Sie sind auf Seite 1von 12

Donald Profit booking/Exit decision Well, the idea is to exit/book profits as soon as your targets are met.

. Assess if it can still double form here within the next 2-3 years. If not, you are better off taking it out and putting it in the next opportunity that can compound at 25% plus CAGR. If nothing can, i.e. markets are way overpriced, you better stay in CASH and wait. Mr D can wait endlessly I can't get him excited at all . In 2008 I did not have access to Mr D or others. I had no experience of a bear market, like most others who started in 2005 or so. Consequently, I have a pretty poor track record of exiting in 2008 - I stayed invested, completely, throughout the mayhem ...with not much pain...BUT huge huge Opportunity costs! So, from what I have assimilated so far (understood, but way to go in practice): 1. Short Term Portfolio : You start booking profits once your targets are reached. Think Pondy Oxides, Rs 30-45, our 50% appreciation target happened in 1 or 1.5 months. I booked 20%, saw it ride to 60, booked another 25%, touched 70...sold another 35%, and back at 65...exited completely. Veterans have told me...just as you get in slowly and keep betting more as conviction builds, exit also slowly never at one you can ride most of the way...never wait to cream it off fully, either! 2. Long Term Portfolio: Whenever my target of doubling gets met, I must book profits if I think the stock cannot double from here again within the next 2-3 years. Take the case of Mayur Uniquoters (it has corrected with overall market) it had almost doubled form my entry of 230, but it had not got over-expensive, the valuation gap had ceased. In my books Mayur can keep compounding at 30% for next 3 years. I agree with Hitesh, anywhere around 370-380 is a good price for additional buys (may be re-entry for him!). 2008 like situations - where everything is primed for one big fall. You better conserve CASH. if your picks have been right, then you would have met your targets anyways, and would not find anything that will compound at 25% CAGR

That's only the theory. I have to see how well I can stick to the discipline!


Practical use/Application 1Yr Apart from a forward Forward view on the business, PE this is the only surefire way to get rid of price-anchoring.

Examples from our ValuePickr Portfolio Experience When I first looked at Mayur it was available ~6x at pre-split 240, think in Feb '11. We visited Mayur and came back highly impressed. Good results came and stock had climbed to 360-400 by July/Aug I think.

(Eternally thankful to Ayush for planting this firmly in my head - in early 2009/10)

Towards year end it was back to 300-320 levels...our calculations showed 5-6x 1 year forward and we loaded up again. Few months down the line at 400-440 levels again we found 6-7x 1 yr fwd and again loaded up - by the 3rd time we bought I think the fab dividends had started. For the first-time I was rid of price-anchoring for good. (Of course it helped that I was in love with the business). I found when we have done detailed homework to our satisfaction, and were generally comfortable with Managementspeak and walk-the-talk, and could project with a degree of certainty (+/-10% tolerance), I could apply it successfully to other businesses. My entry price ceased to matter!

Hitesh Donald, Coming to the points put up as a checklist for looking at a company Business Quality-- This should be relatively easy. We should be able to ascertain whether quality of business is great or not. 1. Is the business suitable for long term investing? Is there ample opportunity for the company to grow its business at a smart pace over the next 3-5 years? 2. Does the business entail excessive capex? sufficiently high returns to justify efforts to expand? And does the capex generate

3. Is there any possibility of govt interference creating problems with the prospects of the business? 4. Is the business sensitivie to raw material price volatilityis the business such that price hikes can be passed easily? 5. What kind of business are we looking at? Is it a sunrise sector(agri, water and waste water management, cloud computing, biotech etc), or a steady growth sector(consumer, fmcg) or a neglected sector(capital goods, infra space)? Many a

times it happens that todays sunrise or a steady business is tomorrows neglected business. 6. How are the majority of companies in the sector doing? If most of them are doing well then it should be a good business to invest in. Management Quality -- Here there are a lot of subjective opinions possible. Essential questions one asks are 1. What kind of promoter holding is there? Any excessive pledging?

2. How have the management handled the companys growth in past few years. Whether they have taken unnecessary risks/debts etc. Whether any bets taken by them in the past have paid off or failed? 3. Does the management have the hunger to grow?

