The ART of Valuation

(krrish seth) #142

hi guys

Thank you very much for explaining in a simple & crisp language.


(Donald Francis) #143

Hi @ronak

I am sorry that I didn’t get around to check out your compilation before. Just didn’t have the space due to my various interests :slight_smile:

I spent a quick 20 mins going through your excel. This is indeed a wonderful compilation of incremental learnings at VP over last 6 years.

Some immediate observations/comments
1.Shift the Aspiration - from identifying Multibaggers to just identifying Quality Emerging Businesses
Staying with Quality Emerging businesses that continue to perform - has no option but to take you through market-beating superiror returns - if you can sustain the intensity of the quest. That will be a happy byproduct of your search for excellence

Have seen some very good folks taking not so rational decisions - when the driving quest is Multifold returns - somehow the mind plays its tricks!

2.Its wonderful to see you start off with a compounding sheet over 25 years.
I have seen very few investors extend their horizon over a few decades to “appreciate” the real impact of slow-n-steady miracle of compounding. Some suggestions
a) extend horizon to 4 decades - 25 years starting age to 65 years say
b) use a 26% compounding rate - thats 10x in 10 years
Most folks again blink some before they can answer when quizzed - how many folds do you stand to make if you can find an investment that grows 26% on an average for next 40 years. A whopping 10000x …forget 100x. In a country like India, at the growth stage it is, we can do much much better than 100x!!
Check out Motilal Oswal Wealth Creation studies …may be a good starting point…

At a portfolio level the VP experience has shown us (over 6.5 years now) that sustaining a 26% cagr over 10 years certainly looks doable - when we remain consistent in upping the learning curve, learn to not be in “Love” with our portfolio businesses, always be OPEN and HUMBLE to “appreciate” different styles that work in market, be open to Market cycles to appreciate why Market works the way it works - are some of the prerequisites.
Sustaining it over another 3 decades will be a tough ask - but certainly something that should be aspired for!!

3.Your compilation is excellent, but can be improved
Its still pretty high level - try and bring it down to more practical levels by asking
a) how do you spot a promising opportunity - must have patterns
b) what makes you sit up & notice - success patterns
c) what to avoid at all costs - failure patterns
Look at these threads …there is GOLD in many threads at VP for an aspiring learner. Also see the 2015 and 2016 Chintan Baithak presentations - someone like you will again pick up loads and loads of actionable/practical dos n donts

4.Understanding Yourself

  • what kind of an investor are you - strategic/opprtunistic mindset
  • what are you more excited by - Superior Quality or High Undervaluation
    In my expereince the investing word is neatly divided in the middle. Either you are excited by Undervaluation or you are excited by superior quality. If you belong to one camp, its very very very difficult for you to cross over. Continuus Learners at VP -try to bridge that part through exposure to other successful styles.
  • what kind of a risk taker are you - Calculated risk taker or a risk mitigator
    this aligns with above quaity vs undervauation personality pattern

These are my top-of-mind reactions to your excellent effort. and thanks for sharing this back with the Community. Young Learners take Note - This kind of sustained, systematic approach is needed initially - to drill home things in an untrained mind - then you will see some mental models taking root - which as we all know - are key to our decision-making ability (in the face of incomplete information…it will always be incomplete)

Sorry again for not reverting earlier.
Lets talk sometime next week post 9th …busy with children’s exams now.


(Anand) #144

A quick question. What will be the starting valuation (If it raises funds through New IPO or Preferential Issue) one will be comfortable for a greenfield new venture from a top pharma company? I know everyone can have a different number. But, wanted to know at least a range.

Thanks in advance.

(Ronak) #145

Hey Donald… Many thanks… Really appreciate your advise and looking forward to meeting you / talking to you. Do let me know a convenient time and your email / contact no. . Alternately - my email id is [email protected] . Am looking forward to it. All the best to your kids and a very caring dad for the exams.

