Success Patterns!

[onlycastel]

@Donald

Thanks Tony, for pointing to another excellent article.

Usually its a good idea to highlight in 1 or 2 paras what you so liked in an article. For one, this exercise makes you retain what your read in some way; and on the other hand folks like me who consciously try to stay away from the information overload - may get drawn by the quality of the ideas/thoughts brought forward.

I am reproducing what I like from the article, as below:

the other hand, even though the infrastructure space is being beaten down by the markets, Andrade remains bullish on a player like IRB. He says the company operates in the 561 km Ahmedabad-Baroda stretch and traffic on this stretch is expected to grow tremendously, thanks to the GDP growth. Back-of-the-envelope calculations suggest that IRB could collect Rs. 20,000 crore in toll by the end of 2020. These are the types of businesses that Andrade believes will outlive any IDFC, Andrade is now brimming with optimism in spite of the drubbing that the mid-cap market has taken. He is hinging on consumption cycle to bail out mid-cap companies. are hardly 25 percent into this (consumption) cycle. One of the biggest drivers for this change is the fact that you have migration happening from rural to urban areas which will help he says. In the last 10 years, per capita income has crossed $1,600, but is still 60 percent lower than In another 15 years, he asserts, India and China will account for 30 percent of the market capitalisation and 40 percent of the world population. And when that happens we can expect the market to go up by four times from its present outsourcing was to the and infrastructure in the last decade, globally, consumers can dictate the next he says. No wonder that India has followed in the footsteps of other countries to boost consumerism lowering interest rates and increasing salaries. The increase in salaries has also put three public sector undertakings (PSUs) in the top five bracket in the Index. And this is the group that Andrade is pinning his hopes on as they account for 17 percent of the population. He believes that these are the people who will not downtrade in any kind of economic

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Dear Donald,

A good sum up of the article. In future i will give a synopsis and also give a link to those who want to read the whole article. Is this suggestion ok with you??

_

[Donald]

Dear Tony,

Exactly. It always helps to post a synopsis with the link(s). Readers will thank you more for that.

-Donald

[Donald]

Hi Guys,

Here's one more attempt to refine - from the submissions so far.

