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

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


Perfect Kedar! Another thought-provoking variant perspective arriving from personal experience sharing. There is great merit in these arguments esp. with the perspective of emerging moats…where things get clearer in 2-3 years of familiarity with business/management - it’s never on day 1. No business becomes great by itself without enabling tailwinds, that’s a given. But there are few that stand out and execute far better - multiple reasons including superior business model execution driven by superior Management.

There is no reason that both I & O digging (as you so aptly put it) outputs - shouldn’t be part of our BQ framework detailed data points. Please continue to share more perspectives from your experience set to incorporate. Unlike common perception, Frameworks aren’t about simplistic pattern matching (which some do fall prey to in lazy attempts, seen from folks we know), in-fact frameworks are all about heavy-duty grunge work sitting right behind the abstractions. Minus the business/industry/domain obsessed grunge-work, simply-fitting to frameworks is worthless, I agree.

I find exposure to frameworks help us achieve more structured deep-dives, which I am naturally inclined to. It brings much needed rigour. Now deep-dives can and should be attempted from completely open-ended divergent perspectives too. These can be equally rewarding. What works best for me is when we can balance/marry the two successfully. It happens naturally for us in our team - Ayush is always more open-ended naturally, me more structured naturally - wherever our interests converged it’s mostly worked it’s magic. So yes I do appreciate starting from a completely open divergent perspectives is actually great, as long as somewhere down the line we bring-in structure and rigour. Which is why, many might have noticed, this whole BQ pursuit is encouraging unstructured divergent inputs, at appropriate times we need to inject structure. Some have already complained to me, Donald there is no structure to the new BQ initiative, it is going all over the place :slight_smile:, and I am letting on it’s more deliberate.

So, as rightly pointed out by you - It’s NOT about fitting a business to a framework BEFORE you/team around you have done enough hard work on collecting the facts about the business/Management/industry/competitive forces. It’s AFTER. Absolutely, agreed.

Now to set some context right, from us framework-believers :slight_smile: .

Some use-cases:

  1. If one has a natural mindset like me that makes one very very choosy, and after 2-3-5-7 years of decent familiarity with the business/management and domain - where you are tracking multiple businesses that you think could be special - like what Ayush’s pipeline keeps supplying - having a super choosy framework that progressively gets refined better and better makes enormous sense. One needs to pick just 2 from a Concentrated Portfolio perspective in a year. Sans any framework, I wouldn’t even know what to look for, let alone choose well. A framework certainly helps sharpen and retain focus when one is spoilt for choices - not difficult to imagine the situation only a few months back in the financial services space - did most people automatically choose the number one performing business in the financial service space, despite most sharp investors probably knowing the numbers behind only too well?? Fitting to the framework, after all grunge work is done, when spoilt for choices has worked beautifully in the last 2 years too, and created huge wealth. A Bajaj Finance, a PI industries are prime examples, as are HDFC Life, and many others. Many ways to skin the cat :slight_smile:, period. One should stay with what one is comfortable with naturally, and occasionally intentionally break comfort zones to expand horizons, like you are doing now.

  2. An often neglected part is proper Risk Evaluation. Without that, we are probably just plain lucky; can’t sustain and ensure repeatability of success. I am pretty convinced - even more than BQ/MQ we need a proper discussion/debate thread towards a proper VP Risk Management Framework 2.0. We know only too well what happened in the last 2 years for almost all folks we know, don’t we? A Risk Management framework is the need of the hour for VP 2.0 and essential for sustainability in the next decade. Only this evening I had a brief very invigorating discussion with someone (whom we all know) who perhaps has the best performance in last 2 years of folks I know - and he swears by Risk Evaluation - a framework that is work-in-progress for him too, no doubt. But hey VP Risk Management Framework 2.0 has a committed believer and driver, who will launch that most useful thread potentially (in our current Investment learning curve context) hopefully pretty soon, on VP.

  3. And don’t we know the best use-case for frameworks. Exposing newbies quickly to best practice thinking and execution, get them to quickly up the learning curve, for the most passionate and hungry learners in any trade. Had Mr D not exposed me to a Capital Allocation thinking framework that got me hooked in 2011 that we captured back in a thread and got everyone than majorly involved, most of Team VP newbie performance curves would probably look very different today.

  4. Am aware frameworks have much lesser utility value NOW to senior practiced professionals perhaps because innately they have learnt to do their job better and better - but how would someone unexposed to your set of skills aspire to capture that for his and others benefit. Only via frameworks - is my true enduring belief and aspiration - that we can think of capturing back best practices from most successful sharp minds around, and try and transfer that to every passionate aspiring learner - that we can aspire to create a scale-multiplier effect?

