Factor screen Sector no

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 avg
RONW 10.5% 9.5% 13.8% 14.1% 14.3% 28.6% 18.8% 21.0%
ROCE
debt/equity (incl AP /
Accrued expenses etc) 0.6 0.5 0.42 0.78 1.3 1.1 0.82 0.47
Fixed assest T.O 0.7 0.7 1.1 0.9 1.1 1.4 1.6 1.5
W cap T.O 1.8 1.8 2.6 1.8 1.8 1.8 1.9 1.8
Inv T.O 2.3 2.4 2.6 2.5 2.4 2.6 2.55 2.20
Recievables TO 4.3 3.8 3.7 3.4 3.3 3.4 3.31 4.80
Total asset T.O 0.48 0.50 0.75 0.62 0.67 0.80 0.87 0.95
OPM ( EBIT/Sales)
NPM 10.5% 9.6% 10.0% 10.5% 12.1% 15.9% 10.5% 15.4%
Salesgr 6.8% 54.9% 6.7% 37.3% 46.7% 17.7% 12.2%
OP gr
NP gr -2.6% 61.3% 12.5% 57.3% 93.7% -22.7% 65.1%
Interest cost 8.6% 6.7% 2.4% 2.1% 3.0% 3.2% 3.1% 2.3%
Overhead % 42.1% 40% 33.5% 39.7% 39.7% 36.4% 33.5% 37.4%
RM Cost %of sales 42% 43% 34.0% 35.4% 38.9% 37.3% 40% 37.8%
Manpower cost 10.8% ### 7.8% 12.6% 12.2% 10.1% 10% 8.8%
Tax % of PBT 11% 8% 20.9% 21.1% 31.6% 21.4% 36% 8%
current ratio 1.39 1.54 3.0 3.2 4.0 4.0 3.4 4.4
Dividend ratio (DPS/EPS) 21% 21% 21% 22% 18% 23% 32% 22%
Depriciation (% of sales) 5% 6% 3.8% 4.3% 4.1% 3.3% 3.0% 2.9%
Avg Capex ( % of sales)
FCF (% of sales)
Net cash from ops/ net
profit
Investment / share
Sales 3249 3469 5374 5735 7877 11558 13609 15263
Seasonality analysis
Cash on books (Crs)
Interest income as % of cash
Key no brainer questions

Key variables (3-4) which control performance of the compay

raw material pricing
Demand from steel industry

Factors to track to know if company doing well

Company specific Key variables (Important and
knowable/predictable)
Factor 2005 2006 2007 2008 2009 2010
 comments

likely to head lower as new capacity needs to be added

steady
steady
steady, may drop a bit
asset turns improved due to improvement in FA turns

assume 10-11% normalised

avg maintenance capex is 6% of sales

for FCF take 2% out of margin. Normalized margin is 9-10%

net of debt is zero

Checklist - to be developed based on my and other's mistakes

Debt
Does the company have > 0.7 times debt (unless it is a bank / finance institution)
Will the company be able to finance/ renew the debt without equity dilution or bankruptcy
Is the debt non-recourse or recourse ?
Does the company have contigent / off balance sheet liabilities ?
Does the company need borrowed money for funding a critical aspect of the business ?

Valuation and growth

Does the company sell @ PE >20
Does the valuation assume growth in excess of the past or the same as past above average growth ?
Is the company not growing or likely to underdegrow due to competiton, poor economics or management
incompetence ?
Is there only 5 years of history of good performance, i.e is there insufficient past history of performance
Does the company have a 10%+ potential for long term growth (10+yrs)

Corporate governance
Is the management hoarding cash with raising dividend or reinvesting it ?
Has the management allocated cash rationally and returned excess cash to shareholders ?
Is the management putting cash in other non core areas which has no relevance to the core biz ?
What is the % of non core income (other than operations). Is it more than 10%, does it look fishy ?
Has the management been reprimanded by SEBI or other bodies. Does the management has bad governance
history with other firms ? (check watchoutinvestors.com)
Is the management lending excess cash to sister firms via loans and advance, sometime even below market
rates ?
Does the management make more than 3% of net profit as salary
Is the management buying or selling shares of the company?
Has the management does accquisitions in the past at high valuations and did they work out successfully ?
Has the record been good ?

Does the company have an MNC management which has worked against shareholder interests in the past ?

Competition
Does the company face intense competition in its segment from some new competitor ?
Does the industry have a history of intense competition in the past ?
Does the company operate in a segment which could see severe competition from a large competitor ?
Is the company getting impacted or will get impacted by low cost imports ?

