The ART of Valuation

(seshukumar) #121

Dear all,

I am a new comer to vp and had found this thread extremely interesting. I was wondering if we apply the same logic - EPA, ROIIC etc. would you have identified Asian paints, Pidilite, Dabur, Marico etc.? Has any one done the math for proving the hypothesis?

(P Sharma) #122

As the title of the thread suggests, we are looking at the art of valuation and not the science of it. It is easier to get attracted to hard numbers as they tend to convey a picture of what is happening in the business. However, numbers without a narrative convey only half of the story.

Donald Rumsfeld ( erstwhile US Defence Secretary) had made this quote in the thick of the second Gulf War. He was ridiculed for saying this but what he said has a lot of import for all investors as investing in stocks holds the same kind of uncertainty as war.

“There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.”

Known Knowns )- This ispubliclyavailable data. These are things like revenue, PAT and with a little bit of effort data points ROE, ROIC etc. This is level one thinking and it doesn’t provide any edge to an investor.

Known Unknowns â These are the gaps that one is aware of and can be conquered by diligent research. These are things like industry knowledge, companyvisitsand Q&A. This provides an edge over 90% of the investors who don’t think it is necessary to do the requisite research and draw inference of where the odds lie. This is more like level 2 thinking and provide adiscernibleedge in the markets.

However, the harder aspect of the known unknowns is what this thread is trying to achieve in terms of trying to narrow down some of the factors we think impact valuation of companies in the long term. Liquidity, dividend payout, FII/DII participation etc have been discussed.

Unknown Unknowns â These are the investor blind spots. The size of the box varies from one investor to another. This is the investment journey and comes from experience and a result of the maturation process. The idea should be to keep reducing the size of this box both through self and vicarious learning.

The hardest part is to accept that there are unknown unknowns. However, no matter who you are, this category of unknown unknowns will always exist. Herein comes individual investing characteristics like humility,patienceand discipline. The ability to accept that there are some things about the business or the markets that i don’t even know that i don’t know.

As Donald very rightly puts it,have faith that i have done all that i could have done in terms of my research and now the best thing i can do is to sit tight and wait for the story to unfold. We tend to over analyse every piece of news coming out and every quarterly result. This noise at times drowns out the signals and we end up taking decisions that we shouldn’t.

(Arun S G) #123
[quote="Donald, post:96, topic:286853916"] * Those interested in the Calculations can find detailed workings in attached Ajanta Excel. Best part is you can upload this excel at and download the same calculations (automated) in a jiffy - for any business of your choice. Eternally grateful to Pratyush & Ayush Mittal for this wonderful service/tool [/quote]

Very good discussion here!

The ratios ROIC and EPA are calculated based on current year's numbers. However I would think that the EPA would accrue based on investment that happened earlier which may, or may not be within the same financial year under consideration. In essence, there is a lag between the time investment happens and the time it generates EPA. When the calculation does not capture this fact, is it to not complicate more than necessary, or is there refinement possible to capture this fact? For example, one might consider calculating the EPA based on average of this year and previous year investment. This would certainly vary across industries, for instance between Pharma and consumables, or steel.



FY2013 Ajanta Mayur Astral
Sales (Cr) 839.20 380.54 821.09
EBITDA Margin 25.58% 18.87% 13.84%
Invested Capital (Cr) 460.88 125.81 302.98
Capital Turnover 1.82 3.02 2.71
EBIT/Invested Capital 39.49% 52.95% 31.68%
Tax Rate 28.51% 32.13% 22.28%
RoIC 28.23% 35.94% 24.62%
RoIIC 72.46% 125.56% 24.28%
WACC 13% 13% 13%
EPA 70.19 28.86 35.21
EPA/Sales 8.36% 7.58% 4.29%

(Administrator) #124

Thanks Arun for your query. Your comments are valued inputs into the EPA discussion.

However this is not the EPA discussion thread. This is the ART of Valuation thread, It was made very clear that all EPA specific discussions need to be carried out on the Business Value Drivers thread.

We will start enforcing this more strictly from here on - in a bid to keep important discussions clutter-free

Kindly repost your query in the appropriate thread. Pls take the trouble of finding the right thread and do the needful. Everyone please pay attention to a simple tenet : Are you adding value to the ongoing discussion? Is this the right place for your query?


