VP Productivity 2.0: Mental Models Template - Emerging Moats

An accelerated learning/productivity enhancement exercise for curious young minds.

What is the correlation that you can spot between the two pictures shared so far - Deep Dive Template and Mental Models map for Emerging Moats

What are the desirable attributes in a business and Management that moves the needle the most?

Those with a curious, long term, strategic focus for zeroing in on opportunities will benefit the most from taking this exercise seriously. Others will too, but in my experience NOT everyone wants to work that hard, or has that kind of hunger to try and nail down what it really takes to SPOT the dark horses capable of running away with the race :slight_smile:

But those who do engage with this exercise seriously, I can only energise and encourage you on this beautiful quest by saying - honestly, most of last 10 years whatever we have learnt at VP in spotting runaway winners is - captured in these abstractions (simple words like Capital Allocation, long term long gestation customers, Operating Leverage, Trust Eco System) here! These are small small aspects that move the needle the most.

Your job is to discuss and debate why these are that important? Why do they move the needle the most?

So come on guys & gals, lets see who among you runs with the ball faster?
My role is that of the Coach - I will not be spoon feeding, may only intervene rarely to provide some direction & energy!

The ball and the court is all yours - volunteers in deep dive exercise, it’s mandatory to participate enthusiastically here so that you GET the vital interconnects. All other curious newbies, learner’s, seniors welcome to participate and help enrich discussions


Hello everyone,

Between these two pictures I stumbled across an interesting concept ~ Operating Leverage.
Operating leverage is a simple concept that measures the change in EBIT as a function of change in sales.

In simple terms Operating Leverage is high when with every 1Rs change in sales leads to incremental change in EBIT.

The issue of operating leverage is that it does not receive enough attention and it can provide insight to company’s changing earnings/fundamentals.

As i was searching for the same concept, found an pdf on the same.
Michael Mauboussin has been earlier talked by many seniors in the forum itself. In the Presentation of @desaidhwanil in ‘Investor carnival presentation’ thread has talked about his ‘Luck vs Skill’ and @Donald himself has mentioned him in BQ thread.
Below is the link to his pdf.
I think this is a very important element in business analysis. Requesting everyone, especially seniors to guide us into thinking deeper about operating leverage and its impact.



I believe it’s mostly about the capital allocation and its efficiency, i.e ROIC and ROE, that speaks most about business and Management running it .

Any business that can generate a ROE in excess of 6-8% over its cost of capital is adding value to the operations, however, if the management is equally successful in deploying the incremental capital for similar returns, the value shall compound and move the need most intrinsically.



While going through the template of Axtel I found that the operating leverage of 3.42 is led by many mixed factor.

This set me thinking in how many more ways EBIT can be increased. Few of them which I identified are:
As seen in many companies Increase in Sales YoY led by decreasing Raw Material cost can lead to increased margins and higher EBIT. Similarly new or innovative technology can help company in increasing EBIT, Consistent increase in Fixed Asset turns YoY, Capability of company to hike prices as and when opportunity arises, Capital WIP can also lead to increased revenue with increased capacity gradually. Thus these and many more factors which help in increasing EBIT can lead to higher Operating Leverage.( Please suggest more)

While going through Axtel I also saw similar trend of higher Operating Leverage in following companies:

  1. Avanti Feed: With Operating Leverage of more than 3 during 2011-12, EBIT jumped by more than 70% ( This could be because company was opportunistic and was able to hike prices leading to jump in sales)
  2. Ajanta Pharma: During 2011-2014 there was a nice jump in operating leverage.
  3. Sudarshan Chemicals: During 2018-19 operating leverage stood at 4.5, possible due to capital expansion undertaken during 2015-16 (assuming based on BS figures)
  4. IOL Chemicals: During 2018-19 stood at 4.2 due to ability to hike price ( BASF plant shut down) and capacity expansion undertaken.