Business economics
Is the company in commodity type biz with poor pricing poor and is not lowest cost mfg
Has the recent FCF or performance been due to bubble/ Cyclical high or am I looking at cylical earnings ?
Does the company operate in a business with poor ROE, high competiton, low barriers to entry and typical
commodity economics - i.e does it have sustainable competitive advantage
Does the company have product obsolesence ?

Are the NPM and Return on capital numbers comparable with other companies in the sector, if not why ?
Does the company have average ROE above WACC for 10 yrs ?
Does the company operate in an industry with ample growth opportunities ?

Portfolio setup
Will the company being analysed be impacted in terms of fundamentals and price by fairly same factors as
other ideas in the portfolio

General
Do all the stakeholders of the company benefit or is the company predatory with some stakeholder, for ex:
selling credit to poor customers
 Test of competitive advantage

One of Dominant firm in product or geo

segment ?
High ROE for last 10 years and the same
is being maintained ? If yes, displays
persistence of returns and hence CA

Does the company have customer or

production advantage
- analyse ROC and check if Margins >
10% of Asset turns in excess of 1.
- If high margins, in excess of 10-12%
then customer advantage, if high asset
turns then production advantage. If both
are high then both advantage.

Low entry / exits ?

Market share stability

Source of competivite advantage - production advantage / customer advanta

Strong competitive advantages create entry barriers for incumbents, preventing entry of competition and enables incumbents
Production advantage factors 1. Process economies (resulting in lower cost of production for
- resulting in moat (cost based incumbent)
advantages). Weaker than customer a. Indivisibility lead economies
based advantages expect in case of b.complex , linked activities
patents or government regulation (like c. learning curve process cost
licenses ). d. patent/ copyright/ R&D advantage
- indicator is high asset turns e. resource uniqueness
based advantages expect in case of
patents or government regulation (like
licenses ).
- indicator is high asset turns

1. Scale economies
a. In demand
b. Distribution
c. purchasing
d.production
e. R&D
f. Informational economies of scale such as in advertising would
give prevent new competitor

Customer advantage - creates more 1. Habit forming and High Differentiation - No. 1
durable competitive advantage 2. Experience goods (brand effect, trademarks) - No. 2
- more common, indicator is high 3. High switching cost (Lock-in) - No. 3 (for ex : change of
margins business software by a co. such as SAP ERP etc)
4. High search cost ( where it is diffcult, expensive and risk for
custom to look for alternative ) like case of doctor or lawyer
4. Network effect (related to switching cost - network effect
increases switching cost)

1. License
Government/ Regulation based advantage 2. Tariff / quota/ regulation
Moat analysis - does company has deep 1. Does co have multiple demand side advantages ?
competitive advantage or weak one ? 2. Does company has scale advantages - absolute advantage is
Customer advantages are more not necessary. Local or product specific advantages are enough
sustainable ! 3. Does the company has cost advantages with or without scale
Answer to these 3 questions decides whether competitive
advantage is strong or not

Franchise Analysis - Competitive advantage analysis ( part repeat of the previous tab
Key factors of competitive advantage Drivers
Barriers to entry 1. Patent
2. Governmental License
3. Consumer demand Preference (Brands / Trade marks)
Enduring Low cost position 1. Due to technology / Processes - not so enduring
2. Due to management skill - good but may not endure the
current management

Econmies of scale barriers 1.Economies of scale in demand

2. Scale advantages in advertising, Procurement, Distribution
3. Informational economies of scale such as in advertising would
give prevent new competitor

Switching costs 1. Switching cost to other supplier

2. Network effect - benefits are high in the current network ( like
telecom , e-mails, e-bay etc)

Distinctive capability analysis applied to specific market (product or geographic create the customer based or production based
Analysis of Distinctive capability for the firm
Type Description
Relationships with all stakeholder / systems / process / Knowledge
Architecture base
Distribution network / Customer relationships / plant / license
Strategic assets monopoly / natural reserve /Patents / Media Properties/ Network
Innovation effects / Switchinghistory
R&D / Innovation costs /NPD
Cost Enduring Low Cost position
Strong Balance sheet
Finanical strength
Brands / trademarks
Reputation

The value chain analysis can be used to identify the key distinctive capabilities and how unique the capabilites are and strengh

Value chain analysis Procurement Operations

DESCRIPTION
Key Strenghts
Key Weakness
Cost analysis
Differentiation
Value adds
 List of the drivers/ factors (internal / external ) for the Superior Economic returns ( ROE
Driver

