Guru Mantra 6- Case Study of International Travel House (The Battleground)
I must repeat again. No buy, sell and nothing. This is a live simulation and discourse around it. I even don’t know much about the company. Hence I am not even declaring this stock as hidden gems, opportunity etc. The idea behind simulation is to take you through Guru Mantras and apply them so it is easier for me and you to understand.
Why this company?
An opportunity for investment is sourced from several sources:
- Financials indicating a moat
- Low valuations at first sight
- Thematic (secular trend, growth stories you are convinced at)
- Borrowed (from web, advisors etc, where to borrow and not to)
Opportunity sourcing needs good bit of understanding, better one take it up after doing few investment documentation. By that time one gets acquainted with nuances of investing world.
To explain why I choose the company, I some time use a combination of Financials Moat and First Sight Low Valuations . What are they, will come to you in a while.
Circle of Competence
Before that one must understand whether a particular business falls under their Circle of Competence. How to do a circle of competence, just few days back I posted a topic in VP. Here is the link:
No one expects you to be master of a particular business. If you can do a mastery nothing like it. What is expected from an investor is:
- Do you have a prior experience in such business either as employee, acquaintance or interest or even education?
- Can you spend time in understanding business and allied stories?
Quite subjective, isn’t it? The moment the preaching starts just like I am doing now, always ask the inverse questions: - My portfolio consists of Pharma, FMCG, and Financials. Just now we described the three biggest tenets of academics i.e. Engineering, Doctor and Accounting/Finance. Do you really understand such diverse characteristics?
- Have I known or heard or customer, supplier, lender of business?
- Have I seen the product, services or used?
- Can I think like CEO of business?
We need to document the circle of competence, will come to you in a while, a cursor before that:
- There is no “certified” words called as Large Cap, Mid Cap and Small Cap.
- Emerging trends, potential multibaggers are either wish list or debate topics. Don’t mix them with circle of competence.
- Good financials, a strong moat are characteristics of a business, not yours. So when someone says company have strong financials, you ignore ask yourself do I understand this business?
Understanding circle of competence is a big step before you start. A brief reading of business is required before concluding. The sectors given on stock exchange may be too abstracts.
What I saw International Travel House (ITH)?
Revenue growth- it picked up during 2010 and 2011, otherwise a muted growth.
EPS Growth- flat for last two years, before that slumped to negative.
Free Cash Flow- somewhat stable barring couple of years.
Equity or Book Value Growth- started from 67 in 2007 went up all the way to 297 in 2013 before nose-diving to 159 in 2014 and stagnated at 176 in 2015.
Return on Invested Capital or ROIC- almost in the range of 13-15, except couple of unusual bump ups in 2011 and 2012.
Well what we just saw is confusing state of affairs, flat revenue and margin with a downward bias recently. Book value and free cash flow somewhat stable. ROIC is a number so far looks positive.
Is this the kind of number of I am looking for? Low hanging fruit? For me no, I would prefer 10% revenue, EPS, Free cash flow and book value growth at minimum. ROIC more than 10 are ok for me to start with. I rejected at first sight and closed the opportunity-sourcing file. What caught my next attention will come to you in a while.
You may ask, why these five things…. there are another twenty ratios. Why not them? This is my explanation:
ROIC- this is return a business makes on cash, which it invests in business every year. This means that portion of earnings reinvested to business. This indicates the confidence of management in business and how? I will only invest in my business only when I am confident of getting higher return than risk free rate i.e. say fixed deposit. Now lets not carried away, this is management confidence basis their past history. Future is uncertain other wise ITH wouldn’t have a reported flattish result. And ROIC doesn’t differentiate between borrowed money or owners money unlike ROE (Return on Equity) which tracks only equity or owners capital. If you have a consistent ROIC it gives some sort of indication that business is protected from constant price from competitors. I don’t want to see ROIC going down or at least stable…no sharp decline. If you look ITH they may not be super ROIC but it’s somehow ok type.
Sales or Revenue Growth- I would love to have a billing number than revenue. Remember you can still bill and collect money yet accountants do not allow you to recognize revenue because delivery is not made, work is not completed etc. Many of the times these are more academic reason than business necessity. Imagine you are collecting cash before delivery, ecommerce☺. Yeah, but icing on cake is when you own the product and freely pricing it.
EPS growth- how much business is profiting per share of ownership. The basic reason is the price of a stock is on expectations of current and future earning and that’s an undeniable truth. Though value investors will chop my head off if I say PE ratio is the one to rely!
Equity growth rate- now business earn money and spend in Bahamas in dine and wine. How would I know that? Equity is portion of my money or called as book value also. This means management has kept the money within business either investing within business or outside. Think about a scenario where earnings are growing but equity is not. What can happen, perhaps management need lots of money to maintain assets, spend in advertisement etc or blown that off in Bahamas.
Free cash flow growth- eventually this is the cash available from business. Free cash flow is Cash Flow from operations minus Capital expenditure. This would tell us whether profit also brought cash or just paper profits through creative accounting practices. Now there is a caution, free cash flow negative may not be bad always. A company at growing stage may have to spend tones of money in capital expenditure. Even the cash flow from operations include expenses like Research, Advertisement which is possibly using for creating a competitive advantage.