If we can find out the reason for Increasing EBIT of the company and whether it is sustainable in the long term we can correlate it to the Operating Leverage concept.
Combined with other major analysis factors as stated by @simplyraghav - Capital allocation , ROIC, ROE, Management Capability, … this operating leverage concept can help us to understand much better whether the company has ability to grow in future and by how many folds.

Requesting everyone,especially seniors to please guide more on this concept and its impact.



I would like to boil down the two pictures according to a few “themes”.

Theme 1: The secret sauce of success: Operating Leverage

As @Parul highlighted amply,- operating leverage can attract a virtuous cycle. But what really is Operating Leverage.
Increasing Operating Leverage is really at its heart making your operations leaner. A business that continues to drive operating leverage is essentially not waiting for the proverbial winds to change, but adjusting the sails of its ship.

Driving operating leverage essentially implies, cutting costs, explicitly or implicitly. Explicit cutting cost implies the usual that we understand - reducing superfluous costs. But implicit cost cutting is far more powerful than explicit ones. Implicit “cost cutting” implies driving down costs of production via improvements in the process.

Results abound in the markets where we keep seeing operating leverage get rewarded beneficially.

How it plays out for Axtel: Take a look at the improving fixed asset turnover. The 5-year average was 4.35x and the current one is 7x. For a manufacturing business like this, it plays into the “idea” of Op.Lev very well.
While the yearly depreciation amount remains the “same”, the sales keeps on increasing - thus improving the profitability of the company.

While the “levers” behind driving operating leverage can be myriad and various, it all can be boiled down to a few essentials - you raise your prices (thus improving margins), or you improve your production workflow (thus improving asset turns), you employ technology (thus automating the process) or de-centralize (de-centralization, that is letting people drive the ops has shown to be extremely beneficial in early recognition of risks and cutting wasteful expenditure).

So how has Axtel been driving its OL?
It has improved its Fixed Asset Turnover, consistently improved its gross margins and most importantly reduced its cash conversion cycle to below 0

Theme 2: Opportunity Size and Structural Sectoral Advantage
Opportunity Size and Structural Advantage are best exploited for an investor when they work in tandem. When that happens, a “flywheel” is created.

Large opportunity size helps in delivering sustainable growth - highlighted by Donald’s Best Bang for the Buck picture in the “Numbers Show” section (4th column, last subpoint in Sweet Spot Earnings Profile) and Structural Advantage of the business helps in “keeping” the benefits of growth.

What do I mean by “keeping the benefits of growth”?
Think about the difference between the growth of companies like Lava mobile phones, Intex, Micromax and growth of companies like Coke and Pepsi.

While the first set grew at a much scorching pace, they failed to keep customers hooked to their product and thus they had to spend increasingly larger amounts for advertisement (Hugh Jackman ad, remember?) So when the demand slowed down just a bit, they were struck with slowing sales and high degree of amortized expenses.

Whereas coke, pepsi has a much more staid and slower growth rate, but there is a habit forming nature to their products. I have not seen one person switch from Coke to Pepsi (my brother might be an exception, since he drinks anything that has soda in it), and no one switching from these two to RC Cola (yes not even my brother).

Being able to keep the benefits of growth, ensures that we benefit from opportunity size.

Hence having a “structural advantage” ranks very high in the list and precedes a lot of other important aspects of the business.

How it plays out for Axtel
Take a look at its economic profit per unit of sales over the course of its last 10 years.
It has been all over the place 2010-2016 but tentatively moving up in the last 3 years.

EPA margin (EPA/Sales) is a great way to look and think about a company with regards to its structural advantage.
Economic Profit is a very simple concept : It tries to answer, what’s the “profit” earned by the business after its explicity (that you see on P&L statement) and implicit ( that you don’t see) costs are taken care of.

Implicit Costs like Opportunity Cost and Cost of taking a risk like this , are included in Cost of Equity for a Shareholder.

So Accounting Profit (that is reported) differs from Economic Profit as the latter takes care of the implicit cost of equity for a shareholder as well.