Value driver Value factors Trigger

Sales Sales volume Y
Price and mix Y

Operating margins Operating cost Y

Operating leverage No
Economies of scale No

Re-investment rate Investment efficiency N

Asset intensity N
e advantage

dvantage / customer advantage factors

tion and enables incumbents to earn high returns

repeat of the previous table ) only to be read again
Analysis for the company
None
 Mainly due to scale

1. Economies of scale in demand

2. Moderate scale in purchasing and disribution

Low to moderate switching cost

er based or production based advantages

ability for the firm
Details for the firm

he capabilites are and strenght of the fit

Outbound logisitic Marketing

or Economic returns ( ROE > 15 % )
Influenced by

How much
Checklist

Economics models
Does the industry have good economics - a) High return on capital , Less price wars,
barriers to entry. Chk industry returns for last 10 years and see if the indsutry returns
have been high or characterised by high competition
Does the industry have scale - characterised by large competitors or a large no. of
small firm and intense competition - indicator of low Fixed cost and hence lower
competitive advantage
Does the company operate as monopoly / duopoly / intense competition
Is the industry RM intensive / sensitive ( 40-50 % ) total cost and hence has low
Variable costs - hence high operating leverage ?
Does the industry have high Capital intensity ( sales / FA+NWCA <1.5 )
Can the company increase prices freely ahead of inflation/ Does it have untapped
pricing power ( VV IMP )
What is the earning power of the company through the complete business cycle (level
of cyclicality )
Does the industry have a high degree of change and obsolesence ?

Are they regulatory or technology shifts happening in the industry which will migrate
value to a different set of industry participants ? Does it impact the company ?
What is the % of installed capacity being used ? Will the company require substantial
capex ?

Business model checklist

Is the Company a Low cost producer or among low cost producers (especially
commodity ), if yes why ?
Are the net margins higher than competition ? Why ?
Is the company strengthening its CA, if yes - how ?
Does the company have a recurring revenue stream
Is company gaining share in the industry profitably
Does the company have high concentration of sales with few customers
Does the company have a strong MKt/Sales organisation
Is the business model becoming less asset intensive and increasing the ROC
Does the company have high demand growth due to
a) growth in exisitng product/ market
b) growth in exisiting product / new market
c) growth in new product / existing market
d) growth in new product / new market
Is the company reducing the amount of capital invested ? i.e is the company freeing
up capital or increasing FCF
Does the company have investment which are expensed such as Advtg, R&D. how
effective have been these 'investments'
Does the business have intangible assets - brands, trademarks, patents, customer
relationship etc ?

Accounting checklist
Options grant as a % of O/s shares
Future dilutions due to ESOP
FCCB borrowing resulting in dilution (Indian companies)
Is sales booked agressively ?
Is sales got through liberal financing - AR is increasing as % of sales
Are earning managed by modifying reservers/ special charges ? - Retained earnings >
increase in book value
Does the management have aggressive pension accounting ?
Interest income as % of cash (looks correct ?)
do the provident fund charges look correct (PF amount / employee - compare with
other companies
Any MTM losses on the balance sheet or 'Shareholder' equity statements ? Due to
derivative instruments
Is the loan and advances too high and growing year on year ?

Does the company lease product on financial / operating leases on market terms ?
chk for losses in the loan portfolio (banks)

Knowledge economy models (creating consumer advantage)

Does the Business have network effects
Does the business have a lock in - once the product is bought the tendency to
continue is high
Are switching cost high
Is company increasing the service component

Management factors
Is the management rational in capital allocation . Does management allocate capital
well and above current rate of return. If the management has excess capital, is it
giving it back to shareholders ?
Is the management having integrity
Does the management discuss both negative and positives of the company
performance candidly .
What is the compensation levels in the co. Is the CEO/owner being compensated
heavily (cash or options?)
Does the management / CEO have substantial ownership in the company ?
salary as % of sales
related party transaction - are they harmful to the co ( rights offer, sale of promoter
owned ventures to the company at high price)
Tax as a % of PBT ( is it too low , < 15%, why ?)
Plans for cash ?
Has the management been reprimanded by SEBI or other such govt bodies ? Does
they have any past cases or issues in other companies ? - check google and stock
boards such as moneycontrol , TED etc
Is the cash held in foreign banks ?
Has the management done accquisitions in the past ? What is the track record of
these accquisitions ?
Has the management done restructuring and taken such charges on a regular basis ?

