitable activities of the Tata Group,
Group market cap: Rs 4,46,420 Cr
Tata sons approximate valuations Rs 2,47,350 Cr
Total amount spent by Tata trusts on charity
 In 2009 Rs 291 Cr
 Cumulative Rs 1,525 Cr

Amount spend is less than 1%, perception is different in the market.

 Books to read: 1) The Polyester prince – Hamish McDonald.

2) Storms in the sea winds – Alam Srinivas.
 Try to understand the shareholding pattern of Reliance industries. Promoters don’t have
much stake with their name but through limited liability partnerships. It’s a maze very
difficult to solve.
 In conclusion,

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Be careful of companies doing lot of options, convertible bonds etc. Most mergers, spin
offs, related party transactions etc. Agency problem like empire building, populism and
so on. Complex matrix kind of ownership structures are an avoid.

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Aristotle and value investing, Mahindra Holidays & Resorts (4th

November 2011)

 Why are you investing?

 Focus your investment on goals like retirement corpus, charity.
 Once the target is clear, road-map becomes easier.
 You can search for best companies, most efficient, scout for the best brand in the
country, but finally what determines the success is entry price.
 Single most important thing in successful investing remains the entry price.
 “What lies in our power to do, lies in our power to not do” – Aristotle.
 The most common mistake amongst investors, they sold shares too early.
 Just like old wine, stocks get better with age.
 “The least initial deviation from the truth, is multiplied later a thousand fold” – Aristotle.
(Don’t be lured by short term attractions)
 “A friend to all is a friend to none” – Aristotle.
(Media creates frenzy around a particular sector)
 “We are what we repeatedly do, excellence then is not an act but habit” – Aristotle.
 Mahindra & Mahindra
 Long gestation period.
 Cyclical business.
 Over time pricing power comes back (Taj in Mumbai).
 Best time to buy, when economy is not doing well.
 Most resorts in the outskirts.
 Membership fees pay for construction.
 Annual fee sufficient to run the business.
 Food and beverages are charged extra. Such many other ways the company can
mints money from members.
 Airline booking, foreign exchange and taxi arrange gives additional revenue to
the company.

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 After 25 years, members do not have claim on the property.
 ROE is between 15% - 75%.
 Revenue highly dependent on new subscription in a particular quarter / year.
 Forms an entry barrier as not all companies can come tomorrow and build
resorts across India.
 60% of new member’s cash-flow goes directly to revenue to income statement.

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Identifying the next multibagger (13th Feb 2014)

 Patni computers was sold for Rs 4,600 crores.

 Around the same time the total valuation of Infosys was at Rs 1,86,000 crores.
 Infosys founders started their career as employees of Patni.
 How do we identify the next Infosys / HDFC Bank / Hero Honda?
 The dilemma:
 “Those who have knowledge don’t predict, those who predict don’t have the
knowledge”.
 “The investor of today does not benefit from yesterday’s growth”.
 Buffet says,
 Buy a business, not a stock.
 Partner with honest and competent management.
 Business should be,
 Easy to understand and predictable.
 Should have some moat (entry barrier etc).
 Should have high return on capital.
 Use very little debt.
 Buy at attractive prices (margin of safety).
 Buffet has not spoken much about growth,
 Most analysts feel they must choose between ‘value’ and ‘growth’…
 The two approaches are joint at the hip.
 Growth is always a component in the calculation of value, constituting a variable
whose importance can range from negligible to enormous and whose impact can
be negative as well as positive.
 Sources of growth:
 More penetration in same market.
 New category of customers.
 New geographies.

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  New variants, products extensions etc.
 Gain in market share.
 The requirements for wealth creating growth:
 Buffet’s checklist,
 To avoid growth like “Kingfisher Airlines”.
 Large market potential.
 New product category (internet, cancer cure, cure for baldness).
 New way of doing things which is very superior (iPod v/s CDs).
(Trend visible over a period)
 Proven business model in developed market.
(Jubiliant foods).
 Entry barriers.
 Monopoly / oligopoly in the new product category would be the
best.
 “Me too” product can destroy wealth.
 “Sitting duck” competitors.
 Typically most PSUs.
(MTNL / BSNL, PSU banks, Indian Airlines etc).
 Traditional, small unorganized players.
(Tanishq v/s traditional jewelers, Big Bazaar v/s Kirana, ICICI direct
v/s small time stock broker).
 Obsolete product guys.
(Digital camera v/s photofilm camera, Hero Honda v/s Bajaj Auto,
NSE v/s BSE).
Bajaj auto has the biggest market share but bookings went to 3
years wait time which led to new entrants like Suzuki.
 Business design,
 Are the same individual / group required to perform the same task repetitively?
(Stage performance plays v/s movie production, Infosys v/s Microsoft).

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  Is the business too dependent on an individual or family?
 Are there economies of scale? (NSE)
 Promoter DNA,
 Some have scalability in their DNA (either through nature of nurture).
(HDFC Bank v/s Times Bank).
 Ability to manage people, production, service quality, branches & locations, raise
finances, handle marketing, handle compliance and regulation etc.
 Multi-baggers of yesterday,
 Private sector banks have a lot of market share yet to gain.
 Jewellery will still be loved by Indians.
 Rating agencies will participate in India’s growth.
 FMCG companies will gain as Indian consumption moves up in line with
affluence.
 Scalability + profitability = multibagger.

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Multibagger or falling knife? (9th November 2016)
Why do stocks have steep falls?

 Leveraged financials & loan.

(PSU Banks)

 Food & consumer products – safety, ingredients etc.

(Nestle)

 Victim of a fraud.
 Perpetrator of a fraud.
 Unethical / illegal behavior.
(Wells Fargo – sales target)

 Loss of a key customer / product segment

(Welspun)

 Regulatory issues.
(FDA ban)

1. Warren Buffett:
 Bought Amex during salad oil scandal and made it 40% of Berkshire’s portfolio.
The best thing that happens to us is when a GREAT company gets into temporary
trouble. Buy them when they are on the operating table.
(Don’t miss out on the word great)

 No prior commitment to stock – mind not cluttered.

 Hard work: Went to different locations to check if traveler’s cheque was being accepted.
Not one was refusing. Business as usual for customers.
 Parent company had no legal liability for subsidiary.

2. Bill Miller:
 15 year of outstanding record got clobbered in 2008 global financial crisis after buying
big into financial companies. Stock lost all its value.

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  Suffered from a pattern called commitment bias. He promised to buy more even after
38% fall in Bear Stern stock in 2008.

3. Bill Ackman:
 Lost roughly 3.5 Billion dollars on Valeant pharma. Averaged down on the fall.
A stock that has fallen 90% from its peak is a stock that fell 80% first and then halved.
 A gambler will try to bet more and more to recover losses.

4. Patterns:
 Leveraged financials:
Would you buy the largest bank in the Germany with lower market cap than Kotak bank?
Ask: Will shareholder retain their equity value?
 Food & consumer products:
Problems generally solvable like in Maggi nestle, Cadbury or Coke. Company’s can survive
after a speed bump as consumers love their products.
 Gangrene amputation:
Remove the part of the company (subsidiary or a particular segment of business) that has
committed fraud.
 Regulatory issues:
Pharma companies due to quality issues. Tricky area. Do not fall for this unless sure this is a
buying opportunity.
 B2B Quality / Other issues:
Welspun (Egyptian cotton issue) sells directly to Target and Walmart  Solvable (Product
can be recalled)
Foxconn (Employees jumping off the roof) manufactures iPhone for Apple  Difficult for
Foxconn but employees can be offered more salary and better work environment.

Notes:

 Stocks that fell and recovered:

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 1. MCX
 Stocks that fell and did not recover:
1. 63 Moons technologies Ltd.

(Studying the reasons for recovery of one and not the other helps)

 If you want to bet big, be reasonably sure of success. Results can be extreme 0 or 1.

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Indian consumer market (16th Feb 2015)

 You cannot sow something today and reap tomorrow.

 Consumption demand is like maternity; it’s certain a woman is pregnant or delivered a
child. Income level is like fraternity, one has to infer things.
 The dilemma:
 “Those who have knowledge do not predict. Those who predict don’t have the
knowledge”.
 “The investor of today does not benefit from yesterday’s growth.
 India is a one country with one flag but consumption habits and ideologies are different
and well diverse.
 Absolute purchasing power still low as our country fights poverty. With a ten years view,
cannot ignore this market.
 Affordability growth greater than income growth:
 Fall in prices (nominal / real).
 Smaller pack size etc.
 Availability of credit (interest rates are at levels better than 90s).
 Depending on agriculture as income for rural areas is not as high as it was before.
People now go to cities to work during months they do not cultivate.
 Indian consumers are now more confident in spending than they were few decades ago
(credit has picked up).
 Average age of home loan borrower is coming down.
 Growth story will see bumps. Quarterly shoot in demand could prove to be wrong.
Companies start to spend big on advertising thinking good days are here. Not necessary
the demand will keep shooting up. Bumps are imminent while riding the consumption
story.
 When consumers get richer, new product categories could be entering their basket of
consumption. This could see lower demand for products preferred before. For example,
spending more on phone.

27
 GDP and demand for some product is not linear, always depends on consumption
basket and what is moving. Important to keep a track of changing consumption basket.
 Strugglers in India:
 Kellogg’s.
(Consumers won’t change their habits easily if they are used to eating Dhosa and
Idli for breakfast).
 Heinz.
 Coca cola.
 Pepsi.
 Levi’s.
 Disney had to make a product suitable for Indian culture to succeed. For example, Chota
Bheem.
 Success in India:
 Fair and lovely.
(Product built keeping consumers in mind).
 Kurkure.
(Indian taste, sounds Indian).
 Companies must work on thin margins and higher volume.
 Aashirwaad packaged food failed while packaged Idli batter succeeded. This is due to
India’s preference for hot food.
 Market construct:
 Rich consumer class – Benefit maximizer – Global consumer.
(Need the latest and the best to show off)
 Consuming class – Value for money – Judiciously balance benefit and price.
(Consumers will book their own tickets)
 Cash constrained benefit maximizer – Price point buyers.
 Aspirants – Loose glucose biscuits, low price shampoo, tea sachets & detergents.
 Don’t believe in fancy stories – Tata Nano failed.
 Books recommended: We are like that only & A never before world – Rama Bijapurkar.