Now take a look at EPA/Sales trend of Axtel. Too early to say if Axtel is turning over a new leaf, but its wise to believe something is afoot.

And as for the opportunity size and room for growth is concerned - there is a lot of discretion involved into it usually. I can see, Donald has already calculated a 5 year average sustainable growth for the business. It’s 7.73%.

I don’t know without context of its competitors and without its sector if its high or low.
But as we saw in the example between Intex, Micromax and Coke- growth matters, but can you keep the fruits of the growth matters even more.

“Keeping the Fruits of the Growth” implies is there any economic profit left (ex growth)?

I realize the post has already stretched quite a bit.
But this was 2pence.
@Donald, if this is something that meets your approval, then I can add a few more observation points of mine.


With respect to the analysis of any company looking only at the P&L and computing/driving analysis might not give the whole picture, due to the following:

  1. P&L by nature gives the information on the flow of the business but not the stock of the business which the balance sheet represents
  2. P&L can be easily manipulated by accounting policy gimmicks/discretion, however the counter effect would be captured in the cash-flow statement as well as the balance sheet

Purely from a P&L perspective, the following ratios are the key metrics from my perspective (for non-financial businesses):

  1. Gross Margin and its sustainability
  2. Contribution Margin
  3. RoCE
  4. RoE through the Dupont Analysis

Apart from the above, there are certain other non-financial aspects of the business that also drive emergence of moat(s) for the company. Some of these are:

  1. How closely is the owner aligned to the shareholders
  2. Does the company have any significant patents
  3. Does the company operates in an industry which has suitable macros supporting its cause
  4. Is the company operating in any business which has network effects
  5. Is the company able to win repeat business from its customer/consumer
  6. Is there a brand associated with the company
  7. What is the product differentiation which enables/supports the financial metrics

I will try to take small examples for each of the points mentioned above, so as to give you visibility on how I am thinking about business in my mental models (DISCLAIMER: I am not saying that I am expert in this, or an overall a great stock picker/identifier, but its usually the thing that I look while looking at the financials and the Annual Report of a company)

“1) P&L by nature gives the information on the flow of the business but not the stock of the business which the balance sheet represents
2) P&L can be easily manipulated by accounting policy gimmicks/discretion, however the counter effect would be captured in the cash-flow statement as well as the balance sheet”

Look at the two companies: VA TECH WABAG and ION EXCHANGE, both work in the similar industry of water treatment and processing industry. If one purely looks at the Gross Margins then one might say VA Tech looks better that Ion Exchange; however if you look at the debt and cash conversion cycle one can see that while VA Tech Wabag is generating revenues, it is not able to generate cash out it which is also reflected in the cash flow statements.

Where as if one looks at Axtel, then one sees that the company is able to realize actual cash from the business that it is doing. Therefore two additional parameters that I consider while looking at the Financial Statements are:

  1. Sum of Cash Flow from Operations / Sum of P&L for the last 5-6 years Closer it is to one the better it is
  2. Cash Conversion Cycle -ve CCC is a great business, if reducing then also a good sign, high CCC without adequate support of margins, not a good sign

P&L Metrics:

  1. Gross Margin and its sustainability → While a high gross margin is a good thing to have, but is also attracts competition and it can erode over time (think of Relaxo Footwear where lower GM/NM actually keeps the competition away an it keeps growing vs RCom which never was to develop a pricing power and therefore slowly died). Therefore higher or lower GM, what matters more is the sustainability of the GM (eg. Titan, while it is exposed to the volatility of gold prices, its policy of 80% gold hedging keeps its immune to the underlying RM volatility and its GM is something which is purely coming from business expertise i.e. slowly moving into diamond jewellery which has higher GM, whereas in the case of Axtel while the GM are in the range of 50%, there is a bit haziness around the sustainability of GM)
  2. Contribution Margin: While difficult to directly compute from Financial Statements, but post a high level understanding of the industry one can understand the cost dynamics in play to see what is pure fixed costs and pure variable costs (eg. Paper industry has the cost of the pulp which gets shown in the Raw Material costs, but power and logistics are the two biggest other variable costs, therefore only an improving GM is not the metric to track but improving CM becomes important, case-in-point JK paper has improved its CM by sourcing 96% of its pulp from within 200 Km, reducing power costs through captive power plants as well as improving machinery efficiency)
  3. RoCE: While GM or NM might be low or high, there is no benefit if the business is not able to rotate its assets multiple times (eg. Titan vs Thangamayil Jewellery), reflected through higher FA turn-over,
  4. RoE through the Dupont Analysis: All the metrics that drive the operating leverage, also drives the RoE and by the widely held (and oft-true) return of share price will equalize to RoE in the long run.

Once I place the stocks in these broad categories where they lie, the business metrics can be broken down to see whats driving each of these metrics. As an example:

  1. Gross Margin: Is it increasing incidentally or structurally (i.e. getting pricing power: conversion into a brand eg. KRBL; improving product mix eg. Bata moving into higher margin categories of belts, and higher price shoes Hush Puppies; Titan into Diamond Jewellery; buying power leading to lower CoGS eg. Reliance Retail or DMart)…

The above would likely fit in a mix of NUMBERS SHOW and VALUATIONS Mental Model of Donald’s

For the non financial metrics, i will keep it really short (to avoid lengthening a already long post, as well as its more qualitative and hopefully examples are obvious)

1) How closely is the owner aligned to the shareholders - Rana Kapoor or Vijay Mallaya vs Uday Kotak (fighting tooth and nail with RBI to retain shareholding)
2) Does the company have any significant patents - Pure CRAMS player in Pharma vs Abbot or 3M which have access to global patents of its parents
3) Does the company operates in an industry which has suitable macros supporting its cause - Food industry vs Paper Industry (also refer to this article Link)
4) Is the company operating in any business which has network effects - similar to the network effects that Google or Facebook enjoy, very difficult to find (e.g. Affle India)
5) Is the company able to win repeat business from its customer/consumer - eg. Axtel, CreditAccess Grameen which increases the customer life time value
6) Is there a brand associated with the company - eg. Bata vs Sreeleathers (allowing bata to have higher pricing power)
7) What is the product differentiation which enables/supports the financial metrics - Without this a business will not be able to sustain itself, e.g. Reliance has the ability to process the hardest of the crudes, which enables it to realize the highest GRMs across all oil refining companies

The above non Financial things would come under the management DNA kind of category

Another disclaimer: Of the stocks mentioned above, invested in some, reading about some, analyzed others… but dont take any of them as a recommendation :slight_smile:


Yes it has stretched :slight_smile:; and Yes, you are on the right track.
My suggestions:

  1. Keep it simple - no big theories needed
  2. If at all you have to give advise - give actionable advise/illustrate by way of examples from your own experience set.
  3. No use saying - I dont know about Axtel business so I will tak about Coke.Pepsi. We are not here to teach people anything. We are here to share what we know/have learnt. And stick to emerging Moats business examples - go back to the Title of this thread. Getting the context right, is very important
  4. We are here to acknowledge/accept what we dont know - and make amends quickly. After Divyansh’s PHD on Axtel in 3-4 days, he has been sharing early versions on a regular basis. What prevented a serious volunteer from reading Divyansh’s version with interest. You would have known 60-70% of what is there to know in Axtel by reading his excellent output.

So general comments are - You obviously know quite a bit, should be a mature enough investor; but to really excel we need to get rid of the habit of pontificating - get to the point quickly. Simplify to the most important points that move the needle. Mr D always tells me - know that you know something well, only when you can transfer that conviction simply in quick 2 paras. If we need more than that, acknowledge we dont know enough, he would say. I now know the centrality & importance of this advise to me early on - because the same 2 paras now can convince my wife or a lay man, and the big-shot Fund Manager who may give me just 10 minutes audience, to get him hooked.