What is the management track record in the last 10 yrs ? Have they followed through
on their statements in the past ? How is their execution track record

Probability / options models

Does the industry have high level of change - results in a larger no of real options
Does management has capability of identifying and utilising the real options

Physcological models
Am I working with recency bais - giving more wieght to recent data ( check if the
projections based on recent data or averages )
Am I working with Hindsight bais - thinking that fact was obvious beforehand ( check
if the -ve factor was noted before hand )
Am I framing issues correctly and in different manners - trying to look at situation
using varying models
Is there a data framing bais - influenced by the way data has been presented.
Am I too overconfident on the situation - assuming over familiarity , associating
positive unrelated feeling, too high wieght to optimistic scenario ( familiarity due to
work / association with the industry )
Have I done probability analysis for all negative factors
Am I having too much loss aversion - overwieghing negative factor
Am I working with sunk cost mentality - trying to average down the cost
Am I slow in changing opinion - not responding to negative news
Describe negative thesis for the company

Bais from commitment and consistency tendency - Make this spreadsheet hence
committed to buy ?
Pavlovian association - correlation being considered as cause effect relationship
social proof bais - stock being recommended by various analyst
Incorrect / low weightage of existing/ new negative information or even positive
information
Status quo bais - unwilling to sell existing holding ( review discount to intrinsic value
and sell based on that )
False consensus bais : confirmation bais ,selective recall, baised evalution ( check all
information against you investment thesis and evalute objectively )
Have you questioned the consensus
Has the analysis been done with reverse thinking (working the problem forward and
backward)

Catalyst
Shift of demand/supply to favor company ( relevant more for commodity company )

Change in the business cycle / economic cycle- imp for commodity business
Regulatory changes
Management action - Buy back, Bonus etc
Asset conversion - buyback / LBO/De-merger/Accquisitions - critical if the business is
a holding company or reason for buying is discount to asset
Value creation through access to capital market on very favorable terms
Sale / buying of any asset
Unexpected earnings increase
Time - Catalyst if self assesment of CAP is higher than market. With time market
realises the higher CAP and will give higher valuation
(value - Poor management not interested in enhancing value)

Other models
What are the key no-brainer questions ?
Any combination of factor effects

Biomodels
Will the business survive/adapt into a niche or is it a dominant player
Does the business have practise evolution
Describe how the company operates as part of the ecosystem - dominant firm or
small firm in a niche ?
Hidden assets
Does the company have subsidiary which are carried at cost and is worth more
Does the company has real estate which is at cost and worth more
Does the company have investments which are worth more than the cost

Hidden liability
Forex/ derivative liability
ESOP liability
Pension liability
Equity dilution via FCCB
Contigent liability as % of Net worth and annual profit (concern ?)

Munger Model
1. Solve the big no brainer points in the thesis - find the key points of the idea which
define success/ failure for the idea
2. Use math to support the reasoning the supporting/ opposing points for the idea
3. Think the problem forwards and backwards - find causes which will cause the
company to fail
4. Use multidisciplinary approach - analyse the idea based on models on this page.
Any specific models point to a hidden factor not being considered and can cause it to
fail ?
5.Properly consider results from a combination of factors or lollapalooza effects

Other questions
Based on DCF what factors would improve the CAP and growth further
Based on DCF what factors will cause a deterioration in performance
List 3-4 reasons why the idea will fail ?

Failure analysis (list factors which will cause the company/idea to fail) - describe
High debt level
Cyclical high in terms of margin
Management competency
Competition
Remarks
Read AR/ Google to answer questions on various models

not much

duopoly in local, with threat of import

yes
yes

none

around 13-14% ROE

no

chk

chk
yes
no
chk
chk
no

a. existing product/ market

b. growth in existing product / new market

none
none

none
none
none

chk
yes
chk

no

no
no
no

appears so
yes

yes

chk
yes
chk

chk
yes, keeps swinging up and down
none ..being invested in biz

no

Not much change

NA
yes, partly. Fixing that by considering normalised earnings

no

yes
no

no
TBD
no
no
no
ROE not too high, needs constant capital to grow. Asset turns not high and hence 4-5% is maintenance
capex. Hence fresh capital needed for growth

possible
NA
no

TBD

no

no
yes. Consensus does not consider the improved performance

TBD

Yes
Yes
None
None

None
None
None
Possible

None

how will the margins develop ? Will it reman above 12% ?

