Safal Niveshak

Value Investing Made Simple

www.safalniveshak.com
Basic Company Details (July 2015)
(Enter values only in red cells) | Data Source: Ace Equity
Note: Hero Motocorp's analysis in this excel is for representation purpose only.
Parameters Details
Company Hero Motocorp
Industry Automobiles
Business (As you understand it, in simple words) XYZ
Current Stock Price (Rs) 2,650
Face Value (Rs) 2
No. of Shares (Crore) 20
Market Capitalization (Rs Crore) 52,921

Key Financials (Last 10-Years)

Parameters Details
Sales Growth (10-Year CAGR) 14.6%
Gross Profit Growth (10-Year CAGR) 14.5%
Net Profit Growth (10-Year CAGR) 11.2%
Average Debt/Equity (x) 0.1
Average Return on Equity 46.9%
 Warning!
Excel can be a wonderful tool to analyze the past. But it can be a weapon of
mass destruction to predict the future! So be very careful of what you are
getting into. Here, garbage in will always equal garbage out.

Remember!
Focus on decisions, not outcomes. Look for
disconfirming evidence. Calculate. Pray!

Please! It's your

money. Please don't blame me if results of this excel cause you to lose it all!
I've designed this excel to aid your own thinking, but you alone are responsib
for your actions. I want to live peacefully ever after! :-) I am
not a sadist who wants you to do the hard work by analyzing companies on
your own. But I'd rather give you a compass instead of a map, for you can
confuse map with territory and lose it all! All the best!
But it can be a weapon of
careful of what you are
qual garbage out.

t outcomes. Look for

e. Pray!

It's your
el cause you to lose it all!
you alone are responsible
:-) I am
analyzing companies on
ad of a map, for you can
! All the best!
 Buffett Checklist - Read, R
Source - Buffettology by Mary B
Parameter

Consumer monopoly or commodity?

Understand how business works

Is the company conservatively financed?

Are earnings strong and do they show an upward trend?

Does the company stick with what it knows?

Has the company been buying back its shares?

Have retained earnings been invested well?

Is the company’s return on equity above average?

Is the company free to adjust prices to inflation?

Does the company need to constantly reinvest in capital?

Conclusion

Never Forget
Buffett Checklist - Read, Remember, Follow!
Source - Buffettology by Mary Buffett & David Clark
Explanation
Seek out companies that have no or less competition, either due to a patent or brand name or similar in
the product unique. Such companies will typically have high gross and operating profit margins because
However, don't just go on margins as high margins may simply highlight companies within industries wi
margins. Thus, look for companies with gross, operating and net profit margins above industry norms. A
growth in earnings and high return on equity in the past.

Try to invest in industries where you possess some specialized knowledge (where you work) or can mo
company, its industry, and its competitive environment (simple products you consume). While it is difficu
quantitative filter, you should be able to identify areas of interest. You should "only" consider analyzing
operate in areas that you can clearly grasp - your circle of competence. Of course you can increase the
only over time by learning about new industries. More important than the size of the circle is to know its

Seeks out companies with conservative financing, which equates to a simple, safe balance sheet. Such
have strong cash flows, with little need for long-term debt. Look for low debt to equity or low debt-burde
companies that have history of consistently generating positive free cash flows.

Rising earnings serve as a good catalyst for stock prices. So seek companies with strong, consistent, a
(profits). Seek companies with 5/10 year earnings per share growth greater than 25% (alongwith safe b
help indicate that earnings growth is still strong, look for companies where the last 3-years earnings gro
the last 10-years growth rate. More important than the rate of growth is the consistency in such growth.
with volatile earnings growth in the past, even if the "average" growth has been high.

Like you should stock to your circle of competence, a company should invest its capital only in those bu
circle of competence. This is a difficult factor to screen for on a quantitative level. Before investing in a c
company’s past pattern of acquisitions and new directions. They should fit within the primary range of o
Be cautious of companies that have been very aggressive in acquisitions in the past.

Buffett prefers that firms reinvest their earnings within the company, provided that profitable opportunitie
companies have excess cash flow, Buffett favours shareholder-enhancing maneuvers such as share bu
not screen for this factor, a follow-up examination of a company would reveal if it has a share buyback p

Seek companies where earnings have risen as retained earnings (earnings after paying dividends) hav
profitably. A great way to screen for such companies is by looking at those that have had consistent ear
return on equity in the past.

Consider it a positive sign when a company is able to earn above-average (better than competitors) retu
employing much debt. Average return on equity for Indian companies over the last 10 years is approxim
companies that earn atleast this much (16%) or more than this. Again, consistency is the key here.
That's what is called "pricing power". Companies with moat (as seen from other screening metrics as su
high ROE, high grow margins, low debt etc.) are able to adjust prices to inflation without the risk of losin
sales.

