The case for breakdown was negated post results and I don’t think the upward gap will be filled. The breakdown before the gap-up will require some consolidation which is what is currently underway around 1900 levels (where the trendline is). Post that we could see a proper breakout past 2000. If not for the breakdown we would have had a nice and proper breakout post results.
@Donald Should we not add the free cash flow of previous year to Non-operative assets, when we calculate shareholder value? If added, the market implied forecast period would reduce.
Thank you pratyush bhai, Ayush bhai and Donald for sharing the critical info.
Lot of information/discussions being transpired in the media on comparison of Apex Frozen Food’s financials vis-a-vis Water base and Avanti. Conclusion is that Apex Frozen Food’s IPO is attractively priced. Considering the extensive coverage on aquaculture sector in this thread, trust Apex would also have bright growth in future.
Any takes .
You guys are the bosses here:) Your domain.
I wondered about that, but could find no clues, on how to factor in growth in non-operating assets over the years including in the tutorial Excel on Price Implied Expectations
@Donald Very detailed work. At how years of Free Cash Flow would you consider the value of company is fully reflected in priced? and Why? Rational, if any for same.
First, the long-winded rationale - you asked for it
For me Valuation and Competitive Strategy/Position are always joined at the hip. We are NOT usually interested in Xyz businesses. We are interested mostly in those businesses- where we can envisage them - earning excess returns over a long period of time. A long runway is a pre-condition (read that as under-penetrated market with large opportunity size) as is our hope/evaluation of Competitive Advantage sustainability over a long period of time. Even as Visibility might be re-assessed every 2-3 years.
We are ideally looking for high-growth businesses with self-reinforcing business models, where they increase the distance with peers with every year of execution - likelihood of success keeps increasing with time, have strong barriers to entry, and ideally dominate a niche or segment of their own.
And the short-answer on Forecast periods assumed? Number of years we can see them earning excess returns till reaching steady-state maturity - 10 years. If the business is NOT in the above league, then even forecasting for 10 years may be quite presumptive? In which case we should look for full-pricing in 5? And Bargain Pricing in 1??
The idea of taking the forecast period in the Excel to 15 years - is to drive home the telling realisation that sometimes the valuations are so Rich that Mr Market may be pricing in future cash flows of more than 15 years - please reckon with what we might be chasing. By all means Stay Away. But definitely get very interested in that special bargain, if Mr Market is factoring in 2-3 years, all things being same. Even 5 years for an Outstanding Business, perhaps.
Having said all of that, Valuation is an ART form. Feel for the Next Level of the business (visualising where it may be able to reach, asking why or why not), Sustainability (industry and competitive position) and Predictability (practically less number of variables - based on solid groundwork) and solid familiarity with Operating Characteristics of the business (how much capital can this business absorb if it had a free runway with Excess Returns) are far far more important.
The excels are there to prompt us in the right direction with no more than maybe 20% insight on potentially big bargains. 80% of the investment case strength will come from establishing/knowing Industry Stability and superior Competitive Position, without which all excels will fall flat.
Key RM price continues to remain depressed and will remain so for few Qtrs despite govt hiking the import duty on soya oil and also farmers have reduced acreage under cultimativation for Soya because of non-remunerative prices + international market prices of soya oil remain depressed.
There is an article on this in BS
Great and very detailed reply. Whereas you explained the rationale in greater detail, I could not figure out if the market Cap of a company is equal to 10 years of free cash flow. We should consider it rightly valued.
All Valuation models use the concept of Terminal Value which is useful to think more on this point of yours. Terminal Value is the projected cash flows beyond the explicit forecast horizon, and is usually a significant portion of the Valuations. You can read all about that in myriad investment literature.
I find great merit in the way Vinay Parikh explained it to us. If you have no clue about the longevity of the business, how can you assign any Terminal Value to the business - assuming it growing at a low steady rate to perpetuity??
He also added another useful precept - he said it is very useful to factor in “penetration” status when thinking about assigning terminal value. For a business like Colgate which is 95% penetrated in urban and perhaps 65-70% penetrated even in rural, Terminal Value figure will be low. But for something like say an Asian Paints or HDFC Bank you should factor in much higher Terminal Value because penetration levels have a long way to go before saturation.
Some caveats again …for new learners:
Again - it is useful to remember and not get too carried away - trying to nail this down to an exact finish/number. I find them useful constructs to think about valuations only in a broad way - to give us some valuation ranges to reflect on, nothing more. Never needed to use DCF for a investment Valuation decision.