improvement in margins and growth will improve valuations

yes, a bit
none, consolidated numbers being considered
no
no

none
none
none

foreign operation improve and scale improve. CAP unlikely to increase

RM pricing could hurt margins
Competitor analysis - update data from financial websites
Avg 5-10 yrs numbers
competitior names ROE NPM OPM D/E FA turns Wcap turns FCF/ sales Sales - CY NP - CY Sales Gr
(%)
g 5-10 yrs numbers
Profit Gr % share of Analysis of performance
industry
 INDUSTRY ANALYSIS - The shaded factor
contribute maximum to the competitive
advantage of the firm Y/N Remarks Points Key CA factor
ENTRY BARRIER - No. 1 Factor for Competitive advantage
analysis moderate entry barriers. However chinese competition has an impact
1 Asset specificity M High Y
2 Economies of Scale M High Y
3 Proprietary Product difference M Low Y
4 Brand Identity H Not much Y
5 Switching cost L low to moderate
6 Capital Requirement H High Y
7 Distribution strength L Low
8 Cost Advantage NA Moderate to high
9 Government Policy None
10 Expected Retaliation High
11 Production scale High
12 Anticipated payoff for new entrant Low
13 Precommitment contracts High ??
14 Learning curve barriers Moderate
15 Network effect advantages of incumbents none
No. of competitors - Monopoly / ologopoly or intense
16 competition (concentration ratio ) Duopoly
Total (average) ###
No direct supplier power. However companies in the industry are also price
SUPPLIER POWER takers as RM depends on crude prices
17 Differentiation of input N
18 Switching cost of supplier N
19 Presence of substitute Y
20 Supplier Concentration N
21 Imp of volume to supplier N
22 Cost relative to total purchase
17 Threat of forward v/s Backward integration L
Total (average) ###
BUYER POWER Moderate to high
18 Buyer conc. v/s firm concentration L High
19 Buyer volume L High
20 Buyer switching cost L Moderate
21 Buyer information H High
22 Ability to integrate backward N None
Total (average)
 Substitute product None, but a lot of competition
23 Price sensitivity H High
24 Price / Total Purchase Low
25 Product difference M low to moderate
26 Switching cost H low to moderate
27 Buyer propensity to Subsititute L ??
Total (average)
RIVALRY DETERMINANT High competition
28 Industry growth L Moderate to low
29 Fixed cost / value added M High
30 Intermittent overcapacity H High Y
31 Product difference M Low Y
32 Informational complexity M Low
33 Exit Barrier L moderate to high
34 Industry concentration low
35 Demand variability High
Total (average) ###
Total ###
Grand Total average ###

Low, Bad - 1
Med - 2
High, Good -3

Low CA = < 30
Med 30< , <50
High CA > 50

The Industry structure helps in identifying the critical competitive factors which have to be managed to create a sustainable CA

Industry mapping
Key segments Size Key companies in each segment
Single segment - graphite electrodes HEG
Key Demand Drivers Impact Remarks
Demand from steel industry High
Growth in international markets - germany / EU

Operational Risk factors

RM prices
Demand slowdown

Positive factors
decent balance sheet
Decent pricing stenght inspite of recession

Sell criteria : Imp ( define clear quantitative and qualitative

metrics )
Margins drops below 8% for 3 years
valuation exceeds 14 times earnings
Growth slows to 5% and margins drops with it for 2-3 years

Questions to be explored
What is the industry economics in india.
Why does this company have decent ROE inspite of being in a
moderately attractive indsutry
Valuation ( neutral ) actual
detail 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
PBDIT 0 0 0 0 0 836 792 1010 1128 1774 3187 3061 3321 16000 16400 17000 18000
excpl item & non operating inc.
Less :TAX 0 0 0 0 0 40 30 140 160 270 600 800 180 4191 4324 4491 4765
Less : Wcap change 0 0 0 0 0 1842 82 176 1050 1350 1800 1000 1400 -8700 0 0 0
Less : Capex 0 0 0 0 0 6752 138 270 2150 2381 2749 1204 3002 2354 500 500 1000
Less : Capex ( maint) ** 0 0 0 0 0 2186 430 530.2 1481 1853 2370 1584 2096 -7230 1505 1540 1610
FCFF- normal $$ 0 0 0 0 0 -7798 542 424 -2232 -2227 -1962 57 -1261 9455 11576 12009 12235
FCFF(Mn) 5 0 0 0 0 0 -1390 332 339.8 -513 -349 217.2 677 1045 19039 10571 10969 11625
shares ( mn) 0 0 0 0 0 1404 2802 2790 2726 3000 3398 3316 3154 3150 3150 3150 3150
fcff/ share #DIV/0! ### ### ### ### -5.55 0.193 0.152 -0.82 -0.74 -0.58 0.017 -0.4 3.0 3.7 3.8 3.9
fcff / share ( maint) #DIV/0! ### ### ### ### -0.99 0.119 0.122 -0.19 -0.12 0.064 0.204 0.331 6.0 3.4 3.5 3.7
discount ( 1.15 or 1+ WACC ) 1 1 1 1 1.1 1.2 1.3 1.5
NPV ( maint) -0.12 0.064 0.204 0.331 5.5 2.8 2.6 2.5

