Vijay Malik QA

Part3
VIJAY MALIK Q / A
Robin Garg
Q&A: Manappuram Finance Limited
Advice on entry price, holding or exiting the stock at certain prices,
Business assessment,
Impact of regulations and policy decisions like Gold Monetization Scheme
Allegations of insider trading and management assessment
Rationale for my investment and holding the exposure etc.
Q1: Hi Vijay. I am an investor in Manappuram Finance Limited since it was trading at 22 last year. I bought
the stock without realizing that you own it as well. I saw it go to 39 and back to 27. My reasons for investing
are similar to yours and I do feel the company is poised for better growth rates going forward. However, bear
market in Gold is hurting the sentiment and maybe the business as well. I wanted to know your views
regarding the same. My current assessment is that till the time Gold doesnt bottom out, the stock would
be under pressure as no big investor would want to take that risk at this point especially when there are
many businesses available at attractive valuations. I am waiting for the q1 results but my view remains slightly
bearish in the short term and medium term bullish. I would really appreciate your thoughts about this stock
and gold loan business in general. Thank you
A1: I do not reassess my position/views about a stock based on short term change in operating
environment including changes in gold price (which has been a cyclical event historically) or short term
performance of the companies. I have the same views, which you have read on this website, as
mentioned by you in your query.
Q2: Dear Dr. Malik, thank you very much for posting your analysis & thoughts on so many companies & your
investing style. They are comprehensive but easy to understand and therefore extremely helpful.
My queries are in regards to one of the Stocks in your portfolio Manappuram Finance Limited. I have
followed your 5 Step Analysis Process (Financial, Valuation, Business, Management and Operating Efficiency)
and gone through your blog but still had the following queries:
1) Financial You have mentioned that an investor must look for a company with Interest coverage of at
least 3, while Manappuram Finance Limited has an Interest Coverage of 1.53 (in regard to Operating
Income). How do you gain comfort in investing in a company with such a low IC Ratio, is there a
different benchmark for NBFCs?
2) Business How did you go about assessing if Manappuram Finance Limited has a strong
MOAT/Competitive advantage? The primary business of Manappuram Finance Limited (Gold Loans)
seems to be stagnating, the RBI has asked Gold Loan companies to diversify into other Financial
Services, in line with this Manappuram Finance Limited is diversifying into Micro-Finance (Asirvad
Microfinance) & Home Loans (Manappuram Home Finance), while these are great initiatives, they are yet
to show any results and the Home Finance sector although promising, seems to be crowded/ competitive.
Given this scenario,how did you gain comfort in the business & industry prospects of Manappuram
Finance Limited?
3) Management You have cited the case of Manappuram Agro Farms & the Promoter Mr. V.P.
Nandakumars response to the RBI ban as good management practice, however dont you think it was
unethical of Mr. Nandakumar to accept public deposits for this proprietorship entity through MFL branches
in the first place? Although his subsequent steps to honour his commitments might be commendable, but
isnt this equivalent to a person making recompense once he is caught doing something unethical by a
higher authority? What if this wasnt detected by the RBI, what if there are other such instances which
have been left undetected? Some investors like to say There is never one cockroach in the kitchen
could that be the case here?
I am just playing the devils advocate here and would like to understand your thought process & research
method to learn more. Thanks you for your time & the wonderful blog.
Disc. I am invested in the Stock for over 2 years now.
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A2: 1) Business assessment criteria for financial institutions are different from other sectors like
manufacturing.
2) My assessment of moat is from assessment of past performance.
I believe that company has done well and faced the competition from other players successfully. RBI has
not mandated gold loan companies to diversify. The companies, including Manappuram Finance Limited,
are doing it on their own initiative.
3) Management assessment is highly subjective. It is the same way like we choose our friends. I
appreciate your views and do not refute your logic. An investor should take her decisions as per her own
conviction.
Q3: I'm holding Manappuram Finance Limited of 18.I wish to sell it at 54 but plans to hold it till
100/-. Whats your view on Manappuram?
A3: I do not provide any price based stock calls. You would have to decide the exit point yourself. I
plan to write an article about when to think about selling your stocks, however, that might take some time.
Nevertheless, market price should not be the only factor to decide about selling a stock.
Q3.1: Can you please share your opinion on Manappuram Finance Limited?
A3.1: I feel positive about the Manappuram Finance Limited. I expect it to grow its different business
divisions and earn good returns for its shareholders. How much time that is going to take, is
anybody's guess.
Q4: I went through the framework provided by you and checked couple of stocks from your portfolio. I would
like to know your perspective for holding Manappuram Finance Limited. It actually fails on Company
Analysis Framework parameters which you recently commented in reply to few questions asked. I checked
one of the stocks XYZ that I am holding, which passes the analysis framework except that the ratio of
cumulative CFO with cumulative Net Profit is less than 1 which is not good sign. Request you to elaborate
more on this.
A4: Manappuram Finance Limited is a company with good business which is going through a very bad
phase since Feb 2012. This phase with strong headwinds has given investors a very good opportunity to
buy its stocks at some very attractive levels. Now the clouds seem to be clearing up a bit. I expect that
Manappuram would be able to grow its existing business as well as newly acquired businesses
and would be able to create wealth for shareholders. Regarding a company not able to collect its
profits in cash, multiple companies discussed in this page have faced this issue. I would suggest you to
go through the other companies discussed on this page. The most common result of such issue is that
companies rely more on debt to run their operations and their debt keeps on increasing year on year.
Q5: Saw your analysis of Ambika Cotton Mills Limited and I am thoroughly impressed by your analysis and the
article was very valuable and informative. Just need some information and appreciate your valuable time:
1. Where do we get the data as you had done analysis for 10 years?
2. Did you do similar analysis of your other portfolio stocks and will you be able to share
them. I am specially looking for Manappuram Finance Limited. I was under the
impression that their governance and integrity is questionable. But since you have done
the analysis, I started getting interested in the stock. Can you share and also let me
know, if the current price is reasonable?
3. Also Ambika Cotton Mills Limited has run up and is ~800 level. Do you still think it has
the margin of safety?
A5: 1) The financial data was sourced from the websites: screener.in, moneycontrol.com, ACML annual
reports. The same has been mentioned in the article on Ambika Cotton, as well.
2) I have not documented my analysis of other stocks. I would publish it on the website, if I write detailed
analysis of any other stock (including in my portfolio), in future.
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Entry price of Manappuram Finance Limited:
Entry price criteria differ from investor to investor. The fact that trading is happened in Manappuram
today means that there were people buying it at today's prices. Everyone should have his own criteria for
buying stocks and take decision accordingly. I would request you to take decision as per your
criteria/checklist.
3) Ambika's current price and margin of safety (MoS): I have discussed the calculation of MoS in the
article on valuation analysis.
Q6: In addition to my earlier question on Manappuram Finance Limited, I have more point in mind before
investing that can government's Gold Monetization Scheme have a disruptive effect on business model of
Manappuram Finance Limited and can that be attributed for sudden fall in Manappuram share prices.
A6: You may read about the management's assessment of impact of these schemes in the latest
conference call transcript (available on Manappuram Finance Limited website). I agree with what
management says about it. I do not have any opinion on the reasons of fall/change in
Manappuram Finance Limited share price. I do not know what factors the market is taking into account
to assign it the price it has assigned currently or for that matter at any point in time.
Q7: How would you react to the robbery case at one of Manappuram's branches in Tamil Nadu where the
manager was complicit with the robbers?
A7: An investor should go through the various company communications where the company talks
about/informs about the various risks being faced by the business and the steps which the
management takes for mitigating those risks. By reading such communications an investor would be
aware of the challenges and companies responses to them. I suggest that investors read the annual
report in details and make their own opinion about the risks of gold loan business and the steps taken by
Manappuram Finance Limited to counter them.
Q8: I came across this news item regarding insider trading by Manappuram Finance Limited directors.
http://www.business-standard.com/article/pti-stories/sebi-fines-manappuram-finance-ex-director-for-
insider-trading-115081900955_1.html
Does this make us review our assessment about the integrity of the management?
A8: I believe that an investor should base her decision on the primary source of information and not
on the media reporting. Request you to read the SEBI order in this case and present your views about the
order and the reasoning given by SEBI for the settlement amount. Your inputs would be helpful for other
readers as well.
Q8.1: I read the SEBI order and can make out that the director is guilty. But I do not think that one
director acting on his own can be counted as a negative for the promoters integrity.
A8.1: Thanks for your inputs.
Q9: I have read all the steps (All steps 15) thoroughly, I was analyzing the Manappuram Finance Limited, its
sales are not increasing since 2012. Below is sales (in Cr.) from 2012 to 2015 in the same order -- >2645,
2259, 2100, 1975, 2034. Then it is discarded at financial analysis step itself so I was wondering its
presence in your portfolio. Please help to share the reason.
A9: The guidelines for buying a stock for first time and those for holding it in the portfolio are
different. However, how long an investor should keep any stock in her portfolio or alternatively when
one should sell the stock is based on different criteria. I believe in holding a stock until the time I am
positive about its future. Times of trouble which an investor believes to be temporary in nature are the
best times for accumulating stocks. I am holding Manappuram since 2011.
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Q10: Ashish Dhawan buying Manappuram Finance Limited adds to the conviction level?
A10: It depends upon each investor what she wants to derive from each piece of information like any HNI
buying into any stock. As far as I am concerned, I am indifferent to this event. I suggest readers to do
their own stock research and not follow/depend upon other investors to make their investment
decisions.
Q&A: Ambika Cotton Mills Limited (1)

