Value Investing Framework and Psychology

As Warren Buffet said "Risk comes from not knowing what you're doing." Investing follow the phenomenon of knowing something more which will give you an edge over other investors. But most of the time the big question that comes to our mind is what to know about the market as the Bull and Bear of Stock market not only very confusing but also intimidating. So in Value Investing we put our main focus and effort to discuss about the bits and pieces of Mr. Market. Hope you enjoy it and found it interesting and helpful in your pursuit of become an Investor. Happy Investing ... :)

Framework:-
I always believe in following a framework while doing anything and the same thing goes for Investing as well. Contrary to many people believe investing is a game of luck and sort of gambling I believe it's a continuous study and analysis of Market and the Business.To analyze the business of a company we follow the below described framework.
1. It's Product base
2. It's Consumer base
3. It's Economic Moat
4. It's Financial brief and Balance sheet analysis.
5. It's Near term and Long term growth
6. It's Sustainability 
7. It's Risk
8. It's Management
and then of course .. SWOT view points and periodic analysis.
Our attempt in this blog is to discuss the companies with great fundamental value and having good growth rate. So please you all are welcome to share your views and knowledge. Good Luck .. :)

Now let me describe the factors one by one...

1. Product base :- What are the products the company have? Which product contributes what weightage in the revenue? What are their %concentration in terms of total market? What is the total market size? and what is the expected sales growth % and demand growth % for the Product?

2. Consumer base :- Consumer concentration based on consumption for both domestic and international market. What is the growth prospect and demand from those segment in future.

3. Economic Moat :- Has the company had an established brand? Is it a niche player? Does it have a strong distribution channel? Has it shown a strong performance irrespective of the macro economic factor?

4. Financial brief and Balance sheet analysis :- This has already been covered in our other post here.  

5.  Near term and Long term growth :- Growth prospect factor and possibility

6. Sustainability :- Will the near term growth is sustainable for long term? If Yes, then Why and How?

7. Risk :- What are the risk (both operating & financial) does this company posses ?

8. Management :- Is the Management growth driven? Are they committed towards expanding the operation and customer base? Is the accounting policy well managed ? Are they positive towards reducing debt?
Con Call :- IIFL
Stock in News for Today 
Astrological Support 
Technical Support 
Our Analysis Rating
We have rate the companies as per out analysis in four major category as below :-
Grade A :- Are those companies which has a strong fundamentals,financials and tremendous growth prospects.
Grade B :- Are those companies which has tremendous fundamentals and already have given multiple return to their investors but in near term may not be having the potential to give that much of lucrative return as past.
Grade C :- Are those companies which has seen some turnaround from past and improving financials and business but yet to recover fully though having a good or moderate growth prospect.
Grade D :- Are those companies which has enough potential to grow and industry has some good or moderate growth prospect as well but facing some issue both in terms of financials and strategic end but once resolved could have been the next multibagger.  

Disclaimer :- We are strong follower of various research community and inspired by many important content from their research. So we give a special thanks to NewsHub , Motilas Oswal , Stock Axis, Prabhudas Liladhar , HDFC Securities, IIFL,Ambit Capital,NSE Corporate Action,Edelweisss,Money Control,Value Quest,Economic Times, Microsec, Business Standard,CRISIL,Value Pickr , Sana Securities et all.

Risk Assessment Model(RAM)

Risk Assessment Model(RAM) :-

  Risk assessment can be done from 2 aspects:

•  Quantitative aspect:

Quantitative aspect refers to managing the credit risk by
using the quantitative tools and techniques such as ratio
analysis, and reaching a concrete number for every loan
which would indicate the magnitude of risk and expected
returns, on a case by case basis.