28
InterGlobe Aviation Ltd (18th December 2015)

 Kingfisher shut down, Air Deccan & Sahara being taken over. Jet airways gave no returns
for many years. How many airlines have been successful in the past?
 Low cost operator, working efficiently works? Maybe (Southwest Airlines, US gave 30%
year).
 How do you become a billionaire by investing in airline? Start as a billionaire.
 Sector has been a graveyard for many entrepreneurs and companies. Start with a
negative bias while approaching this sector.
 Indigo:
 Easy to understand.
 Basic transportation needs will exist for a long time.
 Good prospects of volume growth.
 Good (ish) management.
 Lowest cost operator.
 Air India losing market share… consolidation?
 Oil prices … bearish for 3-5 years?
 80% - 85% capacity utilization.
 Mass cancellation due to disaster. Customers are refunded and company bears the cost
of going vacant. Capacity utilization can drop very fast in a short span of time.
 Financial engineering:
 Sale & leaseback profits & cash-back from Airbus.
 Aircraft trading.
 Huge order ~ 430 aircrafts whereas current fleet ~ 96 aircraft.
 Huge dividend payout and then IPO.
(Why did promoters aggressively take out money?)
 Tailwind of low prices, exits of Kingfisher, Sahara and Deccan.
 Maintenance is a big cost in this sector.

29
Understanding the diagnostics lab business (1st Feb 2019)

 Health care:
 Hospitals.
 Pharmaceuticals.
 Diagnostics.
 Diagnostics:
 Pathology.
 Radiology.
 Participants in the business:

(Reagents provide with chemicals to conduct the test)

 As volumes increase, reagents price discount increases.
 Diagnostics chain:
 Independent lab (48%)
(Unorganized mom & pop shops)
 Hospital lab (37%)
 Regional / national lab (15%)

30
 Working of lab demonstrated in below image:

31
 (This flow chart below is the reason a lot of diagnostics labs have been favored)

 Scaling up:

(An IT system to ensure processed data is available in different geographical regions and
patient does not need to carry them in physical paper)

32
  Business model:

Customer Expectations Volume Pricing Margin Cost of

power acquisition
Direct walk in  Good patient experience. Low High High High
(B2C)  Convenience.
 Accessibility.
 Good customer service.

Small lab / doctors  Commissions. Moderate Moderate Moderate Moderate

(B2B)  Reliability.

Hospitals  Commission. High low low low

 Specialized Testing.

Franchise partners  Commission. Moderate Moderate Moderate low

(B2B)  Patients follow up.

 Market structure comparison (India & US):

Market US India
Stage of the industry Mature Growth
Market share (Indie labs) Top 2 – 40% Top 15 – 11%
Indie labs / total labs (5) 54% 63%
Key drivers  Insurance  Branding
contracts  Doctor’s
 Scale recommendation
 Scale

33
Reimbursement Insurance Out of pocket
Pricing power Low Moderate
Role of doctor in lab selection Minimal Moderate
Avg EBITDA (%) ~20% ~27%
Avg ROE (%) ~ 17% ~ 16%
*indie = independent lab

 Metropolis, Dr Lal Pathlab, SRL and Thyrocare hold 9% share.

 Comparative study of top 4 leaders:

FY 18 (cr) Metropolis Dr Lal Path Thyrocare SRL
Labs
Sales 647.2 1052.9 356 854
EBITDA (%) 27% 25% 40.70% 18.90%
PAT (%) 17% 16.30% 26.20% -na-
TTM P/E -na- 44x 28x -na-

Geography (%) Metropolis Dr Lal Path Thyrocare SRL

Labs
North 7% 72% 24% 32%
East 3% 13% 17% 20%
West 54% 7% 31% 27%
South 28% 7% 26% 18%
Others 8% 1% 2% 3%

34
Reference labs Metropolis Dr Lal Path Thyrocare SRL
Labs
National 1 1 1 0
Regional 12 1 8 4

Clinical labs 106 193 364

Patient service 1,130 2,153 3,379 1,078
center
Pickup Points 8,500 5,624 30,000 6,271

 Thyrocare 50% revenue comes from preventive testing. Other 3 players more focused
on pathology.

 Challenges / opportunities:
 Regulation – Price capping.
 Accreditation (NABL, CLIA, etc).
 Government – business / PPP.
 Intensifying competition (Pricing, growth, capital)
 Adopting new technology & processes.
 Asset light v/s Asset heavy (Pathology v/s Imaging).
 Quality & Manpower (Franchising & Owned).
 Out-of-pocket to Insurance.

 Doctor’s recommending testing could be ethical or unethical. They get commission for
recommending tests. Evidence based testing is practiced in developed markets. Doctor’s
generally recommended more tests than required to ensure discovering potential
virus/disease.

35
Breaking bad with the chemicals sector (18th May 2019)

 Is it simple to understand a chemical business?

 On a scale of 1 to 7
(How well do I understand how the chemical industry works?)
 How does the chemical industry work?
(As much operational detail as possible)
 On a scale of 1 to 7
(Rate my knowledge of how the chemical industry works)
 Total size of chemical industry is arguably $3 trillion.

36
 Now rate yourself. This is roughly how chemical industry looks.

 Companies backward integrate to produce their own raw material.

 Companies forward integrate to produce specialty chemicals.
 Each product will have its unique supply chain needs. Each will have a different cost.

37
 A typical business mindset:

 Size of the chemical industry $3.0 Trillion.

(Don’t always go by the macro numbers)
 4% of sales in chemical industry spent on R&D compared to 8% in pharma – Global
average.

38
 India is a net importer of raw material. What if they go up 4 times? This isn’t certainly
factored in while adding capacity or starting business. Focus more on the supply chain.
 Success Factors:
 New product / application development.
 Process technology.
 Manufacturing at scale.
 Distribution & Branding.
 Low cost labor & raw materials availability.
 Shift of chemicals manufacturing to Asia.
 Challenges:
 Commoditization.
 Fragmented industry structure.
 Regulatory compliance (Local & Global).
 Increasing supply chain complexity.
 R&D culture? Processes borrowed from abroad are not innovation.
 Land acquisition constraints.
 Global M & A:
 Consolidate product portfolios for scale.
 Consolidate supply chains.
 Increase market reach.
 New manufacturing base.
 Acquire distribution & Brands.
 Accessing technology & Research.
 Shareholder activism.
 Some resources:
 Ministry of chemicals & Petrochemicals – trade data.
 International trade data & public reports.
 Pricing data (Bloomberg).
 Company disclosures & management commentary.

39
  Consultant reports (for overview).
 Trade journals, trade association data.
 On the ground learning.
Special mention:
 Global chemicals outlook by UNEP (United Nations environment
programme, 2019).
 R&D impact on Indian chemical industry by Indian national academy of
engineering, 2011.
 Avendus Specialty chemicals report, 2016.
 Pollution is monitored by state board of India through sensors. Don’t know to what
extent regulations for violating this could be.

40
Looking back at the telecom sector (31st October 2018)

 Lots of exists in last few years and now only just few players left to compete.
 Data consumption in emerging markets:
 Network quality.
 High cost of data.
 Lack of public Wifi spots.
 Local context (content + apps + services)
 Nokia MBiT a good source to find data on telecom sector.
 India doesn’t have as many public wifi spots as other countries.
 Hopefully more public wifi spots after the launch of 5G.
 In 2017, Hindi and regional languages comprise > 90% of popular videos watched on
YouTube India.
 Pick an investment theme:
 Telecom operators.
 ISP / pipe companies (who provide internet to home through cable).
 Active & passive network infrastructure (Router, switches, antennas, fiber optic,
tower etc).
 OEM mobile device makers.
 Software products & services (app developers).
 Entire digital ecosystem.
 Why towers?
 Capex + Opex to improve network coverage.
 Quick scale.
 Negotiating & managing leases.
 Sharing is cheaper.
 5G network hype?
(It will come at a cost. Neighborhood wouldn’t like it. People suffer from headaches and
health issues)

41
 Who benefits from the telecom war?
 Customers.
 E-commerce / digital businesses.
 Device manufacturers (Phone + network equipment)
 Financial services.
 Content makers & distributors.
 Online advertisers.
*and hopefully telecom companies will make some money.

42
Logistics sector in India (2nd October 2019)

 14% of India’s GDP is spent on logistics.

 $160 Billion is the size of the organized industry (42%).
 Growing @ 10-15%.
 Employs 2.2 Cr people.
 Achieved infrastructure status.
 FY 14 TO FY 18 – attracted Rs 1,00,000 Crs FDI.
 Should India be compared to other countries?
 Yes: Benchmarking & aspiration.
 No: Different state of infrastructure.
 No: Different policy focus.
 No: Different business models.
 No: Different % of unorganized business activity.
 No: Different technology adoption.
 Should India be compared to other countries?
 UPS & FedEx have their own airports with sorting facilities.
 US complains about maintain their existing road network.
 Labor unions across the value chain.
 Consolidation v/s break-them-up.
 What’s going on here?
 Road network.
 Dedicated Freight corridor.
 In-land water ways & sea transport.
 Port infrastructure.
 New airport terminals.
 Multi-modal logistics parks.
 New policy initiative.

43
 Books to refer:
 Matchmakers – David Evans.
 Modern Monopolies – Alex Moazed.
 Narrative and numbers – Aswath Damodaran.


44
 Logistics as a service business model?

*3PL = Third party logistics.

 With the invent of Artificial intelligence,
 3PL could provide recommendations on inventory management etc.
 Do the automatic billing.
 Helps in analytics.
 Data can be stored in cloud.
 Can also manage reverse logistics for returned items.
 All the above can be done with less manpower and outsourcing it to 3PL.
 Is warehouse gold rush?
 Land availability near delivery points.
 FSI & local construction standards.
 Warehouse grades.
(May require robots to work under extreme temperatures)
 Occupancy management.
 Transportation assets:
 Mix of owned fleet + leased fleet.

45
  Primary focus on capacity utilization & Efficiency.
 Rivigo case study, Concor and Blackbuck: Google for more on this.
 Self study
 Things to look out for:
 Logistics-as-a-service (Everything is 3 & 4 PL).
 Business models are evolving.
 Competitors are well funded & scaling up fast.
 Competitors are vertically integrating.
 Infrastructure.
 Wait and watch what the industry would do in the future.

46
Tanishq v/s Tiffany (7th March 2020)

 A comparison of two jewellery companies.