Companies that consistently need capital to grow their sales and profits are like bank savings account,
investor's long term portfolio. Seek companies that don't need high capital investments consistently. Re
first go toward maintaining current operations at competitive levels, so the lower the amount needed to
operations, the better. Here, more than just an absolute assessment, a comparison against competitors
companies that consistently generate positive and rising free cash flows.

Sensible investing is always about using “folly and discipline” - the discipline to identify excellent busine
folly of the market to drive down the value of these businesses to attractive levels. You will have little tro
this philosophy. However, its successful implementation is dependent upon your dedication to learn and
and apply them to pick stocks successfully.

Focus on decisions, not outcomes. Look for disconfirming evidence.

 Hero Motocorp - Balance Sheet
(Enter values only in red cells) | Data Source: Ace Equity
Year / Rs Crore L-9 L-8 L-7 L-6
SOURCES OF FUNDS / EQUITY & LIABILITIES
Share Capital 40 40 40 40
Reserves & Surplus 1,453 1,969 2,430 2,946
Shareholder's Funds / Equity 1,493 2,009 2,470 2,986

Non-Current Liabilities
Long-Term Borrowings 202 186 165 132

Current Liabilities 1,500 1,563 1,479 1,825

Short-Term Borrowings - - - -
Trade Payables 662 646 555 756
Other Current Liabilities 354 427 487 569
Short-Term Provisions 485 490 437 500

APPLICATION OF FUNDS / ASSETS

Non-Current Assets 881 1,157 1,519 1,751
Tangible Assets 674 949 1,166 1,156
Intangible Assets - - - -
Capital Work-in-Progress 41 44 190 392
Non-Current Investments 165 163 164 202

Current Assets 2,416 2,720 2,723 3,301

Current Investments 1,861 1,899 1,810 2,365
Inventories 204 227 276 317
Trade Receivables 90 159 335 297
Cash and Bank Balance 18 159 36 131
Short-Term Loans and Advances 240 274 263 185
Other Current Assets 4 4 4 6
nce Sheet
a Source: Ace Equity
L-5 L-4 L-3 L-2 L-1 L (FY14)

40 40 40 40 40 40
3,761 3,425 2,916 4,250 4,966 5,560
3,801 3,465 2,956 4,290 5,006 5,600

78 66 1,471 1,011 302 24

2,053 4,831 6,017 4,341 4,171 5,527

- - - - - -
703 1,111 2,073 2,293 1,873 2,291
823 2,694 2,898 996 888 588
527 1,026 1,045 1,052 1,410 2,648

1,832 2,054 4,596 4,498 3,748 3,910

1,574 1,659 4,080 3,786 3,071 2,243
- - - - - -
121 48 50 39 62 854
138 347 465 674 614 813

4,244 6,461 5,772 4,831 5,078 6,660

3,231 3,578 4,663 3,290 3,009 3,276
327 436 525 676 637 670
150 108 131 272 665 921
220 1,907 72 77 181 118
311 247 123 242 407 1,509
6 183 258 274 178 168
 Hero Motocorp - P&L Account
(Enter values only in red cells) | Data Source: Ace Equity
Year / Rs Crore L-9 L-8 L-7 L-6 L-5
Net Sales 7,422 8,714 9,900 10,332 12,319

Expenditure
Increase/Decrease in Stock (12) (12) 2 11 (18)
Raw Material Consumed 5,227 6,098 7,216 7,441 8,816
Employee Cost 215 259 299 321 371
Other Manufacturing Expenses 295 380 435 459 545
General and Administration Expenses 374 443 539 550 672
Selling and Distribution Expenses 160 206 257 237 266
Miscellaneous Expenses 6 7 18 12 38
Total Expenditure 6,266 7,380 8,767 9,032 10,691
Gross Profit 1,911 2,249 2,247 2,421 2,976
Operating Profit / EBITDA 1,156 1,334 1,133 1,300 1,628
Other Income 153 196 254 272 337
Depreciation 89 115 140 160 181
Profit Before Interest & Tax (PBIT) 1,219 1,415 1,248 1,412 1,784
Interest 2 3 2 2 3
Exceptional Income / Expenses
Profit Before Tax 1,217 1,412 1,246 1,410 1,781
Provision for Tax 407 441 388 442 500
Profit After Tax 810 971 858 968 1,282
Minority Interest - - - - -
Share of Associate - - - - -
Profit After Tax (PAT) 810 971 858 968 1,282
Diluted EPS (Rs) 40.6 48.6 43.0 48.5 64.2
Account
Source: Ace Equity
L-4 L-3 L-2 L-1 L (FY14) CAGR
15,758 19,398 23,579 23,768 25,275 14.6%