•  Qualitative aspect:

Qualitative aspect is taking a holistic view by a bank at its
overall portfolio, deciding the lending limits to a sector,
setting up the broad policies and procedures, and so on.
Both quantitative and qualitative aspects need to be taken
into consideration while computing the risk levels. In the case
of corporate clients, post-mortem of the balance sheet is one
of the main instruments. Ratio analysis helps us determine
whether the loans have to be extended. But, past performance
is not an ideal indicator of the future performance. This raises

the necessity to consider other qualitative parameters such as
technological status, reputation, repayment track with others
and so on.

A. Liquidity Risk
Liquidity risk is the non-availability of cash to pay a
liability that falls due. A company is deemed to be financially
sound if it is in a position to carry on its business smoothly
and meet all the obligations - both long term as well as short
term - without strain. Assessment of the efficiency with
which the funds are put to use is very important for credit
analysis.
The study of efficiency of debt-service management
becomes essential to banks as the ratios reveal
• Whether the profit of the firm is enough to cover not
only the interest payment, but also to provide a
reasonable cushion against future uncertainty
• Whether the profit is sufficient to provide enough
coverage for repayment obligations
• Whether the assets of the firm provide adequate
security for loans sanctioned.
In short, the coverage ratios show the relationship between
the debt servicing commitments and the sources for meeting
these burdens.
Debt Equity Ratio
The ratio brings out the extent to which the firm is
dependent on outsiders for its existence and indicates the
proportion of the owners’ stake in the business. A high ratio
means that claims of creditors are greater than owner’s funds.
Excessive liabilities tend to cause insolvency. This is the
most unfavorable situation for a banker, as he may gain the
position of just one among the many creditors of the
company.
Current Ratio
The current ratio is an index of the concern’s financial
stability since it shows the extent of the working capital,
which is the amount by which the current assets exceed the
current liabilities. A high current ratio indicates inadequate
employment of funds while a poor current ratio is a danger
signal to the management. It shows that business is trading
beyond its resources.
Current ratio of 2 is ideal. The presumption is that for
every two rupees collected by the business; one rupee is used
for discharging the current liabilities, leaving another rupee
as the margin of safety. However, this ratio should be seen in
relation to the component of current assets and their liquidity.
If a large portion of current assets are obsolete stock the firm
may fail even with a ratio higher than 2.
Liquidity Ratio
This ratio is also an indicator of the short-term solvency of
a firm. Ideal ratio is 1:1. A comparison of current ratio to
liquid ratio indicates inventory hold-ups. The higher the
amount of liquid assets to current liabilities the greater the
assurance of current liabilities being paid off.
Interest Coverage Ratio
It tells the analysts the extent to which the firm’s current
earnings are able to meet current interest payments. When

this ratio is high it shows that the business would earn
sufficient profits to pay the interest charges periodically. A
low interest coverage ratio may result in financial
embarrassment.
Debt service coverage ratio
The standard ratio is 1.5. However, if the ratio is between 1
and 1.5, suitable spacing of the repayment period and thereby
lowering the annual repayment obligations, may raise the
ratio and make the proposal financially viable. A persistently
low ratio indicates heavy repayment obligations, which the
business is at pains to meet. The level of these ratios reflects
the result of business risk drivers and the funding policies.
Generally speaking, higher the level of coverage, higher is
the rating.
B. Operations Risk
In a competitive market, it is critical for any business unit
to control its costs at all levels. To measure the operational
efficiency, the turnover ratios and profitability ratios are used.
They measure how efficiently the firm is employing the
assets. They also represent the relationship between profit
and sales, and between profit and investment.
Net profit trend
The final profit figure arrived at after charging all the
expenses of the firm against all its income is called net profit.
A banker would look at the trend of net profit over the years.
A company, which has been consistently achieving positive
growth rates, reflects a healthy industry position and the
management’s commitment to the business, effective steps
taken by the management to promote their sales in the market.
The company with positive growth is favored than those
whose growth is static or negative.
Cash profit trend
Cash profit represents the annual profit arrived at before
charging depreciation. Cash profit is superior to net profit
due to the following reasons:
• Though depreciation charged to profit and loss
account, there is no actual outflow of cash
• Depreciation is the total cost of fixed assets annually
averaged over the life of the machine. Regarding
annual depreciation once again would amount to
double charging.
Fixed Assets Turnover Ratio
This ratio measures the sales per rupee of investment in
fixed assets or the efficiency with which fixed assets are
employed. A high ratio indicates a high degree of efficiency
in asset utilization and a low ratio reflects inefficient use of
assets.
Total Assets Turnover Ratio
This takes the total view of the business as a producing unit.
It determines the produce ability of the assets of the business,
which also indicates the managerial capacity of the
entrepreneur in putting the assets to best use.
Return on Investments
The ROI is the key factor of profitability of a business. It
matches the operating profit with the assets, which earn this
profit. Efficient utilization of assets will have a relatively
high return, while a less efficient use will have a low return.
Higher profitability implies greater cushion to debt holders.
Free Assets to Total Assets