PS: Don’t look for Donald’s approval. I am generally a very open guy open to new learnings, but I am also biased with my strongest convictions at the core. This is what I am, what has made me what I am. We also need to see the brash side of the young, opinionated, strong convictions coming through. Don’t ever wait for my approval. Be confident about what you know, be humble enough to acknowledge what you don’t know openly/publicly - no one can know everything - that attitude will make sure you will fill up the gaps quickly. Your work will speak for itself, eventually. It always does. And VP readership is very discerning; khali pili gyan ko 4-6-10 likes bhi pad jaate hai; but really useful actionable posts ko 40-50-60-70-80-90 kuch bhi likes milta hai.

My approval note has also stretched :wink:


I used the Mental Models Template to look into Axtel template. I could make the following observations.

Axtel has a close to sweet spot earnings profile because

  1. High ROE (25%) and High FCF
  2. Price Implied Expectation of < 2 years (< 1 according to the XL)
  3. Decent EPA/Sales (7.85%) (template mentions double digits but it is not)
  4. Sustainable Growth Visibility 28.52% (template prefers > 30-35%)

Please pardon my factual (non analytical) view point as I this is my boundary at the moment being a new starter.



I did not know which thread to put my thought process down around core principles to stick to during these times (and even before). I have been a core believer in return on capital coupled with sales growth as that is what leads to value creation.

The hypothesis for me was to stick around those buckets of companies (in the non finance space) which have low debt and high ROCE and sales growth. If these companies were ‘really’ good they would be getting the least impacted in this turmoil relatively speaking.

So I looked at all non finance companies with market cap greater than 5000 Crs. There were 211 companies (I omitted one loss making company as it was an outlier with >80% fall in price).

Here are the results.

The most resilient companies are perfectly correlated directly to their returns on capital and sales growth.

For me personally it clears the clutter in my mind as to which companies to focus on always.



What also matters is the return on incremental capital being employed. If the ROIIC falls below the cost of capital, as a result we get de-rating.

This quotation from Bharat Shah says it all-
Stocks are like bonds, but when the growth stalls. They’re treated worse than a bond. Eg- newspaper companies, Media cos etc.

What really matters is the following in my view:

  1. Value creating sales growth. Where your Roce is still higher than your cost of capital. Eg- many people in Vinati organics have been saying that the new product has lower margin etc…still the Roce (most likely) of Butyl phenols would be close to 20%. Which by any stretch of imagination in a low yield world, seems great.

  2. Operating leverage giving a kick to ROIIC- eg- there are few companies like Apl Apollo and Balkrishna industries who have built up the capacities. Yet, the problem is low utilisation levels (below 70%). Once, headwinds recede and volume growth resumes. Roce’s and incremental returns will pick up. This will lead to re-rating.

  3. Margin expansion plays- biggest driver of Roce’s are Ebit margins and your capital turns. Eg- this story played out in Bata India, when management consciously adopted the strategy of selling products at a higher price. This improved their margins, as a result Roce’s improved. Which led to re-rating.

  4. Some rare breed of companies which have long runway for growth, competitive intensity in industry is low due to concentrated supply sides or consolidating supply sides. Eg- Asian paints and Berger paints in the paints industry. Alkyl Amines in the Amines Industry. Plausibly HDFC and Kotak bank, due to consolidation that will happen in the finance space.

Crux of investment has to be Roce and RoIIC . This is the essence of capitalism. Not only what do you earn on the capital,but how efficienctly you get there. Some stocks might continue to remain expensive due to this.

When Roce and RoIIC are looked through the lense of Runway for growth, past capital allocation track record, Moat of the company, Product innovation, Margin expansion, Operating leverage, industry cycle and improving capital turns, then it becomes a very potent mental model to generate returns. Could be another one of the reasons why markets rerate the stock before the actual improvements start taking place. This is what gets captured by technicals. Pure hypothesis.


