I have had a few calls since morning on the above Topic. Let me reproduce the 1 hour plus conversations - and I had 4 of them including one last night :). There was a common pattern of objections.
Q. This concept of Future Value creation - is it really new? We use it all the time in evaluating start-ups or PE investment.
A. Of course it is not new. But how many apply it diligently, or are very clear about how to use it Sir?. I started looking at it in 2011 - in the Business Value Drivers discussion. Only in this past week I can say with honesty - that I think I know how to use this well as another refinement in my toolset.
Q. So what is the new insight ??
A. If you asked me 2 weeks before about relative merits about investing in either of Ajanta, Mayur or Astral now - I would have 5-6-10 points in each business about the pros and cons of the next 2-3 years. However none would have been as compelling or insightful an answer as the EPA table I shared. I know that's true because without the EPA Metric sitting firmly in my head I did not have this clarity. Obviously without this small refinement I would have failed to transfer my conviction.
Q. Okay. But isn't this making too many assumptions? That the businesses will retain similar or better RoIC or RoIIC patterns in next 2-3 years?
A. Yes. But we are forgetting to note that the businesses in question - Mayur, Ajanta, Astral - we have been tracking and invested in now for 3-4 years. We have good knowledge of the industry and respective competitive positions. It may not be off-the-mark to say we know/understand what is possible and what is not possible in the industry. It may even be correct to say we have an edge over the market in understanding the business closely. On top of that, we understand the Management - their depth, their bandwidth, their hunger in upping the ante. Every year of association we have got a little better at that - is that a reasonable assumption.
Then all we are saying is that the ODDS are high that the businesses in question will continue to execute and continue to record normalised RoIC levels.
Q. Hm! But is it incorrect to say that this still does not factor in the Risks in the business or in the environment?
A. :). Now its my turn to smile. Sir - Risks can be nailed down to the number of variables in the business. For us Astral was a ZERO RISK investment 2 years back - on 2 counts Mr Market thought were the biggest risks. Forex fears and on CPVC competition (every Tom Dick and Anupam was advertising CPVC manufacturing on the back of Autos - and there were biggies like Supreme adding capacities. With our closer understanding and 360 degree interaction with stakeholders in the business- we thought these are Ignorable Risks.
Other than that if there are environment or other new variables that suddenly crop up - that may well be true for any business. No Valuation modeling or ART can capture that.
Q. Final question. It seems that you are mixing up Science of Valuation while talking about ART of Valuation!
A. Yes. We are doing that. We still maintain the Science part is only 30% of the job. All our hard work, industry scuttlebutts and understanding of the business and continuous refinement in Business Quality thinking and Investment thinking - that is the rest 70% - and they go hand in hand; one without the other can fall flat!
But I wasn't even doing justice to the 30% Science job so far - I didn't have a EPA metric to cite between Ajanta, Astral and Mayur!!
VP Q. So now do you agree this is indeed a valuable addition/refinement to an average investor's toolkit? Something a learning investor should be excited about??
Yes. and Yes. I could finally get my point across.Communicating effectively is an ART :), we have miles to go there... I think all will readily agree to that.