This ratio is critical to firms employing commercial
vehicles and construction equipments as it determines the
level of assets available to a banker in case of default. The
higher the ratio more secured the funding would be.
Revenue per KM/HR
Expected revenue generated on the financed vehicle will
form one of the criteria for assessing the viability. This will
show the banker whether the customer will be in a position to
repay the loan.
Operating Cost per KM/HR
The operating cost may be classified into fixed and
variable cost. Study under this classification helps in arriving
at the optimal level of utilization of the equipment. However,
the operating cost and revenue for the vehicle cannot be
measured in isolation. The profitability of the equipment is
what matters at the end of the day.
Fleet Strength
Fleet strength is the number of equipments/vehicles held
by the customer and gives an idea about the size of the
business. A lender generally looks at a small business with
high caution, as there are only few assets to turn to incase the
debts turn bad.
Work orders on Hand
The number of work orders that one has helps to check
how well the business is progressing. Generally, when the
business has many, steady work orders, it shows that they
have constant business. However, those customers who have
unsteady number of work orders need a close watch. It also
shows the trend of the business in the market.
C. Credit Risk
Credit risk is risk resulting from uncertainty in a counter
party’s willingness to meet his contractual obligations. The
business character of a borrower rests on traits as
trustworthiness and commitment.
Repayment track with others
The repayment track of the borrower with others
determines how well they have carried out their business in
the past years. A business with prompt payment has less
credit risks than those whose reputation is a question mark in
the market.
Resale value of the asset financed
The customers are generally divided into two categories,
namely ‘A’ and ‘B’. Category A represents equipments that
command high resale value and category B represents low
resale value equipments. In case of default on the part of
customers to repay the loan, the bankers will look to seize the
asset and realize the due amount from it. Thus, a category
represents a safer investment for the bankers.
Percentage funding to total cost
This helps us measure the level of financial commitment of
the borrower in the proposal. Lower ratio means more
contribution from the borrower and the risk on the banker’s
end is low.
Value and liquidity of collateral offered
As a driving note collateral must not drive lending
decisions. The best security of a lender is a thriving business
on which the appraisal should focus. Whenever, the bank is
forced to foreclose the collaterals, it demonstrates that the
lending decision in the first place had been unsound.