terminal value : note 1 24 Above FCFF should exclude income from cash if cash is being added back to valuation
Intrinsic value estimate 48
Equity value / share : note 2

Terminal value should be less

14 times FCF + excess capital

MICAP calculation
Terminal value 3 38 39 41 43
total = terminal value+ cum of value 4 47.4 51.4 56.3
MICAP years
current price

Notes :
1. FCF ( n+1 th year )/ Wacc - g Wacc : weighted cost of capital , g - long term growth / economy growth
2. Equity value = IV - ( LTD+STD-cash - cash equivalent ) + Non operating asset- ESOP value - contingent liability
3. Terminal value = current year NOPAT / WACC /(1.15 ^ no. of year)
4 cum of value = total of discounted fcff till year in question
5. FCFF adjusted for maintenance capex
$$ - adj for normal capex
** - capex for maintenance

cash/share 15.82 28.62 29.08 40.52 46.88

12.8 0.462 11.45 6.354
### -0.53 11.56 6.476

11.11
 plan
2015 2016 2017 2018 2019 2020
19000 19600 20600 21400 22600 24000

5056 5223 5497 5644 5946 6343

1000 -1000 0 1000 -1000 500
1500 -500 1000 4000 1000 1500
2645 680 1750 2960 1100 2670
12444 14877 14103 11756 15654 16157
11299 13697 13353 12796 15554 14987
3150 3150 3150 3150 3150 3150
4.0 4.7 4.5 3.7 5.0 5.1
3.6 4.3 4.2 4.1 4.9 4.8
1.6 1.8 1.9 2.1 2.4 2.6
2.2 2.5 2.2 1.9 2.1 1.8