Company	Success Pattern(s) identified	Elementary Mental Model(s)
Manjushree	a) supplying to ALL the big names/MNCs in FMCG business b) consistent big jumps in Operating Margins - from 13% to 16% to 19% plus in almost consecutive years in a very competitive industry c) industry-beating metrics - better than global biggies in the business - MNcs at ~10%+ OPMs d) management meet - grounded simple guys, excellent grip over their business, knew exactly what it takes to be successful in this extremely competitive industry - knew what they were doing to a T e) consistent effort at value-addition - staying ahead of the curve - designs/technology	Jump in Operating Margins Ability to Service Global Brands Conscious effort at Moving up Value Chain
Mayur Uniquoter	a) asset-light business model in a manufacturing industry?!! (fixed ssset turn ~8x - first wow!!) b) consistent increasing efficiency trend - take anything - power costs, employee costs, SG&A costs, margins, asset turns, working capital, debt - take anything - I couldn't find a better example - (this was a classic textbook case -total wow!!) c) management meet - humble grounded guys, underpromise n over-deliver type was apparent even in my first meeting, again excellent grip on the business operationals d) global marquee customers like Chrysler & Ford - should go on to next level! e) Consistent reduction in Debt f) consistent efforts at moving up the Value Chain	Jump in Operating Margins Consistently increasing Asset Turns Servicing Global Brands Consistent reduction in debt with growth Conscious effort at moving up Value Chain
Balkrishna	a) best in industry metrics - comfortably beats all the MNC biggies in its off-highway tires niche; competence built over many years b) a global Indian brand!!? - Michelin Investor presentation mentions BKT as #3 in Europe! (Wow!) c) management meets - shows us the company is in top of all operational challenges/issues - whether forex, or raw material or execution on ground d) ability to take price hikes on regular basis to counter RM hikes	Ability to take price hikes Ability to Service Global Brands
Astral Poly Technik	a) huge Size of opportunity - this is the first time I really got to appreciate this - every house/every building in this country would need these products (but effectively few suppliers) b) exclusive tech relationship - Lubrizol controls 80% of this worldwide market - and these guys have the strongest relationship with Lubrizol (most products licensed all over the world) - tells me something, again (?) c) focus on innovation - coming out with new products every year; focus on growth; focus on building capacities as the ways to sustained growth d) Very tightly-knit, superbly motivated distribution network e) positive feedback loop from every level - management, employees, distributors, plumbers f) ability to take price hikes on regular basis - good understanding with fellow licensees	New Products every Year Ability to take price hikes Conscious effort at Moving up Value Chain
Suprajit Engineering	a) dominating its niche of automotive cables totally - 100% of TVS, 85% of Hero Honda, 80% of Bajaj - hey this guy is going to be pretty difficult to dislodge by any competitor b) consistent margins & returns and growth c) cost of product negligible to cost of assembly/product; so can take that 1or 2 rupee hike needed to ensure margins without big scrutiny of OEMs d) winning global customers like BMW - should go to next level!	Niche Monopoly Ability to Service Global Brands
Gujarat Reclaim	from Ayush - a) Good consistent growth of 25-30% with ROCE of 30%+ b)Consistently growing liberal dividend c) The co had low working capital requirement and hence BS looked strong d)It's a "green" business - i.e. environmentally positive business and hence great future e)The promoters seemed honest and very well qualified - MD, ex IITian & son had work ex from Boston Consulting. On meeting this held out really well and the promoters seems hard working, honest and hands on the business	Ability to Service Global Brands Conscious effort at Moving up Value Chain
Kaveri Seed Company	a) astonishing numbers - huge growth b) Play on Intellectual Property of home grown hybrid seed companies in India - that made the Monsantos of the world ineefective - had to change their business model - to remain relevant in India - for the first time Monsanto licensed BT gene tech to others c) huge size of opportunity d) a certain street smartness - to ensure production scalability - the other major success ingredient needed for success in the market, other than having the right product - yet to play out decisively; needs watching
Atul Auto	a) simple case of replicating "home" success in other states - they had the right product, was #1 & #2 in Gujarat & Rajasthan, and now moving to new territories b) low base effect - big competitors with negative growth, only small competitor growing consistently 30-40% c) management meet - simple grounded folks, knew what they were doing; emphasised sustained growth depends a lot on coming good on the "right" local distributor d) very Low Working Capital requirements e) Strong reduction in debt with growth - as sales went from 81 Cr to 300 Cr - debt reduced from 34 Cr to 4 Cr in last 5 years	Low Base Effect 2nd/3rd Largest player in its market Consistently increasing Marketshare Consistently increasing Asset Turns Consistent Debt Reduction with Growth
Indag Rubber	will get Viraj Mehta to fill this; he was the GUY behind the conviction on Indag
Oriental Carbon	a) "second alternate supplier" to major OEMs; Solutia supplies 80% of the market; the majors have a vested interest in keeping this guy alive - even share/upgrade tech secrets, long term arrangements!! b) sudden jump in operating margin to 25% plus (2-3 years back) is a HUGE thing for most companies; and exemplary in chemical industry; not sure of sustainability - despite a oligopoly situation - very few worldwide suppliers c) management meet - establishes sustainability pretty effectively - convincing facts/arguments; when growth returns there should be big kicker!	Jump in Operating margin 2nd/3rd largest player in its market Protected Margins
Poly Medicure	from Ayush a)The co was growing at about 30% and was in an interesting field of medical disposables which has a great future b)The management was young and looked honest and quite capable. Interestingly they had appointed Mr D R Mehta on the board and he is a very honest person with a great vision c)The product had entry barriers in terms of patent, product designs etc and usually doctors won't use a new name very soon. d)Company had shared its vision/plans of scaling up and is seen to be walking-the-talk
Amara Raja & Cera	from Dhwanil - Another pattern that I noticed is focusing on second/third best companies in an oligopoly industry that is growing at crisp rate. a) Take example of Cera and Amara Raja. Both these companies operate in an oligopoly market and are second/third largest players catching up with the leaders. Logically also it makes lot of sense. b) One of the advantagecompanies playing secondfiddle to leadersenjoy is that typically their margins are protected because most of the time market leader in an oligopoly markethas pricing power and hence market leader protects its margins. This ensures that even second/third largest players also protect their margin. c) Another obvious advantage is low base second/third largest players have. So if the company operate in a reasonably growing industry having,say, 10% CAGR, second third largest players typically outgrow the industry by some margin hence decent growth is a highly probable scenario. Growth with protected margins ensures earning growth. d) Moreover, typically market discount second/third largest players with respect to market leaders. Hence valuation wise they trade at discount to leaders while growth/other matrix are comparable to leaders.	Low base effect 2nd/3rd largest player in its market Consistently increasing Market share
Ajanta Pharma	a) Introducing 10-15 new products every year b) consistently increasing operating margins from 14% in Fy06 to 19% in FY09 to 22% in FY12 c) Focus on niche segments/innovation	Jump in Operating Margins New Products every year Conscious effort at Moving Up Value Chain Consistently improving IMS Pharma Ranking Consistent Q-o-Q and Y-o-Y increase in Promoter Shareholding