The current article is an attempt to put together the knowledge shared by different readers about Ambika
Cotton Mills Limited so that all the readers can get benefited from it.
This article contains the queries raised by readers about:

Various factors leading to the competitive advantage (Moat) of Ambika Cotton Mills Limited
Queries about its customers and suppliers
Relevance of DCF and industry P/E ratio while selecting any stock for investment
Q1: I am a banker by profession and am a Credit Manager in ME with an MNC Bank. Your post has provided
great insight into every aspect of company analysis. I am sure that I'll be able to use the same in my day to day
working. On the above case, the only concern was the dip in financial ratios in 2009 but that too was covered
later on attributed to shortage of power supply. One factor that could have been covered is the aspect of
sourcing since the super quality of their products and the premium they demand is basically due to the high
quality of the raw materials. Is the company looking beyond these two countries especially Egypt. What is the
level of dependency on Egypt for sourcing? My thoughts might be irrelevant but then supplier concentration
may limit their growth going forward. All said and done, am in agreement with your analysis. Yes, the scrip
does look good to get in to.
A1: You are right that details of suppliers would provide additional insights about the company. However, I
could not find the related information in the public domain. The company works mainly on advance orders
backed by LC (as reflected by low days of receivables outstanding) and it maintains an inventory of cotton
raw material of about 100-125 cr. (as reflected in current assets). Hence I believe that ACML mostly buys
and keeps required raw material in advance for visible orders. It gives me some comfort.
Q2: I have started investing in stocks from 2012 with V.S.T Tillers Tractors Limited as my first stock. Your
systematic approach to finding the hidden gems is really appreciable. Thank you for the detailed report on
Ambika Cotton Mills Ltd. There should be strong moat in the business, which I am not able to see here. I do
not see the reason why peers shall not be able to import premium cotton (Giza & Pima) and stand in the
competition to ACML. In case of Vinati Organics Limited, it has strong technology know how in its products and
globally a major supplier in its products, which a great moat is. Do you see any such moat in ACML?
A2: Another reader has asked the similar question about moat factors in ACML. I am repeating the same
reply here: "ACML is one of the few players capable of making yarn for varied counts cloths. As per
information available on internet, ACML yarn is used for almost all premium shirts. Its yarn is made from
ELS cotton by a mix of high quality cotton imported from US (Pima) and Egypt (Giza) which in turn
commands premium. It can provide customized products to buyers instead of commodity type single
count product of other players. This business advantage allows it to work on advance orders backed by
letter of credit therefore its average days of receivables outstanding is 5 days!! Competent, honest &
shareholder friendly management is largest moat above all other factors, which I believe ACML has."
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You would agree that Moat might have many other factors in addition to raw material. It can be good
management, relationship with suppliers or customers, distribution network, good labour relations and
many more. In my analysis I do not try to find out each and every contributing factor leading to moat.
However, I try to analyse the financial results to find out whether these numbers speak of presence of any
moat. In ACML, the reported numbers speak of a moat. Some factors leading to moat can be found out
from publicly available information. Other can be learned if an investor talks to the promoters. I have not
interacted with promoters for finding out moat.
Q3: Where can we find the customer list of ACML? Their website says nice premium shirt segment. But
doesn't provide the names of the customers, their geography etc. I would appreciate if you can throw some
light on this.
A3: The details about customers of ACML are not available in the public domain. However, as mentioned
by you, the only information disclosed by the company is that, its material is used in almost all the
premium shirting brands. You may contact the company directly to get customer details.
Q4: I have 2 questions on the business side:

1. Why should the margins not go further down from here? Do we know the reasons why
margins reset from 25-30% to 20-22%?
2. Do we have the list of major customers? Do we know which customers are likely to give
repeat orders for a fairly long time?
A4: Answer 1: Margins may very well go down further. Cotton is an agro-commodity whose prices keep
on fluctuating a lot. Company maintains good amount of inventory of cotton, which may shield raw
material price impact for a short period, but the impact will definitely be visible sooner or later. However,
company has been able to maintain margins over past few years indicate that they might have some pass
thru mechanism for costs.
Answer 2: The details about customers of ACML are not available in the public domain. However, the only
information disclosed by the company is that, its material is used in almost all the premium shirting
brands. You may contact the company directly to get customer details.
Q5: One question I have the DCF analysis and as per the DCF value what is the current value.
A5: I do not rely on discounted cash flow (DCF) analysis for stock research. Therefore, I have not done
DCF for ACML.
Q6: I saw in Care ratings that a long term loan of Rs.325 crores for Ambika Mills which is not shown on the
balance sheet. Is it that this loan is not been used by Ambika Mills??
A6: The balance sheet is as on March 31, 2014 whereas the enhancement of debt facilities which are
mentioned in CARE rating rationale dated November 7, 2014, might have happened post March 31, 2014.
It would get reflected in balance sheet of March 31, 2015. The positive news is that CARE has upgraded
its credit rating from A- to A, which would lower the cost of funds for ACML.
Q7: You have mentioned that one of the prime criteria for valuation of stock is P/E ratio. You have mentioned
that the ratio should be less than 10 whereas if we look at some of the examples quoted, Ambika cotton the
P/E ratio is already higher than the industry P/E. Do you still say this stock is available on a discounted price?
Can you please clarify? The Mayur Uniquoters Limited for example is already trading at high P/E ratio, but you
are still holding it. Can you please explain?
A7: Mayur Uniquoters Limited is now trading at high P/E as market has recognized its potential. I am not
increasing investment in it as I am not comfortable putting fresh money at these levels. However, I do not
sell any investment only because its P/E has increased. It might not give me exceptional returns in future
but if its earnings keep on increasing, I expect that it will keep on giving me good returns over long term. It
is like a plant which no longer needs watering, just monitoring to see if it catches any disease in future.
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Ambika: Though industry P/E might not be an irrelevant data point to compare, however, I do not factor it
a lot in my investing decisions. I am a bottom-up investor and feel that it can give me good returns at its
P/E ratio. Rest future will tell. I can be wrong as well.