4. How are the shareholders been rewarded? Dividend payment and high dividend payout ratio is a very big plus for investing in small cap companies bcos that assures me that the profits reported are for real. 5. Some usual antics of managementswhether they allot themselves convertible warrants and dont convert?? Whether they sell their holding at opportune times in open markets? Whether they are likely to take the minority investors for a ride with the cash in the bag? 6. Management remuneration? Whether it is justifiable?

7. How do they answer investor queries at AGMs or other interaction platforms? Whether they walk the talk? Whether they promise less and deliver more? Or the other way? FUNDAMENTALS: We at valuepickr seem to be good at this. 1. Starts with the growth or lack of it. Kind of growth shownfast, medium, slow??

2. Whether growth if any has been achieved by resorting to too much debt or equity dilution? 3. Return ratiosROE, ROCE etc. I dont need to elaborate on these.

4. Any chances of sudden change in fundamentals for better or worse? Is the company on the cusp of a phase of explosive growth? Or is the company at the peak earnings levels after which it is supposed to slow down/show degrowth? 5. Again dividend payout and especially increasing dividends with increasing profits.


Free cash generation or operating cash flows over past few years

Industry Position and Track Record Here one asks where the company stands in the peer group. Most people want to invest in sector leaders only and believe that only these create multibaggers. I beg to differ here. There have been many instances where the sector leaders have reached such a big level that there might not be too much space to grow? Here the smaller nimble players with some kind of advantages make smart choice for investing. And whether the company we want to invest in is growing at higher than industry average? If so what seperates it from others? Any advantages/niche? GROWTH PROSPECTS: This should has been covered earlier in fundamental analysis itself so does not need too much elaboration. But I would be wary of companies which keep growing their profits without significant increase in the sales figures. VALUATIONS I think all of the above factors may be considered in evaluating the company and then the valuation part begins? What kind of valuation am I paying for getting the business? Is there some flawed market perception which is giving me a chance to participate in companys growth at a very cheap entry point? What is the status of the general market mood? Is it a bear phase/bull phase or sideways market? What kind of market cap the company has and what kind of opportunity the company has to grow a few years down the line. And while looking at market cap it is very essential to look at the Enterprise Value because only market cap is often a factor which is misguiding(. E.g Textile sector stocks) THE ART OF VALUATION:

VALUATION ART #1 Mr D: All your stock picks are good but I can't help observing almost all of them are processor-type stocks. Processor-types? What do you mean? Most of these are strongly differentiated businesses with management having a good track-record at the helm - Mayur Uniquoters, Astral Poly Technik, Suprajit Engineering, Gujarat Reclaim, Vinati Organics, Balaji Amines. They have been doing well too. Mr D: Ya. But all seem to be taking in some input, processing that and selling the output. Not much value-addition don't you think?

This time I am stumped. Even though I was always looking out for strongly differentiated businesses, I had to admit I hadn't thought about things deeply enough. I countered, as long as these are growing strongly and are obviously under-valued why shouldn't I be allocating more capital there? Mr D: Maybe you should examine what is the valuation range accorded to processor-type businesses Frankly till that moment I had invested zero time on finding out for myself practically - what kind of valuations Mr Market awards different kind of businesses. Let alone spend time thinking about it and the why's? And I was already completing 3 active years in the market (`close of 2011, I think), had read all the Must-Have-Investing-Books, and been turning dozens of stocks! Please tell me what's the range for my processor-type companies. I pleaded. Mr D: Just check. It's rare to find Processors crossing 1-1.5x Sales in their lifetimes. And do we have examples of businesses that add-value. Haven't you noticed Piramal Health being acquired at 9x Sales. There's a clue there! What a clue that was, Sir! We got hooked to the next refinement in our Separating the Wheat from the Chaff. We graduated from trying to identify "strongly-differentiated businesses" to identifying those with "High Business Quality". --------------------------------------------------------------------------------------------------------We started thinking differently about businesses. Even with most things being equal, we realised there ARE a few things that mark out businesses as significantly more value-added, if you like. We graduated to slotting businesses according to business Quality. B Category - Balkrishna industries, Gujarat Reclaim, Suprajit Engineering A category - Mayur Uniquoters, Astral Poly Technik A+ category - Ajanta Pharma, Poly Medicure, Kaveri Seed, PI Industries --------------------------------------------------------------------------------------------------------I can't think of any other input that has had as dramatic an impact on our Capital Allocations, and subsequently Portfolio Performance, as this one single input. VALUATION ART #2