[Donald]

My first reaction.

It’s important to pay attention to these elementary models when we see one or more of these playing out - with Sales Growth

a) Jump in Operating Margins

b) Consistent increase in Asset Turns

c) Consistent reduction in Debt

These are basic & simple, right - that’s why they are perhaps aptly called “elementary”. Its not that we are not aware of them, but exercises like these have helped to entrench these firmly in my mind.

In addition to the fundamentals being strong, if I notice the above trends playing out decisively, I am certainly going to give much higher weightage, in my Conviction Ratings.

Views Invited. Please help add different perspectives.

Best is to discuss, where among our current picks do you see some of these playing out? e.g. I am realising it may be real important to catch a fish - when operating margins see big jumps (again, all things being equal) - and we can establish sustainability of the same.

[Prdnt_investor]

Of the recent ones under discussion - La Opala. See attached image.

[janak]

@Donald

You have posted very imp post today. Somebody wise had said that easily identifiable pattern seldom repeat. However my view is that if we pay proper attention and are prepared, then we can benefit a lot from recognizing those patterns and then benefiting from them.

Dear Donald,

There r repeating patterns in so many industries, particularly in cyclicals. I wud rather not put them here! What happens is that if we r prepared at that point in time with dry gun powder, we as an investor can benefit a lot. Many times it makes sense to go 100% equity and then 100% cash.

JM

Dear Janak,

Thanks for the reassurance from your experience.

Please post a few of the important repeating patterns that you use/have used - with company/situation examples - so we can document the same for everyone’s benefit!

Thanks

Donald

Dear Donald,

[Donald]

Some comments from Mr M (of Capital Allocation fame).

A good beginning.

Few thoughts:

1). At a higher level, I’d say we’re mixing “causes” and “effects” in this exercise and the two need to be segregated.A company must be doing something right in its business to derive favourable consequences (at times unintended).Servicing global brandsis a cause and jump in operating margins isthe effect.

2). Consciousshift towards expanding higher value-add productswould beanother cause (are we not finding this pattern in any of the companies covered?, may be in Suprajit) in identifying the success pattern.

3). In 2nd leaders, one important (and often decisive) success pattern to be tracked isincrease in market share****as % of total organised market.I don’t followamara & cera but theymust beexhibiting this if they have undergone a successful re-rating at the hands of market. Hawkins is currently witnessing this pattern for company-specific reasons (it’s own capacity) and industry-specific reasons (quality concerns of competitors etc).

4). Likewise,increase in promoter’s shareholdingq-o-q or y-o-y (not one time spurt) should be another decipherable success pattern.

I also would like to highlightfollowing larger risk of documenting this whole exercise for future investors, and I’ve no idea how ValuePickr is going to guard against it:

Selective cognition of amateur investors (and even seasoned investors) might cloud their judgement when theyrelate tosuccess patterns documented by ValuePickr, and as a result might prevent them fromfactoring other risk factors associated with a company.

[Arjun_BC]

Donald,

Very Ineteresting points.