 Not an apple to apple comparison. Tiffany is more into diamond jewellery while Tanishq
is more into gold jewellery.
 Branded market at 21% in 2020 v/s 10% in 2002.

Shift towards branded jewellery for Gold

Unbranded Branded

85% 85% 83% 80% 79%

90% 88%

15% 15% 17% 20% 21%

10% 12%

2002 2005 2007 2010 2015 2018 2020

47
 Comparison v/s other Accessories
Unbranded Branded

20%
40%
50%
70%
80%

80%
60%
50%
30%
20%

Fragrancies Watches Leather good Eyewear Jewellery

 Structural changes:
 Demonetization.
 GST implementation.
 PAN card regulation.
 Hallmarking.
 Death of money lending due to growth in gold loan NBFCs and Fintechs.
 Slow death for mom and pop jewelers:
 Shrinking margins.
 Increased compliance costs.
 GST implementations.
 Increased awareness of hallmarking.
 Main earnings were from money lending.
 Hallmarking,
BIS hallmark for gold jewellery consists of several components:
 The BIS logo.

48
  A three digit number indicating the purity of the gold in part-par-thousand-
format viz; 916, 750, 585. Thus a BIS 916 hallmark would certify of 916 per 1000,
that is, 91.6%, translating to a 22 carat purity of gold.
 Logo of the assaying centre.
 A code denoting the date of hallmarking.
 Logo/code of the jeweler.
 Wedding jewellery:
 8 -10 mn weddings in India.
 Average ticket size of Rs 2 lakhs.
 Age old concept of “Streedhan”.
 Titan is a weak player in wedding jewellery.
 Too many frauds in this industry,
1. Nirav modi, 2018.
2. Nathella Sampath Jewellery, 2018.
3. Kanishk gold scam, 2018.
4. Shree Ganesh Jewellery, 2017.
5. Winsome Diamonds & Jewellery, 2013.

 Jewellery forms 80% of revenue for the company.

49
 Watches revenue reduced to 12.26% in 2019.

50
 Gold Deposit scheme,
Customers pay 11 monthly installments (for example Rs 1,000 per installment) and the
12th installment is generally contributed by the jewellery company. At the end of 11 th

51
 month, customers are allowed to buy jewellery worth Rs 12,000 from the stock kept at
the store.
 Restrictions under companies act w.r.t these types of schemes:
 Effective return on deposits cannot be more than 12%.
 Term of deposit cannot exceed 12 months.
 Under the amended deposit regulations act, the jewellery company can take
deposits upto 35% of its networth, and no more than 10% of its networth can be
taken from members of the company.
 Despite of volatility in gold prices, profit margins have stayed intact.
 Uberisation of jewellery,
 Rent for 3 days at 3% of the value of the jewellery.
 Despite for the full value of the jewellery which is daunting.
 Players like rentjewels.com, ever24.com.
 Books to read – Titan by Vinay Kamath & The Tata group by Shashank Shah.
 Tiffany:
 Founded in 1837 by Charles Lewis Tiffany.
 1st store in Manhattan.
 $85mn in cash.
 Total D/E 0.32x.
 14,000 employees.
 Company operates e-commerce enabled websites across 12 countries.
 Company is hoping to open the website in china in next year.
 Products,
 Jewellery accounts for 92% or revenues.
 Licensing agreements for Tiffany & Co branded eyewear and fragrance products.
 Contributes less than 1% to the revenues.
 Other products include watches, fragrance products, eyewear, home &
accessories.
 Advertising spend 8-9% of sales.

52
  60% of Jewellery is manufactured in-house. Rest is procured from third parties.
 Entered into a JV with reliance brands to open stores in India. 1 st store to open in
Delhi in January 2020.

Tiffany Tanishq
No of years since first store 182 24
No of stores 321 321
No of countries 20+ 1
Revenues (Bn $) $4.4 $2.3
EBIT (Mn $) 790 272
Average sq ft 4200 4000
Gross profit margins (%) 59-62% 25-26%
Operating profit margins (%) 18-19% 10-12%
Market cap (Bn $) 16.26 16.57

 Bull case / pros of the industry:

 Steady growth.
 Shift from unbranded to branded.
 Leading brands in their markets.
 Balanced merchandise and price coverage.
 Very well managed.
 Bear case / cons of the industry:
 Cyclical sector (consumer discretionary).
 Correlated to global growth which is slowing down.
 Millenials don’t get married / don’t want to own assets.
 Threat of lab made stones.
 Rising commodity prices.
 Execution risks.
 Information sources,

53
 Diamond insights reports.
 De Beers reports.
 Deutsche bank report on Tiffany.
 Jewellery report by HDFC securities.
 Ground view report by Philip Capital.

54
What can value investors learn from quant (30th November 2019)

 Do not have a pre-decided opinion on quants, excessive fees, trading fees, taxation etc.
Be open to understanding both approaches to investing.
 Renaissance Technologies Medallion Fund Track record:
1988 to 2018 (30 years) Before fees After fees
 Annual returns 66.1% 39.1%
 Break up of performance,
 Only 1 single down year, in 1989 (-4%).
 In fact first two years 1988 & 1989 were not that great.
 The fund has never looked back since then, none down years at all.
 Minimum annual returns since 1990 till 2018 of 31.5% before fees and 21.2%
after fees.
 Returns in, 2007 2008 2009
Before fees 136.6% 152.1% 74.6%
After fees 73.7% 82.4% 39.0%
 Is this another Bernie madoff?
No.
 Is this a future Long term capital management?
Umm…maybe not… but…
 Enough of Jim Simons:
 He is secretive, does not explain what he does.
 He will not accept our investment.
 Book description not enough to replicate.
 Does not work with very, very large capital.
 Better, quicker success in commodities, currencies, derivatives rather than
equities.
 Finally, other quant houses have had only limited success.
 Questions to ask yourself?

55
  Concentration / diversification.
 Low churn / high churn.
 “Trading” signals have no predictive power.
 Leverage / derivatives.
 Twenty punch Buffett rule.
 Time horizon.
 Scale coverage,
 Import numerical data through exchange filings.
 Import data automatically.
 Scrape web data.
 Automatic calculations.
 Automatic filtering.
 Low hanging fruits,
 Pure arbitrage.
 Statistical arbitrage.
 Better trade execution even for long term buy/ sell (Lower impact costs).
 Low risk / no risk derivatives strategy.
 What can we learn from quants,
 Make the investment process more objective (Justify management is
competent).
 Make the investment process more rule based ( Joel Greenblatt’s magic
formula).
 Some alternative data:
 Satellite photographs of parking lots of retailers in the US.
 Google trends.
 Twitter sentiment analysis.
 Foursquare check-in.
 Webscrape price trends from Amazon.
 Evidence based, training data, test data, real life test.

56
  Use what works rather than theorizing why this happens or worse, this should
not happen.
 Appropriate application of mean reversion and momentum.
 Trading & investing is a probabilistic endeavor. Don’t obsess over individual wins and
losses.
 No strategy can handle unlimited amount of money.

57
Understanding the dairy industry in India (15th March 2019)

 Dairy Industry size

Milk consumption $107 Billion

Self consumption $58 Billion (54%) Marketable Surplus $49 Billion (46%)

Unorganized $ 34B (70%) Organized $15B (30%)

Co-operatives $7B (45%) Private players $8B (55%)

 Out of 7% co-operative, 5% is Amul.

 Rise of private players:
 No concept of milk holidays.
 Higher realization v/s co-operatives due to brand building.
 Transparency and timeliness in payments.
 Auxiliary services provided to farmers.
 More efficiently managed.
 Advantages of direct procurement from farmers:
 Elimination of agent commission.
 Lower investment in working capital as the farmer is paid less frequently and
agent needs to be paid immediately.
 Steady and dependable source of milk – agent will move to some other company
giving higher realization of milk.
 Quality of milk from agents can be of inferior quality – contamination of milk
possible.
 Why will farmers sell directly to the companies?
 Help of veterinary doctors.

58
  Artificial insemination.
 Access to organized animal feed.
 Loan guarantee – companies may work as intermediary and arrange the funds.
Usually the EMIs are paid from the milk collection payments.
 Support during times of excess milk production – production is high during
winters and low during summers. Excess milk is purchased by the companies and
converted into long shelf products such as ghee and skimmed milk powder.
 Why is it difficult to procure directly from the farmers?
 There are already large players near the points of consumption i.e., Metro cities.
 Milk co-operatives have occupied the key regions of milk procurement.
 As these co=operatives have been in existence over 2-3 decades, they have
developed trust among the farmers.
 Not easy for new player to gain advantage over existing players.
 Industry growth drivers:
 Vast vegetarian population with protein deficiency.
 Rising share of organized segment.
 Faster growth in value added products.
 Premiumization.
 Westernization of food palette.
 Increasing number of times of informal eating out.

59
60
61
 By-product of cheese.
 1 Kg of cheese produces about 600 gms of whey.
 Only 1/3 of the 600 gms is good for human consumption.
 Can be sold as:
 Milk powder in wholesale market.
 B2B for infant food.
 B2C for whey protein (Sports & nutrition).

62
63
 Variables:
 Direct procurement from farmers to control costs and working capital.
(Selling prices are controlled by milk co-operatives).
 Right product mix of value added products.
 Distribution expansion.
(Shelf stable, chilled temperatures, perishables).
 Branding.
(B2B, B2C).
 Spread of manufacturing units.
(Most dairy products are consumed fresh, hence crucial to have a network of
multiple production units across the country).
 Parag milk foods:
 Direct procurement from farmers – 75%.
 Revenues come from value added products – more than 65%.
 Good B2B/B2C mix.
 Procurement of milk – Maharashtra, Andhra Pradesh & NCR region.
 Heritage foods:
 Direct procurement from farmers – 95 -100%.
 Revenues come from value added products – more than 25% (mainly curd).

64
  B2B/B2C mix – 100% B2C.
 Procurement of milk – AP, Telangana, Tamil Nadu, Karnataka, Maharashtra,
Haryana, Rajasthan and Gujarat.
 Hatsun Agro:
 Direct procurement – 100%.
 Revenues from value added products – more than 30% (mainly curd & ice-
creams).
 B2B/B2C mix – 100% B2C.
 Procurement of milk – Tamil Nadu, AP, Telangana, Karnataka & Maharashtra.