  5. Some people are naturally skilled and very very sharp - they will always have less value for frameworks - like our very own Hitman @hitesh2710 - he is so sharp that he picks up on the key abstracted learnings the fastest, and yet he knows and acknowledges the value of frameworks - because again he knows he will smartly imbibe the key best practices unlocked, probably the fastest :wink:. and nicely embed them in, in his own sub-conscious framework. Oh! Yes, every practised senior has a decision-making framework wired-in that works well for him. Our endeavour is to unlock that magical wiring and bung in some of that in a structured framework :):wink:

Rest my case on the utility value of frameworks, for everyone!

Bottomline - everyone NOT convinced about the framework pursuit (well-meaning friends call it my obsession) please IGNORE frameworks case and fitment before, or after debates :wink:. Just be generous and share your experience-set in what worked and what didn’t - and it’s for us framework-believers to find a way to abstract the key learning-skills back into the framework.


I am, by no means, an expert. But one of the most defining pieces of financial literature I’ve ever read is Michael Mauboussin’s “Measuring the Moat”. Clearly, this goes with ‘Sustainability’ part of the framework.

I am simply going to summarize the fairly long paper here, in the hopes that we can determine if at least a majority of the “measuring” can be done for the Indian market. In addition to this, I am going to add my own addendum to the paper in a very few places. So if you see something amiss compared to the original work, it’s just me trying to improvise.

Here’s the short legend for what I’m going to write below: Wherever you see a word bolded, it’s a concept / cog of the model. Wherever you find an bolded and italicized phrase below, it is a data point that we should attempt to get for companies in India (In the paper, Mauboussin has used data from U.S. companies).

Competitive Life Cycle: Firms go through 4 distinct cycles and where they are usually determines what they do: (1) High innovation; (2) Fading returns; (3) Mature; and (4) Need restructuring. The idea is that a firm’s Return on Capital (RoE / RoCE / CFROI) converges towards the firm’s Cost of Capital over time. As long as the Returns are above the Cost, firms create Value (Called “Economic Value Added”).

| Industry Analysis |

Industry Analysis is split into 3 parts: (1) Get the lay of the land; (2) Assess industry attractiveness through an analysis of the ‘five forces’; and (3) Consider the likelihood of being disrupted.

Get the lay of the land

  1. Construct an Industry Map, covering all parts of the value chain and to assess the size of the industry. Create a Profit Pool (Operating Profit / Net Profit) to assess which parts of the chain are the most and least profitable.

  2. Measure Industry Stability by laying out Market Share changes over a long period. Lesser the change in market share, the better. Use Pricing Stability (Operating Margins) to determine pricing power (Correlation to Raw Material prices over time is optional). More stable, less correlated Margins are better.

Industry Attractiveness

Determine Industry Structure using the Porter’s Five Forces model. Porter recommends using industry analysis to understand “the underpinnings of competition and the root causes of profitability.”

  • Supplier Power: What kind of leverage does your supplier have over you? Check Payable Days with regards to the Industry Average Payable Days.

  • Buyer Power: What kind of leverage does your customer have over you? Check Inventory Days and Receivable Days with regards to the Industry Average Inventory Days and Receivable Days.

  • Threat of Substitutes: How likely is it for your customer to switch to a substitute product? Difficult to measure, IMO. Perhaps check Market Share of a company’s individual products Vs the substitutes (No issues for single product companies).

  • Threat of New Entrants (Barriers to Entry): How easily can a new entrant gain market share? Check the Rate of Entry and Exit (No. of firms entering and exiting the industry) for the industry in question over a long period (Something like what @dd1474 did for figuring out the Survival/Mortality Rates?) . For an even deeper analysis of Barriers to Entry, study: (1) Asset Specificity; (2) Scale of Production (Existing Fixed Assets compared to country average); (3) Capacity Utilization; (4) Reputation; (5) Contracts, licenses, patents (Countable, comparable with industry average - perhaps order by difficult to get) (6) Learning curve benefits; (7) Network Effects; and (8) Exit costs (Losses in the last few years of firm that exited the industry).

  • Competitive Rivalry: User the Herfindahl-Hirschman Index (HHI Index) (Need Market Share details for at least 75-90% of the industry) to determine industry concentration. Typically, industries with a HHI Index score > 1800 are said to be less concentrated. Concentrated industries are more profitable than crowded industries.