High Conviction vs High Undervaluation. Right! Getting to grips with "High Conviction" was easy for us. All of us were capable of putting in enormous amount of homework/dig up data/local scuttlebutt/field reports to establish that. Hard work no doubt, but simple enough. No ART in that . Getting to grips with "High Undervaluation" was not so simple. This was mostly the ART part! How do I decide which business is intrinsically more valuable? It is easy for me to KNOW a ~5-6 P/E, ~30% RoE ~30% grower is a steal! But it gets more complicated when anything is available >10x - say 12x and 15x or more. Mr D: Well, historical valuations do provide some pointers. But it is far more enriching to think about it from a buyer of the business perspective. Suppose someone has the 5000 Cr needed to buy out an entire business, which type of business is he going to value more? Is he going to value and pay more for Mayur or Astral or Ajanta Pharma or Poly Medicure or PI industries or Kaveri Seeds? Think about it, and there lies the clue! And you will not find the answer from your Excel spreadsheets/ratios mind you. (He knew about my exhaustive number-crunching excels ) --------------------------------------------------------------------------------------------------------In many cases some of these businesses were growing splendidly. Some of them outstripped others just by the phenomenal growth they were recording. But if we were to have say all things being equal (say Execution track, Growth record, Management pedigree, Financials), two things became clear immediately: 1.The lesser the number of variables in the business, the greater are its ODDS of delivering consistent business performance. In essence, the more predictable a business is, the more valuable it is. 2. The higher the intellectual capital brought into the processes, systems and by extension the products/services of the company - the more valuable it is. --------------------------------------------------------------------------------------------------------No marks for guessing now that we started seeing why a PI industries should be much more valuable than the 12-15x it used to quote at. Same goes for a Poly Medicure at 12x or a Kaveri Seed at 10-12x, and an Ajanta Pharma at 12x!!

Q: When do we say a particular stock is fairly valued/richly valued? A: Some comments from my side. I will try to use ValuePickr Portfolio companies as examples. See if these help 1. Balkrishna, Suprajit, Gujarat Reclaim - are all well-managed manufacturing companies. With strong, capable managements that have demonstrated great long term record. However these are what I would call Category B businesses. There is cyclicality in demand, some years are pretty good, some years are tough, margins do come under pressure. Overall things sort of even out decently achieving kind of 20-25% CAGR growth. But if you think about it, visibility is poor beyond the near-to-medium term. Think about how Mr Market prices these kind of companies. [Current Edit: If I remember correctly, all above were quoting ~10x or thereabouts then, and we recommended an EXIT as we saw imminent deterioration in business performance and found Valuations over-priced] --------------------------------------------------------------------------------------------------------2. Then there are what I would call Category A businesses. These are much more predictable. Size of opportunity is big. Demand visibility remains strong, you don't see a pattern of cyclicality and you CAN see them clocking higher growth rates for a number of years into the future. Mayur and Astral may fall into this category. Think about how Mr Market prices these kind of businesses. Is there a discernible difference in business quality between these 2 categories? [Current Edit: If I remember correctly, all above were quoting ~12x or thereabouts then, and we recommended a HOLD. We anticipated steady business performance and found valuations fair] -------------------------------------------------------------------------------------------------------3. Then there are Category A+ businesses. There is significant intellectual property involved. Once a certain size/profitability is reached and you have a decent track record established, usually these kind of companies go from strength to strength. Can you see an Ajanta Pharma or a Poly Medicure there. Why not a PI industries? Perhaps a Kaveri Seed Company can reach there?? How does Mr Market usually price these kind of companies??