65
Current state of the auto sector (8th March 2018)

 Story so far:
 Ride hailing and ride sharing… here and now.
 Electric vehicles… 5 years to 15 years.
(Not a question of if but when)
 Autonomous… who knows?
(Lower human costs in transportation, fewer accidents etc)
 The India story:
 Cars in India 22 per 1,000 persons (800 in the US).
 Ride haring making cars accessible.
(At best hurting second car sales or miles driven on cars).
 More trips taken that would otherwise not have happened.
 Metros / busses will not kill cars (look at Delhi).
 Convenience of a point to point ride cannot be given by metro.
 Duopolies are fun:
 Coke & Pepsi.
 FedEx & UPS.
 Visa & MasterCard.
 Airbus & Boeing.
 In India… Maruti & everybody else.
 Maruti accounts for 1 in 2 cars sold in India.
 GM 7% pretax margin v/s Maruti 14.61%.
 India has been a graveyard for foreign brands.
 What do they get right?
 Good value for money.
 Indigenization.
(Manufacturing in India gives great cost and scale advantages).

66
  Value proposition offered makes it difficult for other brands. (Price, service,
parts).
 Higher re-sale value.
 Maruti metrics:
 Profit more than 3x in 4 years (CAGR of 34%).
 Waiting list for cars, ramping up production but stock expensive at 39 x earnings.
 10% plus volume growth.
 Premiumization.
 Suzuki motor corporation:
 Owns 56.21% of Maruti Suzuki (share of profit – 4,221 crores).
 Gets royalty from Maruti Suzuki (3,848 crores).
 Maruti Suzuki does not include:
 Royalty income.
 Motorcycles / Marine.
 Gujarat plant 1 & 2.
 Battery plant.
 Market cap:
 Maruti $45.60 B.
 Suzuki (Japanese company) $28.24 Billion.
(Suzuki gets royalty + profits from Maruti)
 Other than Maruti Suzuki,
 Key market apart from India:
 Japan.
 5 ASEAN countries (Indonesia, Thailand, Vietnam, Philippines and
Malaysia).
 European Union.
 Other markets (say Pakistan).
 Products:
 Automobile.

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  Motorcycles.
 Marine and power products.
 Is this the Kodak movement for auto industry moving from internal combustion
engineer to electric engine?
 For a company to succeed in electric vehicle space, not necessary to manufacture
batteries. They can be outsourced, just like in mobile parts are bought from other
companies to build the phone.
 Suzuki – Toyota partnership for EVs in India by 2020.
 Electric nuances:
 Will not flip overnight.
 Hybrids / plug-in hybrids are intermediate step?
 Cost v/s range tradeoffs.
 Manufacture cars or manufacture battery cells.
 Overtime manufacturing of battery cells may get commoditized and profits will come
from manufacturing and selling the vehicles.
 No infrastructure = no electric vehicles = no infrastructure (similar to chicken & egg).

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Psychology of Initial Public Offers (1st July 2011)

 IPO is not always safe. Has no track record.

 IPOs are wrongly seen as potential opportunity to make quick profits.
 The lure of the new:
 Discard the old.
 Value of mystery.
 New growth industry, new technology.
 Why IPO?
 To raise resources from the market.
 Unscrupulous management to cash on the boom.
 When investors are willing to pay a fancy price.
 To capitalize on irrational investor behavior.
 Psychological Errors …1
 Base rate information:
- Singular Information.
- Extrapolation bias (all IPOs don’t necessarily list at a premium).
 Under pricing heuristic:
- Willful under pricing doubtful.
- Gaining on listing make it appears so.
- Bull and Bear markets.
 Psychological Errors …2
 Recency and herd instinct:
- Make noise and advertisement campaigns.
- Sell dreams.
- Gray market premiums.
- Follows the pied piper (could be a strong brand selling dreams).
 Anchoring:
- Controller of capital issues.

69
 Psychological Errors …3
 Representative bias:
- Listing gains in initial issues.
- Current hot sectors attract IPOs.
 Round trip fallacy:
- All successful people are hard workers.
- All cheap stocks are low PE stocks.
- All IPOs are profitable.
 Overconfidence:
- Sell on listing.
- Reliance Power for example.
 Long term underperformance:
 IPOs come when demand is strong.
 Strong demand leads to higher pricing.
 Higher pricing leads to low returns.
- While the Sensex has almost made it back to its January highs, nearly 40%
of the 2007 IPO stocks are still in the red for their original investors, with
some even trading at less than half of their offer price.
- A price performance study by CARE research a unit of rating company
CARE shows that 62% of the 116 IPOs between August 2007 and August
2010 are trading lower than the sale price.
 Reliance power – A case study
 A new company with a profit of mere Rs 16 lacs.
 Shares of face value Rs 10 offered at Rs 450.
 The brand “Reliance” was the only intangible asset.
 The issue heavily oversubscribed to be called the mother of all issues.
 What made it a success?
 Power sector fancy.
 Brand Reliance … Dhirubhai Ambani.

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 Bullish markets.
 Greedy investors.
 Aggressive selling by investment bankers.
 Gray market premium of about 1000 INR.
Representative heuristics:
 Power sector hot.
 All power stocks quoting at high P/E multiples.
 Visible listing gains in Powergrid and NTPC.
 Gray market premium of Rs 400 to Rs 500.
Herd mentality:
 All punters and not investors.
 All came to book profits on listing.
 The same herd which made the IPO a mother of all issues made it the
biggest flop on listing.
 Greed and fear dominated.
(Promoters Anil Ambani and reliance energy offered themselves each
share at Rs 10 while public was offered between Rs 430 to 450).

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Mental Heuristics (1st July 2011)

 Set of new investors are born during bull markets. When everything is going up
everyone is excited.
 Behavior biases are shortcuts our mind takes while taking decisions.
 Investing is as simple as buying quality company and sit on it. But why everyone cannot
do that?
- Success in investing is all about our behavior.

 Overconfidence bias: Too many people overvalue what they are not and undervalue
what they are.
1. Prediction overconfidence – Knowledge.
2. Certainty overconfidence – ability.
 Behavior resulting from overconfidence.
- Overestimate their ability to evaluate a company.
- Trade excessively.
- Underestimate the downside risks.
- Hold under-diversified portfolio.

 Representative bias: Processing new information by simultaneously incorporating

insights gained from usually relevant analogous past experiences. Confuse random
fluctuations with casual patterns. Leads to over-reaction.

Games people play,

- Changing names to be a part of the current fad. The dot com bubble.
- Reliance power advertisements on powering India.
- Fit no stereotypes. Don’t chase the latest management fads. The
situation dictates which approach best accomplishes the team’s mission.

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 - GDP growth and stock prices.
- Second rate stocks in an industry start rising because the leader is doing
well.

Two interpretations,

- Base rate neglect – The hot IPO is a good long term strategy.
- Sample size neglect – pitfalls of sample size neglect representativeness
bias.

Representativeness caution,

- Money managers track record.

- A good company is a good stock depending on when you bought it.
- Salesman / Investment advisor.
- IPOs represent profits on rising.
- House names (Tatas, Birla’s) are not always good companies.
- Bull markets stocks represent profits.
- Bear market stocks represent losses.

 Anchoring & Adjustment: When required to estimate a value with unknown magnitude,
people generally begin by envisioning some initial, default number – an anchor – which
they then adjust up or down to reflect subsequent information and analysis.
In simple term, Being unjustifiably influenced by the past causing people to under react
to any new information.

 Investors’ behavior in Anchoring,

- Purchase/sell decisions.
- Anchored to brand names.
- Index movements.
- Cannot exit junk stocks.

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 - Analyst’s forecasts.
- State of economy/GDP growth.
 Advantages of anchoring,
- Powerful asset when negotiating.
- Awareness is the best counter measure.
- Making forecasts.
- Participating in auctions.

 Availability bias: It is ironic that the greatest stock bubble coincided with the greatest
amount of information available. I always thought that this would be a good thing but
maybe it was not so good.
It is rule of the thumb or a mental short cut that allows people to estimate the
probability of an outcome based on how prevalent or familiar that outcome appear in
their lives.
In simple terms, people are more influenced by recent events vividly and colorfully
displayed. Decisions are based on fast recall value.
Example,
- India shining
- FII buying.
- Current fancies of markets.
- Real estate, Telecom scams affect stocks.
- Budget blues.
- The visual & print media.
- This is a blue chip stock.

How does availability bias affects investors?

- Stocks receiving most press coverage under perform in the long run.
- Investors tend to over react to present daily market conditions. Tech boom
and 2008.

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 - Resisting investing on stock tips from magazines, experts on TV shows,
company meets etc.
- Resist chasing trends.

In a bull markets everyone feels a genius. Everyone wants to become a portfolio

manager of their own money. It is only when the tide goes out, you know who is
swimming naked.

 Saliency heuristics: People overestimate the probability of an infrequent event

occurring in the future. Saliency is closely related to availability.
 Saliency effects,
- Extremely good or bad quarterly results.
- A breakthrough for a pharma company.
- Post 26/11, five star hotels go empty.
- 2G scam talks all telecom stocks down.
- Y2K problem created the biggest boom in IT industry.

 Self attribution bias: Don’t confuse brains with a bull market.

 Refers to the tendency of individuals to ascribe their successes to innate aspects
such as talent and foresight, while more often blaming failures to outside
influence.
1. Self enhancing bias: irrational degree of credit for their successes.
2. Self-protecting bias: irrational denial of responsibility for failure.

Affects investors in two ways:

1. Cannot perceive mistakes and hence cannot learn from them.

2. Crediting themselves with all success makes them overconfident.

Investment mistakes:

1. Too much risk due to overconfidence.

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 2. Trade too much than is prudent.
3. Hear what they want to hear.
4. Investors hold undiversified portfolios: Corporate executives, board members.

Three hypotheses:
- Periods of general prosperity followed by higher than expected trading
volumes: overconfidence.
- Higher the overconfidence and trading volumes, lower than average
profits result.
Post analysis of each investment,
Admitting and learning from your past mistakes makes on humble and that is the road
to becoming a successful investor.

 Illusion of control: I claim not to have controlled events, but confess plainly that events
have controlled me.
It is the tendency of human begins to believe that they can control or at least influence
outcomes when, in fact they cannot.
Pitfalls for investors,
- Trade more than is prudent.
- Un-diversified portfolio.
- Unable to take help of professionals.
- Use limit orders.
- Illusion of control contributes to overconfidence.