Disruption and Disintegration

Christensen’s “Disruptive Innovation” Model. Too subjective to summarize here. Here’s the original paper. The basic idea is that there are three types of disruptions: (1) Sustained Innovation (Small players continuously innovating new processes/products); (2) Low-end Disruption (Predatory Pricing); and (3) New-market disruption (Creating a completely new, non-existent market, but offering to the same customers)

| Company Analysis |

Company Analysis to be added later.

Meanwhile, here’s a nice checklist from the paper for the whole shebang: Value Creation Checklist.pdf (167.9 KB) (Pages 56 and 57 in the original document)


@dineshssairam - Bravo! Cometh the hour, cometh the man!
Thanks for intervening and injecting much needed structure to influence discussion direction. Please keep an eye out for the holes in our older BQ practicals - from the investment literature dive you are on. Will come in handy when we are done with the divergent inputs collation. Dive deeper, and keep helping summarise for all of us - commendable work, again. A request, please start on applying/adapting these to one/some emerging business you like and have done/want to deep-dive grunge work on. Will be immensely helpful.

Now, we are free to get back to collating more open-ended thought-triggering experience sharing :slight_smile: @zygo23554 waiting for your next salvo, as promised.


About a couple of years ago I had started working on viewing the exercise of business analysis/business quality through the lens of an operating manager (O) in addition to thinking like an investor (I). While I did not go ahead and formally capture this in any framework, I made efforts to internalize this mental model and apply this to any business I end up evaluating. This I do after doing the usual in depth work and number crunching which we investors usually do. I did put this into some slides purely for my own use, but taking the liberty of putting this up here. So in a very good way @Donald has motivated me enough to revisit this and evaluate if I am actually putting my own gyan into practice :slight_smile: Answer - To some extent I am, but I am nowhere close to doing this well enough consistently

My sense is some of these can work as a good complement to whatever BQ framework one is using, it is just a slightly different way of asking the same Q’s and thinking deeper. This works very well for emerging businesses since it also streamlines the line of Q&A one can take with the management during interactions. Managements love it when investors start asking them questions related to operations, ask these Q’s to any management and you will see a distinct change in their body language and energy level.

Splitting this into parts for better comprehension

Part I

Core principles (arrived at based on my own real world experience)

  • Tangible offering matters – however intangibles matter equally (sometimes more)
  • More the number of decision makers involved – greater the complexity of selling & higher the entry barriers (direct implications for duration of the sales cycle)
  • High switching costs occur when customer usage/habits are linked to the offering
  • Relationship based pitch too early in the sales cycle indicates a non differentiated offering
  • Charging a premium is easier than it sounds if the customer sees value
  • Difficult to pinpoint the core value add in any intermediation businesses at first look
  • How salesmen spend their time is a lead indicator of how the business will pan out over the medium term

How do people make the BUY decision


Part II

Following are the key questions I start asking myself when I wear the O hat, notes/examples for different businesses included so that the relevance becomes clear…

What enabled the entrepreneur to build the business in the first place?

Important to take a story line & contextual approach, most things are a factor of time & place.

Knowledge gained by working for someone else (AIA Engineering) or from markets that are more advanced (Amara Raja Batteries)
Ready relationships one can tap into and create the customer base (TCPL Packaging)
Commodity business that has evolved/evolving into a value added business over time (APL Apollo Tubes, Garware Wall Ropes)
Tie up/JV with a foreign entity that is willing to bring technology while the local partner manages operations (Auto ancillary value chain)
Beneficiary of an industry tail wind/an idea whose time has arrived (IT Services, E-commerce)

This in my opinion is the best place to start when one is looking to identify entry barriers

What kind of customer relationships will the entrepreneur need to run the business well?
Direct Sales - How many touch points within the customer organization? At what level?
Channel Sales – Where does the power balance lie in the relationship? Most distributors work on the empanelment model since 1) much easier to run ops when the vendor list is consolidated 2) incremental effort for sales is optimized 3) better terms with higher volumes per vendor

How easy is it for customers to switch to alternative offerings?
Switching involves steps – access alternatives, evaluate & decide (needs incentive to shake out of inertial loyalty)
It is easy to dismiss most businesses on this parameter, think deeper. Understand the role of intangibles in the decision making process, other than fast moving goods all other brick and mortar businesses have elements of switching cost (do marginal differences in cost and quality make for enough incentive to switch?)