Ambika Cotton Mills Limiteds business & its export markets
Suitability of Ambika Cotton Mills Limited on Warren Buffett's parameters
Queries about its valuation metrics and pricing levels
Q1: I have a couple of questions:

1. You do an analysis of CFO vs PAT to measure if PAT is translating into CFO. But, you are
not deducting interest expense on CFO. This expense is being deducted in calculation of
PAT. So, to really compare apples to apples, shouldn't you deduct interest expense from
CFO and then compare that to PAT (or am I missing something?).
2. Is this is a no-growth stock that is (or was) cheap or does it have high growth prospects.
Say, for example, if you look at a Kitex Garments, there is a clear case that they have
penetrated their customers only to a very small extent currently, and opportunity for
incremental business from the same clients is huge. Is there some kind of a similar story/
possible case in Ambika?
3. Surprisingly, more than 50% of their total sales are to East Asia and South East Asia. I
have not seen (may be my ignorance) India exporting to these countries. So, which
countries do they export to? India does not have much of a cost advantage to these
countries? Then, why do these countries buy from Ambika? And give it such high
margins? In turn, what is the moat here? It seems to be something more than low cost
advantage which makes it interesting.
4. Exports to Europe were INR 15 crores in 2013 and INR 26 crores in 2014. Making in
India and selling in Europe is a very compelling proposition generally. Is there a lot of
untapped growth opportunity there?
5. Any idea of the current capacity utilization.
6. Any idea if the management is open to meeting shareholders for discussion.
A1: Coming to your questions:

1. Broadly speaking, interest & depreciation are deducted from PAT which are not deducted from CFO.
(There are some other changes as well, but for conceptual discussion lets limit the discussion to these
two). You would notice that due to interest and depreciation adjustment, normally CFO should be bit
higher than reported PAT. Therefore, it becomes significant when CFO is less than PAT over long periods
of time. One should not interpret too much into PAT v/s CFO for shorter periods as the company may be
facing tough times. However, over long periods (say 10 years) CFO should not be less than PAT,
otherwise there is some issue which should be analyzed in detail. Cumulative CFO and PAT are easily
available data and can give an understanding of company's working capital management in a glance.
2. The past financial data indicates that the stock is a growing at 15-20% per year and utilizing its
enhanced production capacities well. Whether an investor would classify it under high or moderate
growth, is the investor's choice. I do not have information about repeat business from existing clients. It
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may or may not be there. However, management has been able to find buyers for increasing quantities of
their product consistently.
3. Deciding about moat can be two way process. It is like finding the best student in the class. One may
check all the students for their IQ, analytical skills etc. and find out which students are the best and decide
that these students have moat due to xyz qualities. Or one may check the past results and see that
certain student(s) have consistently topped/been in top performing students year on year in past exams
(published annual financial results) and decide that consistent performing students have moat. I take the
second approach. I was also impressed by the seemingly different export profile of Ambika and your
concerns (which are good observations, in fact) lead me to believe that Ambika has a moat.
4. If a company is able to make good differentiated product at competitive prices, export demand will
always be there. I am not being very specific in my answer to Europe or any other market, because
tomorrow the business environment is going to change for sure. And what is working for the company
today may not work in future. Company is facing and will face further competition for sure. It is only the
honest and capable management which would be able to survive competition by introducing new products
and in existing/new markets. The data shows that Ambika has good management (remember top
performing student!). However, no one knows whether their current promising performance would
continue in future. That would require consistent monitoring.
5 You may find capacity utilization data in the annual report.
6 I did not contact management. You may try it yourself.
Q2: Ambika cotton mills limited was under my radar for quite some time in most of 2014 and could have easily
bought it under 50% of today's price. However two things stopped me, and both are comments by Warren
Buffet.
First one was where he explicitly mentioned that textiles were not a good business to own.
Secondly, the observation that when a business with bad reputation meets management with
good reputation, the reputation of business remains intact! Notwithstanding the consistently good
performance of this company the fact of it being in a commodity business and in textiles made me
not buy in.
I'd like your views on whether there is a lesson is learnt here, or this is just the opportunity cost of
discipline.
A2: Both the reasons that you have cited for avoiding investment in Ambika Cotton, are based on the
assumption that textile is not a good business, which is a comment made by Warren Buffett. However, it is
pertinent to note that these comments were made by Buffett for US textile industry in a different setting.
You would also appreciate that industries do not face the same environment in India and US. Many
industries die in US only because the work shifts to India & other emerging markets (outsourcing).
Therefore, I believe that an investor should do rely on her own analysis and rely on it, even if it might
seem in contradiction to what great investors might have said in different settings. I also remember Peter
Lynch when he said: Moderate fast growers (20-25%) in non-growth industries are ideal investments.
Whether Ambika would prove to be a good investment, we would come to know only in future. However, I
would suggest that you should give more weightage to your own analysis.
Q3: You hold Ambika cotton and I tried to research about the company business. I was not able to gather
much information about it. 60% of the revenue comes from the export and they export yarn for Premium
shirting segment. Buffet says buy wonderful businesses. How can we confirm that Ambika business is
wonderful business?
A3: I analyse businesses from a few of its financial characteristics. These criteria may or may not be the
same that Buffett calls as wonderful businesses. I am happy if any company meets these criteria. Ambika
met these criteria as mentioned in my article on Ambika Cotton.
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You may get further information about company business either from company & its management or from
publically available sources. I guess that you would already have gone through the annual report and
other documents available at ACML website. If not, then please go through them. Then you should search
internet about the articles and opinions other investors have written about ACML. You would find a good
discussion going on about ACML on Valuepickr forum. If after reading all these sources, you still feel that
you require more information for taking investment decision, then you may contact the management.
Q4: You did not mention EPS growth. Dont you think that it will be part of analysis? What I found out that in
many years there was (-) growth for EPS in screener. On similar lines, how do you track even if a company
growing but its share count is increasing, which has happen to many companies?
A4: If there is no equity dilution year on year, then EPS growth and net profit growth would represent one
and the same thing, whether the no. of shares remain the same or increase due to split or bonus shares.
In such cases, the % ownership of existing shareholders remains the same. However, these two would
not remain same if no. of shares increases due to issuance of new shares which reduces the %
shareholding of existing shareholders. In such cases from investor's perspective, EPS growth would be
more pertinent than Net Profit Growth. However, in both these cases, net profit would retain its
significance in terms of profitability margins and the attractiveness of the business. You can assess the
dilution impact by looking at the share capital of the company. If share capital has increased then you
should explore whether the same is due to bonus shares or issue of new shares. In Ambika the share
capital has been constant from 2006 till date at INR 5.88 cr.
Q5: After the recent sharp run up of the stock, do you think fresh entry can be made at this level?
A5: Entry price criteria differ from investor to investor. The fact that trading is happened in Ambika Cotton
today means that there were people buying it at today's prices. Everyone should have his own criteria for
buying stocks and take decision accordingly. I would request you to take decision as per your
criteria/checklist. In case you have not yet prepared your checklist, then I would suggest you to read
through the article series "Selecting Top Stocks to buy". By the time you would complete this series of
articles, you would have your stock selection checklist ready.
Q6: I need 3 clarifications from the above analysis.

1. In current assets (CA) you showed 165cr, but my calculations shows it as 142Cr.
(Inventories 133 + receivables 6 + Cash 3, all data's from Screener.in), could you help me
where I am missing?
2. From where to get the historical current liabilities (CL)? I am getting only the current CL
from screener.in as 125Cr.
3. While comparison with peers, what is the key factor other than M-Cap to select a
company as peer?
A6:
1. Data for CA & CL has been taken from money control. Current assets have been
calculated as total current assets including short term loan & advance ( 23.5 cr). You
may find it at moneycontrol site.
2. You can get CL data from the moneycontrol website. Screener does not provide separate
data for CA & CL.
3. In addition to market capitalization, you may consider comparing peers based on annual
sales turnover, total asset size of the balance sheet and though not very commonly used
but based on installed capacities.