Follow 4 steps,

- Recognize that successful investing is a probabilistic activity.

- Recognize and avoid circumstances that trigger susceptibility illusion of
control.
- Always seek contrary point of view.

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 - Maintain records of the decision.
 Optimism bias: Even apart from the instability due to speculation there is the instability
due to the characteristic of human nature that a large proportion of our positive
activities rather than on a mathematical expectations.
People over estimate how frequently they will experience favorable outcomes and
underestimate how frequently they will experience unfavorable outcomes.
Investor behavior:
- Overload on a particular stock.
- Wrongly believe that they are getting market like returns.
- Read too much on rosy forecasts.
- Lose outside investment opportunities and ignore the downside.
- Overconfidence leads to optimism and optimism leads to home bias.

Some discipline to follow,

- Live below your means and save regularly.

- Asset allocation is the key to successful portfolio.
- Compounding contributes significantly to long term financial success.
- Use a financial advisor.

 Confirmation bias: It is the peculiar and perpetual error of the human understanding to
be more moved and excited by affirmative than by negative.
Investor Behavior,
- Leave investors in dark for any negative developments.
- Screens showing 52 week high break.
- Employees over concentrate on stocks of companies they work for.
- Hold under-diversified portfolios.

Steps to help,

- Recognize your bias.

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- In investing don’t only go on technicals, but also fundamentals.
- Avoid over concentrating. Especially if you work for the company.

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Index investing (8th June 2011)

 What is an index and why were they formed?

 An index consists of as basket of the largest stocks (based on market
capitalization).
 This index was supposed to be representative of the markets.
 The BSE Sensex consists of 20 stocks and the NSE nifty 50 consists of 50 stocks.
 Indices were formed on the principle of creative disruption.
 Some important guidelines for a stock to enter the market,
 Listing history.
 Trading history (volume).
 Fiscal results.
Reliance power had big market capitalization but no profits.
 Market Capitalization.
 Are index always the best way to invest?
 Not really.
 DLF in 2007, RCOMM in 2006.
 Investors lose out to such hot sectors and current fancy’s as stocks are selected
based on market capitalization.
 What is index investing?
 Passive form of investment.
 Index (High PE stocks) versus Value investing (unlocking value from low PE
stocks).
 No benchmark to judge an index.
 Behavioral anomalies responsible for undue stress on market cap and index stocks;
 Mystery of the unknown.
 Management greed.
 Operators.

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  If you bought an index, there is no regret aversion. Everyone is at par with you; there is
no better or worse performance.
 Satyam was added to the index based on higher market cap although Tata chemicals
was more profitable.
 Value investing should beat index investing as stocks entering the index are always
expensive.
 Evidence suggesting that index investing is not effective and safe,
 Bharat forge versus Zenith Ltd,
- We buy 100 shares of each of these at CMP when the switch happened in
1982. All dividends, bonus and right issues are subscribed and reinvested. We
use a 10 year period as on 3rd August 1992 Bharat forge replaced Zenith Ltd.
Zenith had lost its market cap to Bharat forge.
Bharat Forge Zenith
Date No of shares Price Total No of shares Price Total

1 Apr 1982 100 28.50 2850 100 45 4500

3rd August 1992 740 240 177600 353.57 33.50 11845
Returns 50.50% 9.80%

 BSE Sensex,
- There were 42 replacements in BSE Sensex from 1970 to 2005.
- Make a portfolio of stocks entered and exited separately.
- When scrip is moved out, it enters the ‘exited portfolio’ and the new
scrip enters the ‘entered portfolio’.
- Invest 10,000 in both the portfolios with adjust for entry exit and hold
the investment till 2005. In case, where a company is delisted before
31st December 2005, the returns are calculated on the last day of trading
for making that comparison.

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 - Of the 42 replacements, 21 exited have outperformed the incoming
stocks giving a success rate of 50%. In the exited portfolio, investment of
4,20,000 has grown to 75,91,232.
- In the replaced portfolio, investment of 4,20,000 has grown to only
31,66,054.
- This is phenomenal difference.
 NSE Nifty experiment,
- Same experiment is performed on the Nifty till 31 st December 2005 as
was performed for the Sensex.
- There were 35 replacement till that period in Nifty.
- In 22 out of 35 instances the exited stocks performed better than the
replaced stocks.
- In the exited stock portfolio, an investment of 3,50,000 has grown to
20,97,533.
- In the replaced portfolio, an investment of 3,50,000 has grown to
11,84,641.

Tata chemicals Satyam

Date No of shares Price Total No of shares Price Total

1 Apr 1982 100 53.35 5335 100 3907.35 39075

3rd August 1992 159.78 234.65 37,492 525 737 366517
Returns 31.47% -0.10%

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Points to consider while investing in AMCs (24th July 2018)

 Do not compare based on total asset under management.

 Generally,
 Equity pays the maximum.
 Balanced funds – moderate returns.
 Debt funds – low returns.
 Liquid funds – least.
Arbitrage funds, more akin to liquid funds.
 ETFs – passive game.
 Fund houses offer two types of plans:
1) Direct plan – lower expense ratio.
2) Regular plan – higher expense ratio.
 Stakeholders:
 Distributors / Advisors.
Banks. National distributors, regional distributors and platforms.
 Registrars.
 Custodians / Fund accountants.
 Employees.
 Asset management companies.
 Does brand help?
 Foreign brand? No
 Indian business house? Not necessarily (Birla successful, Tata not so much).
 Government backed? Not necessarily (SBI successful, others not so much)

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Financial equivalents of the optical illusion (9th November 2012)

 Most people talk about:

 Earnings per share.
 Growth.
 P/E ratio.
 PEG ratio.
They completely ignore:
 Capital intensity.
 Return of equity (incremental).
 Dividend payout and retention ratios.
 It is naïve to think of low P/E stocks as cheap and avoid stocks that are 30 P/E (Look for
the reasons why they are trading at such high valuation?)
 ROE = Net profit Revenue Total assets
------------- x ----------------- x -----------------
Revenue Total assets Total equity

Gross profit Asset Turnover Leverage

 Gross profits can be higher due to pricing power or cost advantage.
 High asset turnover can be because of,
1. Sector is such (Service industry, rating agency, FMCG).
2. Business model (Hotel managed based on contract bases, outsourcing
manufacturing of phones).
 Leverage can be risky.
 Conclusion:
 Low P/E is mental heuristics.
 Don’t stop at EPS and growth. Look at payout ratios and incremental return on
equity.

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Basics of mutual fund (12th Jun 2019)

 Why invest?
Protect the capital + grow the purchasing power of capital.
 Start with realistic goals.
 100 rupees doubled goes to 200. It only takes 50% fall to get back to 100.
 100 rupees fallen by 50% is 50 rupees. It takes 100% returns to get back to 100.
 Never chase returns without considering risks.
 Start early.
 Long term investors should avoid fixed deposits and invest in equities. Weather
volatility.
 1 grain of rice for each block in chess. Interest story of compound interest!

The "back half of the chessboard" is a reference to the old story about the inventor of
chess. As the story goes, when chess was presented to a great king, the king offered the
inventor any reward that he wanted. The inventor asked that a single grain of rice be
placed on the first square of the chessboard. Then two grains on the second square,
four grains on the third, and so on. Doubling each time.

The king, baffled by such a small price for a wonderful game, immediately agreed, and
ordered the treasurer to pay the agreed upon sum. A week later, the inventor went
before the king and asked why he had not received his reward. The king, outraged that
the treasurer had disobeyed him, immediately summoned him and demanded to know
why the inventor had not been paid. The treasurer explained that the sum could not be
paid - by the time you got even halfway through the chessboard, the amount of grain
required was more than the entire kingdom possessed.

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The king took in this information and thought for a while. Then he did the only rational thing a
king could do in those circumstances. He had the inventor killed, as an object lesson in the
perils of trying to outwit the king.

For the most part, this fable is used as a lesson in the power of exponential growth. From the
one grain of rice on the first square of the chessboard, the amount increases to the point that
by the time you get to square 64, there are over 18 quintillion grains of rice on the board. In
mathematics, it's a demonstration of extreme growth.

But in the real world, this story teaches a different lesson, and that lesson is this: exponential
growth cannot be sustained. The inventor can't be paid because well before you get to the end
of the chessboard, you run out of grain! You've hit the physical limitations of the math, and as a
consequence, the growth either leads to a dramatic downturn (as in a Malthusian system), or it
simply levels off.

 Mutual funds provide diversification over single companies.

 Managed by professionals.
 Invest directly if you have access to deep knowledge about a company and its industry.
 SIP is an EMI one pays himself.

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Power sector and its menace in India (29th August 2015)

 Suppliers – Coal India.

 Power generator – NTPC.
 Transmission & Grid – Power grid.
 Consumers can be retail or industrials.
 Power generators could shut down for distributors to increase prices (to improve
pricing). But distributors are comfortable with power cuts and load shedding.
 People set up plants due to shortfall and decided to give spot supply and not sign long-
term contracts.
 Don’t be excited if these companies trade at 52 lows. Look for profitability and
sustainability of earnings.
 Consider capacity utilization (Airports are built for political reasons where zero flights
take-off or land).
 So much focus on renewable sources of energy but do not trust agreements / subsidies.
History has showed not to. Distributors will look for cheapest source in the area.
 Suzlon hype makes up a good case study.
 Consumers - Thieves have all the fun - Lenders and equipment producers could business
stalling.
 Conclusion:
Stay away from businesses in which consumer pays a fair price wherever government is
involved.

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Valuation of insurance companies (11th September 2012)

 Hard to understand, hard to value.

 Two types:
1. Life insurance:
 Traditional: Term insurance, Endowment.
 Annuities.
 Unit Linked.
2. General Insurance:
 Car Medical, Marine, Property, Industrial etc.
 Why look at this business?
 Quality promoters?
Quite a few.
 Business easy to understand?
Yes, takes a little effort though.
 Predictable?
Very. Has been for decades. Not one time business or a product.
 High return on capital / equity?
If insurance policies underwritten well.
 Capital intensive?
Yes, but that creates Barriers to entry. Capital in form of maintaining net-
worth for the comfort of policyholder and not as in Plant, property or
equipment.
Float can help investment management earn profits.
 Basics of insurance business:
 Policy (contract) between insurance company and policy holder.
 Receive upfront premium money + regular premium (in some cases).
 Pay out a lump-sum or annuity in the future depending on death or survival
of the policy holder.

