ValuePickr Forum

Business Quality 2.0: Towards a more holistic VP BQ Framework for Emerging Moats

The objective is to arrive at a more holistic framework for evaluating businesses with “Emerging Moats”. Businesses not fully-discovered by the market yet, or discovered, but not-fully-valued yet, businesses that we think has the potential to scale majorly from here. The framework attempted is NOT for Mature businesses.

Those of us who got our hands dirty the first time round around Business Quality (BQ) evaluation seem naturally enthused at another formal go at it. We know the IMPACT it had on prodding us into looking/investigating a business - at a far far more granular level.

For the benefit of new VP Members and those who might have missed paying attention earlier to our BQ/MQ efforts, here are quick reference points. Also for anyone interested, but not familiar and starting from ground zero, going through the threads, responses and counter-responses will be very instructive I can assure you.

  1. Business Quality Value Drivers - Apr 2012
  2. Business Quality Value Chain - Oct 2014
  3. Business Quality Insights - Mar 2015

Those who want to jump to the meat of earlier work straightway, here it is

We covered some six businesses (Astral, Mayur, Ajanta, Shilpa Medicare, Kitex, Avanti Feeds) from the VP Portfolio - as you might have noticed, some of them we had already held for almost 4-5 years, had multiple engagements with through extensive Management Q&As, seen them (so to say) walk the talk. Yet when it came to filling up the BQ Template we came up with, it proved very very tough :slight_smile:, believe me. The mind just wasn’t trained to think the BQ way!!

The first valid objection was that these had the major benefit of hindsight, there was probably inherent bias (which it had plenty, now we know). We should showcase an exercise for a new business we come across, which we did follow-up with.

MPS Business Quality - Nov 2015 (link to a pretty lengthy video, almost 2 hours I think).
We fell flat again. Got carried away (most probably due a suave Management) and majorly ignored SCALABILITY of a niche player even as we were convinced of a durable competitive advantage.

Till 2015 (when we finished the first published draft), I had only seen businesses going in one direction - up, up & up :slight_smile: . And then we started seeing a Mayur faltering, and then an Ajanta, and an Alembic. That Reversal to the Mean is a Law, that even seemingly flourishing businesses succumb (something invariably changes in industry, regulations, technology, competitive dynamics, and the like) became emphatically clear to me.

So then, earnest search started for businesses that can defy the Reversal to the Mean LAW (@deepinsight calls these the rarest of the rare). We then came up with this

Self-Reinforcing-Business-Models-Scrutiny-Framework.pdf - June 2016
Self-Reinforcing Business Model discussion
Bajaj Finance was the business presented.

This time the objection was that this was probably too cumbersome, too heavy. If I remember correctly, we couldn’t get too many enthused to carry out an equally detailed exercise on other businesses they liked/admired. Then it struck me that perhaps we needed to go back to basics - simplify - how do I explain/elucidate on the basic business model at the core of a business we like, and then build up from there to BQ,and more refined exercises.

In a moment of inspiration, before a CCL Products Management Q&A, I came up with this, which I thought was really simple to create - for anyone who thinks he knows a business well. All one had to do was first describe what you know about the Market place - customers, how you reach the Customer, who are the Players. And then you describe the other half - what you know about the Product - product positioning, production, technology; and that was it!

Business Model Canvas
And again there were objections :slight_smile: Ha ha

It’s a complex exercise we had undertaken. And despite some crucial insights gained in all these off-and-on exercises right from 2012 as you can see, there are huge gaps (holes even) in our grasp and analysis, we were too liberal with assigning the final verdict (A, A+ and normalised valuation ranges) as we now know - again with perfect hindsight :wink:

However, THIS IS a very very valuable pursuit. If we make bold to participate, persevere, and see through this exercise - our understanding of businesses will mature significantly. Yes, we need to bring a lot of sustained focus - improve on the template, plug the gaping holes, consult available business model literature, pick the brains of colleagues/Mentors we admire, exemplify through businesses we like…and yes, I know, SIMPLIFY!!

An astute observer - some senior VP Member - can’t remember who right now - had a terse comment to offer. Donald, simplicity, or the ability to abstract, comes only after a lot of hard detailed work. Persist with the hard work!

Our job is cut out. I am excited to embark on this journey! Are you?


I think the first job is to identify what were the crucial missing pieces in earlier exercises, what essentials were missed in the Template Placeholders, what needs to be highlighted more (single biggest risk to business, for example), what would help remove self-biases, what would help simplify, and the like.

The second job could be as Abhishek Basumallick suggested, start mapping diverse business models that we see around - businesses that we think are more resilient, businesses that we think can scale a lot, and/or expose fault-lines in businesses we know have known chinks, et al.

Would request @desaidhwanil and @basumallick to take this forward, as they have already raised their hands. Comments/suggestions from others like @Anant @rohitbalakrish_ who have actively participated in earlier exercises would be great.

Anyone else also welcome to participate. Just be mindful to think twice before we post - Are we adding value to the discussion, what helps taking it forward, and the like. Especially welcome comments/suggestions from those who have devoted time to business model/quality scrutiny independently :slight_smile:. Fresh eyes will be extremely useful. Mine are certainly biased.


In my limited experience, figuring out business quality & management quality over the years has become easier - one will roughly get it right. The part that remains hard is figuring out GROWTH & figuring out QUALITY of GROWTH. One has to understand drivers of GROWTH in fairly granular manner & management capability to grow with the environment but more importantly despite the environment. The latter ones who can grow with decent quality of growth are truly the great ones (Think Bajaj Finance or DMart).