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In-depth analysis of operating parameters of Ambika Cotton Mills Limited

Comparison of Ambika Cotton Mills Limited with its peers
Difficulty in finding value buys in overvalued markets and steps to search of value in such times
Relevance of Self Sustainable Growth Rate (SSGR) in analysis of Ambika Cotton Mills Limited
Q1: I was just thinking from a skeptical angle about the asset turnover ratios and the replacement rate of
machines required. As on 31st March 2015, Ambika Cotton Mills Limited had fixed assets worth 270 cr
against which it clocked a turnover of 483 cr which turns out to be 1.79 times. My understanding is that
generally low asset turnovers should be backed by higher margins and higher barriers to entry. I am clear that
margins of Ambika Cotton Mills Limited are very superior but not too sure about barriers to entry (both of which
are satisfied by Vinati Organics Limited, which is again a low asset turnover business with high margin and
high barriers business). Also the asset turnover, which I am counting, is after the depreciated value. Lets do a
case with a new capital expenditure. If and only if its a relatively easy business to enter, then lets try to
extrapolate it to a situation of a moderate business cycle with the recently announced capex plan of 130 cr.
130 cr financed equally by debt and equity 65 cr by equity and 65 cr by debt. Approx. turnover achieved at
current rate: 130cr x 1.79 = 232 cr. In situation of business moderation (in case of down year/increase in
competition), the turnover would become 75%. i.e. 232cr x 0.75 = 174 Cr. Considering deterioration in EBIT
margin to 12% (low operational leverage or pricing pressure if competitive business case) Ambika Cotton Mills
Limited will clock EBIT of 20.88 Cr (174cr*12%). This gives an ROCE of 20.88/130 = 16.06%, which is still
not bad. However, only concern is what if the capacity utilization or margins fall further. Then I think return
ratios could become shaky. There is a primary assumption that the competitive intensity increases or capacity
utilization goes down because of lower demand or even both may happen together. If possible, can you
highlight whether Ambika Cotton Mills Limited enjoys any specific business entry barrier and why a new player
would not enter such a high margin lucrative business? Why would Ambika Cotton Mills Limited be so
confident of further demand in a relatively mature market and weak business climate around the world? The
recent capex announced is 50% of the fixed assets.
A1: I understand that primary concern that you have is about entry barriers/business advantage/moat for
Ambika Cotton Mills Limited. I had presented my views on the same while answering to the query of
"Rohan" on the current article. You may find his query and my reply in the comments below. Allow me to
copy my response about moat here: Deciding about moat can be two way process. It is like finding the
best student in the class. One may check all the students for their IQ, analytical skills etc. and find out
which students are the best and decide that these students have moat due to xyz qualities. Or one may
check the past results and see that certain student(s) have consistently topped/been in top performing
students year on year in past exams (published annual financial results) and decide that consistent
performing students have moat. I take the second approach. I was also impressed by the seemingly
different export profile of Ambika Cotton Mills Limited and your concerns (which are good observations, in
fact) lead me to believe that Ambika has a moat. About change in competition and business environment,
I believe that it has been changing ever since and will keep on changing in future as well. However, it is
job of the management to deal with it. If we as investors associate with right management, then we can
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rest assured that competent management will take appropriate steps to tackle such challenges. I believe
that Ambika Cotton Mills Limited has a competent management.
Q2: I don't have any specific stock related query but want to know more about your stock finding technique as
at the current level of market its very difficult to find a new value investment by just screening. It would be
better to look for the different business stories like you did in Ambika Cotton Mills Limited. I read your
article How to do Financial Analysis of a Company where you talked about your technique. Can you tell me
specifically which magazines/TV shows/blogs have better content than others and should be followed or which
magazine do you read regularly where author/host talks about the overall business rather than stock as it is
very difficult to read the whole annual report and analyse the business over web to check the quality of every
business to find a good investment. I will be very thankful if you can write an article about this on your blog and
can discuss about the how you found Ambika Cotton Mills Limited.
A2: I believe that stock screening using filters is the best stock finding technique. It has served me well till
now. Ambika Cotton Mills Limited was found using stock filters. Opportunities are always there in markets.
However, during times of optimism, the search gets tougher and longer. Nevertheless, an investor should
keep looking till the time she finds a good opportunity. I read a few newspapers and magazines. But they
have never led to a stock find. I have noticed that by the time a stock makes to media like newspaper &
magazines, it has already grown and run a lot. Market has already realized and factored in a lot of future
growth by then. Therefore, an investor should try to grab a stock before it makes to frontline media. Stock
filtering screeners work perfectly for such cause as they give results without bias. Reading annual report
is necessary for any investor to understand business. It might seem cumbersome at the onset; however,
reading annual report provides an investor to have her own original thoughts about the prospects of a
company. I agree with many investors say that it is difficult to make huge wealth in stock markets with
borrowed wisdom. Therefore, an investor must do her original analysis and reading annual report is the
first step in this direction. I would suggest that you should rely more on your own inferences after reading
annual report than analysis presented in various newspaper, magazines or blogs (like drvijaymalik.com).
Q3: While analyzing companies with this new framework, surprisingly the SSGR for Ambika Cotton Mills
Limited is in negative or in very low single digits! Could you please explain how an exceptional company like
Ambika Cotton Mills Limited can have such low SSGR? I have checked and cross-checked the screener sheet
for any calculation errors. If we analyse the ROE through Du Point analysis, Ambika Cotton Mills Limited has
exceptionally improved its operating efficiency despite the declining equity multiplier. I believe that this makes
Ambika Cotton Mills Limited as part of section C of your article, with difficulty in maintaining sustainable growth
going forward.
A3: You are right. Ambika Cotton Mills Limited falls in part C. It has improved its inventory turnover as well
as receivables days and has managed to reduce its debt and fund its growth by improving its operating
efficiency. Congratulations for your understanding the concept and applying it correctly in analysis.
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Q4: A question on Nitin Spinners and Ambika Cotton Mills Limited. Compared to Ambika, Nitin spinners have
similar margin, bit better sales & Capacity. Yet market cap of Ambika Cotton Mills Limited is greater than Nitin
Spinners. Any reason? I am missing something? May be like management issues, although I could not see
them. Can you advise what could be the reason?
A4: Hi, I believe that any attempt to explain the market valuation of any company or the difference in
market capitalization of two companies is mere guess work. It is always uncertain what factors market
might be weighing at any point in time. Ambika Cotton Mills Limited as well as Nitin Spinners, both have
been analyzed in different articles on the website. Request you to go through those articles and do your
own analysis to arrive at the potential explanation for difference in market capitalization of these two
companies.
Q&A: Asahi Songwon Colors Limited