To add to what you have mentioned above. why success patterns may not factor other risk factors , here is a very interesting article.

It is called the problem of silent evidence.

Diagoras, a nonbeliever in the gods, was shown painted tablets bearing the portraits of some worshippers who prayed, then survived a subsequent shipwreck. The implication was that praying protects you from drowning.

Diagoras asked, âWhere are the pictures of those who prayed, then drowned?â

What Diagoras was pointing to is called “the problem of silent evidence.” The worshiper who drowned did not have any pictures to prove that they prayed and drowned. They are evidence of the fact that âpraying does not protect from drowningâ but are silent because they are now at the bottom of the ocean.

Here is the complete article :http://www.gurufocus.com/news/192657/generating-buffett-randomly

[Donald]

Some more comments. This time form Mr D ( Capital Allocation fame)

Good Progress.

I think part a (identifying elementary mental models) is starting to be addressed nicely…it’s part b that is, ability of chosen companies to tackle various threats (in the past and future), survive and live to fight a another day (which admittedly is subjective and wide-ranging in scope) that might strengthen the argument. Part a and b are two sides of the same coin/question …each co will demonstrate its jockey’s ability uniquely.

Balance sheets of these superstars mightdeteriorate rapidly if threats are under-estimated by the jockey (mgmt) …investors typically overlook these mistakes in the stocks they have had success with and fallen in love with

[akbarkhan]

Hi Donald,

Just came to mind… how about “Capacity expansion mainly using
internal accruals”?
Mayur, Atul, Supreme come to my mind.

Also as in Mayur, “Cost of product (synthetic leather) is small part
of the final product (car)” This gives ability to increase prices when
increasing in RM costs and the car maker passes on the increases to
the end customers. Further when the RM costs are consistently
increasing, there is always mark up for the margins. e.g. RM cost
increase 10% from 70 to 77, Final price is also increased 10% from
100 to 110. Thus addition of 3% to margins, when RM cost increase by
10%.

Best regards,
Akbar

[Donald]

Hi,

Some great additions/refinements.This is starting to look good.

Please keep sending in valuable observations/perspectives.

-Donald

a) Conscious effort at moving up the Value Chain - atleast 5 companies exhibiting this trait

b) Consistent Increase in Marketshare (Eating away market share form others) - All 2nd/3rd player

This pattern can sometimes can play out decisively (like in Hawkins currently, as mentioned by Mr M), and when tracked properly, can provide rich benefits

c) Consistent q-o-q and y-o-y increase in promoter holding - another easily decipherable pattern

Dangersfrom oversimplification of thefocus on Success Patternsshould beadequatelybalancedthrough a similarfocus onRisk Assessmentand Management's demonstrated Risk Handling ability.