Some examples ->
CCL products remains a decent business with decent competitive advantage but growth rates over last 5 years are just sub-par & it might continue to be so for next 2/3 years.
Some other obvious examples where growth has slowed down in last 2/3 years are - Eicher Motors, Can Fin Homes etc. The list is quite long.
Info Edge is one of the great business with great digital assets (Naukari, 99acres, JeevanSaathi etc.) & yet stock did not go anywhere from FY14 to FY17 despite such good BQ. Only when Zomato joined the party in FY17 & started growing 2-3x per year from FY17 that such wealth has been created in Info Edge in last 2/3 years. One can argue about the quality of growth about Zomato but eventually growth matters!

Figuring out growth rates is actually a pretty hard work. CapEx as a proxy to growth is an easiest one but I have realized over time that we need more than that.

Industry headwinds & tailwinds & strength of these winds must be tracked & understood well. e.g. China environment issues leading to CapEx in Indian Chem/Pharma industry leading to such strong tailwinds for GMM/HLE. I am willing to put my neck out & say that these are not A+ category businesses (truly great) but they are not poor quality businesses either. But the strength of tailwinds might carry these decent businesses for quite a while.

Figuring out growth in FMCG type companies or consumer durable or consumer product type companies is again pretty hard & mostly led by micro/macro trends. e.g. I did not see such strong growth coming in AC segment or cables/wire segment in recent past. How does one figure these out? How long will such strong AC growth last? Can one figure out growth of luggage players like VIP/Safari given pretty secular growth in air traffic? Is there a tailwind currently to pipe industry due to various government measures & bad debts at Jain Industries?

Another parameter to look for good growth is innovation & how fast these innovations can be scaled up. An example of this is HDFC Life. The company has created great innovative products consistently over last few years (Credit Life, Sanchay, Deferred Annuity etc.). This has helped them grow despite ULIP products facing headwinds due to general market environment (look at ICICI Prudential growth rates post DeMo). HDFC Life comes close to a company that might be able to grow DESPITE the environment.

Another aspect that I feel I/we do not pay great attention to is RM side story for many companies. There are very few companies who can truly pass on the prices to their customers (Paints companies, FMCG etc.). Most companies will say that they can pass on prices but in reality they can not.
An example of this is AIA engineering - the company had super-normal margins in FY15-FY17 due to subdued prices of RM Ferro Chrome. When the growth really started to come fin FY18-FY19, the margins compressed by 4-5-6% because Ferro Chrome prices shot up & eventually PAT growth was pretty subdued. And mind you, AIA has a decent BQ with duopoly structure in the world, low manufacturing cost advantage compared to other competitor, proven solution that enhances efficiency, throughput, power consumption, wear & tear etc.

Another aspect is most of the times growth projections that I have are based on management commentary. Many times during management Q&A, investors try a little hard to get this out of management. I have tried to train myself to remain skeptical of just management projections & kind of try to find other softer clues one way or another to corroborate the potential for growth.

One final point I would like to mention is to not confuse high growth rates with high quality businesses. I have heard the argument that - “Because this business can grow so fast, it must have great competitive advantage”. This relationship is not a given & one has to be cognizant of this else one is bound to make mistakes of valuation or enter or get stuck exactly at the wrong time.

And that is my morning sermon on GROWTH & BUSINESS QUALITY! Thanks for reading.


Bravo Rupesh!
Nice morning sermon to read on the way to the airport.:slight_smile:. You exemplified the focal importance of Sustainable Growth with great examples. Wonderful thought triggers for all.

Our ability to assess growth sustainability clearly needs much more work. I would venture that by itself would not plug all the holes - there are many other aspects to expose frailties in assessing BQ and MQ. It will be good for all of us to remember that we are mainly talking about evaluating emerging businesses that we come across - not so much long track record businesses where we have seen Management walk the talk (or not) and/or navigate through different market/industry cycles

Welcome more such thought triggering experience sharing. VP is such a wonderful community.


Got some 15 minutes before boarding, and thought of making a quick note. [Note Edit: Remember to upload 205 PI Industries worksheet here]

Sustainable Growth pursuit is like Utopia - very elusive - So far the only Emerging business that has successfully exhibited sustainable growth from the set we came across in 2010-11 is PI Industries. All of 10 years and going strong. Some of that strength is amplified by the China alternate sourcing shift, but that’s more the icing!

Divis Labs is another. But probably that was already a mature business by 2011 (?) and identified as sustainable growth candidate (@SandeepKapadia could vouch for that) till before the FDA fiasco which they handled so brilliantly.

We had done further work after the business model canvas attempt, and PI Industries worksheet in 2016 was a good attempt. So much so that we made a bold attempt to present to PI Industries Executive Director that we thought PI exhibited self-reinforcing business model strength.

We did mention that Pollution regulation was a red herring (for mean reversion) and the day may not be far when Indian regulations tighten up significantly (all of us on Gujarat 2012 trip may recollect the stench in the air in Panoli (?) area on the way to Rajkot for Atul Auto.

Food for thought: Isn’t Sustainable Growth a byproduct of Business Quality and Management Quality? Why try to assess sustainable growth separately from BQ and MQ? Assessing durable competitive advantage in an industry with tailwinds, a more competitive inclusive pursuit ?


Going forward, I feel , Sustainability of Business will be determined , how Organizations are able to differentiate in Customer Experiences, Operational processes and Business Model ,they operate in

Now unlike traditional approach, the source of differentiation will come from , successful harnessing of multiple digital enablers, that is not only for the organization but for the entire ecosystem, something Amazon is successfully doing and constantly improving on

One challenge traditional small & mid cap cos , will face , how to deploy additional money on sustained basis because unlike traditional Capex or system upgrade, this approach needs a visionary approach …Digi- Imagination of the Existing processes and ecosystem

What I foresee, traditional companies , unless , they build an unique product or delivery unique service, will struggle a lot…

@rupeshtatiya mentioned, HDFC Life and why it will grow. Apart from products, one should look into its recent, how it is planning to become Digitally Enabled and Equipped…in future

Insurance companies are making use of IoT, AI, ML , RPA to improve customer experiences, making claim processing simple and transparent

That’s why apart from valuation concern, I am so convinced on Marcellus’s Quality Companies, will grab more market share theories

Also Quality or say their resultant growth will come from , What’s culture of the organization, what’s the leadership, processes they follow,

Recently Mr. Haresh Chawala of The Founding Fuel, mentioned in an excellent article, that Indian Companies, will face significant challenges in hiring good quality talent. That’s actually a reality. Infact he mentioned, HDFC bank’s recent issue is an outcome of that. Inability to hire top class, technical talents…

Business Landscape is changing fast…Companies that just focus on Quarterly earnings will need to beware of …


Some initial thoughts…

There are fundamentally two types of businesses.