I used to own shares of Asahi Songwon Colors Limited in my portfolio. I first bought the stock in February
2012 and sold my position finally in August 2015.
The current article is an attempt to put the queries asked about Asahi Songwon Colors Limited and my
responses to these queries, so that it can be beneficial to other readers as well, who might be analyzing
Asahi Songwon Colors Limited.
These queries cover different aspects of Asahi Songwon Colors Limited like:
Business analysis of Asahi Songwon Colors Limited including competitive advantages,
Financial performance and valuation levels of the stock
My reasons for buying and then finally selling the stock.
Q1: I went through the framework provided by you and checked couple of stocks from your portfolio. I would
like to know your perspective for holding Asahi Songwon Colors Limited. It actually fails on Company Analysis
Framework parameters, which you recently commented in reply to few questions asked. I checked one of the
stocks, Dhanuka Agritech Limited that is holding, which passes the analysis framework except that the ratio of
cumulative CFO with cumulative Net Profit is less than 1, which is not good sign.
A1: Asahi Songwon has been enjoying good growth & healthy profit margins till FY2012. In FY2013 they
shut one of units for debottlenecking for about 2 months, in FY2014 it raised debt and did capex on water
treatment plant and oil prices also kept on increasing during these periods. Combined impact of these had
weighed on its profit margins. Now the company has undergone demerger as well. I expect the net profit
margins to improve. However, if at all it might happen, then when it would happen is anybody's guess.
Management is good and I believe, they would also be having the concerns you have shared in their
mind. Let's see what they do and how they perform. Regarding a company not able to collect its profits in
cash, multiple companies discussed in this website have faced this issue. I would suggest you to go
through the other companies discussed on in the Research & Analysis section. The most common result
of such issue is that companies rely more on debt to run their operations and their debt keeps on
increasing year on year.
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Q2: I have read the annual report of Asahi Songwon Colors Limited (FY 2013-14) and analyzed their financials
for last 8 years. Management seems to be impressive, transparent and has clarity of thoughts for business
future. However, I am concerned on few areas as mentioned below:
1. They are dependent on single product (blue and green color). No plans to add other
products for reducing business risk.
2. Dependence of business on 4 clients, hence high risk if even one of the clients stops
doing business with the company. Although probability of that happening is less since
they are focusing on quality and have ISO and other certifications in place.
3. Past performance and margins have been inconsistent (may be due to crude oil
dependence).
4. Their long term vision and growth plan is lacking in Annual report.
5. Moat or competitive advantage is weak. Quality and customer relationship are the ones I
can think of. No sharing of plans on how to increase competitive advantage.
These are my view points on this company and I might be completely wrong in interpreting financials and
business. Also I believe company is trading at low valuations (7 times earnings) due to these issues only,
otherwise it would be available at 20~25 times earnings. I request you to share your views and thought
process on this company and your insights for investing in it. It will help me surely to learn from your
viewpoints and see same things from a different view point.
A2: I appreciate that fact that you do your own stock analysis. Your queries reflect the hard work you have
put in studying the company and making the observations.
1. Single product: Its definitely a risk which an investor is taking while investing in Asahi. It is to be noted
that with the demerger of green pigment to Aksharchem India Limited, the risk is even more concentrated.
An investor needs to take her own call.
2. Customer concentration: again the same logic as above. It can be an advantage or disadvantage.
Investor needs to take informed call.
3. Profitability:
Asahi Songwon has been enjoying good growth & healthy profit margins till FY2012. In FY2013 they shut
one of units for debottlenecking for about 2 months, in FY14 it raised debt and did capex on water
treatment plant and oil prices also kept on increasing during these periods. Combined impact of these had
weighed on its profit margins. Now the company has undergone demerger as well. I expect the net profit
margins to improve. However, if at all it might happen, then when it would happen is anybody's guess.
Management is good and I believe, they would also be having the concerns you have shared in their
mind. Let's see what they do and how they perform."
4 & 5: Amount of disclosures expected is subjective interpretation. One may feel something is lacking and
declare it poor. Other may like certain things compare it with other companies' disclosures and have
different view. However, SME companies are always on learning path and disclosures improve as they
grow. It is whether the same would happen in this case, only time will tell.
Q3: I want to understand the reason behind your buying Asahi Songwon Colors Limited in spite of poor Return
on Capital Employed over the years. Please refer to attachment. Keen to understand your perspective
A3: I have responded about Asahi Songwon Colors Limited in other posts as well. You may find my views
about its profitability of Asahi Songwon Colors Limited in the above queries.
ROCE: Falling profitability of last few years is a reason for decline in ROCE. However, Sourabh I am not a
huge proponent of ROE and ROCE. I had written a post on my views about ROE a few months back.
ROE and ROCE are different yet in some ways similar parameters. I do not give huge weightage to both.
Q4: I wonder why you have sold Asahi Songwon Colors Limited scrip. It would be good if you can say the
reason for the sell as well. I am just curious on this.
A4: As I continuously keep researching/analyzing companies, I keep coming across new factors which
differentiate rewarding businesses from average businesses. Asahi Songwon met all the criteria of my
earlier checklist, therefore, it was purchased in the portfolio. However, recently while reading book
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"Financial Shenanigans" I learned about another factor, Free Cash Flow, which is CFO-Capex, where
Asahi is not doing good. Pigment business Asahi requires continuous heavy capex to continue growth.
Over last 10 years, it has generated CFO of about 90 cr. whereas its capex is about 140 cr. Therefore,
it is a cash guzzling business. I now realize that an investor should invest in businesses which are free
cash generating (post capex). One of the readers, Jigar (you may find his inputs in the comments below
"My Portfolio" page) has highlighted this issue to me about 3 months earlier, however, I chose to stick with
the company as there was no issue otherwise with the company. Good growth, good management, good
pricing etc. everything was fine. However, when I analyzed many companies on the FCF parameter, I
found that invariably the companies with high FCF post meeting their capex requirements, have rewarded
shareholders well. That is the primary reason for selling Asahi Songwon Colors Limited, despite its
meeting all my checklist criteria.
Q5: With regards to Asahi Songwon Colors Limtied, I observed that over years amount it has invested is 1.5
times higher than amount it has generated from operations. This being one of your prime criteria, how do you
see it for the said company? That the company is not able to generate more cash from operations when
compared to funds it has been utilizing to generate cash from operations.
A5: Thanks for providing this crucial input. I agree that pigment business Asahi requires continuous heavy
capex to continue growth. Over last 10 years, it has generated CFO of about INR 90 cr. whereas its capex
is about INR 140 cr. Therefore, it is a cash guzzling business. I now realize that an investor should invest
in businesses which are free cash generating (post capex).
Q6: If I understand correctly, they have had to invest a good amount to meet environmental standards, which
are becoming stricter by the day. Obviously it has absorbed money without adding to productivity or increased
capacity. And this is expected in these kinds of manufacturing units. The points I wanted to make are:
Is it not possible to look at it in a different way? This capex acts as an increased entry barrier for
new competition. Thereby actually improving the long term story?
Here I am assuming that
All the excess fund requirement was for environmental systems
The management didn't foresee this situation and will take corrective actions in future (either
proactively planning advanced systems for environment management meeting future
requirements or pricing)
A6:
1) Capex might act as a barrier to entry. However, the capex/barrier to entry is not benefiting
shareholders. The company is raising debt to fund extra fund requirements which is having impact on the
balance sheet. Company is paying dividends effectively by borrowing from lenders.
2) (a) you would get to know the exact amount of capex done on the environment related expenses by
going through their past annual reports.
2(b): I doubt that management did not foresee this situation. They are running this business since many
decades and if not the state govt., their overseas clients have been asking for high environment
standards. Any way, if the situation/operating efficiency improve in future, an investor can always change
her views and check back into the company.
Q&A: P/E Ratio, ROE, Selling Stocks & Others