6 (24) (84) 33 8
10,781 14,190 17,449 17,458 18,314
438 619 736 821 930
677 674 363 412 508
842 605 774 855 960
388 383 366 469 493
15 393 440 530 614
13,146 16,840 20,044 20,577 21,828 14.9%
4,295 4,558 5,851 5,865 6,444 14.5%
2,612 2,558 3,535 3,191 3,447 12.9%
414 344 448 492 539
191 402 1,097 1,142 1,107
2,834 2,500 2,886 2,541 2,879 10.0%
2 15 21 12 12
(80)
2,832 2,405 2,865 2,529 2,867 10.0%
600 477 487 411 758
2,232 1,928 2,378 2,118 2,109 11.2%
- - - - -
- - - - -
2,232 1,928 2,378 2,118 2,109 11.2%
111.8 96.5 119.1 106.1 105.6
 Hero Motocorp - Cash Flow Statement
(Enter values only in red cells) | Data Source: Ace Equity
Year / Rs Crore L-9 L-8 L-7 L-6
Net cash (used in) / generated from operating activities 747 936 625 1,212
Payment for purchase of fixed assets (219) (399) (519) (375)
Free Cash Flow 528 537 106 837
Net cash (used in) / generated from investing activities (563) (323) (273) (781)
Net cash (used in) / generated from financing activities (204) (471) (493) (432)
Net increase in cash and cash equivalents (20) 141 (142) (2)

Sample Cash Flow Statement (f

MINUS
ow Statement
a Source: Ace Equity
L-5 L-4 L-3 L-2 L-1 L (FY14)
1,359 2,687 2,254 2,360 1,890 2,963
(315) (212) (364) (565) (608) (937) Remember!
1,044 2,475 1,890 1,795 1,283 2,027 Cash fl
(861) (528) (1,322) 93 (733) (1,619) what determines a
(500) (2,109) (955) (2,458) (1,056) (1,415)
(2) 50 (23) (6) 101 (71)

low Statement (from Annual Report)

Remember!
Cash flow, not reported earnings, is
what determines a company's long-term value.
 Hero Motocorp - Key Ratios
(Don't touch any cell on this sheet, as all are calculated figures)
Operational & Financial Ratios L-9 L-8 L-7 L-6 L-5
Diluted Earnings Per Share (Rs) 40.6 48.6 43.0 48.5 64.2
Diluted Book Value Per Share (Rs) 74.8 100.6 123.7 149.5 190.3
Tax Rate (%) 33% 31% 31% 31% 28%

Profitability Ratios L-9 L-8 L-7 L-6 L-5

Gross Margin (%) 26% 26% 23% 23% 24%
EBITDA Margin (%) 16% 15% 11% 13% 13%
EBIT Margin (%) 16% 16% 13% 14% 14%
Net Profit Margin (%) 11% 11% 9% 9% 10%

Performance Ratios L-9 L-8 L-7 L-6 L-5

Return on Equity (%) 54% 48% 35% 32% 34%
Return on Capital Employed (%) 51% 46% 36% 37% 34%
Return on Invested Capital (%) -442% 708% 109% 156% 299%
Sales/Working Capital (x) 8.1 7.5 8.0 7.0 5.6

Efficiency Ratios L-9 L-8 L-7 L-6 L-5

Receivable Days 4 7 12 11 4
Inventory Days 10 9 10 11 10
Payable Days 33 27 20 27 21

Growth Ratios L-9 L-8 L-7 L-6 L-5

Net Sales Growth (%) 17% 14% 4% 19%
EBITDA Growth (%) 15% -15% 15% 25%
PBIT Growth (%) 16% -12% 13% 26%
PAT Growth (%) 20% -12% 13% 32%

Financial Stability Ratios L-9 L-8 L-7 L-6 L-5

Total Debt/Equity (x) 0.1 0.1 0.1 0.0 0.0
Debt Burden (x) 0.4 0.3 1.6 0.2 0.1
Current Ratio (x) 1.6 1.7 1.8 1.8 2.1
Quick Ratio (x) 1.5 1.6 1.7 1.6 1.9
Interest Cover (x) 631.7 484.6 775.0 706.1 705.1
y Ratios
l are calculated figures)
L-4 L-3 L-2 L-1 L (FY14)
111.8 96.5 119.1 106.1 105.6 Remember!
173.5 148.0 214.8 250.7 280.4 counts in the long run is the
21% 20% 17% 16% 26% share value", not overall gr
business.
L-4 L-3 L-2 L-1 L
27% 23% 25% 25% 25%
17% 13% 15% 13% 14%
18% 13% 12% 11% 11%
Remember!
14% 10% 10% 9% 8% Gross margins sugg
Higher = Better, but also invit
watch out for cons
L-4 L-3 L-2 L-1 L
64% 65% 55% 42% 38%
68% 52% 56% 53% 50%
-114% -651% 124% 100% 95% Remember!
ROE = Efficiency in allocating
9.7 (79.2) 48.2 26.2 22.3
CEO's #1 job. Higher = B
consistency
L-4 L-3 L-2 L-1 L
3 2 4 10 13
10 10 10 10 10
26 39 35 29 33