The demand for collaterals as a condition for a loan is a
sufficient indication that the borrower lacks the required level
of credit worthiness. Collaterals enhance the credit
worthiness of a borrower. The test of good collateral lies in
its ‘liquidity’, which, in other words means the saleability of
the assets. The higher the liquidity is, the better the
collaterals.
Timely submission of information
The customers are required to be prompt in submission of
information. A delay in such submission is highly likely to be
caused because of tampering of information. This reflects to a
great extent the credibility of the customer. Thus, customers
who are always regular in submitting the information score
over those who have an irregular track for submission.
D. Market Risk
The factors influencing the relative competitive position of
the customer are examined in detail. Some of these factors
include nature of business, reputation of promoters, influence
of business cycle, influence of government policies and
technology status. The result of these factors is reflected in
the ability of the issuer to maintain or improve its market
share. It may be mentioned that the customers, whose market
share is declining, generally do not get favorable long-term
ratings.
Nature of the Business
The kind of business in which the customer is in will
greatly influence the risk associated with him. It might be
against the policies of the company to advance loans to a few
businesses, like in the case of CBL, advancing of loan to cab
drivers is not entertained. Thus, the preferred businesses
might have been realized from experience or observation.
Net Worth to Netsales
The net worth of a business provides that important
cushion to withstand shocks from adverse changes in
external (economic, financial and legal) and internal
environments of the business. Net worth is thus referred to as
the risk capital. When compared to the sales of the business,
it shows the efficiency with which the capital is rotated in the
business.
Reputation of Promoters
The promoters are the ones who initiate a business idea
successfully. The background of the promoters gives an idea
of their business expertise and their talents. A promoter
hailing from a highly reputed business family is less likely to
fool the public. A person hailing from a business family,
whose reputation is not established or suspect, is to be looked
at with caution, as the probability of default is high.
Technology Status
Obsolescence is another problem that an industry faces. A
firm’s competitive position is decided based on the
technological competence it possesses. Advances in
technology can dramatically alter a firm’s landscape.
The firm is at an advantageous position when it holds
superior technology. The risk is more among the players in
the industry when the technological competence is inferior.
The risk of not keeping up with the progress of changing
technology may affect the growth. Hence a firm with a good
technological background is more attractive.
Effect of Business Cycle

Almost every industry suffers from some amount of
cyclical fluctuations. At the downturn of a cycle, credits may
be frozen, while in its upswing, there may be excessive
fluctuations of loan volumes. It is important for a banker to
know on which side of the cycle a borrowing unit is operating
to adjust to the credit needs of the borrower and the riskiness
of his fund.
A business which is least impacted by the business cycle
would be an ideal borrower. As the impact decreases the risk
also declines.
Government Policies
The pace and pattern of growth in a country depends
largely on various policies of the Government. It acts as a
regulator and a mediator between the businessmen and the
public. When the government policies are friendly and
favorable towards the industry, then the growth prospects are
high.
Provision of incentives such as export subsidy, cash
incentives, duty drawbacks, excise relief, credit at concession
rates helps an industry grow. On the contrary, absence of
such positive policies or a very stiff taxation policy may
create obstacles to the growth of that industry.

It had Rs 230 book value, 6 percent yield, 4 times earnings, growing at 20 percent for the last ten years, available at Rs 105

Read more at: http://www.moneycontrol.com/news/market-outlook/dhfl-lupin-buys-equal-meeting-aishwarya-rai-jhunjhunwala_1325914.html?utm_source=ref_article

It had Rs 230 book value, 6 percent yield, 4 times earnings, growing at 20 percent for the last ten years, available at Rs 105

Read more at: http://www.moneycontrol.com/news/market-outlook/dhfl-lupin-buys-equal-meeting-aishwarya-rai-jhunjhunwala_1325914.html?utm_source=ref_article

 

Understanding the the Balance Sheet

Debt Structure :- Debt structure in a balance sheet is a highly important factor because it does reflect how the management is managing their accounts?. Now there can be various way a company can manage their debt. Generally the company used to divide their debt into two parts Long term debt and Short term debt.
1. Short term debt :- the short term debt can be managed in various way.
i. As simple debt in the balance sheet which is repayable from the free cash flow.
ii. As a short of working capital[i.e. a natural hedging from operation i.e. surplus of a  trade operations as working capital borrowing in foreign currency] in the P&L accounts against which an extra hedge is also possible like net from the trade operation i.e. export minus import. This eventually help the company to lower the tax rate as profit will be shown lower than actual.
2. Long term debt :- the long term debt can be managed in various way as well.
i. As a simple debt and it's interest payable within one year.
ii. As long term convertible bond to hedge it's foreign debt i.e. if the share price will not reach certain amount within that period then the company has to pay the bond money otherwise it will be waived off.
iii. As forex debt[Hedge fund] i.e. depending on the currency factor volatility. This will have a negative effect if the rupee fall against dollar but it has a better effect of interest rate cover which is only 3.7% [i.e. the interest cost on foreign currency]compare to borrowing from indian market which charge 9-10% as interest rate.Even if currency fluctuate within a range then it will take up to 6-7%.
iv. By capitalizing it which will increase the profit in the P&L account but a loosing factor for Investor.
v. By making it as a forex loss quarterly for the quarter which though reduce the profit but inturn beneficial for the investor.