The current article in this series provides responses related to:
Use of forward P/E ratio vs historical P/E ratio in stock valuation
Influence of industry and market P/E ratio on stock valuation
Taking Sell decision based on P/E ratio of a stock
13
Use of return on equity (ROE) as a stock selection parameter
Impact of size of a company on the returns its stock can provide to shareholders
Q1: Do we look at the forward P/E ratio or historic P/E ratio? That seems to be one big debate always,
particularly, more so in current situation. With the Government unleashing reforms slowly, would it make sense
to look at forward P/E ratios?
A1: I believe in limiting myself to P/E ratio based on historical earnings and not to use forward earnings.
While reading the book The Intelligent Investor by Benjamin Graham with commentary from Jason
Zweig, I came across a section which deals with the dilemma shown by you. I would quote the same para
from The Intelligent Investor: "Graham recommends limiting yourself to stocks whose current price is no
more than 15 times average earnings over the past three years. Incredibly, the prevailing practice on Wall
Street today is to value stocks by dividing their current price by something called next years earnings.
That gives what is sometimes called the forward P/E ratio. But its nonsensical to derive a
price/earnings ratio by dividing the known current price by unknown future earnings. Over the long
run, money manager David Dreman has shown, 59% of Wall Streets consensus earnings forecasts
miss the mark by a mortifyingly wide margineither underestimating or overestimating the actual
reported earnings by at least 15%. Investing your money on the basis of what these myopic soothsayers
predict for the coming year is as risky as volunteering to hold up the bulls-eye at an archery
tournament for the legally blind. Instead, calculate a stocks price/earnings ratio yourself, using
Grahams formula of current price divided by average earnings over the past three years". After reading
this from the holy book of value investors, I never believed in analysts valuations based on future
earnings. Hope it helps. I would recommend you to read The Intelligent Investor, if you have not read it
already. It is a very good book.
Q2: According to my observations till now, P/E ratio also depends on industry of operation and state of market
also. What were the debt (ratios) considerations when you took these stocks? When a company is reducing
debt by restructuring or other process, P/E expansion takes place. You are right that its very difficult to identify
good stocks with P/E <10.
A2: You are right that P/E ratio also depends on industry and state of market. Say average P/E of FMCG
industry would be higher than mining industry. However, within same industry you would find companies
trading at a wide range of P/E ratios. For example, if you see the P/E ratios for tyre manufacturers in
India, it varies among players like Modi Rubber Limited 7.12 to Apollo Tyres Limited: 22.82 to even 46 for
Krypton (data taken from moneycontrol at Jan 31, 2014). Therefore, I believe that in any industry at any
given point of time you would find low P/E companies. The important step is to identify whether these low
P/E companies are good companies ignored/undiscovered by markets or fundamentally bad companies
which are rejected by markets. The role of an investor is to understand this differentiation and the main
purpose of this website is to help common investors like us, to become able to differentiate a good
company from a bad company. If an investor prepares a checklist of parameters strictly screens every
stock on the parameter, she would be able to differentiate a good company from bad one. I prefer low
debt companies. The debt to equity ratio (D/E) of Mayur Uniquoters when I bought was about 0.1 and
currently at FY14 end it was about 0.2. For Vinati Organics, D/E ratio was 0.5 when I bought it, which at
end of FY14 stood at 0.4. International Finance Corporation (IFC) had converted its FCCBs into equity in
FY15, therefore, the debt has come further down post March 31, 2014. My investment philosophy is to
gain from P/E expansion which happens when fundamentally good companies growing at good rate, are
discovered by market participant post my purchase. I am able to find such companies in sub 500 crores
(5.00 billion) market capitalization segment. You are right that companies showing good recovery post
restructuring, see P/E expansion. However, I have not looked at this segment of opportunities yet. I would
like to know about your stock selection approach. Share it with readers and me. It would be a good
learning for all of us.
Q2.1: I am a beginner in stock market and I get lots of help from my father who have been investor from
more than 25 years. I would categorize my style of investing as Value Investing. I try to grab good
companies at fair price. I believe in having patience and companies having bad quarters are common and
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main thing that matters is capabilities of management. I always gives preference to dividend paying
companies as it tells much about management (you already mentioned all this in your articles). I don't
limit myself to limited number of stocks as far as I can get a fair price. ONGC, HPCL, BPCL, IOC, ITC,
HUL all were available at fair prices in 2012 when market was hovering around 5500. I increased
positions in all of them during that time. I can't compare returns of these companies with growth
companies as both are in different categories. It will take time for me to understand about picking up
growth companies and will wait for that. Page Industries Limited, SRT Finance Limited, TITAN Company
Limited, as an initial investor since time of their inception (my father) in all these stocks I know what
growth companies (still holding except SRT Finance Limited) with good management can do for you. I
might be little late in entering into finding these growth companies as 2008-2013 was golden period for
someone looking for growth companies, but nevertheless we will have lots of opportunities. We need to
wait and have patience. Apart from Large Cap, I am invested in L&T Finance Holding Limited (from 45),
Swaraj Engines Limited for now and will be holding it for long term (at least 5 years till their results are in
line). I am waiting for Snowman Logistics Limited to come down to enter into it till 75-80 (was unlucky in
its IPO), their business model is unique and I am seeing growth prospects for now. Lets wait and see,
how they will be utilizing investors money in next 6 months.
A2.1: Thanks for sharing details of your stock picking approach along with your portfolio. It is helpful for
me and would also help other readers. It is nice to have someone near & dear with experience in markets
as it would give you much needed guidance during different times. Congratulations for building a good
portfolio and buying stocks during tough times, which I believe that every fundamental investor should do.
I believe that an investor is never late while entering market because time of stay in market is the most
important factor which would influence returns. Best time to invest is now. Future is bound to show
corrections and if an investor can maintain buying habit, then she might get good stock at discounted
prices in future as well.
Q3: Your articles are really very informative. So when do you decide to sell a company which you bought at
very low P/E ratio and now trading at very high P/E ratio?
A3: If any stock in my portfolio, which I bought at low P/E ratio starts trading at higher P/E ratio, I do not
think about selling it. I only stop incremental investments in it and start looking for a new stock to add to
my portfolio. The high P/E stock becomes a plant which no longer needs watering, just monitoring to see
if it catches any disease in future. I sell a company when its business dynamics take a hit for worse, which
I believe might be irreversible. If business advantage is lost, then I sell the company irrespective of P/E
levels. However, if I believe that adverse situation is temporary then I increase my investment in it as that
becomes a golden opportunity to accumulate a stock.
Q4: Can I buy Vinati organics limited at CMP (544)? I am looking for a long term investment. Please advise
me sir.
A4: You should decide the entry price criteria yourself. The fact is that trading happened in Vinati
Organics today, means that there were people buying it at today's prices. Everyone should have his own
criteria for buying stocks and take decision accordingly. I would request you to take decision as per your
criteria/checklist.
Q5: I been observing till now you have hardly mentioned ROE in your talks. Rather you refer inventory/
receivables turnover for operating efficiency check. If you decompose the ROE (the classic DuPont view) then
ROE itself takes into account the high/ low assets turnover. So, even if a firm generates decent CFO and/or is
debt free, it may or may not be generating return (Wealth) to the investor on their Equity. That's where further
check of Operating efficiency comes in and ROE takes care of it. Hence if we incorporate ROE > 10 then it
makes your Checklist classic.
A5: I notice that you have taken keen interest to study my responses to multiple queries and then made
this observation about use or say non-use of return on equity (ROE). I appreciate the time you have put
on the website. I am not a strong proponent of ROE. Though it is a very widely used criterion by many
investors, I feel that it hides more things than it reveals. I do not prefer using it either for accessing
15
business efficiency or return to shareholders or entry criteria. I had written about my thoughts on ROE in a
detailed article in January 2015. We may differ on the use of ROE, however, I cannot help but thank you
once again the time and effort you have put for this query.
Q6: Do you think that the size is one of the big negative for any co.? Like Larsen & Toubro Limited has all the
potential to perform but looking at the size, it's quite tough to give another 40 times return in next 10 year. But
it's the single one entity in the Indian market which is going to be beneficial for Make in India initiative. And do
you think that the valuation of some defense co.'s are justified at 70x P/E with negative cash flow, huge debt
and totally dependent on govt. policy?
A: Size does seem to have an impact on the future growth of any company. It is easy to show high growth
rates when base are small. I do not invest in companies at high P/E levels. However, investors who invest
money at 70 P/E would make money or not, no one can tell. There is no single path to success and
market can never be predicted.
Q&A: Portfolio Management, Valuation Assessment &