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  ULIPs are more like mutual funds.
 Revenue stream for insurance company:
 Premium income.
 Investment income (Interest / dividend / capital gains etc).
 Miscellaneous income (Fees / charges etc).
 Expenses for insurance company:
 Commissions.
 Operating expenses.
 Benefits paid to policyholders.
 Bonus given to participating policy holders.
Note: Revenue – expense is NOT profit for the shareholders.
A large portion of premium is to be allocated for future expenses.
 Profits and losses:
By far the biggest item impacting profits and losses are:
 Provisions for future payments.
- Valued by actuaries.
- Depend on mortality assumptions and future investment return
assumptions.
 Past performance.
- Investment returns.
- Mortality.
 Why is the gestation period long & where are the hidden reserves?
 Gestation like any other business (brand building and marketing, distribution
setup and start up expenses etc).
 Entire marketing expenses for a multi-year contract to be written off in first year.
 Very conservative estimates for investment returns that can be achieved,
 Results in huge losses and lots of hidden reserves.
 How does one analyze?
 Expense ratio should be under control.

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  Actuarial assumptions should be conservative,
- The more conservative - the better.
- Mortality assumptions.
- Investment returns.
 Favorable selection versus adverse selection.
 Good reported numbers to justify current valuation and hidden reserves for
upside.
 Impact on insurance profits:
 People live longer?
 Investment returns achieved are higher?
 Expenses are higher?
 Interest rates go up?
(Positive for insurance company driven by higher future investment returns
unlike banks that have to mark-to-market).
 What can go wrong?
 Japan (A case study)
- Decades long bear market in equities.
- Record low interest rates.
- Domestic currency appreciated resulting in losses on foreign investment.

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The boy who cried wolf (27th June 2018)

 Recalling 2015 Tyranny of quality large caps and selected mid caps.
 Strong fundamental story.
 Propounded by respected gurus.
 Have made a lot of money for investors in past few years.
 Complete disconnected valuations today – this time it’s different kind of
arguments.

Price as of March 2015,

Company P/E ratio

Bosch 77
United spirits NA
Page industries 80
Gillette 192
Jubiliant Foodworks 84
ICRA 76
Nestle 57
Whirlpool 49
Dabur 65
Kitex garments 37

 What happened in 2018:

 4 stocks out of the 12 gave negative returns.
 Equal weighted portfolio of “overvalued” stocks gave an annual return (including
dividends) of 11.04% v/s 9.10% of Nifty.

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 Comparing P/E over time,

Company 2012 Current

Asian Paints 31 59
Page industries 33 61
Eicher motors 24 47
Nestle India 45 68
Gruh Finance 5.8 13.4
Symphony 13.6 60
Cera Sanitaryware 9 45

 To be sure, a single parameter like a price/earnings ratio or a price/book ratio does not
capture the business outlook and prospects of any company. This table is not a
comment on the prospects of the individual companies listed here, it is just to indicate
that overall share prices increase have been far greater than the underlying earnings /
book value growth.

 What actually happened,

 2 stocks out of the 7 gave negative returns.
 Equal weighted portfolio of “overvalued” stocks gave an annual return (including
dividends) of 22.58% v/s 14.65% of Nifty.

 Flash back 2017. Current Scenario,

 Steep climb in 3 spaces.
 Financials (more so in non banks).
 Indian consumption theme (FMCG, Auto etc).
 Small and mid-caps in general.
 Frenzied valuations in IPOs.

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 Scenario today 2018,
 The seemingly steep fall in small/mid caps is just giving up of excess returns.
 Only bad governance / fraudulent companies have fallen off the cliff (auditor
resignation, SFIO, NCLT, etc).
 “Quality names” have only gotten more expensive.
 “Value” has not started to emerge in mid / small caps. Most of them are still
expensive.
 A person who bought bonds in 1982 would have received 16% yield without taking
what-so-ever risk. Today long-term 30 year bond yields have come close to 3%.
 Looking at history is a must. Studying history is more important than predicting future.
 Government guaranteed borrowing for projects like Sardar Sarovar at 21%.
 Government of India 10 year bond yield at 14%.
 Tata steel and Larsen & Tubro (AAA rated) were borrowing at 18%.
 Investment managers don’t look at history but predicting EPS 2030 is crazy.

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Return of the boy who cried wolf (23rd August 2019)

 Flashback March 2015,

 Tyranny of quality large caps and select mid caps.
 Propounded by respected gurus.
 Have made a lot of money for investors in past few years.
 Complete disconnected valuations today – this time it’s different kind of
arguments.

Company P/E ratio

Bosch 77
United spirits NA
Page industries 80
Gillette 192
Jubiliant Foodworks 84
ICRA 76
Nestle 57
Whirlpool 49
Dabur 65
Kitex garments 37

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Company 2012 Current
Asian Paints 31 59
Page industries 33 61
Eicher motors 24 47
Nestle India 45 68
Gruh Finance 5.8 13.4
Symphony 13.6 60
Cera Sanitaryware 9 45

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 The new story:
 Would you buy when Maruti is witnessing 6 months booking, or when inventory
levels piling up? If you follow news headlines, one will end up buying expensive.
Maruti is 1 in 2 cars sold amongst Indian households. Such news is scary.
 Watch know your country – Mr G Maran (youtube).
 Read – Factfulness – Hans Rosling.
 The main story:
 All central banks without exception have thrown in the towel.
 $17 Trillion worth of securities at negative yields.
 That is 17,000,000,000,000.
 Never seen before:
 Earth is round, earth revolves around the sun.
 Time and space are relative.
 HIV and antibiotic resistant superbugs.
 Dietary fat is good for humans.
 Long term interest rates are negative. (lots of money flowing to equities).
 Unilever issuing bonds at negative yields with stock yielding 3% dividend.
 GOI is offering the best deals:
 7.75% RBI bonds / small savings.

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  Sovereign gold bonds (2.5% interest + capital appreciation in gold).
 Drop the anchor:
 Capital the world is cheap.
 Past ROCE, ROE may not be the future.
 Expect lower returns from equities like that of other assets.
 Lower returns does not mean negative returns.
 Disconnect:
 Bond valuations and equity valuations seem to be from different galaxies.
 Drought next to an overflowing river.
 Why should European hold bonds and not shares of Unilever / Nestle?
(7% earnings yield & 3% dividend yield v/s negative interest rates)
 PPFAS view:
 Quality businesses are compelling buys (high ROE, low leverage, and predictable
businesses with good cash flows).
 Capex cycle, M&A, Buybacks are a matter of time rather than if they will revive.
 Asset bubbles will get created, difficult to predict where and when and to what
extent. (cheap money will see money move to good and bad use).
 Beware of capital mis-allocation and permanent loss of capital down the road.
 Cash / liquid funds may underperform equities.

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Retail payments industry (19th January 2018)

 I have said the Indian banking system needed a revolution. The revolution is upon us.
The country has the most sophisticated public payment infrastructure in the world,
which can be accessible to anyone who enters the system – Raghuram Rajan.
 Payment mechanism:
 Barter.
 Cash.
 Check, demand draft.
 Card based: Prepaid, charge, debit and credit cards.
 Digital wallet / prepaid wallet / payments banks / UPI.
 Crypto-currency / Block chain.
 Card association:
 Visa.
 MasterCard.
 American Express.
 Discover.
 JCB.
 China Unionpay.
 Rupay.

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 The highest portion of discount range goes to the Issuing bank.

 NPCI (National Payments corporation of India):

 RuPay (debit and credit card). RuPay contactless.
 UPI (United Payments Interface).

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  BHIM (Bharat Interface for money).
 IMPS (Immediate Payment services).
 AePS (Aadhar Enabled Payment Systems).
 APB (Aadhar Payment Bridge).
 Bharat Billpay.
 Bharat QR.
 NFS (National Financial Switch).
 NACH (National automated clearing house).
 CTS (Check truncation system).
 Wallets:
 Digital Wallet.
(Eg, Masterpass, Visa, Paypal one touch).
 Prepaid wallet (PPI)
 Reserve bank of India has three categories of wallets.
1. Closed.
2. Semi-closed.
3. Open.
 Paytm:
 Founded by Vijay Shekhar Sharma.
 Started 2010 as a prepaid mobile recharge website.
 Paytm wallet in 2013.
 In 2015 Paytm received a license from RBI to start payments bank.
 Alibaba group and Softbank are significant investors.

Paytm Payments bank,

 Savings account with 4% interest rate.
 Balance of upto Rs 1 lakh.
 Free digital RuPay card.
 Paytm payment bank will invest it in government securities.

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  Currently no checkbook, no demand draft.
 Third party products (partnered with ICICI bank to disburse credit).
 Pay and receive money over BHIM UPI from within the Paytm app.

 Paytm for merchants,

 Flat transactions fee of 1.99% + GST for merchants.
 Running promotion for no transaction fee for offline merchants.
 Offline acceptance via mobile number, QR code and now UPI.
 Paytm mall.
 5 million merchant partners.
 Over 200 million registered users (customers).

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Life insurance (9th August 2018)

 Life Insurance is sold and bought as an investment product. Companies wrap it up in a

complex way and sell it without rational justification.
 This should not be seen as an investment product.
 Insurance is a very small portion of the packages sold, but it helps seller earn fees.
 They are typically High-cost products for consumers, low-persistency and a lock-in.
 Low persistency = people won’t pay premiums throughout the life of policy term.
 Term insurance - pure protection risk-cover (Preferable).
 Life insurance companies good for investors?
 Only look at top 2-3 companies (HDFC life, SBI life & ICICI life).
 Stick with players that have huge amount of brand recall.
 Should have strong distribution network / tie-ups.
 Should have lower fixed costs per “Unit”.
 Largest companies will benefit the most. Look for scalability to spread costs.
 Good growth and good return on equity.
 Not as great as AMC in terms of ROE / capital intensity but arguable less cyclical.
AMC Life insurance
Can stop SIPs Need to pay premium
Redemptions Lock-in period
Investors seek returns Investors don’t check returns often.

 Accounting Basics:
 Life insurance  long dated contracts.
 Entire marketing costs are expensed upfront.
 Return and other assumptions are conservative as per IRDA guidelines to more
than adequately meet future liabilities.
 Hence losses / low profits in initial years, low reported net-worth, hidden
reserves.