is being added back to valuation

45 47 49 51 54 57
60.8 59.15 60.898 62.293 64.774 67.63
HIGH PROBABILITY - NEUTRAL

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
sales 3249 3469 5374 5735 7877 11558 13609 15263 80000
Sales Gr #DIV/0! 6.8% 54.9% 6.7% 37.3% 46.7% 17.7% 12.2% 424.1%
Operating cost 2413 2677 4364 4607 6103 8371 10548 11942 64000
% of sales 74.3% 77.2% 81.2% 80.3% 77.5% 72.4% 77.5% 78% 80%
PBDIT 836 792 1010 1128 1774 3187 3061 3321 16000
% Gr #DIV/0! -5% 28% 12% 57% 80% -4% 8% 382%
% of sales 25.7% 22.8% 18.8% 19.7% 22.5% 27.6% 22.5% 21.8% 20%
depriciation 175 198 205 246 321 377 410 440 2100
dep %sales 5.4% 5.7% 3.8% 4.3% 4.1% 3.3% 3.0% 2.9% 2.6%
dep % FA 3.6% 4.0% 4.1% 4.0% 4.5% 4.6% 4.9% 4.4% 10.0%
Interest 279 231 128 118 233 370 428 351 1200
% of sales 8.6% 6.7% 2.4% 2.1% 3.0% 3.2% 3.1% 2.3% 1.5%
Tax 40 30 140 160 270 600 800 180 4191
% of PBT 10.5% 8.3% 20.7% 20.9% 22.1% 24.6% 36.0% 7.1% 33%
% of sales 1.2% 0.9% 2.6% 2.8% 3.4% 5.2% 5.9% 1.2% 5.2%
Net Profit 342 333 537 604 950 1840 1423 2350 8509
% Gr #DIV/0! -3% 61% 12% 57% 94% -23% 65% 262%
% of sales 10.5% 9.6% 10.0% 10.5% 12% 15.9% 10.5% 15.4% 10.6%
wcap 0 1842 1924 2100 3150 4500 6300 7300 8700 0
Inc Wcap 1842 82 176 1050 1350 1800 1000 1400 -8700
wcap % of sales 56.7% 55.5% 39.1% 54.9% 57.1% 54.5% 53.6% 57.0% 0.0%
Inc Wcap % of inc sales 56.7% 37.3% 9.2% 290.9% 63.0% 48.9% 48.8% 84.6% -13.4%
capex 6752 138 270 2150 2381 2749 1204 3002 2354
Capex as% of sales 207.8% 4.0% 5.0% 37.5% 30.2% 23.8% 8.8% 19.7% 2.9%
Capex ( Maint ) 2185.7 429.62 530.2 1481.2 1853.4 2369.8 1584.1 2096.2 -7230
Capex ( Maint ) % 67.3% 12.4% 9.9% 25.8% 23.5% 20.5% 11.6% 13.7% -9.0%
fixed asset 4910 4966 5060 6160 7191 8140 8344 9946 21000
Sales /FA 0.7 0.7 1.1 0.9 1.1 1.4 1.6 1.5 3.8
Debt
EPS 0.2 0.1 0.2 0.2 0.3 0.5 0.4 0.7 2.7
Cash
TA 6752.0 6890.0 7160.0 9310.0 11691.0 ### ### ### ###
Sales/ TA 0.5 0.5 0.8 0.6 0.7 0.8 0.9 0.8 3.8
ROC 5% 5% 8% 6% 8% 13% 9% 13% 41%
cash / share
No. of shares 1404 2802 2790 2726 3000 3398 3316 3154 3150
 Projections
2012 2013 2014 2015 2016 2017 2018 2019 2020
82000 85000 90000 95000 98000 103000 107000 113000 120000
2.5% 3.7% 5.9% 5.6% 3.2% 5.1% 3.9% 5.6% 6.2%
65600 68000 72000 76000 78400 82400 85600 90400 96000
80% 80% 80% 80% 80% 80% 80% 80% 80%
16400 17000 18000 19000 19600 20600 21400 22600 24000
3% 4% 6% 6% 3% 5% 4% 6% 6%
20% 20% 20% 20% 20% 20% 20% 20% 20%
2150 2200 2300 2350 2400 2500 2800 3000 3100
2.6% 2.6% 2.6% 2.5% 2.4% 2.4% 2.6% 2.7% 2.6%
10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
1148 1190 1260 1330 1372 1442 1498 1582 1680
1.4% 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% 1.4%
4323.66 4491.3 4765.2 5055.6 5223.24 5497.14 5643.66 5945.94 6342.6
33% 33% 33% 33% 33% 33% 33% 33% 33%
5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2%
8778 9119 9675 10264 10605 11161 11458 12072 12877
3% 4% 6% 6% 3% 5% 3% 5% 7%
10.7% 10.7% 10.7% 10.8% 10.8% 10.8% 10.7% 10.7% 10.7%
0 0 0 1000 0 0 1000 0 500
0 0 0 1000 -1000 0 1000 -1000 500
0.0% 0.0% 0.0% 1.1% 0.0% 0.0% 0.9% 0.0% 0.4%
0.0% 0.0% 0.0% 20.0% -33.3% 0.0% 25.0% -16.7% 7.1%
500 500 1000 1500 -500 1000 4000 1000 1500
0.6% 0.6% 1.1% 1.6% -0.5% 1.0% 3.7% 0.9% 1.3%
1505 1540 1610 2645 680 1750 2960 1100 2670
1.8% 1.8% 1.8% 2.8% 0.7% 1.7% 2.8% 1.0% 2.2%
21500 22000 23000 23500 24000 25000 28000 30000 31000
3.8 3.9 3.9 4.0 4.1 4.1 3.8 3.8 3.9

2.8 2.9 3.1 3.3 3.4 3.5 3.6 3.8 4.1

21500.0 22000.0 23000.0 24500.0 24000.0 25000.0 29000.0 30000.0 31500.0
3.8 3.9 3.9 3.9 4.1 4.1 3.7 3.8 3.8
41% 41% 42% 42% 44% 45% 40% 40% 41%

3150 3150 3150 3150 3150 3150 3150 3150 3150

Sensitivity analysis
Intrinsic value estimate Eliminate cells which are low probability ones

CAP = 8 years Answer the following questions

1. Is the company sensitive to changes in gro
Topline growth 2. What drive the growth or margin/ are curre
NPM 5% 8% 10% 12% 3. Provide details on the most probable scen
8%
10%
12%