Is this a business enabler or a business driver? (e.g. residential real estate)
Customers tend to spend less time negotiating with business enablers since proportion of cost towards this is lower

How high is the annuity/repeat component of the business? (e.g. auto ancillary, packaging)
Higher this component, more the emphasis on reliability, relationships & ease of doing business, pricing will always be a challenge. However minor improvements by competition cannot take business away

Is the industry structure consolidated or fragmented?
Consolidated structure implies stable pricing, too many players entering means volatile pricing and business terms are experimented more

What is the extent of product/service differentiation among the key players? (e.g. Ceramics)
Lower the tangible differences, higher is the component of intangibles in decision making

Does the offering have a setup service attached to it?
If yes, the stakeholder performing the service becomes a key influencer in the customer buying process (e.g. system integrators in IT, fabricators in steel pipes, work technicians for plywood)

Has the business traditionally spent more on ATL or on BTL?
Usually a tell tale sign of the power balance between the OEM and the channel. Also analyse how this mix has been changing over the period, usually a good way to detect changing power balances and transitions

Any traction on concentrated buying centres emerging as an intermediary?
Look for presence of network effects in any emerging intermediation model, if so be very wary


Part III

What sequence would I follow to make this exercise more structured?

Learning drawn from my experience of applying this perspective to businesses over the past 2-3 years

  • The customer perspective is usually the best perspective to view any business. Most stock analysts do not understand this perspective as well as business people do. If you have run P&L in a professional company, you have a better chance of cracking this than most analysts

  • Competitive advantages are a factor of time, place and multiple things working in unison. One can at best have a framework ready for analysis but the analysis needs to be deeper and consider various perspectives. Always take a storyline approach

  • Brand + a sticky distribution channel in a consolidated industry structure is a very powerful moat. Usually the tangible points of difference across offerings is low here and the intangible factors in customer decision making dominate

  • Understand that the enterprise selling cycle is very long. A well entrenched market player in a segment that is characterized by infrequent technology changes has likely built a customer base that suffers from inertial loyalty (this by itself is a switching cost)

  • Always invert when you analyse, things are usually the way there are for good reasons. Hypothesize on what these could be, over a period of time one can make sense of things

  • Using a checklist helps ingrain thinking patterns till they become drilled in. However the checklist should never be the focal point of an investor

Unless one is able to translate the qualitative analysis into tangible inputs to the valuation model, all of this becomes an exercise in theory


@Donald, @rupeshtatiya, @zygo23554 and others, amazing pace and quality of discussions on this thread. Really feel invigorated as the new perspectives opens up new way of thinking and re-visiting your hypothesis. I really think the difference in perspectivel between the investor and an operating manager as brought out by Kedar is a brilliant idea to capture in framework…although I don’t lnow how we can do it without making it too complex… but I think it is a must have in version 2! :grinning:

One thing that I have learnt is that in almost all the businesses out there, there are only 2-3 variables/attributes that drives the business performance and leads to success/failure. The only way to get some handle around the business is to understand these 2-3 key drivers of the business in detail and think throught the factors affecting these 2-3 attributes/drivers. Unfortunately when we start working on elaborate framework, the due focus on these key drivers get diluted and we start putting in generic attributes/aspects of the business (which doesn’t matter much) in place where the marginal utility of the information diminishes.

To put this in context- let me give example- For a company like APL Apollo- a key driver of business strength performance are only

  • Volume growth and through higher than industry volume growth margin expansion
  • Ability to create expanding product basket that includes continuous introduction of innovative products

Everything else is a derivative of these two attributes as they operate in a near commodity industry . If you look at the success of APL, as long as they have executed well on this parameters…they become stronger as business.

Similarly if one is analyzing Jubilant foodworks or westlife development - the key focus has to be on SSG- what drives SSG? If SSG is not encouraging - what are the factors behind them? In case of Jubilant - around 2014 - it was very clear that negative SSG was the sole contributor for bad performance- however if one digged deeper- one would have understood that the key reason for SSG not growing was not the tough environment etc as claimed by management but it was the lack of value proposition offered by the Pizza compared to other QSR/dine in option. I distinctly remember that if one had to order Pizza for family of 4 - it would have cost no less than 1200-1500 Rs while in same or less cost one would have dined out in non-metros. Thus the basic value proposition was misaligned- As soon as new CEO came and addressed this value proposition problem by offering everyday value - 99/199 Rs option- footfall grew, conversion rate improved, SSG bounced back and margins improved. It is like pieces of puzzle falling in place.