Wonderful efforts Kim.

One important tenet is to use the phrase “All things being Equal” - identify those, and then look past them for that one or two attributes, that moves the needle the most. It might be different for different businesses/sectors, and there are some commonalities too.

All things being equal - implies that the business must pass minimum thresholds that we expect of an Emerging Business - one of the most important perhaps being Sustainable Growth - Numbers don’t always tell the full story. What are those minimum thresholds expected - a decent sustainable growth rate, a decent RoE, expansion in margins trend,growing Positive Operational Cash flows, (Free cash flow may not necessary to sport for a growing business that is likely to invest everything back in the business), near-zero debt position - a strong balance sheet, what else??

In Axtel case, if we go back and study the exemplary Axtel Deep Dive version Stock Story precursor produced by Divyansh, we will quickly realise that although medium term looks decent (mainly led by Mgmt commentary) nature of the business being EPC and tender based, sales is basically lumpy in nature, and will be difficult to sustain 2x Sales levels in lumpy project sales business, for a company of this size.

Folks interested in deeper understanding of key attributes that move the needle - will be well advised to go through important(old) threads like Business Value Drivers, Business Quality, Capital Allocation, and ART of Valuation threads - where repeatedly we have been referring to - all things being equal - in order to zero down on one or more key attributes.

Over to @deevee @Worldlywiseinvestors, and more seniors with generous hearts to spare your valuable time and help nurture newbies and young minds in this important quest.


Nice thread and discussions. But I’m seeing that most of the people are coming down to formula based investing. While I feel that markets have become fast and by the time things reflect in the ratios etc, a lot of re-rating already takes place (during bullish times). While these ratios etc are important but many often simple things like - 1. Growth 2. Underlying product/reason for growth 3. Clients 4. Industry are even more important things. For eg - If I come across a small company doing something new/innovative in a pharma industry and I can see early results, I’ll be more interested. When one talks of Axtel, I know investors who picked up the stock at very early double digit prices just seeing the name of the customers vs the small size of the company + the qualified and young promoters. And its pretty usual that when businesses rapidly grow, lot of the underlying numbers change for good and vice versa.

I’m sorry if I’m diverting from the topic as the focus might be identifying “emerging moats”. I feel moat is a very strong term and needs a lot of work on history of the company over different business cycles to give that title.


Thanks for pointing out this Parul. A very simplistic definition of operating leverage: distribution of fixed costs over production. This in itself could require a long post but that is for another day.

For most processor kind of companies without any special intangibles and other differentials operating leverage makes the most difference. In commodity industries (not govt. regulated like sugar) like cement, steel, graphite rods etc. this is clearly an indication of cyclicality since higher demand results in higher capacity utilization (along with higher commodity prices) and higher operating leverage and the opposite happens in a down cycle.

But apart from above Operating leverage also tells us how we can look at management’s of processor type companies.

Let us take Divis and Hikal two companies discussed widely on this platform, to some extent both have similar CRAMS based business models and similar addressable market size . Now a Divis focuses solely on Pharma APIs which leads to cost of SGA, Costs of compliance etc. to be spread over the entire company. Effectively when Divis develops a new molecule the costs gets distributed and assets of the entire company sweats . On the other hand Hikal which is into CRAMS, Agro, Vet APIs requires different compliance strategies, different sales and marketing teams and when a new molecule comes up the assets of only one of the three divisions are sweated leading to lower production efficiency and higher costs. A question that comes to my mind is was there really a need for diversification for Hikal when their close competitor has been able to and continues to grow and do better in only one line of business and get better operating leverage .

A very different but an interesting example is UPL. UPL is the largest generics play on the Agri side. Purely from a technical (chemistry) perspective UPL is a processor with limited differentiating intangibles (for the time being I am ignoring UPL brands, registrations etc) . But with its worldwide reach UPL gets a huge ability to scale up a new product across borders, decide the best place to manufacture it and work on a scale which no other generic Agri company has and all of this comes at virtually no extra fixed costs.