Others
Investing with a target price in mind
Deciding about the stock screening/filtering parameters
Deciding about the number of stocks in the portfolio
Allocation of portfolio among stocks of different market capitalization
Assessment of P/B ratio as a valuation parameter
Putting high current ratio in perspective and its inferences
Impact of Debt to Profit, Debt to Equity and PE*PB ratio on stocks assessment
Whether a person needs to be registered with SEBI before conducting workshops
Q1: Is it wrong to stick to the expected returns? I have my investment in Bliss GVS Pharma Limited, where Im
currently getting nearly 45% profit. But, as I was expecting 100% profit, I didn't sell it when it reached nearly
65% profit. Ive never got 100% profit in my investments. At least, I expect this counter to hit 100% profit. My
average pricing is 73. I am holding it from nearly 6 months.
A1: I do not believe in buying a company with a target price in mind. It is a losing strategy that leads an
investor to sell her winning positions with limited profits and whereas she ends up holding losing
investments longer waiting to achieve breakeven. If an investor keeps a target price in mind, she would
never be able to get multibaggers in her portfolio. Warren Buffett acknowledges that most of his wealth is
a result of about 8-10 good investment decisions like Coca Cola, Gillette, Wells Fargo, Washington Post
etc. If he had kept a target price in mind, his wealth would have been languishing at few hundred million
dollars and not billions which he owns today. Therefore, I would suggest you not to keep an expected
return in mind and stay invested till the time business strength of the company is intact.
Bliss GVS Pharma Limited: I glanced through the financial numbers of Bliss GVS Pharma Limited. The
numbers though looking attractive at the first look, are hiding some significant developments concerning
the business operations of the company.
Q2: I want to know, as a learner when I scan stocks in screener.in, which critical parameters should be
focused like p/e ,debt to profit, debt to equity, PB x PE etc.
A2: Before using the stock filtering feature of screener, you need to decide what parameters of the stocks
that you consider, are the best indicators for a fundamentally good stock. Once you have identified those
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parameters, then you can set the objective values in the filtering tool of screener to find out the stocks that
meet your parameters. Such objective parameters can be PE, D/E etc. as mentioned by you. I have
explained the vital parameters to judge the fundamental position of any company. Many of these
parameters are objective in nature where an investor can assign a threshold value like P/E <10, D/e <0.5,
sales growth rate >15% etc. Ideally, I would prefer to invest a stock which meets all the parameters. So I
would set filter levels at the threshold value of each of these parameters and then analyse the resultant
stocks presented by screener.
Q3: One thing I want to understand is that how many companies an investor should have in her portfolio. I
have around 30 scripts, out of which 70% large cap, 25% midcap & 5% in small cap.
A3: The number of stock in the portfolio depends on size of portfolio, investor's comfort and availability of
time with her to monitor the stocks in the portfolio. I feel comfortable having 6-7 stocks as I can keep track
of them well. I currently feel that if I increase the number further than portfolio monitoring would require
time more than I am willing to provide. However, in future, I might add more stocks. You may decide
whether you are able to monitor all the developments with respect to all of your 30 stocks. If after reading
this article, you feel that you are not doing all the activities required for monitoring then probably you
should reduce the number of stocks.
It is regarding maximum number of stocks in the portfolio: When I read statistics, then I learnt that as
the number of stocks in the portfolio increases beyond 30, the benefit of diversification from every
additional stock is very minimal. So ideally, the maximum number of stocks should be around
30. However, there are investors like Peter Lynch who owned more than 1000 stocks in his mutual fund
portfolio at one point in time. But it was his reason for owning these many stocks that it helped him in
keeping track of these stocks. He in effect kept his watch list stocks also within his portfolio by investing
minimal amount in them. I do not select stocks based on market cap. I prefer investing in fundamentally
good stocks at low P/E. I find most of these stocks in the small cap segment. I invest in these small cap
stocks and do not sell it when they grow and become mid-caps. All the large cap stocks at some point of
time in the past, were small/mid-caps. Therefore, I simply focus on buying good stocks available at cheap
prices without bothering a lot about market cap.
Q4: Premier Explosives Limited:

Market Cap: 247.11 Crores
Current Price: 278.90
Book Value: 66.31
Stock P/E: 36.66
Dividend Yield: 0.76%
Stock is 10.00 paid up
Listed on BSE
52 Week High/Low: 329.70 / 64.30
Sales growth 7Years: 11.73%
Price to Earnings: 36.66
Debt to equity: 0.18
Debt to Profit: 1.92%
PB X PE: 154.34
I am learner and I want to know about
1. Difference between Debt to Equity & Debt to profit
2. PB*PE is 154.34 more than 22.5
How do all these parameters impact the stocks?
A4:
Debt to Equity: It is a ratio which indicates out of money invested in total assets of a company, how
much is put in by the shareholders and how much is taken as loan from outsiders like banks. If a
17
company as assets of 100 and shareholders have put in 50 and balance 50 is taken as loan from
bank, then debt to equity ratio would be 1 (i.e. 50/50). Higher debt to equity means that company has
taken high amount of loans than their own money to fund the assets. It increases risk, as lenders will ask
their repayment as per schedule even if the company does not do well in any year. Then the company
might have to sell assets to pay its lenders.
Debt to Profit: This ratio tells you how much the debt level when compared to profits is. As a company
has to pay its debt from its profits, therefore, higher debt to profit levels indicate high risk due to the same
reasons as discussed in debt to equity ratio section. The debt to profit ratio calculated above seems to
have an error. The debt of Premier Explosives Ltd (PEL) at March 31, 2014 was 10cr. and profit was 9
cr. So the ratio would have been 10/9 = 11.11. P/E*P/B of 154.34 indicates that the stock is very highly
priced, and therefore, is very costly. Benjamin Graham has suggested that an investor should not buy
stocks which have P/E*P/B more than 22.5.
Q5: On P/B ratio, you mentioned that you don't consider it (except for financial firms) since the book value of
assets is measured on historical cost basis (I think it is as per accounting rules) and it may not represent the
current market value of the assets. However, if P/B ratio is at an attractive level, say ~1 then if we adjust the
book value of assets to reflect the current market value than isn't it even better?
A5: You are right that if by any metric, we are able to adjust the book value to reflect current market
value, and then it would be better. Every investor uses her own judgment to assess the current market
value of the assets of a company. In effect, the current market capitalization is the judgment of entire
market for current market value of the net assets of a company. I do not use P/B as an important metric
because I have not come across any reliable methodology to find current market value of company's
assets. In case you use any such methodology then it would be great if you can share it with us. It would
be a good learning for me as well as other readers of the website.
Q6: While analyzing a company, the current ratios were found to be within 4 to 8 for the past 5 years. Does it
mean that the company is having too much inventory or they were not properly investing their excess cash to
get more out of the business? If yes, is it a red flag for investing in that company?
A6: It can be any of the two situations mentioned by you. To find out the real cause of higher current
assets, you should see the breakup of current assets in the annual report of the company and then try to
analyse the trend in different components of current assets (e.g. inventories, current investments, trade
receivables, short term loans & advances etc.). Only upon the granular analysis of current assets, you
would be able to find out the real reason. It can be that the company is selling goods but not able to
collect money from buyers, therefore, trade receivables would be increasing year on year in relations to
sales amount. I suggest that you should study the annual reports and analyse composition of current
assets year on year.
Q7:
SEBI (Research Analyst) Regulations, 2014
That means investor should rely on his own analysis & research. People who are taking workshop for
investor awareness also come in this category.
A7: It seems people taking workshops might be covered under these regulations as SEBI has initially
covered everyone who provides opinion about securities and then excluded only certain set of people out
of the purview of registration. However, only SEBI or a counsel can have definitive opinion on it. By any
means, an investor should always conduct her own analysis before making investments. Investors like
Peter Lynch say that investing without own analysis & research is like playing poker without looking at the
cards.
Q&A: P/B Ratio, ROE & Others