  1. Mean reverting (cyclical)
  2. Trending (non-cyclical or long cycles)

My experience has been that there are a very very very few companies or industries which has long cycles, where demand is non-cyclical. Look at companies that have endured for 100+ years across the world. Examples in this category would be banking/financial, insurance, healthcare, food, agriculture and agro products, hotels, real estate, metals and mining.

The biggest mistake that investors make is that they think short term growth is sustainable and project short term growth over the long term. I am yet to come across any business in India, which looks extremely strong and can survive for a 100 years.


The next aspect is technology change and adoption is making huge changes in industries which have remained insulated for decades even centuries. For example, we cannot guarantee that banking will look the same 20 years from now as it has been in the 20.

Evaluating business quality without looking at management quality in tandem makes very little sense. A great business run by a crook management will deliver very different results from a mediocre business with a superlative management. We have many examples in each category. Think about how vanilla commodity businesses like paints or adhesives were branded and made a category (Asian Paints, Berger, Pidilite).

So, when we look at business quality 2.0, my endeavour would be to incorporate business model, management quality and longevity of (growth in) the business.


I think management quality or say integrity has taken a front seat in India because a no of businesses collapsed in the last 2 years.Will like to look for indications for the same and thanks for your contributions as I am still a novice and lost a lot of investment during the period

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Hi Rupesh,

I am away at a family function for 3-4 days, so my responses here are more off-the-cuff than deliberate, considered ones. However I felt compelled to try and respond to the different, very interesting thought triggers from your experience set, so we can take these forward and try to bring everyone on the same page - that’s the objective anyways.

Let’s set the context clearly first. BQ for Emerging businesses - how do we get a FEEL for that. Objective is about creating a holistic BQ Template that could help us in developing a Foresight about BQ of possible Emerging Moats in the face of INSUFFICIENT data (not with the luxury of long track record hindsight…that’s a different quest). Template to use for emerging business that we run into today, tomorrow,

BQ for Emerging businesses come to light progressively, as we get more familiar with the business/industry; usually it takes us upwards of 2 years of sustained performance to get fully convinced to stay on…with increasing allocations. Never on Day1 with the business.

Let me try a reverse chronology tale here:) (@ayushmit , you will enjoy this!)
So, lets say we were attracted to a new business flagged by Ayush asking us to dig deeper …headline numbers and margins on an uptrend for 5-6 quarters. And we had done our usual type of scuttlebutt digging work. We have seen 30% growth for 2 years now, with close to 30% RoE. And Ayush says, imagine what if this proves sustainable for another 6-8 quarters, boss?

Also assume Industry tailwind exists - they are not fighting headwinds - where an emerging business doesn’t have much of a case. All things being equal on other BQ/MQ thresholds it becomes a question of taking a leap of faith and watching them walk the talk (we have done all the homework we could)

If we check back over VP Management Q&As, we will see we never quizzed Management about the near term. It wasn’t about the ability to project near/medium term growth. It was always more about the big picture. We became majorly interested in this emerging business, if our findings indicated following growth drivers/quality of growth Pointers (all other thresholds having been passed, say including Opportunity Size being decent if not exemplary))

  1. Strongly differentiated business model (KEY, and usually the starting point)
    Industry is actually fragmented. Lots of players. The whole industry is going one way, but this Management has the self-confidence to go another way and has created its own profitable niche (always is a niche, in the early days)
    (Think Mayur, Astral, Poly Medicure, Ajanta Pharma, Ambika Cotton, Kitex, PI)
  2. How easy or difficult is it to replace this guy? [in conjunction with 1 above]
    If you look at the above, in most cases, there was no alternative in sight and/or sufficient entry barriers exceeding 2-3 years (Lubrizol barrier for Astral vs others). So again, a very good lead indicator for sustainability of growth.
  3. Is this business becoming stronger or weaker?
    Nearest competition and how much distance it is creating with them. Whichever business this insight were available, it is again a great pointer/dampener to growth sustainability, Ajanta Pharma moving form Rank 80 to 60 to 50 in domestic pharma, and again moving to below 40 in progressive years after saying that is impossible.
  4. What is the next level for this business?
    In many cases this would be very apparent after close familiarity with the business. And that would be a great milestone based pointer to sustainability of further growth down the years ( or Not) - for Mayur it was about going beyond Ford & Chrysler to Mercedes and BMW; for Poly Medicure it was about cracking the US OEM vertical; for PI 2011-14 it was about CSM:Domestic mix changing from 40:60 to reverse to 70:30; post that it was about large volume commercial success for CSM - hint came form announcement for 300 Cr factory capex for 2 independent factories for 2 single commercialised molecules; Kitex it was about 3rd largest to largest player
  5. What’s the special DNA of this business?
    After more interactions with Management in consecutive years, for every business Ayush & me would come up with some pithy description - for Poly Medicure it was all about Cost Efficiency, Astral and Ajanta Pharma was all about new product extensions, and the like
  6. Growth Mindset Management
    Current cash cows (for 2-3 years); beyond 2 years products are seeded and growing; already working on product plans for 5 yrs down the line. This would again become apparent for some Managements like Ajanta Pharma, Astral Poly, PI Industries.