Company	Success Pattern(s) identified	Elementary Mental Model(s)
Manjushree	a) supplying to ALL the big names/MNCs in FMCG business b) consistent big jumps in Operating Margins - from 13% to 16% to 19% plus in almost consecutive years in a very competitive industry c) industry-beating metrics - better than global biggies in the business - MNcs at ~10%+ OPMs d) management meet - grounded simple guys, excellent grip over their business, knew exactly what it takes to be successful in this extremely competitive industry - knew what they were doing to a T e) consistent effort at value-addition - staying ahead of the curve - designs/technology	Jump in Operating Margins Ability to Service Global Brands Conscious effort at Moving up Value Chain
Mayur Uniquoter	a) asset-light business model in a manufacturing industry?!! (fixed ssset turn ~8x - first wow!!) b) consistent increasing efficiency trend - take anything - power costs, employee costs, SG&A costs, margins, asset turns, working capital, debt - take anything - I couldn't find a better example - (this was a classic textbook case -total wow!!) c) management meet - humble grounded guys, underpromise n over-deliver type was apparent even in my first meeting, again excellent grip on the business operationals d) global marquee customers like Chrysler & Ford - should go on to next level! e) Consistent reduction in Debt f) consistent efforts at moving up the Value Chain	Jump in Operating Margins Consistently increasing Asset Turns Servicing Global Brands Consistent reduction in debt with growth Conscious effort at moving up Value Chain
Balkrishna	a) best in industry metrics - comfortably beats all the MNC biggies in its off-highway tires niche; competence built over many years b) a global Indian brand!!? - Michelin Investor presentation mentions BKT as #3 in Europe! (Wow!) c) management meets - shows us the company is in top of all operational challenges/issues - whether forex, or raw material or execution on ground d) ability to take price hikes on regular basis to counter RM hikes	Ability to take price hikes Ability to Service Global Brands
Astral Poly Technik	a) huge Size of opportunity - this is the first time I really got to appreciate this - every house/every building in this country would need these products (but effectively few suppliers) b) exclusive tech relationship - Lubrizol controls 80% of this worldwide market - and these guys have the strongest relationship with Lubrizol (most products licensed all over the world) - tells me something, again (?) c) focus on innovation - coming out with new products every year; focus on growth; focus on building capacities as the ways to sustained growth d) Very tightly-knit, superbly motivated distribution network e) positive feedback loop from every level - management, employees, distributors, plumbers f) ability to take price hikes on regular basis - good understanding with fellow licensees	New Products every Year Ability to take price hikes Conscious effort at Moving up Value Chain
Suprajit Engineering	a) dominating its niche of automotive cables totally - 100% of TVS, 85% of Hero Honda, 80% of Bajaj - hey this guy is going to be pretty difficult to dislodge by any competitor b) consistent margins & returns and growth c) cost of product negligible to cost of assembly/product; so can take that 1or 2 rupee hike needed to ensure margins without big scrutiny of OEMs d) winning global customers like BMW - should go to next level!	Niche Monopoly Ability to Service Global Brands
Gujarat Reclaim	from Ayush - a) Good consistent growth of 25-30% with ROCE of 30%+ b)Consistently growing liberal dividend c) The co had low working capital requirement and hence BS looked strong d)It's a "green" business - i.e. environmentally positive business and hence great future e)The promoters seemed honest and very well qualified - MD, ex IITian & son had work ex from Boston Consulting. On meeting this held out really well and the promoters seems hard working, honest and hands on the business	Ability to Service Global Brands Conscious effort at Moving up Value Chain
Kaveri Seed Company	a) astonishing numbers - huge growth b) Play on Intellectual Property of home grown hybrid seed companies in India - that made the Monsantos of the world ineefective - had to change their business model - to remain relevant in India - for the first time Monsanto licensed BT gene tech to others c) huge size of opportunity d) a certain street smartness - to ensure production scalability - the other major success ingredient needed for success in the market, other than having the right product - yet to play out decisively; needs watching
Atul Auto	a) simple case of replicating "home" success in other states - they had the right product, was #1 & #2 in Gujarat & Rajasthan, and now moving to new territories b) low base effect - big competitors with negative growth, only small competitor growing consistently 30-40% c) management meet - simple grounded folks, knew what they were doing; emphasised sustained growth depends a lot on coming good on the "right" local distributor d) very Low Working Capital requirements e) Strong reduction in debt with growth - as sales went from 81 Cr to 300 Cr - debt reduced from 34 Cr to 4 Cr in last 5 years	Low Base Effect 2nd/3rd Largest player in its market Consistently increasing Marketshare Consistently increasing Asset Turns Consistent Debt Reduction with Growth
Indag Rubber	will get Viraj Mehta to fill this; he was the GUY behind the conviction on Indag
Oriental Carbon	a) "second alternate supplier" to major OEMs; Solutia supplies 80% of the market; the majors have a vested interest in keeping this guy alive - even share/upgrade tech secrets, long term arrangements!! b) sudden jump in operating margin to 25% plus (2-3 years back) is a HUGE thing for most companies; and exemplary in chemical industry; not sure of sustainability - despite a oligopoly situation - very few worldwide suppliers c) management meet - establishes sustainability pretty effectively - convincing facts/arguments; when growth returns there should be big kicker!	Jump in Operating margin 2nd/3rd largest player in its market Protected Margins
Poly Medicure	from Ayush a)The co was growing at about 30% and was in an interesting field of medical disposables which has a great future b)The management was young and looked honest and quite capable. Interestingly they had appointed Mr D R Mehta on the board and he is a very honest person with a great vision c)The product had entry barriers in terms of patent, product designs etc and usually doctors won't use a new name very soon. d)Company had shared its vision/plans of scaling up and is seen to be walking-the-talk
Amara Raja & Cera	from Dhwanil - Another pattern that I noticed is focusing on second/third best companies in an oligopoly industry that is growing at crisp rate. a) Take example of Cera and Amara Raja. Both these companies operate in an oligopoly market and are second/third largest players catching up with the leaders. Logically also it makes lot of sense. b) One of the advantagecompanies playing secondfiddle to leadersenjoy is that typically their margins are protected because most of the time market leader in an oligopoly markethas pricing power and hence market leader protects its margins. This ensures that even second/third largest players also protect their margin. c) Another obvious advantage is low base second/third largest players have. So if the company operate in a reasonably growing industry having,say, 10% CAGR, second third largest players typically outgrow the industry by some margin hence decent growth is a highly probable scenario. Growth with protected margins ensures earning growth. d) Moreover, typically market discount second/third largest players with respect to market leaders. Hence valuation wise they trade at discount to leaders while growth/other matrix are comparable to leaders.	Low base effect 2nd/3rd largest player in its market Consistently increasing Market share
Ajanta Pharma	a) Introducing 10-15 new products every year b) consistently increasing operating margins from 14% in Fy06 to 19% in FY09 to 22% in FY12 c) Focus on niche segments/innovation	Jump in Operating Margins New Products every year Conscious effort at Moving Up Value Chain Consistently improving IMS Pharma Ranking Consistent Q-o-Q and Y-o-Y increase in Promoter Shareholding