To Be Contd..

Debt Capacity Bargain (DCB)

Debt Capacity Bargain (DCB) is a technique by which you can find the sustainability of company in long term or how strong it's economic moat is?

It needs to be calculated as per the below steps :-

1.  Calculate the avg. operating cashflow using last 5 yrs data or Buffett’s Owner’s Earnings (Cash flow from Operations – Capex +/- Changes in Working Capital).[Both will give you different result but suggest to calculate both for better understanding of the stock]

2. Use a desired interest coverage ratio of 3x-5x (Prof. Sanjay Bakshi recommends 3x for highly stable businesses, 5x for cyclical businesses). I use 5x for all, just to be extremely safe.

3. Divide Avg. Op. Cash flow/Interest coverage to find out what is the interest expense that the company can service.

Interest Expense = Avg Operating cash flow 5years/5

4. Divide the interest expense arrived at in Step 3. into the current interest rate to determine debt-capacity of the company; SBI’s AAA bonds were issued recently at 9.5%. Let us be conservative and take an interest rate of 12.5% (a 15% would be even more conservative, for a company having debt devide it by 30% if you are looking for a turnaround) to find out Min. value of business.

Min. value of business = Interest Expense / 0.3

5. The enterprise value should be found for the company by subtracting the Debt and adding up the cash available at the previous year end from/with the Min. value of business.

Enterprise Value = Min. value of business - Debt +Cash end of last year + Equity Value

6. Compare this debt-capacity with the current market cap, and if the Market Cap is less than Debt-Capacity, we can consider buying the stock.

Enterprise Value > Market Capitalization

http://fundooprofessor.blogspot.in/2005/11/one-valuation-rule-two-paradoxes.html

Earn 500 times in 10 years

Hi Friends,

Today I am sharing my own analysis of making 500 times in 10 years.If I say in 10 years your money will become 500 times i.e. just 2 lakh will become 10cr then you must started to think that this person is definitely a big thief but if I say only 6% per month return on your investment for 10 years will eventually greater than that 500 times will you believe ? Well that is the magic of the number which you can not imagine but can definitely achieve... so my friend if you would like to gain 500 times of your investment in 10 year then please come and learn value investing.

Let me explain my details analysis on this numbers with a comparison of my portfolio.



Just have a look in this excel. I have a target investment of 2,00,000 at 1st Jan 2015 and just by making 6% return every month on my cumulative investment I can earn 4,02,439 at the end of 2015. Then look at the right bottom if I assume my initial investment for the year 2016 is 4,00,000 which actually I am earning at the end of 2015[i.e. a simple funda of re invest your money] then based on this you will be able to earn 10,24,00,000 at the end of 2024 i.e. at the end of 10 year you can make more than 10cr from 2laks which is definitely more than 500 times.

Now if you see the left bottom I have declared my actual investment till the month of April and my return also I have set the target for the month of April for an 13.24% target to meet the deficit because you can clearly see till now my total investment has not exceed 2,00,000  and I have started this year even less then 1,00,000 . So if I would have been able to manage this deficit then from the next month onwards it will only be 6% which is feasible if you choose the right investment.

So guys if you really want to make your money works for you them come and learn the way of investing.

Hope this Help :)