This is by no means a comprehensive set of pointers - necessary, but not sufficient conditions. If we found all 6 or many of these growth drivers in a business it would prompt us to allocate more in that business progressively. Sometimes even the first 2 pointers would be enough to take a leap of faith. Now maybe we know better, this should be augmented with Capital Intensity (what Capital is required to fund next level of growth for the business), EPA/Sales and other pointers that indicate ability to fund high growth. Are the RISKS significantly higher as we extend the time horizon of growth. A 7th point could be about Value Migration curve presence/absence. And more…

It would be apparent from this exercise that BQ, MQ and inherent growth drivers are all intertwined/enmeshed together just like @basumallick pointed out earlier. We may choose to evaluate as separate entities to maintain FOCUS but we will see that in practice they have to come together as a whole - for CONVICTION to emerge.

Agree forecasting growth/execution over near term is an altogether different beast. It helps if we are clear about that distinction. Then (unless we are industry insiders or deep knowledge about forces at play) in most cases perhaps we will desist from a likely futile exercise except for obvious capex completion, operating leverage cases and/or cyclicals. Any others?

Thanks for a patient read. The attempt is not to linger in the past but to exemplify (share our experience set) how we went about thinking about Quality of Growth and Growth Sustainability. Perhaps a good exercise NOW would be take up relevant examples of new emerging businesses we have recently encountered/invested in …those most familiar with these businesses can map how they fare in above qualitative growth metrics?

Will try and respond to your other thought triggers progressively … I had some pointed comment about your RM impact monitoring …that is eluding me now …got groggy…zzzz


Nice compilation for the novices like us to learn and evaluate before investing. U HV used RM I n the last para.grateful if u could add the full form and also some companies, that can be studied by us currently based on your post.

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This is such an excellent post. You have condensed the process of judging businesses in 6 simple questions (finding answers to them requires great lot of hard work). And if answers to above questions resonate with oneself, one can allocate more & more.

Thank you for setting the context as well. Our ultimate pursuit is to find strong, growing emerging businesses which will have enormous wealth creation & transformational effects on our lives. (Simply put in your own words from VP journey presentation many years ago - 20-25% to HDFC Bank bhi de raha hain, we need more!). This is the thing worth pursuing.

On above part, I strongly feel BQ/MQ has to be separate from potential growth in short/medium/long term. This helps me with clarity of 2/3 things -

  • As growth falters, narrative changes from “what a great business/management this is” to “forensic investigation of smallest of things, disapproval/disappointment with management etc.”. If one has done proper work on BQ/MQ, one can manage this narrative change pretty well & hopefully to one’s advantage on valuation front.
  • Many emerging/strong businesses can go through periods of business under-performance due to various reasons. It keeps me incentivized to keep tracking these businesses even in these times.
  • Optimizing capital allocation. If one has list of 15-20-30 great emerging businesses, one can figure out may be 10 businesses which are better in terms of growth visibility or valuation & optimize capital allocation.

I can think of two examples - RACL GearTech & Axtel Industries. I am not sure if it makes sense to go into these businesses in this thread. But I will write in brief about these two businesses below. If you feel it is not appropriate, please moderate away.

RACL GearTech has been posting pretty good results for 3/4 quarters now DESPITE such bearish auto industry backdrop. The business seems differentiated (or has a niche) on two fronts - significant focus on export markets, manufacturing specialized parts for global high end two wheeler customers. Further, for such a small company, they have been smart to keep the end industries diversified so that headwinds in one industry does not stop them from growing. I had opportunity to observe & interact with them once recently & it seems that management has “growth mindset” & management capability to be a lot bigger than their current size.

BUT (Here comes the hard part, at least for me) is this growth sustainable? I am scared in back of my mind that - is this one off? What is driving this growth - new product introductions? new customers? Is there product/customer concentration? How will this company fare in terms upcoming EV disruption?
Basically, a lot more work is required (at least for me), to read about their customers, growth in their customers, understanding their products a lot better etc.

Axtel industries is what I would like to call is a “soft monopoly” (like Poly Medicure). The gap with nearest competitor in terms of capability/customers is quite large. The management seems like a technocrat management. There is clear cost advantage with global competitors like Buhler. It’s a different matter that Buhler is far ahead in terms of technical capability. The company has been doing projects for customers like Nestle/Hersheys/Mondelez/ITC/Amul etc. & some projects in export markets etc. Superficial tracking of end industries shows that - chocolate industry is growing at 15% CAGR & there is talk of CapEx. Nestle is talking about product introductions & CapEx. ITC is in perennial CapEx mode. Most snack players are in growth phase.

BUT will the trajectory of the business move from inherent 15% kind of growth to 25-30% type of growth that we seek? At least, I do not know! I will keep observing.

This is an attempt to demonstrate my central point - it is imperative to get the growth thesis right, to understand reasons for growth in granular manner, understand whether & why underlying growth trajectory can remain for 2/3/4/5/10 years without compromising on quality of growth & to figure out why & when growth will go down. This is pretty much an EDGE that we are all seeking.

This is not to say that we have not been doing this in BQ framework, we have been always doing it. It’s just that this aspect needs most attention post basic sanity checks & hopefully formalize it as much as we can. And to prevent us from throwing caution to the winds when story catches fancy & lowering our guard.

Disc - I have positions in both RACL Geartech & Axtel. This is not a buy or sell recommendation. I am not SEBI registered analysts. Please do your own due diligence.


Hi Rupesh,

Good thoughts and nice write-ups along with examples to bring clarity to the discussions.

Given the names you have taken, these are the practical challenges we will fall into whenever we are working on a very small company. Despite having reasonable qualitative insights in both these examples, its really tough to predict too much into the future. More so because when a company is small, its promoter/few people driven and hence it is not easy to understand so many aspects that we want to or often we don’t get the confidence.
Yet, at a certain valuation, these are very good bets as they provide sufficient margin of safety. If these businesses keep delivering on the assumptions you would have made today, you will gain more confidence and new insights will unfold.
I also, feel that what Donald is communicating is possible for very few businesses - ones which have demonstrated some track record + the investor has riden along with the company for atleast 2-3 years and has developed insights beyond the usual.