(Karan Maroo) #125

Sorry for bumping this, but just had a query regarding this.

Was reading this concept a few days back and loved the paper - the concept of breaking value down into two parts. Just a query, from the comments and follow ups, since there is no effect of inflation accounted in calculating the steady state value,shouldn’tthe cost of capital also be inflation adjusted? So lets say, for a company having 50% equity and 50% debt as its capital structure: WACC = 16% (assumped CoE) + 11% (1-33%) (assumed CoD and tax rate) = 12%. However, IMHO, weshould notbe using this WACC in the equation for steady state value; rather we should be usinginflationadjusted WACC which should be much lower.

Any thoughts on this? Please correct me if I am wrong.

:)) ;)).



Mr reasoning? _

Business Value Drivers Link: …/…/…/forum/valuepickr-scorecard-aug-2011/184497495 lots of lots of examples Link: …/…/…/forum/top-down-sectoral-dissections/531558273 Foundational paper on Valuation Link: ]




(Ishaan Gupta) #126

@karanmaroo Another similar approach to this is to calculate the Fair P/E of the company using the formula:

And to calculate this Fair P/E in several small components and add them up: From the retained earnings in the first 5 years, from dividends in the first 5 years, From the retained earnings in the next n years and from the dividends in the next n years and the terminal value effect on the P/E.

I have described this in detail at:

Hope that helps.

(rampalp) #127

Dear Sir, Why is this post not opening?

(Rupesh Tatiya) #128

Very interesting thread. Many important concepts like

  1. Think like an acquirer
  2. A new entry into the portfolio must not rank the last
  3. Market values different businesses differently (Average, Laborious, Smart etc.)
  4. Understanding the business is the only margin of safety
  5. Undervaluation can not be a basis for extra long-term (>10 years) investments as valuation will catch up sooner than later.

Now to put these to use is a big task and effort.

So here is my question regarding KRBL:
Most of the company’s revenue comes from branded rice sales. They are market leaders in Basmati rice. Their prices are 10-20% higher than rest of the market and they have very integrated operations.

My question is - at what point Mr. Market value it as an FMCG business? Will it ever value it as an FMCG business? OR What does KRBL will have to do so that markets see it as FMCG business?

I’m skeptical that KRBL will have pricing power in the long term (rice is rice!!), but that needs to be tracked.

If this is the wrong question for this thread, then please help it move to the correct thread.


(Donald Francis) #129


If you are otherwise convinced about KRBL, can you keep aside Valuation, and learn/assimilate all about the Business.
Trying to put together a BQ Sheet (on the lines of the 6 shared) with complete integrity - will make it clear to you how much you really know/understand about that business.

Ask anyone who has an attempted a BQ sheet - Anant, Dhwanil etc - the real insights are revelaed when you do an honest job there.

My suggestion for you will be no different :smile:

(Rupesh Tatiya) #130

Sure Donald, I’ll work on BQ sheet for KRBL and try to present in this forum (In KRBL thread) in 1-2 weeks.

But my intention behind asking question is not particularly regarding KRBL but to eke out a particular aspect of ART of valuation. When does Mr. market decide that business has transformed itself from category B business to category A business? Is there any mental model for it? Does this phenomenon happens often?


(Donald Francis) #131

We don’t usually see a Category B business making the transition to a Category A business. The industry dynamics, the business model it follows - startegic assets and business architecture - are evidence enough to slot the businesss. Sure the competitive position can and do get strengthened (or deteriorate) over time.

Mayur and Astral were always A category business for us - it didn’t transition from B to A when Market recognised it. All the characteristics that determined the category slot were in evidence from 2010 when we saw them - or for that matter an Ajanta Pharma or a PI Industries.

Its about Business Quality. Its about our mind being trained to Value the Intangibles in the Business. Mr Market may take 2 years or 5 years to wake up - to sustained., predictable performance. When they wake up is not in our hands.

Its futile to try and predict that. Its far more profitable to focus on correctly slotting your business - gain those crucial insights in the business - that is your edge over Mr Market.

(Ronak) #132

Hello Donald / All,

I have been reading this thread to learn more on the Art of Valuation. I am amazed at the kind of knowledge shared on this forum - thanks o you and all vetrans of investing. I have got stuck on this post where u have calculated the EPA - the thread contains an excel link - but am unable to open. Would anybody be able to send me the excel pls.