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 Valuations: (Indian Embedded Value method)
 Discounted cash flow (DCF) on current policies in force.
(Already values the SIPs (premium) in force)
 Why the premium over IEV?
- For future policies sold.
- Scale benefits of the future.
 P/E not the right metric.
 P/B not the right metric (Book value is under-reported).
 Price to embedded value the right metric.

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Platform companies or modern monopolies
 Example of platform companies include, Uber, Zomato & Swiggy.

 Learning more about the platform companies

Some resources:
 Company filings.
 What’s going on & evolution.

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  Track people working in the tech industry.
 Observe products & services around us.
 & of course, books.
 Books to read,
1) Platform scale.
2) Platform revolution – Geoffrey Parker.
3) Modern monopolies – Alex.
4) Matchmakers – David Evans.
 Why should we study platform companies?
Platform in action,
 Ecosystem is the new supply chain.
 Network effect is the new scale.
 Data is the new dollar.
 Community management is the new HR.
 Curation is the new quality control.
 User journey is the new sales funnel.
 Behavior design is the new loyalty program.
 Algorithmic is the new decision maker.
 Real time customization is the new market research.
 Plug & play is the new business development.
 Ecosystem is the new supply chain:
 Inventory in the market place v/s own inventory.
 Amazon market place.
 AirBnB.
 YouTube, Medium.
 Uber (surge pricing).
 Well co-ordinated labor (Swiggy, Uber etc).
 Distributed assets.
 Network effect is the new scale:

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  Scale by creating meaningful interactions.
 … because all my friends use it.
 Positive feedback loop.
 Data is the new dollar:
 Manage data v/s resources.
 Database of usage & patterns.

 Community & curation:

 Push v/s participative marketing.
 Incentives management.
 What you allow on your platform.
 Rule based & social curation.
 User journey is the new sales funnel:
 Customer can come from anywhere (omni-channel).
 Multi-device, multi-channel + physical.
 Personalized experiences.

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 Behavior design + algorithms are the new loyalty programs:
 UI / UX show be seamless.
 Customer must want to opt-in.
 Reward desirable actions (cash backs?)
 Personalized landing page / timeline.
 Re-targeting & Repeat customer.
 Real time customization is the new market research:
 Because you saw this, you might like this…
 Sense of discovery + sense of familiarity.
 Update experience constantly.
 Plug and play is the new business development:
 Physical integration to digital integration.
 Software API (think about API for website) creating new business.
 Outsource non-essential functions.
 No need to vertically integrate.

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 Tech enabled:
 Moore’s law (reduced computing cost).
 Internet (provided connectivity).
 World wide web (organized the internet).
 Broadband communication (build fast & deploy).
 Software & API (build fast & deploy).
 Cloud computing (capex became opex).
 Any listed platform companies in India?
 Exchanges?
 Depository services / RTA?
 Banks?
 B2C NBFC / Fintech?
 Retail companies?
 B2B Vendor discovery?
 B2C e-commerce & travel?
 B2C jobs portal?
 B2B manpower management?
 Platform risk?

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 Compete with other platforms.
 Innovate.
 Using data.
 M&A strategy.

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Road to Zero (3rd March 2018)
 Formalization of the economy (Demonetization, GST, rising number of tax returns…)
 Traditional savings structures outdated (Gold, Real Estate, Small savings, Bank deposits)
 Financialisation of savings
- MF SIPs, FPI flows, Insurance, Trading, PMS, REIT…
 Increasing affluence of Indians
 Strong stock markets
 What is there not to like?
“Obvious prospects for physical growth in a business do not translate into obvious
profits for investors”
-Ben Graham
- Volumes may go up significantly but will it convert to revenues and profits?
- Will they have pricing power like in the past?
- Will regulations curb fees?
 Cyclical elements,
 Rising interest rates.
 Debt funds have not covered themselves in glory.
 Equity exotics (PMS/AIFs) have been thrashed.
 Equity mutual funds – last year relative not so good.
 Balanced funds anyone?
 What do capital market intermediary (Motilal / Edelweiss) offer to customers?
 Trade execution.
 Equity research.
 Financial advice.
 Asset management.

 Zerodha ne kaha “Brokerage chood do”

PayTm money ne kaha “Distributor commission chood do”
Index fund ne kaha “Asset management fee chood do”
Ek din aisa ayega, kahoge financial services chood do

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 Are we at make my trip kind of movement for financial industry?
- Customers can take care of their trips.

 Scale providers (model 1)

 Extremely low costs.
 Scale inefficiencies.
 Standardization.
 Use of technology.
 Unbundled pricing.
 Standard stock brokerage, distribution, passive investing /ETFs.
 Moral hazard, loss leader pricing, data misuse?

 Niche premium players (model 2)

 People wanting personal services.
 Technology adverse clients.
 Willingness to pay premium pricing for personal services.
 High volume players.
 Only affluent.

 Non-standardized stuff (model 3)

 Actively managed (PMS / MF/ AIF)
But pressure to prove differentiation.
 Access / scale
Real estate, debt, distressed debt, REIT, private equity, structured products…
 Investment banking.
 Fund based activity.

 Human + machine (model 4)

 Use of technology to improve efficiency.
 Retain human touch.
 Transparent pricing lower than value addition.
 Will work well with affluent / mass affluent.

 Fintech / Freemium (model 5)

 Completely (almost completely) automated.
 User does most of the work or automated.
 Web / Smartphone based.
 Some free service, some features prices.

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  May use customer data.
 Masses / mass affluent / some affluent also.
 Conclusion, It is not easy as booking an air ticket.
 Summary,
 If it is a run on the mill execution service – it is TOAST.
 If it is differentiated (may be in one of the 5 models)
- Volume Growth may come over time.
- Pricing may come over time.

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Money & Banking (2nd Jun 2016)
 Banking:
 Deposits,
1. Savings bank.
2. Fixed deposits.
 Borrowing,
1. Personal.
2. Business.
 Safekeeping & custody (lockers / demat account).
 Currencies & remittances.
 EXIM services.
 Distribution of third party products (insurance, mutual funds etc).
 Advisory & trusteeship.
 Universal banks:
1. Insurance.
2. Mutual funds.
3. Stock brokerage.
4. Investment banking.
5. Proprietary trading.
 The current landscape:
 Traditional Indian banking:
1. Licensing.
2. Predominantly PSU.
3. Foreign banks retreating.
4. Silver of a window opened.
 Hobbled by bad loans, excess staffing etc.
 Likes of HDFC bank have a free run.
 What has changed?
 Changing all the time but like boiling a frog.

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  High push towards financial inclusion.
 Encourage cashless society.
 Specialized licenses.
 New private sector banks.
 Small finance banks / local area.
 Payment banks.
 Custodian banks.
 Wallets / carrier billing.
 Esoteric (without license).
PayPal, Bitcoin & paytm.
 The incumbents:
 Have a large branch & ATM network.
 Lots of staff.
 Traditional on-boarding processes.
 “Core” Banking solutions.

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Perils of Real Estate & Gold (30nd Jan 2013)
 When rational people start to act irrationally and fundamentals are topped for hope of
over-optimistic returns. Danger!
 Perception of real estate,
 It’s tangible.
 Low volatility.
 It’s always going to go up – wrong perception.
 Pride of ownership.
 Perception of Gold,
 Has some intrinsic value – but what?
 Hedge against inflation.
 Considered safe haven.
 Tangible asset.
 Use value – can be converted to jewellery.
 Perception of Stocks,
 Intangible asset.
 Trading vehicle.
 Volatile.
 Lack of control of returns.
 While some of the perceptions are right, some are not true. People can even take it to
extreme levels. For example, US dollars will become toilet paper.
 IPO boom during dot com bubble – Subscribe and if allotted, sell it for profit on first day
(Wrong perception).
 When corporate try to diversify into real estate when it is not their core operating
business – time to be scared. Example, Bombey Dyeing and Arvind mills.
 Borrowing for buying second house on which rental yields are 1-2% is actually
speculating. You still pay interest on the borrowed amount.
 Be careful of marketing gimmicks showing Hong Kong and writing Borivali, saying hurry
up prices to increase next month.

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  People forget to factor in maintaining cost while buying real estate.
 Why Am I worried about Gold?
 Herd mentality for Gold – all around everyone buying or talking about gold; don’t
blindly follow anyone as today’s buyers will be tomorrow’s sellers. Borrowing
money to buy gold – speculation.
 Currency effect – Last year gold prices down in real terms but positive returns
only because of falling rupee. What if rupee appreciates?
 Behavioral biases in current times for Gold and Real estate:
 Herd mentality: When individuals and corporate run after hot sectors (ex –IPO
rush, IT in early 2000’s, Power and Infra Boom)
 Endowment Effect: Always believe prices undervalued if it’s in ones possession.
Especially if there is no exchange to give you fair price.
 Recency bias: Over past 5 years gold and real estate up whereas stocks down.
Recent memory so will be biased towards that.
 Representative bias: comparing one example and extrapolating to all others.
 Availability bias: ads all around you of real estate and gold painting a rosy
picture. MF’s and jewelers promoting gold investments.
 What’s the solution?
 Financial Planning – aim is to optimize returns and not to maximize it.

Equity Real estate Gold FD

Liquidity -

Post tax returns

Volatility -

 Asset allocation
 Need to have proper asset allocation depending on risk profile of the person.

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 Assets should be in proportion and not go overweight or underweight due to
extreme optimism or pessimism.
 Professional help available.

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Does Apple have a moat and a sustainable growth driver (16th Mar 2015)

 Market capitalization of $745 Billion (TCS $82B). More than GDP of all but 19 countries
in the world.
 $178 Billion in cash – More than the market cap IBM.
 Net Income in Q4 2014 OF $18 Billion (all time record).
 Has sold more than 1 Billion iOS devices.
 Apple stock is ‘not expensive’ - 2015
2015 2020
Market cap $745 Billion $1.6 Trillion
Cash $178 Billion $115 Billion
Net market cap $567 Billion $1.5 Trillion
Net profit (12 months) $44.6 Billion $98.1 Billion
P/E 13 33

 The moat debate:

Pros
 Customers love it, Great ecosystem, design and simplicity.