Thanks Rupesh. I can see where you are coming from and understand your pre-occupation with developing the required ability to judge growth sustainability better. There is merit in your arguments.

Unlike Ayush, I have limited exposure to microcaps. But from whatever I have seen over the last 10 years, while your growth-sustainability pursuit might be a laudable objective, we must be clear that it is unrealistic to achieve that clarity for 90-95% of microcaps. RACL and Axtel though very promising, belong to that category. Apart from Mayur Uniquoter I haven’t come across a single microcap where we could get a pretty fair sense of sustainability for 3-5 years in the first meeting itself in 2010.

But let me inform you that we had spent 6 hours - 2 hours with Management first, and then 4 hours on the shop floor talking to folks at different levels workers to supervisors to quality auditors - and what impressed us most was that we could detect the same fire in the workers eyes when they talked to us passionately about their part of the work and how its critical in the value chain for Mayur to become the vendor of choice for global auto OEMs. The Management vision was communicated very well down the line and we are amazed to see everyone as energised and fired up as the top man. Mayur Management Q&A - Think this is the second Q&A. Cant locate the 2010 one rightaway.

Also useful to inform you - that we could do a very good job of extracting the right information from Sr management as we came very well-prepared; Nagabrahma had done the first Mgmt Q&A all by himself in 2009 with Mayur management and what he shared in detail helped us tremendously to familiarise ourselves with the domain, and thus we could keep Sr Mgmt engaged with us for slightly over 2 hours - not a very easy thing when interacting with the key man.

Writing a long story to emphasise the double whammy that helped us - getting so much time 6 hours - enough time to ask follow up questions and corroborate the story down the line; secondly Mayur was a very strong differentiated business in a completely fragmented industry.

But for 90-95% of microcaps with 100/200 Cr Sales kind of run rate, we will never get that much clarity in first meeting. Its only by second and third meeting (annual) that we progressively get to understand the domain better, ask intelligent questions with more data points and are able to extract more. Its our job as Analysts to prepare very hard so that we can extract as much as we can. Asking open-ended question often gets us stock replies - which don’t equip us to solve the puzzle. Its only when these businesses get to the next level, that we see a decent track record and some good insights - where its easier to make that judgement call - if this small business is likely to scale further and cross say 500 Cr Sales in the next 2-3 years. Till then its dicey as most small business either do not get to cross 500 Cr Sales (fail) or cross that trajectory with a lot of lag. Then the next scale challenge to cross 2000 Cr Sales trajectory is on them.

Besides, most times even the Management really doesn’t know how the picture will unfold in 2-3 years - its like an unfolding best-effort story. Getting the big-picture right certainly helps, but as Ayush says with very small businesses future growth is a big unknown. We also had the benefit that Ayush and family, being invested in a large number of such promising unknowns, would alert us when they see them get to the next stage - from 100 Cr to 250 Cr Sales. Ayush was invested in Poly Medicure for 6 years through several ups & downs - before he handed the case over to team VP saying I think they are at an inflection point - let us go and explore in detail. Many such cases like Shilpa Medicare, he/family had been invested for over 3 years I think before we decided to go to Raichur and meet Management.

Promising small business needs to be nurtured through for a number of years, through ups & downs. Management execution is best-effort, and not that strategic always; During this long holding period some keep delivering even if not that consistently, and Ayush says new insights unfold. Not everyone can do that. I certainly don’t have the temperament for that. Ayush can and does all the time. His dad does for 100s of very small business. Can you? - thats a question you need to ask yourself and have micro-allocation strategies to deal with such volatility - which is probably common, and to be expected; its again an ART form, and for those interested and able, fortunately there’s a very skilled practitioner with us to guide

Second, one needs to answer this for oneself - what kind of investor am I? The investor world is very neatly driven in 2 halves, I have come to realise (after observing so many investor friends closely). Either one is driven/excited primarily by cheap valuations with decent quality, or One is primarily driven/excited by strongly differentiated business model - Oh! what a business, I can see this business going very very far; Man! Who is going to replace this guy?? But if this business ain't going cheap this camp can never convince the other camp!!

No guess for knowing which camp I belong. But if you are clear about your camp, then you know the answer already. Maybe a series of mispriced bets will hold more appeal - where you can and do second-guess near-term performance in many cases. You are typically NOT looking to find businesses that you can hold for 10 years.

But if you are in my camp, you temperamentally are very very choosy; Very rarely will something excite you; If someone thinks something is worthy of investment attention, you would ask that guy to outline in 1 or 2 paras why that business is special; Ayush used to get maha-irritated with me for that initially. In a concentrated portfolio of not more than 10-12 businesses, I find that in a year I do not need to find/add more than 2-3 new businesses to account for 2-3 old ones that might have mean-reverted. That has been the case for the last 10 years.

What has worked very well for both camps is that we have been “opportunistic” about altering both styles a bit to accommodate a bit of the other type. I am not averse to add some mis-priced bets that also meet my camp goals - that they exhibit possibility of longevity. Thats how a Manjushree Technopack, Atul Auto, Avanti Feeds came into my Portfolio.

There are also important lessons here from a Portfolio Construction and Maintenance point of view to accommodate different styles. Like at any point of type I now like to have 2-3 contrarian bets that will NOT work in the near term but meet my strongly differentiated business model needs, yet valuations are cheap and I am able to allocate very well as valuations wouldn’t be demanding. Of course again this needs lot of detailed work to establish that it WILL work in the medium term - in between 2-3 years. Will outline this aspect better in a separate thread dedicated to Portfolio Construction & Maintenance as suggested by Hitesh Patel and ask for more experience sharing and thought triggers there.

The heart of one’s success, hinges completely on knowing oneself well!
Sorry for a sort of rambling answer, but I think there may be important pointers here for you to think through.

