After getting enough hints from VP conference , i have been just thinking about levered businesses and calculating terminal value for them . Big NO to the levered businesses from two guru’s shocked me and started to think more and more . They hinted us to focus more on culture and stay away from companies whose managements talks market shares and fond of growth . I got a sense that in product companies or other businesses , performance wouldn’t get into cliff all of sudden , where as in finance business you will never know until that happens .
Should we consider the businesses which have blow up chances even remotely ? Can we envisage the probabilities ? If you are not sure then how should we calculate terminal value ( at least in our mind ) ? Say if we have 5 year horizon things should be pretty fine for another five years right ?
Professor has posted excellent piece of article A tsunami of debt is building up in Tamil Nadu – and no one knows where it is headed .
If we invert our doubts and start to think from customer perspective , then i’m getting lot of doubts . In case of repco , we are celebrating tier 2&3 opportunity , self employed segment , prudent underwriting skills so on . If i think of how story can go wrong i am getting lot of new thoughts . In micro finance sector incentives ( I would dare to say lures ) are driving the loan book growth and end of the that is bad credit . How and when the things will stuck ? In Bajaj finance case say if consumer durables companies are not making money and stop to pay such incentives ( 24 Percent IRR ) , what would be the situation ? Say shriram with 28 percent capital adequacy growing at 10-15 percent . why can’t they shore up the loan book growth at 25-30 percent ?
So the point is while evaluating self reinforcing business models , we should also consider these aspects . Prudence , risk mitigation measures , counter cyclical approach , chances of blowing up , Customer repayment capacity .What are the unique traits in the company and management that prevents these kinds of mishaps .