Krishnaraj,
Well-made point.
I would like to add a lot this time :):
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From your comments so far, it would appear that your approach to Valuations is primarily based on the “Tangibles” in the business, and which is perfectly right in its own way - and probably the more scientific way of going about it.
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What Ankit has been hinting at is that at VP we have been coached into adding an additional layer of Valuation on top of the Tangibles - wherever possible - to put a Value to the “Intangibles” in the business, if you recall our ART of Valuation thread
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We have been coached that the best way to go about thinking about Intangibles in the business - is to think like an acquirer of 100% of the business. How would someone armed with a war-chest allocate Capital between 2 businesses that have similar levels of Tangibles - but disproportionately different count on the Intangibles?? Why should/could a NIcholas Piramal be sold to an Abbot Laboratories for 9x Sales? There were one or two which followed at 10-11x Sales later
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Surely there is more to a business than the sales and margin figures - there is Intellectual Property for example which we can easily appreciate, and there are Strategic Assets that others cannot replicate at similar cost/time efforts, there is an Architecture of business processes within some businesses - that deals with customers, suppliers, vendors - in a manner that reduces the external bargaining powers to being negligible or managable versus another that is exposed to higher competitive intensity from multiple forces, and yet is managing a steady job.
Where will the 100% Acquirer of the business like to allocate more Capital??
If we bring in that paradigm into our Valuation thinking, we believe we will do a far better job of separating the Wheat from the Chaff.
- When we start thinking this way, there are many many small things together that may (or may not) add up and give us the FEEL - that required comfort and conviction - Yes it is a business that has a long runway, Yes it will be very very difficult to dislodge this guy from its perch, yes we may expect a certain consistency in performance, and YES there is a big Gap between Perception & Performance.
We have been coached - the ART of Investing is all about developing that FEEL about longevity, sustainability and predictability in the bsuiness, keeping FAITH and staying invested from lower levels - by first doing an enormous amount of hard work on the company - that is an enabler for that kind of a feel after a few such intense efforts. When will you take the first step of compiling Shilpa’s Pipeline prospects , e.g??. Once you do that I can guarantee that this whole approach to Valuing the Intangibles in a business like Shilpa will shift a few gears up :). Without that kind of effort, the assessment into Shilpa is incomplete …
And everyone who can’t appreciate how to go about putting a Value to the Intangibles so described above - please DON’T HIDE under the excuse that it is too abstract to put a finger on. Through our Business Quality Insights PDF we have shown live examples of how to go about doing that in 6 highly well known, well-dissected businesses in VP Portfolio. We have slotted the 6 businesses into different categories, based on how we value the “quantified” Intangibles - we have taken great pains to record that, we could be quite wrong in our assessment - but we have stuck our necks out and shown what we think the stable PE ranges should be for this category of business with these kind of Intangibles, and we have also tried to show if there is a “Gap” between Perception (as captured in PE) and business Performance.
So anyone serious about understanding Valuation at a more granular level has an easy option - pick and choose the business you are most familiar with - and try and create a BQ Sheet on that business like we have shown, share it on VP, get others who are tracking/invested in that business to add value to your efforts, get BQ experts in at the last stage:)
You gotta get out of your COMFORT ZONE first !!