Thanks for keeping patience - in a long rambling post. Hope it is of some use in your dilemma.


Roopesh, You have brought out some practical aspects beautifully here. I reckon this potentially would be among the most useful refinements needed for our existing BQ/MQ Template, with a few other gaps that need plugging. Been wanting to respond to this, but realised that this probably needed not off-the-cuff, top-of-mind kind of response, but a more deliberate, considered response.

So here’s a first-cut deliberated response from my side - finding quality time on the flight back to Bangalore :slight_smile: Would request @desaidhwanil, @basumallick, @Anant , and others to add theirs. Please humour me let’s step back to some basics first, that our Gurus have tried to drill into us. That foundation I am convinced will help us explore building a methodical execution track for assessing growth sustainability. Thanks for your patience, in advance.

How should we think about any Business? And it’s Value?
That the business is in essence a series of future cashflows. And that it’s value is determined by discounting this series of future cashflows to the present.

What is a ideal business to invest in?
An ideal business to invest in would be where I could allocate large sums of capital , at high rates of return , over a long period of time .

[Probably true for 95% of Emerging Moat businesses we pursue, we will do good to ignore for our discussion purposes the few cases of negative working capital (others funding some of your growth capital, and hence lower risk) stories which are really really scarce]

Near/Medium Term Sustainability thinking has proven the most challenging to achieve clarity on. Any simple thought paradigms?

[While sometimes it has proven relatively easier to examine probability of sustainability of a business over the longer term, perhaps :wink: ]

Yes, Michael Mauboussin avers there is, actually! Very simply put it is ALL about Industry Stability, and Competitive Position. While it is much easier to spot Industry Tailwinds (our desired trait of Industry being stable and growing) and Headwinds (reverse trait of secular trouble for most in industry sector), it is NOT always that easy to spot Competitive Position getting stronger or weaker.

Experienced seniors would always tell us that most times Industry Tailwinds are enough to take care of most issues a business faces, and that we should hugely respect that. [They would challenge us, show me one business that has become great without industry tailwinds aiding the first big concerted growth spurt; Management ability to harness the opportunities thrown up proves secondary mostly].

Next they would tell us - in addition to Industry tailwinds, in some businesses it is relatively much easier to spot Competitive Position getting stronger (or weaker). Usually the easiest is where we see periodically published market share figures (domestic pharma, auto, and the like), or where we can track market share gain (or loss) (think cotton seed, aquaculture, cement, and the like, even as it might take lot of hard work and insights to cut through clutter of disconfirming evidence, of which there will always be plenty, therein lies the edge), or where there is clear evidence of the strong getting stronger (inefficient competitors gradually dropping out, far easier to spot). These are cases again they would tell us - where a lot of respect is due - it’s like a delightful double whammy we MUST savour!

It’s where we CANT easily track Competitive Position getting stronger or easier, that things become very challenging in the near/medium term. But veteran senior generals would again remind us - it’s for us to be aware and CHOOSE our battles well, use our discrimination; know ourselves well, smartly expand our Trust/Expert Network of field-workers, trade folks like deaers/distributors, industry/trade bodies, domain professionals/sector experts who might (if we cultivate them well :wink:), guide us to better and better sources and/or more and more useful insights into the competitive forces at play, in the domain.

I can already hear some smarts saying, all good…but isn’t this is all known stuff. Yes, but how many of us can honestly affirm that he/or she is absolutely clear about his/her ability to choose well, and be part of a circle of competence to track/assess Competitive Position becoming stronger/weaker? It isn’t ironical that the harder it is to track/understand, the better our EDGE can be, and hence the Moolah :wink:. Hope I have made a very strong case for why VP Expert Network is potentially the most impactful of VP 2.0 endeavours to influence and drive :slight_smile:

Thanks again for your patience. Hope this helps bring most folks on the same page on what is reasonably/smartly achievable, what is probably beyond our current competence circle, and what is exciting to ASPIRE for over the next 5-10 years.

May I urge everyone who found this useful (despite yet another ramble), to first UPDATE their PROFILE page. It’s a humble request - to me everyone is an expert in his or her domain!

Now that we have some food for thought on near/medium term growth sustainability tracking/assessment, time to move on to the big picture case for assessing Growth sustainability. Allow me a few hours to lay that out.

Meanwhile keep your considered responses flowing in - more critiques, and some acknowledgements hopefully from your individual investing experiences.


Time to take a step back and get back to the simple but basic guiding questions set - while trying to assess a well-performing business with decent track record - if we think it qualifies as one with an Emerging Moat.

Formatting Issues; If this proves unreadable then use this Business Quality Guiding Questions v2.xlsx (56.0 KB)
[Operating Leverage Essential Reading. Michael Mauboussin’s Framework for anticipating Changes in Earnings]. Also Essential for us to get inside @Anant’s head to help us all learn how (and why) he is so good at taking advantage of Earnings change visibility coming into play, in a favourite business.

@rupeshtatiya - See if this slightly-improved set of questions plugs some more holes for you in your issues with the seemingly unknowables at first-look microcaps. While it is true that it takes a min of 2-3 years repeated interactions/familiarity with the business/management - we can certainly ASK ourselves more focused questions, and seek Mgmt responses to as well.

A gaping hole earlier is the Scalability placeholder - looks like we were NOT explicitly focused upon. Check if these more pointed guiding question placeholders prove more useful in your Axtel, RACL Geartech kind of puzzle sets on Scalability??

Missing folks like @desaidhwanil acutely in this renewed quest; he was one of our regular sparring partners asking pointed questions and offering many astute observations; he is down with some niggles and cant spend big-screen time for a few days.