Cons

 Disruptive innovation, closed versus open architecture, 3 rd party apps replacing

original apps, subsidy wean off, upgrade cycle wall, High margins.
 Services were just 10% of revenues in 2015. iPhone was 54%.
 History,
 iPod was a great success.
 Bundled devices prevalent in the USA.
 Steve Jobs negotiates Exclusive contract with AT&T for iPhone
 Consumers lap it up?

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 Who would not (USD 199/ Rs 12,300 but minimum plan on 2 year contract $45 /
Rs 2,800 per month)
 Win-Win for Apple and AT&T.
 Disruptive innovations that Apple seems to ignore,
 Better battery life v/s “thinnest”.
 Dual Sim phones.
 Removable batteries.
 Provision for memory card.
 Easily transferable and open media.
 Cross platform apps (Whatsapp, Google maps, Drop box v/s iMessage, Apple
maps, and iCloud).
 Remember the scorn on “bigger” phones & 7-inch labels.
 So what does Apple do?
 A new fabulous product is introduced, gains acceptance and high sales. High
margins at the beginning.
 Product itself goes through rapid improvements and upgrade cycles.
 Product upgrade cycles rest or the product gets upstaged.
 Difference between Google, Facebook, Amazon v/s Apple.
 Low margin, highest volumes v/s high margins and high volumes.
 Open systems v/s closed architecture.
 Habit forming annuities v/s device upgrade cycles.
 Investing (wasting?) for the future v/s stewards of shareholder wealth.
 Trillion dollar questions?
 Will consumer keep paying $700+ every 2 years for iPhones?
 Will Apple keep creating new categories for people to fall in love with?
 If answer is yes, stock is cheap (2015). If no, upgrade cycle could affect stock price. At
PPFAS they do not know and therefore will continue to track company closely.

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The business model of ride hailing - Uber (30th Jul 2019)

 Traditional Fictions Solved

 Where is the cab? / Where is the rider?
 Matches service provider with service asker.
 Works on ratings by the people.
 Is the driver trustworthy? Is the rider trustworthy?
 Works on ratings by the people.
 I want to go to Nariman versus I want to go to Borivali
 On Uber’s platform will reduce rejection rate.
 Solves problem of change
 Can use credit card to pay.
 Navigation by maps instead of local knowledge
 Time optimization.
 Bulk buying / fleet management / financing
 Ease of doing business.
 Ride sharing
 Works only on specific route.
 Questions?
 Is there a double sided network effect?
 Is there a winner takes all business?
 Is the lifetime value of a costumer great?
 Are there potential economic benefits down the road (autonomous vehicle)?
 Some network effects
 NSE / MCX.
Doubled sided network
 Mastercard / Visa.
Double sided network
 Facebook / Whatsapp /Linkedin.

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 Single sided network
 Some numbers,
 Apple Inc App store revenue $46.6 Billion dollars.
 Global card spend > $20 Trillion.
 Visa Inc $392 Billion
 Revenue $20.6 Billion
 Profit $10.3 Billion
 Mastercard $278 Billion
 American Express $106 Billion
 Card spend $1,184 Billion dollars.
 Revenue $40 Billion.
 Size of Opportunity,
 UBER accounts for less than 1% of miles driven globally.
 Negligible market share in food and logistics.
 $3.11 Trillion Global auto market.
 Metrics,
 91 million monthly users.
 700+ cities.
 17 million trips per day, 1.5 billion trips in a quarter.
 3.9 million drivers on platform.
 Gross bookings from ride-sharing grew to $18.8 Billion in 2016 to $41.5 Billion
in 2018 (paid by customers).
 Revenue to Uber from ride-sharing grew from $3.5 Billion in 2016 to $9.2
Billion in 2018.
 Risks,
 Legislative / Union based monopoly busting (taxi drivers en-masse create an
app and move to it).
 Autonomy and say GM or Waymo flood a city with autonomous cars.

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Debt Mutual Funds – Theory & Practice & Rating agencies (7th Mar 2019)
 Objective is to get positive rate of return.
 Defaults in corporate bonds are not a bug, they are a feature.
(If risk was same why would corporate offer high yield on their bonds)
 What are the features of debt mutual funds?
 Mis-pricing of risk.
 Lumpiness of default.
 High expenses and commissions.
 No junk bond market.
 Concentration usually does not pay.
 Contagion.
 Indian people are obsessed with large companies and think they cannot default. Should
focus on the capacity of the borrower to repay interest and principal. Larger company
should not be the reason why corporate cannot default.
 Bonds should be priced such that there is adequate risk premium. During good times the
spread decreases between corporate bonds and government bonds not reflecting true
risky nature of corporate bonds.
 Composition of schemes matter: On an average 5 feet depth of water drowned a 6 foot
man. Averages don’t matter. Water could be 20 feet deep in some places. Some schemes
could have terrible credit exposure but report average rating of AAA.
 Being highly concentrated in a few holdings doesn’t work well in debt mutual fund
schemes.
 Avoid looking at the credit ratings of the fund. Credit rating agencies don’t do a good job
with giving ratings. AAA does not certainly mean it is better than AA in real world. A lot of
securities that are called AAA are not AAA.
 Credit rating agencies are fighting for market share and therefore may end up giving
wrong ratings to work with a company in the future.
 S&P 500 has just 2 companies that are AAA rated. Johnson & Johnson and Microsoft.

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 The ratings agency companies have an obsession with large companies in India.
 Indian banks are obsessed with asset based lending and less cash-flow based lending.
 Small companies can avoid stampede. Huge selling of credit in large companies can cause
contagion effect.
 Look for operational cash flows before buying a company’s debt.

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Amazon – The google of e-commerce (4th Aug 2015)

 We focus on customers, not competitors

(Also not on employees?!, We are Frugal)
- Jeff Bezoz
 We are long term oriented and we like to invent

- Jeff Bezoz

 Great merchants have never had the opportunity to understand their customers in
a truly personalized way, E-commerce is going to make that happen
- Jeff Bezoz


August, 2015 Amazon Walmart

Market cap $246.50 B $230.50 B
Sales $95.81 B $485.65 B
Net Profit -$0.24 B $16.26 B

March 1998 Amazon Barnes & Noble

Market cap $5 B $2.29 B
Sales $147.80 M $2.8 B
Net Profit -$27.60 M $64.70 M

August 2015 Amazon Barnes & Noble

Market cap $246.50 B $1.74 B
Sales $95.81 B $6.07 B
Net Profit -$0.24 B $36.60 M

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 E-commerce,
 Advantages,
- Wider selection.
- Lower inventory.
- Savings on high street.
- Personalization / Big data.
 Disadvantages,
- Delayed gratification.
- Shipping costs.
- Logistics nightmare.
- Think grocery.
 Morphed into something different,
 Books (Kindle)
 Music (iTunes, Spotify, Pandora)
 Movies (Netflix, Hulu, Amazon prime, YouTube)
 In online market places, the network effect is pervasive.
 The messier world of general retail,
 Apparel.
 Electronics.
 Home Appliance.
 Jewellery.
 Grocery.
 Benefits,
 Volume discounts.
 Advertising & listing.
 Loss leaders to jewellery?
 In house brands?
 Customer insights, cross-selling, up selling.
 Losses as an entry barrier in areas of rapid falling costs/prices

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 A fad or an earthquake?
 Will continue to disrupt and has implications on a lot of businesses that exist
today.
 Current prices are difficult to say if it’s a buy or a short.
 Investor must have this on track list.

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Launch of India’s first REIT (29th Sept 2018)
 REIT – Real estate investment trust
In a crude way – a mutual fund for real estate assets.
INVIT – Infrastructure investment trusts
In a crude way – a mutual fund for infrastructure assets.
 Real estate investment basics
 Property managed by investors.
 Maybe fully paid or partly leveraged.
 Property maybe residencies / offices / others like warehouses.
 Property let out to tenant for rent.
 Rent gives regular returns.
 Inflation protection from property appreciation and periodic rent increases.
 Returns have been quite decent…
 Indians love real estate investments.
 Returns not as great as equities but decent.
 Arguably easier for lay person to understand.
 But…
 Problems,
 Lack of diversification.
 Lack of divisibility.
 Vacancy.
 Hassles of hands on.
 Price controls, squatters.
 REIT advantages,
 Accessible – you do not need crores of rupees.
 Liquidity.
 Experts in the fields to manage.
 Operations hassles taken care of by professionals.
 Diversification.

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  Regular income + appreciation of potential.
 Assets not otherwise available.
 Global Context,
 US REIT market cap – USD 30 trillion v/s Global REIT market cap of $1.3 trillion.
 Not as big a market as equities (also not all real estate is in traded REIT form).
 Indian REIT market yet to see first listing.
 2 INVITS listed so far.
 Indian REIT guidelines,
 Trust, Sponsor, Manager, Trustee Structure (like mutual funds)
 Trustees – Debenture trustees – third party.
 Invest in developed properties generating income (>80% of the total assets).
 Payout > 90% of the cash flows to investors on at least 6 month basis.
 Minimum investment in IPO 2 lacs / trading lot if 1 lac.
 Skin in the game 25% at time of listing 15% after 3 years.
 Some leverage allowed 25% / 49%.
 Invits,
 Complicated.
 Each may be unique.
 Road assets, bridges, transmission assets, ports, shipyards, airports, oil pipelines,
gas pipelines, LNG storage, dams/channels/embankments, water treatment
plants, solid waste management.
 Highlights,
 Yield + appreciation.
 Somewhat less correlated with stock market.
 Less volatile than stocks (?)
 Bull and bear market even in real estate,
 Depression: High vacancy, low rent, properties with excessive leverage
repossessed by lenders, close to zero new construction.

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  Gradual recovery: Rise in occupancy, rents stabilize and gradually rise, not too
much of new construction.
 Boom: High rents, very high occupancy, little spare capacity, construction
projects announced, media hype.
 Bust: Over supply, over leverage.
 Types of REITs,
 Flats / apartments.
 Shopping centers / malls.
 Offices / office buildings.
 Logistics / warehouses / industrial properties.
 Hospitals / hotels etc.
 Things to look for,
 Management quality.
 Follow on offerings / raise more capital and add properties – Growth strategy.
 Leverage.
 Turnaround – undertake management actions to improve returns.
 Investors should diversify and not the REIT.
 What can go wrong,
 Oversupply (mainly over-construction, to a limited extent - recession).
 Changing trend / location preferences etc.
 Interest rate cycles.
 Socialism (seriously…)
 Management (will the leopard change its spots?)

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