Operating leverage in most cases by itself is not a sufficient condition for investment and an investor will require a lot of other parameters to look into but as mentioned above it can throw up interesting insights into business, managements and cycles.

In the next few days I will also add a few of my favourite cases of where spotting operating leverage in play - while forecasting earnings (essence of the Mauboussin paper actually) was quite easy, and I believe everyone should develop the necessary focus to be fixated on this easy to spot aspect in a business. It really really moves the needle - when many other things are going for the business. meanwhile you guys/gals can try citing your own favourite examples …it will be fun exchanging notes on that.


Desirable attributes in a business and Management that moves the needle the most?

  1. Ability to use right operating lever during different part of business cycle ie knowing when to use
    Cost lever , Product range lever , Business Portfolio/ Geography , Price lever etc

Jack Welch - ( GE story over 20 years ) is excellent example on how to push these different levers at different point of business cycle … Here you will see pattern what to do in bear cycle and what to do in bull cycle to move the needle the most …

  1. How does on create different kind of leverage ( other than financial ) to turbo charge business ?

One of best form on free leverage is making consumer/ customer do the maximum work for free …

When any business does that it get Maximum Value …
SEARS in 1920s , Face book in 2000s are best such value creators where consumers worked hard to create value for firms for free …

Next form of Leverage is when customer funds capex and opeX for free :
How Mahindra Holidays created value for Mahindra is classic example - with under 50 cr investment it has been able to create thousand of crore of hotel assets …

Next form of best leverage is supplier/ Distributors funding Gr which people call Negative working capital - Asian Paints / Pidilite are excellent

Unused Price leverage - is another big opportunity for investor and threat for competitors - Apple is classic example of untapped price leverage - Jio vs Airtel in India is another example

If you find the above interesting will share more ideas …

On creating Mental Model template to spot these high impacting leverages or abilities is very difficult as one needs to be student of history , psychology, economics and mathematics at same

But for people who are interested we can take one industry / or company and do this exercise as learning model …


Thee is always good to be beginner again and forgetting about what have you had learnt over the years .The Risk such as COVID-19 never been take in to consideration before recent time which justify the definition of Risk that it is the more number of the events which can occur that we have taken in to consideration while making the valuation of any company .
Finding the TRIGGERs is very important that what are the recent triggers that can lead to disproportionate growth in capturing vast market share domestically and internationally . I am summing some of the recent triggers which are not going to displaced / disrupted by the IT or Amazon or technological innovation

Theme 1 : Commodity consumption such as sugar / ethanol
Demand of ethanol /Chini is increasing and the companies which has huge crushing capacities such as Balrampur and Dhamapur Chini and they are optimising the product mix by diverting more crushing unit out toward creation of ethanol and apart from direct we have indirect player PRAJ Industries . In indian context the demand of he major companies such as BP /IOL / ONGC is find short supply of ethanol .

Theme 2 : Essential Metals Aluminum / Copper / Manganese / Chromium
Next is there is multilevel low of the metals particularly second most used metal that is Aluminum is low and NALCO is lowest producer of alumina in world has better chances to have rise with in next couple of years . Cars need lighter material JSW STEEL / TATA steel

Theme 3 : Packaging companies
Third company is Essel Polypack which has more than 30 % share of laminated tube used in world in the manufacturing of the Oral tube and has global companies in its client such as Colgate patanjali and many more some of it’s supply fro china yet a small contribution as it is operating from various geographic of the world

Theme 4 : Holding companies
In this time there is good chance for invest in the Holding companies Though it wont give you multi-bagger returns but along with protection of capital one can create good wealth one such is Bajaj holding . which along with Bajaj group of companies They have invested in good companies such as Britania HUL Pidilite Marico and any more which need to study with recent noose dive by Baja finance give a good trigger to be interested in this

Next is the screening
We must exclude the companies with high debt and also expanding using external money while implementing the CAPEX .
We must have cautioned about inflated earning . for that we need to check is the receivable is increasing or the valuation of inventories is on higher end .