CAP = 10 years - optimisitic

Topline growth
NPM 5% 8% 10% 12%
8%
10%
12%

CAP = 4 years - pessimistic

Topline growth
NPM 5% 8% 10% 12%
8%
10%
12%
ch are low probability ones

ng questions
sensitive to changes in growth or margins ?
growth or margin/ are current numbers sustainable ?
on the most probable scenario (mark it yellow)
 Normalised earnings calculation
year
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Comments Normalise
d values
sales 0 0 3249 3469 5374 5735 7877 11558 13609 15263
np 0 0 342 333 537 604 950 1840 1423 2350
eps #DIV/0! #DIV/0!
0.2 0.1 0.2 0.2 0.3 0.5 0.4 0.7 15
price - low 29 31 40 41 49.5 53 54 62 62 56
Price - high 60 67 70 80 90 100 110 110
no. of shares Mn 0 0 1404 2802 2790 2726 3000 3398 3316 3154
mcap 0 0 56160 114882 ### 144478 162000 210676 205592 176624
mcap/sales #DIV/0! #DIV/0! 17.3 33.1 25.7 25.2 20.6 18.2 15.1 11.6
p/e - low #DIV/0! #DIV/0! 164.2 345.0 257.2 239.2 170.5 114.5 144.5 75.2
p/e - high 246.3 563.8 363.7 361.1 284.2 184.7 256.3 147.6
Book value
Retained earning / share

PE based valuations (based on observed Subjective Probablility based valuations

Normalised earnings based valuation Price

PE Price Optimistic scenario 100.0

values
Lower limit ( historical ) 14 50.4 Neutral scenario 48.1
Upper limit ( historical ) 25 90.0 Pesimisstic scenario 60.0
Normalised PE 20 72.0 Intrinsic value 58.3
disocunt to int price 0.0
Normalised PE based valuation
Earnings price

Earnings in depressed 3.3 66

scenario
Earnings in optimistic 4 80 Computation for 5 yrs
scenario
Normalised Earnings 3.6 72 Profit growth 1746
Capex added 11486
current odds based on past price behavior Depreciation 1794
Upper band price 90 Net capex 9692
Lower band price 50 ROI in capex 15%
Current price (buy) 56 ROI on net capex 18%
Upside ( upper - current ) 34.0
Downside ( current - 5.6
down )
Risk / reward ratio * 6.1
Gain / loss value 22
* upside / downside

PE comparison based valution

Sector avg PE
times Mkt current PE 1.14286

Earning yield (latest) 1.3%

Earning gr 5%
Expected return without PE 6%
expansion
Tot ret /PE ( between 1-2 ) 0.1

* compare the current PE with PE of other companies

in the same sector
** also do a rough comparison of PE with that of other
companies in the index
based valuations

Probability Expected
value
0.15 15.0

0.65 31.3
0.2 12.0
Asset valuation
Net cash ( Debt - cash )
Any investment

Asset = NFA (reproduction cost) + WCAP

Total asset (Slice 1) = Asset + Investment
+ Net cash (or reduce debt ) - Any off
balance sheet liability
No growth value (NOPAT/WACC)- Slice 2 67
DCF Value (Slice 3)
Current Mcap

If slice 1 >= Slice 2 No competitive advantage

If slice 2 > Slice ( check the EVA / sales % ) competitive advantage
Slice 3 - slice 2 represents the value of growth of the excess return over cost of capital
Buisness Net Profit Neutral vaOptimistic valuation
Marico (india 98.8 2470 2568.8
MBL 11.66 292 291.5
Sundari -8.85 22 66 @ 20 % REarnings = 4.4 Cr Capital = 22 Cr
Kaya -11.6 78 234 @ 20 % REarnings = 15.6 cr capital = 78 Cr
Total 90.01 2862 3160
Shares 5.8 5.8
Per share 493 545

Logic of analysis
Marico india has high profitability and contributes to bulk of profits. Been valued at 27 times NP
MBL - marico bangaladesh has ROE of almost 40% +. Hence been valued at 25 times NP
Kaya and sundari have almost 100 Cr of invested capital. Currently are loss making and have accumulated losses

Neutral assumes that kaya /sundari are at best worth the captial invested
Optimistic assumes that they will become fairly profitable and valued at 15 time earnings ( earnings calculated at 2

Key result of analysis - current price fully values marico india and MBL.. Upside are limited to how kaya and sundar
some additional benefits will come from nihar acquisition

SAMPLE VALUATION
27 times NP

and have accumulated losses

rnings ( earnings calculated at 20 % of invested capital )

limited to how kaya and sundari will perform

operating lease cpnvertor
R&D convertor
other expense capitalise