(Ronak) #133

Hello All,

It seems people have missed my querry - so repeating it. Kindly mail me a copy of the excel calculating EPA of Ajanta Vs Mayur Vs Astral. I am not sure whether we can openly share the email id on this forum - but since this is not for soliciting anything - here’s mine.

(Donald Francis) #134

Sorry about the late response.
Takes time…Digging out old files :slight_smile:
last worksheet …future value/EPA calculations

Ajanta-Pharma-Future-Value.xlsx (79.0 KB)

(Ronak) #136

Thanks Donald,

This means a lot. I am obliged and vow to give back to the forum everything that I learnt. I have made a small note of my leanings from the forum - still work in process but will share the same once it is complete. But the journey has just begun - Me destination being my Financial Freedom - I will need your and all the members support to achieve it. Kindly bear with me through this wonderfully challenging journey - am sure it will have it’s ups and downs.

(Alphin) #137


From my limited knowledge I think I can summarise that theoretically a portfolio return can be expressed as

Return = Uv x Pfd

In this equation

Return = return that may be realized.

Uv = undervaluation return

Pfd = probability of failure of the business.

For example

In case of a company in which we estimate the Pfd to be 0.7 which assumes that there is only 70% chance that business will survive.

We need a undervaluation return of 200%.

So 200 x 0.7 = 140

That is our return.

Now in this Ev = undervaluation return that can be calculated by dcf, net net etc.

Pfd can be calculated theoretically by examining each event that may affect the company, thier probability of occurance, their magnitude of affecting the compnay. However it will be beyond the scope of an individual investor. Hence this will be the art side of investing considering management quality, business model, moat , etc all this are the risk and survival factors that may be considered to assign a probability of failure factor.

Theoretically this concept is used in calculating failure rates of safety systems in nuclear plants, oil and gas industry. Aeronautical industry etc.

In these Pfd is also assigned considering the previous data of failure of components.

(Alphin) #138

As an example I would assume a Pfd of 0.99 for Coca Cola and would consider buying at faire value.

But in case of Welspun right now I may assume a Pfd of 0.4.

(Ronak) #139

Hello Donald & All

As promised - I am through with my reading of the threads on

  1. ART of Valuation
  2. Business Quality: Calculating the Value Drivers of the business
  3. Business Quality: Refining our thinking on “Great Businesses”
  4. Assessing Value: To a 100% acquirer of the business! (This is my personal favorite so far - highly intellectual though abstract).

Attached is my summary of learning from the threads. It is excellent - seems like taking the 1st baby step towards the learning. Please note that these are inferences which I have drawn from the reading and hence they are MY OWN - given that I am a novice - I may not have done justice to the wisdom and hence is not a substitute to reading the threads.

I have the following request -

  1. You refer to a revised version of the Business Quality Insight - post review / suggestions by some members. Again, the excel does not seem to open. Kindly upload the latest version for the benefit of readers.

  2. The business quality presentation PDF refers to the VP Management Quality Insights presentation (Which I have read) and
    Valuation Insights presentation - which I am unable to locate. Kindly also upload the same.

  3. Having read this - I think the next logical step would be to undertake the case study of the stocks - just wanted to confirm - am I missing something - Do I need to read any other thread before undertaking the stock study threads.

  4. I request Donald / Seniors to read it once atleast - to see if it is useful - suggest ways where we can improve it’s usability on this forum. Hope this helps

Thanks for everything…
Identifying Multibaggers - Q&A.xlsx (42.2 KB)

(Finrahul9) #140


Mr D: Just check. It’s rare to find Processors crossing 1-1.5x Sales in their lifetimes. And do we have examples of businesses that add-value. Haven’t you noticed Piramal Health being acquired at 9x Sales. There’s a clue there!

Is this Market cap/ Sales ?
Thank you

(Ronak) #141

Yes…it is market cap to sales…

September 24

Mr D: Just check. It’s rare to find Processors crossing 1-1.5x Sales in
their lifetimes. And do we have examples of businesses that add-value.
Haven’t you noticed Piramal Health being acquired at 9x Sales. There’s a
clue there!