With my limited knowledge I am humbly sharing my views in context of Axtel Suppose you are running a small firm do you conserve money or spend money in this current scenario . In history during the Economic downtime the most of the companies either stop the CAPEX or postpone the same even if they implement they stretch the time frame for the money payments to the vendors . This is first cut they do in order to control the expense and they put emphasis to run the capacities with minimum resources it can be lower manpower . Raw material cost become more dearer . In order to offset the cost of production most of the companies want to invest in the raw material first and put more effort to improve the cash conversion cycle .

I am fairly new to this world of investing and thus pardon me if my understanding sounds bit too novice. I spent quality time going through the template prepared by Divyansh and to be honest it felt like reading a bible on Axtel.

I tried correlating the “Best Bang For My Buck” with the “Deep Dive Template” and to see how Axtel stands from the standpoint of various metrics mentioned in the “Best Bang For My Book”. Below is my understanding.


  1. Strategic Thinking:
  • I believe management lacks this quality.
  • Company has been in a business since 30 years and have served big and prestigious clients. Company also enjoys monopoly as far as India is concerned because there are no listed companies working in this space. Even after having these advantages management doesn’t seem to have explored different business avenues on their own.
  • Management could have targeted some smaller businesses in terms of developing food processing machines or providing service line of business.
  • Company could have expanded its business to cater to other businesses where there is need for processing units.
  • The geographical expansion that company has managed is because of existing clients taking them to other geographies, rather than management trying to expand on their own.
  • Company is working from single plat and any crises situation will affect company’s operation.
  1. Capital Allocation:
  • Company has cash & investments worth 21cr on the revenue of 110Cr.
  • Management could have invested this capital for the expansion of the business, but that doesn’t seem to be the case.
  1. New Revenue Stream/New Geography:
  • Company doesn’t seem to be exploring its options to expand its business by providing services to company’s which need assembly lines/processing units.
  • Company is also not seen to be expanding its operations outside India. The revenue that company has got from outside India has come from the clients which operates in India and outside.
  • Thus company seems to lack the drive to explore new revenue stream or new geography.
  1. Intellectual Property:
  • Company manufactures the products based on the customization and requirements provided by clients and doesn’t seem to invest in the research and development thus does not have any intellectual properties.
  1. Price Setting Ability:
  • Axtel needs to work closely with the clients to develop customized solution and these clients have good insights about the raw materials, development efforts etc. thus Axtel does not have much of the scope in setting up the prices.
  1. Clear Trust Ecosystem: (Positive)
  • Axtel seems to have fair trust from its clients.
  • The quality, stability of the machine matters to the customers because low quality machine can affect the produce and production of their clients. Axtel has fleet of prestigious clients like HUL, ITC, Nestle etc., which indicates the trust that these clients has in Axtel.
  • Axtel has managed to win the repeat orders from above said clients which underlines the trust client has in the company.
  • Clients are inviting Axtel for competitive bids, not only in India but outside as well. This also indicates trust which customers has in the Axtel.


  1. Company is virtually debt free
  2. High ROE
  3. High Operating Leverage
  4. High ROIC
  5. Company has maintained good current ratio over the period of 10 years
  6. Cash In/ Cash out ratio is also good.
  7. Price/Sales or MCap/Sales ratio is good, if not excellent.

Comparing above ratios against the “Best Bang Template”, I can say that company is good as far as “Sweet Spot Earnings Profile” and “Strong Liquidity” is concerned.

My view:

As far as my understanding goes, the company looks good on number front but could have and can do much better job on management front which can move the needle in company’s favor and in turn investors. Company is 30 years old but story started unfolding since 2014 only, thus one needs to look out what actions management takes in future.

P.S: Please feel free to correct me and guide me, as being a newbie.