All five done, hopefully I could convince you.
As I said initially I booted this stock out of my file. Again it popped up during low valuations. What is the definition of low valuation? My apologies, PE ratio is just a psychological valuation for me….use when you just returned from a pub to brush up whether market is behaving same as fundamentally. Which they will never do in short run.
What is valuation based screening for me?
I use Graham and Dodd at purest form to dig the first hole. By spending X amount how much earnings Y I will get?
If I have to buy ITH today I have to spend 142 Cr that is the current market capitalization of company.
https://www.screener.in/company/500213/
During last nine month ITH have made 11 Cr profit , if you full scope to 12 months it would around 15 Cr.
What does this mean? By spending 142 Cr, I can walk out with 15 Cr that gives a return of 10.56%. Sounds a small mark up on fixed cost, isn’t it? I mean one will say I get 9% in FD, even 11% in bond what’s the big deal? May be yes may be no, let us check out this same factor:
Cox and King appear to be the big daddy in listed space. Let us find out what Cox and King is up to:
It made 360 Cr profit in last nine months, say a full scope of 480 Cr and Market Cap is 2800 Cr, this is a whopping earnings yield of 17%. That to for a brand name.
Let’s find another one, Thomas Cook …another big daddy. Nine month profit 54 Cr, full scope 72 Cr. This is the earnings I will get if I pay 6836 Cr, which is market cap, a miniscule percentage of 1.12.
Another confusing story, I have one who is making lot earnings, another one who doesn’t and they are all big boys. Then I have this ITH, which is in middle. What should I do?
Here is my conclusion:
- I didn’t see any one else other than this three survived business at least in listed space.
- Earnings yield of 5% and more can be a case of price value mismatch. Simply because our index earning yield is 4-5%.
I am not very happy in selecting the stock but again not the best way to conclude.
Documenting the circle of competence
This is one step if I fail will simply pass the stock.
Question 1: What is the business category of company? What is my first reaction?
Consumer Cyclical Leisure, all about entertainment and travel. This something you and I do. May not be in same scale, I think can understand further.
Question 2: Did I look at the “about us “ section on web site? Can I explain they’re what are written without referring to other sources including Google?
ITH is travel and tourism service provider offers air ticketing, car rentals, inbound tourism and holiday packages. Plus official event management. Sounds super!
And this is an ITC Company☺.
Question 3: Did I check the products and services sold by the company? Have I seen them or known before? Can I write down 2-3 lines about each product and services?
All about services, when you hire car or go abroad you need these guys.
Business travel- requirement to execution, I have been part of such entourage. I am sure all of you.
Car rentals- taxi services.
Holiday package- complete package of fun, wine and dine.
Question 4: Who is buying the products or services and what is the usage? How does the product and services generate money in business?
Anyone of us, who wants to travel for need, for leisure.
Question 5: What is required to make these products and services? Have I seen them or known before? Can I explain in 2-3 lines about requirement?
We need chiefly people and infrastructure. For example we need a car and driver.
For holiday package we need network, people and technology.
This is kewl! I have see them and I have used ITH car hires in Gurgaon as well.
Question 6: Who (nature of) are the suppliers of the requirements as mentioned in question 5?
Suppliers are hotels, air line carrier, individual drivers. Long rope of value chain.
Question 7: Do I think the business or company is unethical at first go?
ITC is well trusted name in India, parent company is one of index company.
Question 8: Can I mention one more competitors for the company (which are listed)?
- Thomas Cook 2. Cox and Kings
Question 9: Do I think I will get right resources to analyze the company further? What is the edge of circle?
Plenty available, right from pricing, consumer preferences and trending. There may be a problem of plenty here.
Question 10: What all I need to move from CAN to CONFIDENT category?
None, confident category stock.
Conclusion: Confident category, I do understand the business…can document and maintain analysis on earnings, risk, operation, and finance.
The Initial Impression
Forming an initial impression is very important aspect , if you don’t feel good no point being associated with company. The problem is behavioral finance needs to practiced not read. How, write a small paragraph with your current understanding:
“When I check the key financials number somewhat I found stable or even flattish results. It didn’t not excite much. At valuation side apparently numbers do not meet the eye. Even two biggies earning yield behaving differently. Circle of competence is a positive, plenty of information available. Associate company of ITC add to the curiosity. I am sure it’s going to be fun reading about the company”.
Preparation for battle
All that is required a checklist which is flexible but no so flexible☺. This will ensure we don’t forget anything. Checklist doesn’t come easy, takes some time and study to build a mature checklist. What all I need before starting investment documentation, I can share with you:
- Annual reports (10 years is good)
- Links to major websites, forums etc.
- Books and books (hard copy, kindle , pdf anything). Keep those books which are required for practice.
- Conference call transcripts, all other BSE communications
- Templates of investment documentation (we will go through sequentially)
What to avoid at this stage:
- any analyst reports including buy and sell
- price movements like DMA etc
- getting overwhelmed by advertisement and name, fame etc (already we have one here ITC!)
Next step is information gathering, after covering financials and investment philosophy we will get into that. By that time I will collect the annual reports etc.
I sincerely hope I may be able persuade few people who will start believing in value investing or those master investors to encourage me more in value investing. Either way this will enlighten me!
Thank you so much for reading my rants.