(Bheeshma Sanghani, PhD) #146

it took me some time to go through this entire thread and some of the companies ( not all ) mentioned. The three most cited ones are Astral, Mayur and Ajanta. Not that i need to point out however warren buffet also describes the three types of business ( akin but not exactly to the cat a, b and c student analogy )

the art of valuation is to identify such businesses as their story is developing and one of the important components is (i am aware it has been repeatedly referenced & discussed ad nauseam on this forum!) - is how much extra sales / profits is the extra reinvested capital fetching you ( i can see the eyes rolling :slight_smile: )

The evidence thrown up by Astral, Mayur and Ajanta does support this and this is BEFORE they became hallowed. So it IS possible to identify these types of businesses and then deep dive into them to understand their business models. The stock prices of these three companies took off vertically from 2012-2013 onwards.

In all these companies , you can clearly see that the Sales/Profits were growing at a rate which is significantly higher than the Asset base ( Assets are excluding of cash, investments and CWIP), as on 2013 i.e before mr market recognized them fully. These companies were doing a great job at accumulating productive assets. As Arnold schwarzenegger says about body building - the difference between lifting 70 kilos and 140 kilos of iron is just an addition of a couple of pounds of muscle in your body. a bit of muscle in your productive assets allows you to produce outstanding results!

Which brings me to the art part of it - After reading through all the posts here , I could extract 5 generic factors that contribute to making valuation an art ~

  1. Is the company doing something that is unique? ( processors vs IP )

  2. Is the company doing something that is valued by customers?

  3. Can it be replicated by others?

  4. Can it be scaled up OR down?

  5. Are its customers price insensitive or better still do the customers value the product more as its price goes UP ( of course this factor becomes redundant when low price is what makes the company unique)

The ideal company of course would be doing something unique that is highly valued by customers which cannot be replicated by others, the production of which can be scaled up and customers that basically just ignore the price.

With Regards (and i hope this is the right thread to post this)

(krrish seth) #147

Thank you very much donald & all guys

This is one of the best thread in VP i came across. I am trying to grasp every bit of this.

Ajanta Pharma excel sheet is not opening. Please do the needful.


(krrish seth) #148


Thanks for explaining with so much detail, recently in an interview have heard similar view from an investor with an analogy of the Chinese Bamboo Tree : the seed of the Chinese bamboo trees when planted doesn’t show any movement till 05 years and in next 01 year it grows to 90 feet.

This thread is not opening

“Valuation Stages for a Quality Emerging Business: We can All learn to Ride Well”

Access denied / Private


(Bheeshma Sanghani, PhD) #149

Every time i re-read this thread i learn something new. I have been thinking about quickly identifying these processor vs non processor type companies. The idea obviously is that non-processor companies are more valuable because there is just more value addition. So i put myself in the shoes of a person who runs these valuable non processor companies and two things occurred to me immediately simply by this mental switch.

Non processors should have substantially less material cost as a percentage of the total expenses. These businesses will spend less on raw material and more on other things. It seemed logical to me.

The second thing is that non processors will have a lot of talented skilled people working for them and talented skilled people generally get paid higher than lesser mortals like me! :slight_smile: ( my wife says that the only measurable talent i possess is eating )

So % of employee cost to total expenses should be high. These two % of material cost & % of employee cost to total expenses - can be combined in various ways. for e.g % of material cost minus % of employee cost. A lower number indicates that the business is a non processor.

To test my theory i went to ( where else would anyone in his right mind go ? its the iphone of all screeners anywhere)

I looked at some companies mentioned in the above post by @Donald over time and computed the material to employee numbers & found the following.

Look at how Ajanta was successfully able to reduce this number ( the portions shaded green are consistent reductions in these numbers). In fact i think it successfully went from being a processor to a non processor! Or look at Page. or Eicher or any company that catches your fancy.

Do comment and critique. The more i know, the more i dont - after all science progresses one funeral at a time!

(Anuprem) #150

Hi bheesma,

How did you calc material cost, manufacturing cost,. Employee cost… did you do it in

(Bheeshma Sanghani, PhD) #151

Yes i used screener to calculate these costs

(Anuprem) #152

Hi bheesma can you please guide us how to calculate these costs using screener features. I am not seeing these costs directly anywhere

(Bheeshma Sanghani, PhD) #153

you dont need to calculate screener does it for you. Here is the screenshot for ajanta. But ensure you crosscheck with the Annual reports just to be sure you are on the right track.