How are the odds of business performance stacked for these companies?? If you can see that difference clearly - that should give you some clues to differentiating among these businesses. And therefore buy, hold or sell clues too! if you can say whether Mr Market is NOW (12 months forward, 24 months forward) valuing them cheaply, fairly or richly - w.r.t. that future picture. [Current Edit: If I remember correctly Ajanta and Poly Medicure were quoting ~12x or thereabouts then, and we had recommended a BUY. We found these much Undervalued] -------------------------------------------------------------------------------------------------------It is an ART form - BUT, the more stronger that ODDS (probable business performance) picture for you, the more parallels you can cite from studying Mr Market's preferences, the more businesses/stocks you get familiar with - the better will be that Feel, and we believe the better will be your Calls. VALUATION ART #3 Mr D: Time has come to become more aggressive. It's not enough to sort your businesses into categories. Even within categories there is that one which stands apart, you have a hunch probably is by far the best. You have to pit your Portfolio picks against the other one by one, rank them all the way down. Now this was getting interesting and tough. We were being really challenged and this got us thinking real hard. Among Category A, we had to choose between a Mayur and an Astral for the longer term. Remember that discussion (Check Mayur Uniquoter thread around Sep/Oct 2012, for pointers). Similarly we had to rank Poly Medicure, Ajanta Pharma, PI Industries and Kaveri Seed in category A+ businesses. We evolved the Conviction Rating (CR) and Valuation Rating (VR) models guided by Mr M as illustrated in our Capital Allocation Framework. We modeled CR on 5 parameters - Business Quality (BQ), Management Quality (MQ), Fundamentals (FM), Industry Position & Track Record (IPTR) and Growth Prospects (GP), and assigned weights to each. --------------------------------------------------------------------------------------------------------We went on to sub-parameterise each of BQ, MQ, FM, IPTR and GP that allowed us to think more deeply about why one business may be ahead of the other. I really needed this logical breakdown effort to think more

intelligently/deeply/comprehensively about businesses and found it extremely rewarding - because for the first-time many incremental aspects (that MUST be included) got ingrained consistently into my thinking/decision-making (via the modeling ). In no particular order : such as Equity dilution track, ability to fund growth, reducing debt with growth, incremental return on capital, RM volatility correlation to OPM, consistent reduction in working capital, management depth, attractiveness as an employer, self confidence - doing things differently, fair compensation, sector attractiveness - market fancy, and the like. --------------------------------------------------------------------------------------------------------We presented our full-blown model to Mr D within a month. He was pretty impressed and complimented us on the novel way in which we had attacked his challenge with gusto. I remember he said we had exceeded his expectations , but this is only a good start, no more. All the credit for the modeling goes to Mr M - without him we couldn't have done some justice to Mr D's challenge in so short a time! Mr D: We are not done yet. Every time you have a new prospect for the Portfolio, it must find its own slot/ranking at least one notch above the least ranked. It has to dislodge at least one of the existing - adding to the bottom of the pile, isn't much use, right . This seemingly innocuous challenge (new entrant must dislodge at least one business from current perch on the ladder) perhaps has been the most rewarding for us. While our mental models may yet be half-baked, this one test has ensured the quality of ValuePickr Portfolio hasn't deteriorated, not yet at least . Never cease to be amazed by Mr D! His sophistication and his clarity! His neverwaning enthusiasm to see folks like us reach the next level. --------------------------------------------------------------------------------------------------------We had made a good start. This is a PROCESS and we had just got started on an exciting process . Refinements are incremental, we have miles to go! Everyday there is new learning. Repeating the process over and over again, having the discipline to stick to this regimen, doing it every time with full honesty and integrity (no lip-service please) - maybe there lies the clue to UNDER-PAYING!! Consistently!!
Origination of A+, A, B Kind of companies