L-4 L-3 L-2 L-1 L

28% 23% 22% 1% 6%
60% -2% 38% -10% 8%
59% -12% 15% -12% 13%
74% -14% 23% -11% 0%

L-4 L-3 L-2 L-1 L

0.0 0.5 0.2 0.1 0.0
0.0 0.8 0.6 0.2 0.0
1.3 1.0 1.1 1.2 1.2
1.2 0.9 1.0 1.1 1.1
1,349.4 164.8 135.5 213.4 243.6
member! What
unts in the long run is the increase in "per
hare value", not overall growth or size of a
business.

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

emember!
= Efficiency in allocating capital, which is a
CEO's #1 job. Higher = Better. Look for
consistency.
 Hero Motocorp: 2-Stage DCF
Figures in Rs Crore | Enter values only in red cells

Initial Cash Flow 1,701

Years 1-5 6-10

FCF Growth Rate 12% 10%
Discount Rate 10%
Terminal Growth Rate 2%

Shares Outstanding (Crore) 20

Net Debt Level (3,369)

Year FCF Growth Present Value

1 1,906 12% 1,732
2 2,134 12% 1,764
3 2,390 12% 1,796
4 2,677 12% 1,829
5 2,998 12% 1,862
6 3,298 10% 1,862
7 3,628 10% 1,862
8 3,991 10% 1,862
9 4,390 10% 1,862
10 4,829 10% 1,862

Final Calculations
Terminal Year 4,926
PV of Year 1-10 Cash Flows 18,291
Terminal Value 23,738
Total PV of Cash Flows 42,029
Number of Shares 20
DCF Value / Share (Rs) 2,273

Note: See the explanation of DCF here

Why DCF?
The value of a business is
simply the present value of cash that
investors can take out of the business
over its lifetime.
 Hero Motocorp - Fair Value Calculation
(Enter values only in red cells)
Year L-9 L-8 L-7 L-6 L-5 L-4 L-3
Diluted EPS (Rs) 40.6 48.6 43.0 48.5 64.2 111.8 96.5
High P/E (x) 15.0 20.2 18.5 19.1 18.4 23.2 19.6
Low P/E (x) 10.4 12.0 13.2 13.6 12.1 15.1 13.7
Average P/E (x) 12.7 16.1 15.9 16.4 15.2 19.2 16.7

Valuation - Different Methods (Rs)

Avg P/E Ratio Valuation
DCF
Fair Value Range (Rs/Share)
High End
Low End
Margin of Safety (MoS)
Fair Value after MoS
Current Mkt. Price (CMP, Rs)
Premium / (Discount)
1,830
2,273 Remember!
Give importance to a stock's f
answered in "Yes" to these two ques
be understood? and (2) Can
2,051
1,895 Don't try to quantify everything.
20% mathematical you are, the more simp
1,578 analysis and results. Great analysis i
2,650
67.9% Also, your calculated "fair value" wi
don't invest your savings just becau
for perfection. It is overrated. Focus
for disconfirming
ion

L-2 L-1 L (FY14)

119.1 106.1 105.6
22.9 18.9 21.5
16.6 14.3 13.6
19.8 16.6 17.5

ber!
mportance to a stock's fair value only "after" you have
Yes" to these two questions - (1) Is this business simple to
derstood? and (2) Can I understand this business?

o quantify everything. In stock research, the less non-

you are, the more simple, sensible, and useful will be your
esults. Great analysis is generally "back-of-the-envelope".

lculated "fair value" will be proven wrong in the future, so

our savings just because you fall in love with it. Don't look
n. It is overrated. Focus on decisions, not outcomes. Look
for disconfirming evidence. Pray!
Expected Return Model
Hero Motocorp L-9 L-8 L-7 L-6 L-5
Profit After Tax (Rs Cr) 810 971 858 968 1,282
Earnings per Share (Rs ) 41 49 43 48 64
Net Profit Margin 11% 11% 9% 9% 10%
Return on Equity 54% 48% 35% 32% 34%

Calculations
Esti. CAGR in EPS over next 10 years 10%
Esti. EPS after 10 years 274
Current P/E 22.2
Esti. Stock Price @ 20x P/E 5,479
CMP (Rs) 2,650
Esti. CAGR Return in 10 Years 7.5%

Note: See the explanation of this model here

 L-4 L-3 L-2 L-1 L (FY14) CAGR (10-Yr) CAGR (5-Yr)
2,232 1,928 2,378 2,118 2,109 11% 10%
112 97 119 106 106 11% 10%
14% 10% 10% 9% 8%
64% 65% 55% 42% 38%