Mr D had drilled into us early on in 2011. Real “Undervaluation” will scream at you. It will be so apparent - creating that lollapolluza effect - no matter how you look at it, it will appear undervalued - not relative to peers, relative to market or Industry - just pure absolute undervaluation.
For outperformance in markets, we have to UNDERPAY. To learn to underpay, we need a lot of patience but also extreme decisiveness when the opportunity presents itself - it always does. For developing that kind of patience, and to get to the extreme decisiveness needed, it demands a lot of CLARITY in our decision-making - which in turn demands honest, hard work focused on understanding the business in its Industry. A temperament that is NOT feverish about making quick bucks, helps,
WoW. note to self: read this reply from Donald again and again and then again.!!
Donald , Thank you for the hard work and explanations. For me still many things goes over my head.
Would you mind explaining this screaming undervaluation from some past experience with companies and 3 or 4 reasons why it was clear absolute undervaluation ? How a newbie can start learning to see it with CLARITY. Then I would assume rest is validating the thesis.
Note: May be suited for art of valuation thread, not sure.
It is just amazing to see the kind of time & effort you are ready to put in for your fellow boarders.
So going back to your earlier post, the right valuation for Avanti should be 10 years of free cash flow plus terminal value.
If I have understood correctly, now we should focus on putting (however off we may be, we can always revisit. If our assumption do not work, we will rebuild the model) a terminal value to Avanti business after 10 years.
Yes, James, It may seem strange talking about finding “sheer undervaluation” in a continuously rising Market
There are enough examples in the past in threads of good to great businesses like Mayur, Astral, Ajanta Pharma, Kaveri Seeds, Poly Medicure, PI Industries, Shilpa Medicare…and many others here at VP, that you can go through …where pre-SEBI analyst regulations days - we have freely alluded to what seemed like no-brainer valuations; that some or the other business appeared completely undervalued …there are enough references in the ART of Valuation thread too. If you do spend some time in those individual threads, I am sure you will spot many such “Aha!” moments.
But all learnings are contextual. Guys will be quick to re-butt but that is the past…when markets remained subdued for long periods, what about now…when markets are continuously rising? So let’s bring the focus back on that question - Can we really find absolute undervaluation in a continuously rising market? It is NOT an easy task, but yes, we CAN, provided we can assume a few things …
If for a moment we can “assume” that we have the “clarity” of what kind of businesses we want to go after, then lets also assume that we have also put in the necessary hard work - of understanding a few businesses in some detail - the competitive position/strategy and Industry stability…why the business is likely to continue to execute well. Then we can assume, therefore we have a buy list of say good to great businesses - that may be currently placed anywhere between fairly priced to slightly overpriced, to richly priced. We also have to assume one more important aspect - that having that clarity, we also developed the “Patience” not to fritter away all our Cash …on other Temptations Mr Market keeps throwing our way. We have some ammunition in the bank.
Then all we have to do is extend our memory horizon a few months back …to Nov2016…Jan 2017 . Most of my friends who had these prerequisites listed above …had no hesitation in picking up many businesses that they had conviction in. I and some of my friends concentrated on picking up more of Bajaj Finance (800-900 levels), Avanti Feeds (490-550 levels). Limited point being, every year Mr Market gives you opportunities to pick up pretty good bargains Dec2015 -Feb/Mar 2016 was another.
For a concentrated portfolio like mine … I need to think of adding only 2-3 good to great business at most in a year…as 2-3 of the older businesses go out due to mean-reversion in business-cycle or rich valuations prompt lot of trimming. If that perspective resonates with you, that might also help in keeping the much needed “Patience” - remain CONTENTED with the goodies we have in the portfolio, and NOT chase momentum.
That and keeping faith that Mr Market always gives us opportunities if we are patient. The way our Markets are going I am happy to keep patience (and keep accumulating ammunition) for the next big correction - hopefully within next 6-9 months again.
A request - let’s shift focus back to Avanti business. These clarifications are now cluttering up the thread.
I think you have used Palisade @risk tool. Can see you have used a student version. How long is trial period. What i had expired within a month. If it holds good for 1-2 years, would like to know and install it
You are right. This is actually a very old excel sheet when i was in b school. We used this in addition to McKinsey’s sheet for valuation. Dont have the risk software but only mckinsey sheets now. I think Prof Damodaran’s website has some link to a free tool though. Maybe check there.
Hi, a stupid question but is the promoter selling his stock in avanti?
No issues sir. Have used their licensed version for professional reasons but could find any version for personal use beyond 1 month trial version. Thinking of writing a Monte Carlo simulation code using R,Python someday
Thank you Donald for explanation with good CLARITY.