I agree with you. Looking at incremental market cap with incremental retained earnings is erroneous as ostensibly themanagement cannot control the market cap.
Warren Buffet doesn’t compare the incremental retained earnings with market cap but with 'intrinsic value’ and how he calculates it is anybody’s guess.
In my opinion the incremental retained earnings should be compared with the incremental net profit which is incremental ROE. This is something that directly measures the efficiency with which management is employing shareholder capital.
This is what W.Buffet has says in his Owners Manual:
"We feel noble intentions should be checked periodically against results. We test the wisdom of retaining earnings by assessing whether retention, over time, delivers shareholders at least $1 of market value for each $1 retained. To date, this test has been met. We will continue to apply it on a five-year rolling basis. As our net worth grows, it is more difficult to use retained earnings wisely.
I should have written the âfive-year rolling basisâ sentence differently, an error I didnât realize until I received a question about this subject at the 2009 annual meeting.
When the stock market has declined sharply over a five-year stretch, our market-price premium to book value has sometimes shrunk. And when that happens, we fail the test as I improperly formulated it. In fact, we fell far short as early as 1971-75, well before I wrote this principle in 1983.
The five-year test should be: (1) during the period did our book-value gain exceed the performance of the S&P; and (2) did our stock consistently sell at a premium to book, meaning that every $1 of retained earnings was always worth more than $1? If these tests are met, retaining earnings has made sense."
Any measure of company performance attached to market price/cap is surely going to have question attached to it because of the reason you mentioned about the “speculative component” of PE. But i thought the emphasis on calculating it on a “5 year rolling basis” and doing it over a long period of time would be enough to handle them.
Coming to the example, my understanding is, if a company is earning an EPS of 100, say on an equity base of 500 & i.e., earning 20% RoE and retaining it all. If the company keeps doing an EPS of Rs.100 year after year on an ever increasing equity base ( from 500 equity + retained earnings 100+100…) will ultimately have it’s RoE reduce to levels where one day it’s RoE will be less than it’s cost of capital. So, in ideal case market will adjust it’s PE (the speculative component) to reflect this reality.
The other way round, if the increased capital continues to earn a equal or higher RoE for a long period of time, that’s a investor’s dream come true and Mr. Market acknowledges this factor over a period of time. Thanks P Sharma for explaining that.
Thanks Vinay for highlighting the refinement in his retained earning test policy.
The best part about Prof’s lecture slides/case studies is that they exemplify analysis/valuation concepts in a simple, easily transferable way for most folks like us.
I have seen so many guys refer to this Relaxo case-study as a good learning exercise (including Abhishek).
So that we can use this as a learning opportunity for all, I asked guys to quantify incremental learnings to analysis/valuation frameworks or plain insights. I find everyone shyying away from specifying 1.2.3.4 - I learnt this and this and this (maybe new first-time ‘aha’ realisation for me, maybe refinement of old concept, maybe already known concept).
Come on guys- spell it out - looks like I will have to get back to the Nestle case study for reviving what could have been an interesting learning exercise.
I liked the part assigned to group 3 more than other parts. Things like
)- how much of growth in past 5/10 years is due to business volume growth, product mix and pricing changes.
)- possible source of volume growth.
)- profit after tax per unit of thing sold
Next to that the task of group 8 is something I want improve on, competition analysis. What’s the difference in strategy between the company and it’s competitors and it’s impacts.
**Company to be viewed as an unfolding movie instead of still photography-**Relaxo improving its working capital continuously to move towards the probability of working on negative working capital.
Earning Retention Test- Its better to leave the earnings to the company that can grow our capital in multiples of AAA Bond rate.
Economic earnings vs reported Earning: Amortizing expenses made by the company towards brand building to more than 1 year (may be 3/5 years) just like amortization of fixed assets if the 2 conditions are fulfilled
1). ROE before that treatment is high; and
2). The company is gaining market share
Philip Fisher lesson on seeing beauty in low margins:
The other way for the honey-jar company to keepthe insects out is to operate so much more efficiently than others that there is no incentivefor present or potential competition to take action that will upset the existing situation.
Seeing the Big Picture: Expected CAGR of 15% for the industry and value migration from unbranded/unorganised market towards branded/organised market.
