You are on page 1of 5


Treat this as the first page of your assignment

Course Name: AMGT
Assignment Title: Equity Analysis Checklist
Submitted by: Group 12
(Student name or group name)
Group Member Name PG ID
Vaibhav Doshi 61510440
Abhishek Rastogi 61510514
Surabhi Dua 61510687
(Let us not waste paper, please continue writing your assignment from below)
1. Country of operation
I. Is the economic, political and legal environment in the country stable and conducive to demand growth?
Countries that are going through demographical changes such as India offer unique opportunities. For
e.g In India, companies in the healthcare sector have huge growth potential in the coming years,
because of the increasing population, increasing health awareness, availability of doctors, increase in
the disposable income of consumers, increasing amount spend on insurance coverage etc. from Legal
perspective a country in which contracts are enforceable and laws are investment friendly is likely to be
helpful. Political factors mainly determine to what extent a government participates or interfere in the
economy. Businesses favour a stable government with fewer regulations in the economy. A government
that is transparent and promotes free market economy is favoured. We should also consider interest
rate and inflation to consider general demand environment in the economy.
2. Competitive Advantage
a. Industry Structure
II. Are we in the right industry- assess using Porters five forces model?
Buffet in his 1985 letter said following about choosing the right industry-A horse that can count to ten
is a remarkable horse not a remarkable mathematician. Likewise, a textile company that allocates
capital brilliantly within its industry is a remarkable textile company but not a remarkable business.
Porter Five forces analysis is essential to understand the structure of the industry and to determine the
potential profitability in the industry:
1. Bargaining power of Supplier: This is determined by the nature of the product if it is capital
intensive / technology based or a commodity product. Number of suppliers for a given input or a
raw material also determines the bargaining power of suppliers. Fewer the suppliers, more is
the bargaining power enjoyed by them.
2. Bargaining power of buyers: If the cost of switching for buyers is low, then they enjoy huge
bargaining power in the market; implying a lower profit potential. If the customers are
fragmented and there is not much concentration in terms of number of buyers, then the buyers
have no power in determining the market price.
3. Competitive Rivalry: In a concentrated market, pricing power mainly lies with few players, where
as in a fragmented market, prices are not driven by any individual or a few group of individuals.
Competitive rivalry is also dependent on factors such as customers loyalty towards competitors
product and cost of leaving the market for the existing players.
4. Threat of Substitution: Larger the number of substitutes more is the bargaining power of the
buyers. Thus, if buyer has low switching cost because of the presence of various substitutes,
then such industries tend to have a lower profit potential.
5. Threat of New Entry: If existing players in the industry have huge economies of scale, use highly
intensive technology in terms of high fixed costs and low variable costs, have huge distribution
network and low supply chain costs; then these companies definitely enjoy competitive edge
over the new players and act as sustainable barriers to entry.

III. Does it fall under funds area of circle of competence and are the growth rates in the industry

Buffet has empahsised that to be a good one investor one does not need to be expert on every
company. We need to only evaluate companies within our circle of competence. While the size of circle
of competence is not very important, identifying the boundaries of the circle of competence is very
important and our fund would classify every company as In the circle of competence, out of circle of
competence ( e.g health care and high tech) and Too hard - businesses that show signs of economic
moat but we need to spend a lot of time and effort to evaluate. With warrant buffets concept of area of
competence we would like to check growth of the industry. A company seeking a sustained period of
spectacular growth must have products that address large and expanding markets. While we are a value
investor we cannot ignore the growth aspects of the industry- to make strong long term returns if the
industry is compounding at higher returns are better, further the industry structure deteriorates when
growth slows down.

b. What is the source of the companys edge
IV. Does the company have an economic moat as suggested by warren buffet?

Moats are structural business attributes that enable companies to generate high return on capital on a
consistent basis. Based on readings from Berkshire Hathways annual letter following are some common
sources of moat
6. Network effect- This refers to a situation when adding more members in the network makes it
stronger than the competitor and attracts more business because of the same reason. E.g.
commodity exchange business. In commodity exchange business an addition of customer
creates liquidity and hence attracts more customers.
7. Intangible assets: These include licenses, patents and brands. Since these are difficult to imitate
they are very effective tools in countering the competition. E.g. Fevicol brand. Good brands beat
the competition outside the product functionality and hence are a source of sustainable moat.
8. Cost of switching: Higher cost of switching are a source of moat and competitive advantage.
These are related to the additional effort, time and monetary costs involved in switching to
another product. E.g after installing the flexcube- the flagship banking product of Iflex, banks do
not want to change their banking software.
9. Cost advantage & Greater Scale: Companies create cost advantages by creating wide
distribution networks, large manufacturing capacities, control over resources and better
processes e.g Tata steel. Lower costs are source of competitive advantage
Please note that having multiple sources of moat is better than having just one and greater the moat
lesser the business dependent on superior management. We would also use the VRIN frame work to
understand the competitive advantage. For a company to generate above average returns, it is
important that the competitive advantage the firm enjoys be sustainable and be non-substitutable. The
VRIN framework (valuable, rare, imitable, and non-substitutable) defined by Barney (2001), helps
analyze whether the value creating strategy used by a company is indeed different from that of its
competitors and whether can be easily replicated.


V. Does the company combine customer captivity with pricing power?
Warren buffet in one of the interview said
that the most important decision in evaluating the business
is evaluating the pricing power. Companies that keep to keep current customers and (possibly) attract
new customers, on profitable terms superior to those of ones competitors with new products better
service, better value proposition have low cost of customer acquisition and high pricing power. This
results in better profitability. Further this pricing power can provide significant hedge against inflation
VI. How would you rate the Management based on integrity? How are they instrumental in sustaining
competitive advantag.
Buffet says
that he looks for three things in an individual energy, intelligence and integrity.If they
lack integrity then do not bother with evaluating the other two. We would look for demonstrated
track record of management for integrity.

Managers World over are judged on three parameters - operating the assets efficiently, allocating
the capital correctly and conducting themselves with integrity. However in line with buffets
philosophy,we would look for integrity first. Over the longer term in buffets strategy of avoiding the
lemons choosing people who are honest is very critical aspect of investing. To sustain a competitive
advantage management should also demonstrate characteristics highlighted as per the Adam Bryant
the author of the book The corner office management (refer to annexure I).

Annexure I- To sustain a competitive advantage we believe they should use should have following
characteristics- As per the Adam Bryant the author of the book The corner office management.
1. Passionate curiosity: (the best student; relentless questions; student of human nature;
infectious state of fascination of the people and systems around us). This quality will help them
consistently question themselves to maintain and improve the competitive advantage
10. Battle-hardened confidence Do they fall under the sweet spot between confidence and
humility .This reflects ability to handle cycles that management can exploit to consolidate the
competitive advantage.
11. Team smarts- This is an organizational equivalent of street smart individual. This will help them
institutionalize the competitive advantage.
12. A simple mind-set - Management teams and organizations need to know how to priorities
and to distill a lot of information into what are most important. Charlie Munger said that if
something is not worth doing, it is not worth doing well. This will help the organization focus on
key priorities that ultimately lead to sustenance of competitive advantage.
13. Fearlessness: In business context this means having the confidence to shake things up a bit.
Even though businesses are running fine the organization and management is willing to take the
risk to get a better solution to stay ahead of the game.