Even though it may sound too audacioous, I feel our framework need to be decluttered and be more focused on what is important/critical for business performance and be less generic- at least that has to be the 70% of effort. This will also mean that for each business there may not be the same questions/ponderablers - but there is no dictum to make a generic framework right?:grinning:


Very very interesting perspectives. However, let be play the devil’s advocate and be the sceptic that probably comes naturally to me.

All this framework etc is nice to have and good to slot businesses. The challenge is if you take them too seriously. They need to be starting points and not endpoints of analysis.

The reason I say this is if you think of any framework / any model and any parameter you can always find examples of companies doing well and ones which will do poorly.

As I drilled myself in my head when I started maturing as an investor - “The market is a complex adaptive system.” It is too large, too dynamic, too complex to be correctly modelled. Else, it would have been modelled by now. Think about this. We are able to get cars drive themselves, we can get unmanned vehicles to the moon, but we are not able to figure out which company will do well and which will fail.

If a company with all its resources like SoftBank can fail visibly and miserably in judging WeWork and other such companies, why have the ego and hubris to think we are able to do a better job, especially when in hindsight we have not been able to do it with any great skill? Most of the VP picks did well because the team here were able to understand and catch the tailwind of the specific industry and/or the specific company. Tons of examples, Shilpa, Mayur, Ajanta, Manjushree etc. Can we refine the existing frameworks? An emphatic YES. Should we take them too seriously? To me, clearly no.

One of the best frameworks I have come across is the QGLP model. Yet, even with applying such a robust model, the founder of the model makes the mistake of buying Manpasand. Raamdeo Agarwal is a much better investor than I ever will be. And he armed with a great model can still get blindsided by what happens in reality.

The use of a framework, to me, is more for a negative screening tool AND a deep-dive tool. I follow the QGLP model, and it helps me dig deeper into questions related to individual aspects of the model.

Any model needs to be high-level enough so that is useful for customising and facilitating deep dives. Individual companies will have their own dynamics. Sometime as @desaidhwanil mentions, industry-specific dynamics will be of paramount importance. However, history is replete with examples of companies following similar strategies but ending up with completely different results. Can anyone explain why Infosys did so brilliantly and say a Mastek underperformed in the last 30 years? They both started within 1 year of each other and see where they are today. Easy answer, looking back today, is management quality was superior. But was it apparent then? I can sight literally hundreds of such cases across industries. We look at the “stories” and create a narrative fallacy for ourselves.

So, to conclude, my brief point is, use a framework to dig deeper. Keep that framework a live one. That is, keep updating it when you get new learnings. Keep it flexible. Read and understand the history of companies and industries as much as possible to get a “context” of history. And finally, two more things – i) don’t take yourself too seriously and ii) keep some leeway to make mistakes and adjust for it.

Apologies if I sounded a bit negative … that was the intent :wink:


Just to add to my thoughts to the above:

What is a good business? What is a quality business?

Lawrence Cunningham in his book Quality investing defines quality businesses as those which can generate high levels of free cash flow, return higher than cost of capital, is sustainable and can grow its earnings consistently over long periods of time.

In another excellent book, competition demystified, Bruce Greenwald talks about entry barriers. This actually roughly ties in with the sustainability of earnings point.

Michael Mauboussin writes this about good quality businesses:
A high-quality business is one that is profitable, typically as a result of high margins, has relatively low debt, a very capable management team, and a business that is unlikely to change abruptly in the near term. So essentially it is a business with a high return on invested capital and stable prospects.

And this about good management:
All roads in managerial evaluation lead to capital allocation. A high-quality management team is one that knows how to take resources, including capital and people, and put them to their best and highest use. Quality executives are ethical, open-minded, thoughtful, judicious risk-takers, transparent, and long-term oriented.

The challenge is all this is very difficult to figure out in real-time. Most of the time, tailwind or headwind in the business makes a management look far better or worse than they actually are. We, most of the times, have to go with our gut-instinct about the management based on a few interactions or how they speak etc.
Example - When Pidilite management is able to brand a commodity business they are termed after many years of success as visonary. Asian Paints was able to do the same. When Astral was doing it the same thing was being said. Now I hear the same thing for APL Apollo. But no one talks about all those other players who also tried creating brands and failed miserably (not for the want of trying). Nerolac, ICI, Dendrite etc. They remained marginal players in the same industry. Even DHFL used Shah Rukh Khan as their brand ambassador. A world of good it did for them!!

