A Value Operations White Paper - April2013

7/30/2019 A Value Operations White Paper - April2013

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Value Operations 2013

This report was prepared by Value Operations and services Pty Ltd. This document

has been prepared for the purpose of providing general information, without taking

account your particular objectives, financial circumstances or needs. You should

obtain and consider a copy ofinformation kit relating to the fund before making

decision to invest. While the information in this document has been prepared with all

reasonable care, neither Value Operations & Services or Aziz Dodhiya makes any

representation or warranty as to the accuracy or completeness of any statement in this

document including forecasts. Neither Value Operations & Services or Aziz Dodhiya

guarantees the performance of the fund or the repayment of any investors capital. Tothe extent permitted by law, neither Value Operations & Services nor Aziz Dodhiya,

including their employees, consultants, advisers are liable for any loss or damage

arising as a result of reliance placed on the contents of this report. Past performance is

not indicative of future performance.

A Value Operations Private Fund white paper

April 2013

A Value Operations Fund: A portfolio of extraordinary businesses of India

This white paper provides information to the professionals, part time and first timeinvestors to understand how the chief investment officer investigates investmentopportunities for their clients.

By Aziz Dodhiya

Disclaimer.


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What future does Bajaj Auto and Hero Motocorp holds for itsshareholders?

We have shared our view on the Bajaj Auto on our recent blog. This time we will tryto add more bolts to our investigation and also look into the Hero Motocorp business.

For investors who are looking for the exposure in the two wheeler businesses, whereprices of many had come down from its 52 week high, Bajaj Auto and Hero Motocorpare worth to investigate further. The outcomes, however, are likely to be binary.Either a big win or a big loss and little middle ground will be the result of forayhere, so be sure to seek personal or professional advice.

When we talk about two wheelers market in India, suddenly it reminds us about thestory of India shinning. The migration of the families to middle class and from middle

to upper middle class in last one decade has changed the whole canvas of India ineconomic terms. Consensus report says that eleven years ago only 12% of theIndian families use to own two wheelers and that number has jumped up to 21% bythe 2011.

There are more than half a dozen businesses competing in this sector as manyanalysts think that there is still a room to grow. By average the industry is growing at13% every year for the last one decade and is expected to grow by the same incoming decade.

The major and the oldest players in this sector are the Bajaj Auto and Hero Motocorp(earlier it was Hero Honda). I still remember those old television advertisements and

song, Yeh zameen Yeh asmaan, hamara kal hamara aaj and desh kidhadkan

Though there are so many players in this segment, Bajaj auto and Hero Motocorptogether holds more than 75% of the Indian market. They do have big competitiveedge on their rivals which is its presence in the market for a long time. Almost threegenerations of Indian households are their loyal customers.

Now days it has become tough to maintain their share in the market as we find thatmany businesses are entering in this sector. There is a tough competition in themarket. Today if anyone wants to buy a bike then he/she has almost 5 to 6 options tochoose from in the market. Competition is good for consumers but not for the

shareholders of those businesses.

As competition grows you as a business owner loose the power of your productpricing. This results in less profits and lower return on the shareholders equity. Tokeep their returns steady these businesses have to invest in new technologies and intheir research programs and keep inventing innovative products to keep that edgeover their competitors. Eventual Bajaj Auto and Hero Motocorp will shed their marketshare due to increase in competition in the next decade. This is how businessesshape up.

On this note by itself we can end this column. But lets keep going as thesebusinesses have found other opportunities in this globe and are promising same

returns to its shareholders.


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If we look through the global perspective then it is not just India which is a shiningstar. There is many other developing and even fourth world countries which aregrowing fast and are looking promising.

Let me start with the Bajaj Auto, Value operations platform gives this business agrading of A1 in its Balance sheet quality and overall performance as a business.This grading gives us a green signal to do further investigation as it is an investmentgrade.

Lets have a look at the capital history of Bajaj Auto and find out how themanagement of this business has managed shareholders capital.

Capital History of Bajaj Auto

Bajaj Auto management had really managed well their shareholders fund. The veryfirst good thing they did was getting rid of those debts on their balance sheet.

The other most important thing to consider before investing is to check the cash flowof the business. It is important that managers of the business should be goodallocators of shareholders and business funds. They should always keep theshareholders interest first before making any decision.


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Cash flow analysis of Bajaj Auto

The management had really taken care of their cash flow. They have also managednot only to pay dividends but also had grown their dividends every year.

Many analysts are expecting a robust growth in their profits for the forecast years.They are optimist of those numbers on the basis of their growth prospects in the

exports. If we look at the sales for the year end 2012 then exports revenueaccounted 35% of their gross sales.

So far 2013 have been the worst year for the business. There are many factors toblame on. But the real question is, will it be crossing rupees four thousand Crore bythe financial year 2015?

It is impossible to predict the performance of any business. It is not also advisable toanchor those consensus estimates and take decisions based on it. As they changeevery month or even day.

We are to witness 0 5% growth in its net profits and in its revenues for the 2013. If

we do expect the same performance by this business for the year end 2014 then wevalue this business for Rs 1,604. If we anchor that consensus estimates are going tobe almost exact figures then we value this business for Rs 1,840.


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Also, Value operations value this business for 2013 to be Rs 1,390. With theexpectations of falling interest rate, inflation and steady Indian rupee we areexpecting its intrinsic value in range of Rs 1,604 Rs 1,840.

Bajaj Autos market price is currently trading within those estimate range.

On the other hand Value operations rate Hero Honda as a B1 grade in its quality andperformance rating. It is an investment grade and we can further do investigation.

Capital history of Hero Motocorp

The major difference between the Bajaj Auto and Hero Motocorp is in the estimatesof future profits by consensus. They are not that optimistic about its future profits.

We know that to the certain extent this business had damaged its competitive edgeafter leaving Honda. But you cannot ignore that one of the two bikes that sell in the

market today is of Hero Motocorp.

Hero Motocorp is under the process of building up its marketing strategy for exportingits products overseas where Bajaj Auto is already well recognised brand. The totalnumber of units they exported overseas represents only 3% of its total units sold inthe 2012 year.

They have still long time to go and catch it up with the Bajaj Auto. It would be also notfair to mention that product mix of Bajaj auto (two and three wheel products) givethem upper hand on Hero Motocorp.


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Cash flow analysis of Hero Motocorp

This is very interesting chart of how the cash flow was managed by the HeroMotocorp management. The good part about this business is that they generatedsurplus cash flow through their operations.

In 2010 and 2011 they paid dividends more than what profits they generated to its

shareholders. In other words they paid back some of the shareholders capital in away of dividends to them. It is very hard to comment on this matter whether it was inshareholders interest or not. As it all depends on individuals goals and expectationsthrough their investments.

We at Value operations do not like businesses giving us dividends bigger than its Netprofits or in other words return our capital back to us. It brings down business intrinsicvalue. We like to stay invested and look for businesses where its intrinsic value isgrowing. It tells us that management does not know or are not competent to allocateour funds to generate good returns within its business.

We value this business on its 2013 performance for Rs 1,427 and expect its intrinsicvalue to grow to Rs 1,527 for the year end 2014. The market price for this business istrading at almost its fair value today.


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Disciplined value investor obviously has to wait for justification and an alignment ofits signal from both the companys valuation and performance before plunging anyfunds into it.

Value operations private fund does not own any stock in any of thosecompanies discussed in this paper.

Aziz Dodhiya

(Chief Fund Manager)

A Value Operations White Paper - April2013

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