(hemenrk70) #154

You need to click on Expenses to view these costs.

(praneshrvikram) #155

In the above post what this 1-1.5x sales and 9x sales refers.Is it referring to stocks price? Sorry if it sound silly, you are trying to say something very valuable,i want to understand it clearly.

(praneshrvikram) #156

Dhwanil unable to find the table (is this restriction for new user?) could you please share the same to email [email protected] you.

(NNaik) #157

Double click on Expenses. Even I got to know this today only !

(phreak) #158

Never noticed this before on Screener since there is no indicator that Expenses are expandable. Thank you!

(Mukesh Tolani) #159

Hello Bheeshma,

This is a good way to assess things. I appreciate the unique thinking process.

But in my humble opinion, the decline in (% of material cost - % of employee cost) may not always necessarily indicate the shift from the business being a processor one to a non-processor type. The 2 main reasons for the shift can be :

  1. Increase in net profit margins. This will contribute to : lesser % of material costs.
  2. Increase in employee cost can again be due to 2 reasons : a) addition of more employees to cater to increasing demand & b) annual appraisals to the existing employee strength.
    The former serves better business prospects in the long term.

A simple and a very common way which I follow to assert the company’s increasing supremacy in the market is : a look at the consistent yearly rise in Total Sales., and increase in % OPM. (sone pe suhaaga).

These two almost sum up the story.

(Bheeshma Sanghani, PhD) #160

Hi @mukesh_gt

You are correct. I sometimes look at the employee cost of various companies in the same industry to get a sense of the type of business. Let me share an example from logistics ( data is from screener )

Here are the employee cost%'s & RoCE numbers of some companies in that sector

As you know logistics is a very cutthroat sector and is largely unorganized. If the company invests in employees it must be because the employees are doing some important value addition with their skills. If you look at VRL, Blue Dart, Allcargo & Kesar ( Green shaded) you would see that high employee costs correspond to relatively high ROC’s.

CCI,Sical and Gati ( the orange guys) all dont seem to spend so much on their employees and all seem to have relatively low ROC’s.

A glaring exception is Tiger Logistics which spends a low amount on its employees and is still having high ROC’s which would indicate that it has some differentiated business compared to the rest ( which it has ).

Looking at employee costs and material costs often seems to throw interesting insights into the company businesses. I find it very useful to build a mental picture in my mind.


(deep86) #161


Not sure if this is the right thread or not, but I wanted to understand how to value a stock which is already in your portfolio and it has reached slightly stretched valuation - I am referring to Kajaria. Most of the content that I found was w.r.t. when we buy the shares and it makes complete sense.

If you want I can share the detailed thesis on KCL. but the gist is : -
It is market leader, the tiles industry will continue to grow at decent rate for next 3-4 years, it has good distribution, it is spending good amount of money on branding (60+ cr consistently for last 3 yrs.) which is more than the PAT of some of its listed peers and branding is kind of reflected in good numbers (improving ROC, NPM etc.). It is launching new designs - but i am not weighing that in.

Everyone knows it - and market has provided a high valuation for it. Although, when i compared to some of its peers ( NITCO, Somany, Bell, orient, Asian granitio) - KCL does stand out in terms of business quality and financial with good able management running it. Unless they do something wrong or any irrational competitor comes into the market, KCL should continue to do better than the average market growth.

Now, my question is how should I value a stock which I already hold in the portfolio, for which I am hopeful that business will continue to do well but I am not sure how much of that is already priced in. Does it make sense for me to continue to own this business? Should my valuation of business for buy and hold not be different? How should I go about doing valuation for this and similar stocks.

I read the entire thread but could’nt find one. Mr Bakshi’s example on Asian paint does provide some insight but for every AP there might be thousands of failures as well, what key things I can look to ensure that whether i am holding a high quality business which still has a upside potential from 5 year perspective at current valuation?

In my mind conflict is - I have a feeling that its a good business but is it the right investment at current valuation to continue to hold for 3-5 years?

Any insights from VP team’s experience, Books , links etc would be of immense help to me and would help me to think currently about it.

If this is not the right thread, please direct me to right link( I could not find it though).

This question has been bugging me since long now and not able to get over it.