Meanwhile, where are the other business thinkers? @zygo23554 @basumallick, @Anant and others - got to hunt out a few names from the earlier BQ threads :slight_smile:


Highlighted Operating Leverage coming into play spotting skill as a key learning - only to reinforce what I found as an essential value-addition to our Investor Learning Curve. I was never good at taking advantage of it - even as I saw it plainly before me, and still struggling with that - the focus just is missing, much to the chagrin (and some amusement) of some of my more accomplished colleagues at this game. At the same time would be amiss in my duties, if I fail to mention, all things being equal, this is more of a tactical power-weaponry addition to our investing armoury.

Once you become good and practised at it (with bull-market tailwinds to boot), there is quite the danger of getting caught up in it much, and probable missing of the woods for the trees. You are what you are - a zebra doesn’t change stripes easily. So knowing ourselves well is again key.

An innately strategic investor like me (and Dhwanil for another) is well-advised to buckle down, and add key tactical skills such as above to boost performance, just as taking advantage of totally mis-priced opportunistic bets remains critical to boost performance. (like the earlier cases of Manjushree Technopack, Atul Auto, Can Fin Homes, and Avanti Feeds were at different points of time - some of which did show good-enough potential to move to core portfolios).

Highlighting different styles of skinning the cat deliberately again. Mr D says History is a great teacher - as we go through earlier case stories, something in our recent experience set clicks through that we absolutely can relate to and hey, we just might have one of those eureka moments. Dhwanil was telling me the other day, how going through 3 consecutive years of Poly Medicure Management Q&A - provided him one of those rare moments again, recently.

Perusing the old showcase discussion threads and Capital Allocation BQ threads - and relating to our personal experience sets can help us tremendously in achieving more such Aha! moments of clarity, as also collectively equipping ourselves - towards becoming clearer and clearer about the current BQ 2.0 quest.

This BQ drive is a strategic quest - powerful, empowering, and enriching too :slight_smile: !!
Which are the best of the best in our current set of small and micro-cap investing universe? Which have the best potential to scale to next level, and why? What lessons can we draw from our rich last-decade experience and apply to the current set - why a small set of businesses did scale, whereas most did not? To start with… Common Scalability patterns, anyone?? Ha ha…we will get there…Inshallah!

If Rupesh finds Axtel Industries and RACL Geartech can potential qualify here, you too can give us 2 more names that you find equally promising. The caveat? If you supply names here, you gotta justify using one or two simple paras as to what you find so special or unique in the business. Simple, isn’t it.

When I was after the simplification (pattern-seeking) drive in ~2015 or so, one of my astute friends can’t remember who now, quipped - Donald, simplicity comes after lot of hard work, that enables us to abstract key questions/key learnings. Let’s keep doing the hard work! Let’s be curious. Let’s actively put our minds to sifting through our recent experience set of last 2 years - meeting Managements, talking to fellow investors, talking to analysts, domain guys and the like - and come up with one or two names as our best choice, best of the best - and transfer that choice insight (in our head) into 2 simple paras. Shall we?

Meanwhile let’s not shy away from active efforts at attracting the ‘best minds’ in the business to this ongoing discussion. I have no doubts, we will easily achieve that, if we work hard and passionately at this homework quest for the VP Community. VP TopContributors first :slight_smile: - time to earn your spurs - put on your thinking hats - supply the much needed energy and drive - throwing up names of your special favourite businesses with simple 2 para justification.



I think industry landscape (especially headwind/tailwind) requires far more place in business quality template. It includes many things among-st - regulatory action, weather impact, demand-supply shortages, value migration, buyer consolidation etc.

Examples -
A simple act of rising maize prices has muddied the growth for good quality business like Hester Bioscience. It has also dented fortunes of very decent company like Gujarat Ambuja. Some of the competitors of the latter are reporting losses.
Recent regulatory changes for life insurance companies & TER rate cuts for MF, MF distribution companies have created challenges/opportunities.
Buyer consolidation in US for pharma companies leading to price erosion in generics is another example.
Regulatory changes hitting the hospital sector is another example from 2/3 years ago.

Second aspect is RM side story for companies/industry. I again feel that this is the aspect that we do not pay enough attention to. This aspect can also cover change in product mix, demand-supply shortages.
Examples -
Rise in milk prices hitting gross margins of Nestle is an another recent example. Super normal margins of Alkyl Amines now & Vinati organics few quarters back are few examples. Gross margins of RACL improved in recent quarters and we need to understand why that is the case.

Regarding operating leverage - one observation I have is - most of the times operating leverage is accounted for in valuation for the companies in industries which have obvious operating leverage. E.g. Hospital sector has obvious operating leverage & metric used is EV/EBITDA. I would expect that operating leverage below EBITDA line for hospital sector might not move the valuation much.
The trick is to see if operating leverage is found in an company in an industry where it is not accounted for in valuations.
Examples -
HDFC Bank aiming to cut cost to income ratio by 5% over next 5 years, that’s an operating leverage benefit that will get valued. Ujjivan SFB is an another example.

Another aspect that has helped me is to track the customers & suppliers & competitors (i.e. entire value chain) of a company. This continues to bring tremendous insights for me.
Examples -
When Nestle went through Maggi fiasco, Axtel suffered quite a bit as Nestle was its single largest customer. Similar story with R S Software & Visa.
If one has to analyze Natco Pharma, there is no option but to analyze entire landscape. One has to work product by product - track innovator, track competitor, track settlements of competitors, track distributors etc.
One can not look at PPAP automotive in isolation from Maruti Suzuki & Honda Cars.

