Checklist Mindmap

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Stock template INV theme Business model Product Segment breakup Key Parameters Reasons to buy Reasons not to BUY Prior probability Industry history Company history What all went WRONG IN INUDSTRY What can kill the idea Ecosystem Sh pattern Promoters XX FIIs & DIs Valuation AVG [2006] Current [TTM] PB EV/EBITA Owner Earnings ~ = EBITA EBITA excluding Profitability BS analysis Working capital See CF Analysis Debt D/E = leverage = Business model Why Re-rating See key parameters Why Not something else % allocation When to sell Portfolio aggregation risk Mental models Guidance Peers Industry History ContrarianValueEdge.com

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Transcript of Checklist Mindmap

  • Stock template

    INV theme

    Business modelProduct

    Segment breakup

    Key Parameters

    Reasons to buy

    Reasons not to BUY

    Prior probability

    Industry history

    Company history

    What all went WRONG IN INUDSTRY

    What can kill the idea

    Ecosystem

    Sh patternPromoters XX

    FIIs & DIs

    Valuation

    AVG [2006]

    Current [TTM]

    PB

    EV/EBITA

    Owner Earnings ~ = EBITA

    EBITA excluding

    Profitability

    BS analysis

    Working capitalSee CF Analysis

    DebtD/E =

    leverage = Business model

    Why Re-ratingSee key parameters

    Why Not something else

    % allocation

    When to sell

    Portfolio aggregation risk

    Mental models

    Guidance

    Peers

    Industry

    History

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  • Segment breakup

    Revenue mixProduct wise [FY14]

    Other

    EBITA mix

    Capital employed

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  • Business model

    Quality

    Pricing power

    Competitive advantageScale, capacity

    Access to skilled labour

    Capital intensive ?

    Bullet proof capital structure?

    Debt/EBITA

    Debt/4yr avg OCF

    Debt/4yr avg FCF

    Debt repayment schedule

    (EBITA+ interest )/Interest

    Porter 5 forces

    Entry Barriers

    Brand power

    Economies of scale

    Easy/difficult for competitor to replicate

    Does it make life difficult for competitors?

    Environmental issues

    Intensity of competition among existing players.

    Threat of substitutes

    Bargaining power of customers

    Bargaining power of suppliers

    Product level economics

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  • Product [Business]

    Growth

    Consistency

    LT

    Durablility

    Predictability

    No material growth Equities = Bonds

    Very HIGH growth NOT required

    Certainty matters MORE over HIGHER GROWTH

    ROCE

    Capex + Working capital

    Lower the better

    Avoid businesses with Both HIGHCapex

    Working capital

    Strong entry barriers

    High RoCE

    Re-investment potential

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  • Key Parameters

    Growth Scale of opportunity

    Valuation

    EV/EBITA [TTM]

    Core EBITA FY14

    PB

    Ready to hold for 5-10 YRSYes

    50% decline in price after 3 yrs

    EBITA

    Implied EV

    Current EV

    Key Risks

    Price Risk

    Business Risk

    Mgt Risk

    What will drive share price

    Margin expansion

    PE expansion/Contraction

    Revenue growth

    Market perception

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  • People

    How to judge mgt

    Objective

    Capital Allocation Incl FA + Working capital

    Capital distribution [Div]High Payout ratio, ROCE & Growth

    High quality business

    Good ROE over a PERIOD OF TIME

    Subjective INTERVIEW

    Vision

    Size of opportunity

    Threat

    Mgt

    Integrity

    Probably OO 2 type operator

    Basant rule: Innocent till proven guilty

    Red flags

    Competency Operating skills

    Vision

    Execution

    Compensation

    Good business High probability of good mgt

    Remuneration

    Bad quality business High probability of bad mgt.

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  • Strong competitive advantage

    Gross profit

    Capacity utilisation

    CCC

    1999-2002

    2003-09

    2010-14

    2014

    Receivable days

    2002-08

    2009-14

    2014

    CCC = Cash conversion cycle

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  • Reasons to buy

    Other positives

    Strong competitive adv

    LT Trends

    4Ps

    People

    Product

    Potential

    Predictability

    Pain/Problems business solve

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  • Reasons not to BUY

    Other negatives

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  • Other negatives

    What went wrong in past

    Possibility of equity dilution

    No history of earnings power

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  • What can kill the idea

    Do Pre-mortem

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  • Profitability

    8 Y AVG Div Payout ratio

    ROIC [4yrs avg]

    EBITA

    Asset turnover

    ROIC

    SpreadROIC - Interest rate

    Derived ROEROIC + Spread * Debt-equity ratio

    Capacity

    1997-2004xx

    2005xx

    2007xx

    2008-11xx

    FY 14xx

    Capacity Utilisation

    1997-2001xx

    FY03-10xx

    FY11xx

    FY 14xx

    Cash flow analysis

    Du Pont analysis [4yrs AVG]

    PBT breakup

    EBITDA marginxx

    Depreciation % salesxx

    Interest % salesxx

    PBT Marginxx

    Asset turnover

    xx

    FY14

    15 yr AVG

    Pre-tax RoAxx

    PBT/Total assets

    Leverage [Assets/Equity]xx

    FY14 =1.8x

    Pre-tax ROE AVG42%

    Tax rateBook tax rate34%

    Cash tax rate30%

    Net marginx%

    Margin analysis

    Sales CAGR

    FY04-14xx

    FY09-14

    FY11-14xx

    USD terms

    FY04-14xx

    2009..14 = xx%

    FY11-14xx

    ASP

    FY05-11x

    FY99-2002

    FY97-98

    INR USD

    1993-97INR 30-36

    1998-2011INR 40-48

    FY1253

    FY1358

    FY1460

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  • Margin analysis

    EBITDA margin

    Gross margin

    FY 99-2001xx

    FY03-10xx

    FY12-14xx

    Accounting adjustments

    Emp cost

    FY02-11 avg

    FY12-14

    Emp cost CAGR

    FY04 to 08

    Capacity

    Core sales

    xxx

    FY09 to 147% CAGR

    Capacity

    PowerFY99-2010xx

    FY11-14xx

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  • Gross margin

    FY 99-2001

    FY03-10

    FY12-14

    Reason Gross margin

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  • Ecosystem

    State of labour

    Regulations

    SuppliersSubtopic 1

    Customers

    Changes in technology

    Environmental issues

    Exposure to inflation

    Is it a win-win situation for ecosystem

    Society trends

    Distribution channels

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  • History

    1995

    1997

    1998

    1999

    2000

    2002

    2004

    2008

    2014

    2012

    2011

    2010

    2009

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  • Cash flow analysis

    NWC

    Receivable days

    FY01-08

    FY10-14

    FY 14 xx

    Inventory

    FG

    RM days

    FY 01-07 xx

    FY08-13 xx

    FY14 XX

    % of sales

    FY01-08 XX

    FY11-14 XX

    FY09 & 10 XX

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  • Mental models

    Working for business

    Working against business

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  • Other positives

    Detailed Annual report Since 1999

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