Next question is then how to distinguish between a good and a great business? Or conversely, between a good and mediocre business.

One thing I have firmly seen is a consistently good return on capital (whichever way we measure it - RoE, ROCE or ROIC etc) for a good business. But a good ROCE does not automatically mean that the business or its earnings are sustainable for long periods of time. Or that the business cannot be disrupted materially by external or internal conditions over a short period of time.

Back to Mauboussin. On source of competitive advantage.

The closest thing I’ve seen to an empirical study of this question is the work by Michael Raynor and Mumtaz Ahmed, consultants at Deloitte, that was discussed in their book, The Three Rules . They analyzed thousands of companies going back to the 1960s and suggested that superior performance, results that are above and beyond what luck allows, is the result of companies following two rules. The first rule is “better before cheaper.” In other words, do not compete on price. The second rule is “revenue before cost.” Successful companies focus on increasing sales rather than cutting costs. The title suggests a third rule, which, irritatingly, is that there are no other rules.
Those rules seem closer to a differentiation strategy than a cost leadership strategy.

So, question to ponder is this – is there genuinely a way/model/framework possible that is going to help drill down business quality into its components? Or is it just a chimera we are running after?

I will end this with the following study done by McKinsey on the 50 companies appearing in the 3 seminal books - Good to great, Built to last and In pursuit of excellence.

Performance of the “excellent,” “lasting” and “great” companies vs. the S&P

"In Search of Excellence" "Built to Last" "Good to Great"
(1982-2002) (1994-2004) (2001-2016)
Stars (more than Wal-Mart Philip Morris Phillip Morris
5 percentage points Intel Marriott Nucor
better than the market) Merck
Johnson & Johnson
Outperformers (more than Procter & Gamble American Express Kroger
2 percentage points Avon Products Johnson & Johnson Wells Fargo
better than the market) Walt Disney IBM
DuPont Wal-Mart
3M Nordstrom
Middle Dow Chemical Procter & Gamble Gillette (a)
Bristol-Myers Squibb Boeing Kimberly-Clark
Boeing Walt Disney Walgreens
Amoco (a) Merck Abbott Labs
Emerson Electric Hewlett Packard
McDonald’s General Electric
Texas Instruments
Underperformers (more Maytag (s) Ford
than 2 percentage points Hewlett-Packard
worse than the market IBM
Delta Air Lines (s)
Failures (more than 5 pct. Schlumberger Citicorp Pitney Bowes
pts. worse than the market) Kodak (s) Motorola Fannie Mae
Raychem (a) Sony Circuit City (b)
Key Amdahl (a)
(a) Acquired during Dana (s)
evaluation period National Semiconductor (a)
(b) went bust during DEC (a)
evaluation period Data General (a)
(s) subsequently acquired Kmart (b)
or went bust Wang Labs (b)

We came to some interesting, even surprising, conclusions.

Great companies were more likely to do really badly than really well.

Their odds of outperforming the stock market were 52-48, hardly better than a coin toss. But there are more big losers than big winners on the lists. Just eight companies outperformed the index by more than 5 percentage points, while twice that number underperformed by the same percentage.



Was just wondering if we have Food Process Engineering domain professionals within VP? If yes, do put your hand up - What are the key questions a food process engineering professional would ask to Axtel Management to evaluate if they are ready/equipped to scale up and move to the next level?

As a way forward that is the best way to get some insights into Rupesh’s poser, I think.



I agree with @basumallick dada that this is a rabbit hole which can go as deep as we want. We need to have few key starting points and then go from there.

The other way to look at this is to invert and see why good companies don’t scale and track those/discuss them.

One of the things which of course is visible in hindsight is building of team. Typically, when we entered any of the stories they were promoter led. But if the ambition of the company was to go big then they need to seriously invest in good, best in class talent.
I often look at placement companies of top schools in the country ( IIT, NIT, B-Schools…should be more) but have I think except for PI never found any of our companies in the list. To that extent have never seen except Atul Auto-post a job opening on premier job sites like or cut shorts.
It is I think foolhardy to expect that you can be in big boys league but the team is not skilled for the same.
Since then it is now a part of my thinking process, that if I don’t see our companies recruiting well then scaling up beyond a point is going to be really a low probability event.


3 posts were merged into an existing topic: Axtel Industries Limited: A proxy to packaged food industry

RM stands for Raw Material.

To start with you can study about some companies mentioned by Rupesh like Axtel Industries and some old proven companies like those mentioned by Donald sir e.g - Avanti feeds, poly medicare, etc.