Yes, Jatin. Having interacted with Professor, he has a huge focus on very long term sustainability and steady compounding. He emphasised - if you come across a 10 yr 20% compounder then leave your usual 30-40% CAGR for next 2-3 years and focus on that (as they carry the huge risk of re-investing wisely)
I read all 5 pages of this Relaxo thread (not so easy to read and it took few days). Not all Sr. members are agree on Relaxo’s brand play in future. There have been lots of contradictory arguments have been stated.
**I believe there are two types of value investing **(after learning strategy of most of Sr members here, legendary WB, CM, FT, PL, Piramal, RJ etc…)
Mid term strategy players - seeks 30-40% CAGR
Long term strategy players - seeks 20-30% CAGR (for say 10 years or more)
Both of above strategies are perfectly fine and requires hard work, constant efforts.
Relaxo can be success story in 2025 if
**Product : **Innovative product portfolio for different ages, user groups. (Strong product is a key aspect. Can it be like Bata / Rebock / Nike ?)
Marketing : It understand India’s consumption story ahead and rapid competition. Ecommerce market is growing for mobile, clothing,footwear in India. Relaxo has to successfully expand in store level, distribution level, ecommerce level, exports etc
Product & Marketing : Brand is important in footwear too. Do you knowChineseHighPhone ? Did it broke iphone’s market in india or else where ? iphone is the best case study of “Constantly improving product with killer marketing / branding approach”.
There have been enough hot discussion made here. I would not prefer to comment on buy / hold / sell here.
Last note : Relaxo doesn’t look appropriate for Mid term strategy players. It is more like a “Gut Feel” type of issue.
The stock has reversed. The management has guided 20% growth. With the economy turning up rubber prices softening, margins are likely to improve. The stock can provide 20-25% cagr. Sparx is a famous brand.
Q1 results are out http://www.bseindia.com/corporates/ann.aspx?scrip=530517&dur=A&expandable=0
IMHO very good results. As always, the following comparisons are Y on Y
Sales (Gross) 454 vs 374 (21% growth)
NP 36 cr vs 23 cr (57% hike - stellar performance here…softening in rubber prices has contributed a lot)
Q4 had higher NP nos and the stock rocketed based on that…there might be some cool off if one goes with that q on q NP comparison (mind you,top line comparison is good for q on q too)…
PS - not a buy/sell reco…invested from very low levels
Sparx dispute is atlast settled with Bata. Relaxo gets to keep the brand SPARX and from the looks of it, it has dropped the ongoing case with Bata http://www.bseindia.com/corporates/anndet_new.aspx?newsid=c608c445-6c36-4a0e-a8c7-a4adcffbed86
Relaxo Footwears Ltd has informed BSE that the Company has amicably settled the on-going protracted litigation with Bata India Limited in respect of Trade Mark “SPARX”.
The Company has executed a Deed of Settlement with Bata India Limited for Assignment of Trade Mark “SPARX” in favour of Relaxo Footwears Limited and both Companies have agreed to file necessary Consent Terms before the Hon’ble Delhi High Court in due course, for withdrawal/settlement of all pending litigations filed by/against Bata India Limited and the Company. The benefit on account of this assignment of trademark along with saving in cost of litigation is considered to be materially beneficial to the Company in long term.
If any fellow member has particular queries to be addressed and not able to attend, please feel free to share.
Also if other members are attending then it would be good opportunity to meet and connect.
Thanks.
Anurag Jain.
Note - I am invested.
PS - AGM of Relaxo footwears and VLS Finance is both on 24 Sept 2015 at same venue (different timings) - VLS Finance holds approx. 12% stake in Relaxo.
Good to know that u r attending the AGM. Can u pls inquire abt their debt reduction plans? A further decline in the debt, I think, would boost the bottom-line further as a third of EBIT is going into finance costs.
Would like to differ respectfully here. My point based on the above scenario - there is no risk of re-investing here as once you are through with 30-40% CAGR for 2-3 years invest that money into the 10 yr 20% compounder straight away. right? More money at the end of the day. So I would invest in 30-40% company for 2-3 years and buy the 20% compounder at the end of 3rd year.