I had sent out a query to some senior investors. Here's the query and a brilliant throught-provoking response received from a very respected senior and VP wellwisher. --------------------------------------------------------------------------------------------------------Sir, Need guidance - to take our ART of Valuation discussion forward. [Link] How do the best investors think about the right valuation for an emerging business (and therefore the gap) before consensus emerges about that business in the market? --------------------------------------------------------------------------------------------------------In Mr M's words I sort of mentally slot where the stock belongs to - what I call as (C) Laborious stocks (B) Average stocks and (A+) Smart stocks. The origin of doing so has something to do with school or hostel days where all of us have classmates of different types. You have very studious and extremely hard-working guys who generally do well in a class directly proportional to their study hours, night-out effort and time. Rank toppers & gold medalists generally come from this segment. Most disciplined & regimented guys also come from here. Some of the dumbest guys are also placed here because of family & peer pressure etc. they keep slogging with poor results. All these are Laborious stocks Type C. They typically constitute 20-25% of the universe. Then you have guys who are average studying types, will make same mistakes whenever faced with a googly question in the exam or viva. General tastes, fashion, fads etc. You wont find any Sachin Tendulkars here. These are Average stocks Type B that typically constitute 60% of the universe. Then you have few who study little but are actually much sharp, fast grasping power, excellent subject understanding of fundas and output they deliver in relation to the inputs gone in . Im referring to only fair study means, no shortcuts or hanky panky stuff. These are Smart stocks Type A+. They may not be rank toppers and sometimes they can even be laid back but my experience shows they have done fairly well in life (not always in conventional sense of the word). May be when you think back, youll find some real life examples.

It is this Type A+ Smart stocks that I always look for when scanning emerging stocks that are yet to arrive (in terms of markets institutional discovery and consistency of results) but have some advantage. Scale up, Network effect and expanding of moats are easier to achieve with this Type C stocks. Pardon my saying but most of your ValuePickr stocks are the Laborious types including Manjushree, Vinati, Mayur, Balkrishna, GRP, Indag, Astral etc and even Kaveri that you are putting in A+ category. There is nothing wrong in being with laborious stocks and with right traits they make very good money so long as they preserve their traits just like gold medalists and most disciplined guys display. Mayur is a case in point. HDFC bank is a very laborious stock and very disciplined at that, so they can be really rewarding if you find them early and they themselves dont goof it up. Ajanta Ill not comment as I dont understand it well. I can slot PI in Type A+ where results can be disproportionate. Last year, Alembic was a very easy Type A+ and we made an easy kill there, doesnt always happen. Two Type A+ that Im betting on at the moment are JB Chemicals and Accelya Kale, though from much lower levels. One Type A+ where Ive probably gone wrong is IL&FS Investment Managers. While dealing with Type A+ Stocks, one important caveat is that management quality & integrity should not be suspect. Second is when analyzing such a stock, we should be looking at the outcome of big would-be picture. Third is we should have a handle on the right metric to value such a business, not necessarily the PE or PB. -------------------------------------------------------------------------------------------------------The term Processor stocks never occurred to me thus far, but its a nice way of looking at it and they are a subset of Laborious stocks. Discl: I have no position in any of the stocks mentioned above, except for the last 4 named stocks. On Laborious stocks, to take the cricket analogy forward, I'm reminded of Australian fast bowler - Glen McGrath who can keep bowling the same outside the off stump nagging line to the batsmen the whole day - so disciplined and so immaculate. If VP stocks are those Glen McGrath, I don't want to give an impression that these stocks will not be good vehicles to ride, as historic CAGR shows they have given superlative returns, and may continue to do so by all means.
Donald -

My takeaway from this analogy is that we should look for companies which have laid the building blocks for disproportionate future growth. Laborious stocks

will produce a rupee worth of incremental growth for the extra rupee of incremental input. It is not a one to one relationship but an extra rupee wouldn't produce two rupees of incremental growth in this category. Smart companies will produce disproportionate growth. This is a moat type company which will be able to rapidly expand because of its brand, IP or network.This is not very different to smart( moat as one is usually born this way) students who have a great grasp of the fundamentals and can combine diverse disciplines to answer complex problems. PI and Polymedicure clearly are in this group. Having built the base e.g Poly medicure can have a disproportionate growth if some large OEM order comes in. Another stock to be included in this category is Amararaja. It has done the hard work of building a dealer network and brand building. It is in the process of expanding capacities.It will capture a larger part of the market share with lesser incremental effort as in a two cornered fight, the spoils to the winner are disproportionate.