Further, I went through my notes from presentation Sumeet Nagar did at VP Goa 2018 & few points that we need to incorporate -

  • The thing that stayed with me the most is 4 axes of evaluating management - scalability, capability, integrity, passion.
    If one can easily tick boxes in all of these after tracking business for some years, one know they have come across a business where management capability will drive the business through tough times. I felt strongly on these dimensions when tracking HDFC Life.
  • Another aspect was he broke down growth in some broad categories & that really helpes.
    • Linear Models - Industry Growth/Market Share Gain/Margin Improvement/Price Increases
    • Expansionary Models - Value Migration/Product-Geographic Expansion/New Category Launch
    • Step Change - Acquisitions

Finally, another important insight I learned from @deepinsight bhai is where is the business in the J-curve of business evolution. We are searching for businesses which are at explosive expansion/growth phase which have crossed the death valley of the business. This is very difficult to figure out but can be extremely rewarding.
Bajaj Finance & DMART are two obvious examples. But which are the ones -
Bandhan Bank (proven model of MFI + bank), can asset size grow from 50-60k to 3-4L cr with new products & new geographies?
Can IndiaMART grow on the back of increasing digitalization of businesses?
V-MART - taking value fashion pan India?

I do not know how are you going to incorporate these changes into above template but I am sure you will!


Wonderful Rupesh. Your thoughtful posts from own experience set makes for tremendous value-addition to ongoing discussions. Reserving responses for later.

No worries about the eventual Template. It will happen, and we will keep things simple :slight_smile: enough. Let’s first try and attract more & more experience sharing that will surely come in egged on by your value-added posts - to abstract to a set of focused questions to ask.

Management Quality, as you mention, needs separate attention. When we have enough experience sharing coming in next week, we will shift that to a Management Quality 2.0 separate thread for undivided focused attention.

By the way - a key learning of mine - after doing all the hard work, much of the humongous details get taken care of if we get the big picture more or less right. It has happened often enough…so I don’t get bogged down much anymore…more data points the better the refinement always is…abstracted insights that move the needle significantly is what we are after. It’s like the lollapolluza effect Munger describes, we do run into such situations often, if we can abstract and keep things simple.


One of the fundamental disconnects I see in a lot of investment management professionals & investors is the inability to wear the Operating Manager and P&L hat and view the business.

Assume the stock picker in me is I and the P&L manager in me is O

Exhibit 1

I - Does the business have pricing power?
O - Is the salesman of the company treated with respect or is he just an order taker? Who wears the pants in the OEM - distributor relationship?

In HDFC AMC when the TER cut came in and there were questions, I intuitively knew the answer since I was a P&L manager in the investment management industry. Any day the fund house (AMC) commands more respect than the advisor (wealth manager/distributor). Forced me to look deeper into the AMC expenses and that is where I saw that a good chunk of the expenses were discretionary in nature. The answer was then very apparent

Exhibit 2

I - Who among the midcap IT companies can grow faster over the medium term?
O - Which among the midcap IT companies has invested the most into their sales team?

Starting with the perspective of I in an industry like IT is fairly useless. I have posted about this in the Persistent Systems thread about why I wouldn’t buy the stock even when it appears cheap. Instead, when I started thinking with the perspective of O, the answer to me was clear that I just need to figure out who has the most motivated & high performing sales team. 2-3 calls was all it took to conclude that L&T Infotech had a higher quality sales team and hence the growth prospects there were clearly higher.

The above two were clear cases where I had an edge since I have worked as a P&L manager in both the industries.

Exhibit 3

I - What are the advertising spends of the company? Is the company investing enough into building a brand?
O - Is building a brand as simple as doing advert spends? Does the category even respond to advert spends? If the product has an associated service/installation component, is ASP even the right approach or would channel loyalty programs work better? Adverts when done right can create tremendous operating leverage, when done wrong it is just a waste of resources

So when an APL Apollo talks of doing a 50 Cr advert spend, the investor in me might feel good but the operating manager in me gets worked up because I begin to doubt the effectiveness of the spends.

Exhibit 4

I - Does the business have a moat or not?
O - How important was the operating situation or the context that led to the existence of a moat? Would APL Apollo have done this well if they had even one single serious competitor? Would Astral have done well had Finolex Industries decided to focus on CPVC when Astral and Aashirwad Pipes were just about picking up steam?

Implication of this answer is very high. It means that sometimes moats emerging is more due to the specific situation than due to any great capability or execution by the management. Moats do exist but they aren’t necessarily created proactively all the time, sometimes they just emerge.

If so, can an investor expect to identify emerging moats through a framework in the first place?

Taleb keeps harping on this point that just because success has been obtained does not mean it was planned for, we can see this in how some people just rise through the ranks in the corporate world. Can’t the same thing happen for businesses?

What exactly am I saying here?

Always keep toggling between the perspectives of I and O. O understands way better than I ever will what it takes to scale a business, I understands valuation way better than O ever will

Around 5 years ago I was a framework guy who would try to fit in businesses into my template and try to evaluate the quality of the business.

Today my point of origin/reference is always the business and never any framework. So if I were to word my investment thesis for some of my investments, I’d do it this way

APL Apollo - Average quality business on all parameters, the emergence of even a single serious competitor will prompt a review of my investment. As of date I don’t care if they do 15% ROCE or 25% ROCE, I know the market is theirs till they get challenged.

HDFC AMC - A good business in an industry that can have many other good businesses. 3 years down the line if we have 5 other AMCs listed, I would go more by valuation rather than by the business or management quality.

Minda Industries - A typical auto ancillary that has emerged as a higher quality auto ancillary purely because of their product development road map and ability to add a new business line every year. If their product development road map starts slowing down/sputtering, I would revisit my thesis.

If you’ve noticed well enough, the above thesis also trigger my exit thinking, this I believe a framework will obfuscate. This is where “point of origin” as a concept becomes very important.

Business Quality and Frameworks are good & helpful but overrated if they become the point of origin for investing. Does not mean we should not focus on it and get better at it but at any point of time the point of origin has to be an obsessive focus on the business at hand and not how well it fits any framework.

The above sounds very simple & innocuous but can mislead drastically. If I had stuck to the framework I had in 2014-15 I’d have missed some of the names that have created the most wealth for me.

I know I haven’t contributed much to the specific endeavor at hand but I had to put this out there. :slight_smile:

I will go through the posts and come back with specifics over the next few days