[basumallick]

Donald , very good compilation as always. And sorry for not being able to contribute so far. Have been really really busy

Back to success patterns. Can we think of pivoting this table and adding a pinch of Munger’s inversion theory here? What I mean is as follows:-

)- Now you have a list of success patterns that has been derived from looking at individual stocks (over a very short timeframe though, so cannot be sure they are successful!!!)

)- To prove causality, list the patterns on the 1st column and see how many of the stocks are falling in each category.

)- Then consciously think that of other companies (and stocks) which have done well without fulfilling that category. If you can’t find any such stocks/businesses, then you have a robust success pattern. Else, it is more a good-to-have.

Example to explain what I am driving at:

2nd/3rd largest player : Cera, Amara Raja, OCCL, Atul Auto

**Invert (companies which are num 2/3 in their category but have NOT done well) **)- Hindustan Motors (back in the days when Maruti, HM and Premier where the only players), Kingfisher Airlines - just trying to be provocative here , Firstsource (at one time the 2nd largest BPO in India) … I can think of some more if I really put my mind to it and spend some time.

Then the next question is, are these success patterns really worth anything? Let’s look at the Lollapalooza effect of combining more than one factor. Can I think up of a company which has NOT done well when it has been the **2nd/3rd largest player AND **
**Consistently increasing Marketshare? **The answer is I really can’t find any very quickly.

So, then what we need to think about is how we combine these factors and not look at them in isolation. And which ones actually combine to make a killer combo?**
**

[HG_6470]

@Prudent_Invest_

Hi Subash,

As mentioned by Donald, we can readily leverage the capabilities of screener.in without re-inventing the wheel again.

Please concentrate your efforts, in co-ordination with Pratyush, to arrive at a model analysis template as per Pat Dorsey framework. I am also currently reading it and may be help you guys at some point, if required.

After reading One Up…I prepared a basic template, which is kind of a dashboard for my portfolio stocks. However, one need to automate the whole data crunching and computation process to free up our time for reading good books and ARs

attached: Quick Analysis template (Lynch)

Hi Rudra,

I was going thru this thread again. Your dashboard is very useful. Were you able to automate the data updates? I don’t know how to do that and would be obliged if you could share that.

regards

HG

[ricky_]

Where is pattern 2 and 3? Pardon me but I am very much new here.

[preetkaran]

This comment is so underrated

[mileage100]

Sir, the link is not working