18
Investing in PSU (Public Sector Undertakings) Banks
Illustration of ROE & P/B ratio as interlinked valuation parameters
Relevance of 1 increase in market capitalization from 1 of retained earnings test over bull
and bear phases.
Deciding about the buy price of any stock
Difference in the company data on screener/moneycontrol and the annual report of a company;
and which data source an investor should use
Sector specific (Top-down) approach for stock selection
Importance of equity capital as a parameter for stock selection
Clarification about Reserves and Retained Earnings in the balance sheet
How to decide about selling a stock
Technical vs fundamental analysis approach of stock investing
Q1: I have invested in SBI and would like to know if I should continue for long term.
A1: I do not prefer investing in PSU banks due to a number of reasons. PSU banks do not have long term
CEO/Chairmen tenors. Every person on top comes with a fix tenure of 3-4 years and in order to keep
his/her record clean, he/she tries to show the result in the joining quarter (resultantly joining financial
years r) as bad as possible. All the provisioning is usually done within one quarter in order to wipe the
slate clean. This by no means should be interpreted that provisioning should not be done or is to be
avoided. However, the way PSU banks show cyclical trend of bad to good results and then again bad with
a frequency of 3-4 years. It indicates that something else other than shareholders interest is also at play.
Most of the times, the management seems to be motivated by short term vision. SBI shows the same
trend with years of chairman changes 2011, 2014 etc. showing exceptionally bad results. Due to certain
reasons, PSU banks always seem to have higher non-performing assets (NPAs) than their private
counterparts. Higher NPAs hurt shareholders interests. SBI also has higher NPAs than most of private
banks. Currently, I am not invested in any PSU bank. In future, I may or may not. However, you should
decide about holding or selling SBI, for your own reasons. I have presented you with mine.
Q2:
Why Return on Equity (ROE) is not meaningful for Stock Market Investors!
However, I would tend to diverge from this view, because lets suppose there are two companies A and B
earning same profit after tax (PAT) 100/year and their book values are 1,000 and 2,000 respectively
(hence ROE is 10 and 5 respectively). Now, if we buy company A at 2 times book value and company B at
1 time book value, ideally, we bought them at same valuation as per your view. But shouldn't company A
get more premium compared to B since it can generate same profits on less assets compared to B. Also it
shows that capex requirement of A is less and hence, it should command higher premium. So I believe
company A in this case is cheap compared to B. Kindly provide your views on this.
A2: Company A is definitely good at P/B of 1. It might still be good at P/B of 2. But there would be a P/B
level at which it would not remain attractive. This level can be P/B of 3 or 5 or 10. The main point here is
that ROE alone does not give the true picture. Purchase price will always be a factor to determine its
usefulness for any investor. You would appreciate that in markets different people interpret same set of
data with different conclusions. This difference in perception creates market and generates trade.
Q3: In majority of the companies analysis you have mentioned "$1 in market value for $1 of earnings
retained". My doubt is that when there is a bear market, majority of the good companies (companies selected
as per your shortlist criteria) fail to meet this criterion. Similarly, in a bull market even the worst companies will
meet this criterion. Kindly tell your viewpoint.
A3: You are right that in bear market, most of the companies might fail this test whereas in bull market
most of the companies would pass this test. However, that would happen only if you take the $1 test only
19
for short duration. If you use this test for long periods of time, which covers bull as well bear phases, then
this test makes a lot of sense and true wealth creators get differentiated from wealth destroyers. I use $1
test for past 10 years because most of the times a period of 10 years coves entire business cycle
(sometimes multiple business cycles).
Q4: I was wondering if you could either provide advice or direct me in the right direction. I'm currently running
a successful share portfolio based on principles of Warren Buffett and Trident Confidential. I'm interested to
know the best way to value a stock price based of earnings and how to asses a maximum buy price for a
stock.
A4: There are many parameters that I use to access whether the current price of a stock is at attractive
levels. These parameters vary from:
Price to earnings ratio (P/E ratio),
P/E to growth ratio (PEG ratio)
Earning yield (EY) and its comparison to G-Sec/Treasury yield (margin of safety)
Price to Book value (P/B ratio)
Price to sales ratio (P/S ratio)
Dividend Yield (DY)
Q5: While analyzing company data, I get confused which website to use Screener, monyworks4me or balance
sheet of company from its portal (tedious job of data entry). Many a times, company portal data is different
from screener. Can you please clarify the reasons for the difference?
A5: Data in the balance sheet of the company is the most authentic data about any company. You should
use it to make final investment decision about any company. However, as you also acknowledge, it entails
tedious job of data entry. Therefore, annual report financial data should analyzed once you are satisfied
from analysis of the company from the information available on the public sources like screener,
moneycontrol etc. that the company financials represent a potential good story. Open portals like
Screener etc. use the data from company report and rearrange it to keep consistency between the data
formats reported by them. This may involve regrouping of certain items which may give the impression
that the data on screener is different from annual report. Therefore, it is recommended that an investor
should open portals like screener to filter stocks based on her favorite parameters, do preliminary analysis
based on their data and if satisfied, then see the annual report to make final decision. By following this
process, an investor can make good use of the limited time she has got.
Q6: I would to know future of power sector because Prime Minister Mr. Narendra Modi has announced 24*7
electricity for India in next 5 years. Can our investment remain safe in private power sector companies like
Adani Power Limited, Tata Power Company Limited etc.? My investment horizon is for a long time up to 4-5
years r.
A6: As mentioned by me in the article on conducting business analysis of a company, I am a bottom up

investor and do not have views on industries. I believe that there can be good investment opportunities in
non-growth sectors as well. Therefore, I do not have any view on power sector.
Q7: In some of the company balance sheets, retained earnings are not mentioned. Can I consider the
"Reserves" mentioned as retained earnings?? Are company reserves and retained earnings same or
different??
A7: Reserves and retained earnings are not the same thing. Retained earnings are a part of reserves, but
reserves contain many other things as well. Reserves may contain retained earnings, premium on shares
issued, any increase due to revaluation of companies assets etc. Retained earnings (RE) are the profits
which are not distributed to shareholder by dividends. You can calculate RE for any year by deducting
(dividend + dividend distribution tax) from net profit. RE is effectively the part of profit which a company
invests in its own business.
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Q8: Basically I am looking for stocks with a small equity capital like CRISIL Limited, Symphony Limited,
Colgate Palmolive (India) Limited, Procter & Gamble Hygiene & Healthcare Limited etc. However, as we
cannot expect a small equity capital for a company like Tata Consultancy Services Limited (TCS), therefore, we
have to relate it with net profits. E.g. net profit of TCS is 19,163cr and its equity capital is just 195. Hence
Net Profit/Equity cap gives you a ratio of 98, which is awesome. You can ignore market cap/PE*equity capital
as market cap/PE = net profit only. If you find a company with these characteristics, even with moderate growth
of 12 to 15 percent, your return on equity will be more.
A8: As per my understanding, equity capital on a standalone basis is not a significant parameter for stock
analysis. It is the shareholder's equity (Equity Capital + Reserves & Surplus), which contains the equity
capital that was contributed by shareholders while establishing the company and reserves & surplus i.e.
shareholders' money (profits) retained by company. Initially contributed or subsequently retained money,
both are equally significant. Therefore, I believe that the comfort, which small equity capital might give an
investor, is only notional.
Q9: I want to know:

How to decide the target price of stock when you buy and
Secondly, your exit strategy when you buy a stock.
A9: Target price (upper cutoff purchase price) is based on the valuation level at which an investor is
comfortable to buy any stock. I follow a checklist approach and prefer buying into companies at P/E ratio
of <10. So P/E of 10 acts as a tentative upper cutoff price for me. An investor should hold the shares till
the time the stock is showing good business performance. A company should be sold only when its
business gets deteriorated in an irreversible manner. Market price should not be the factor to decide
about selling a stock.
Q10: While reading the article Top Stocks to Buy, I saw that you have analyzed the data for last 10 years.
According to you how many years data should be analyzed?
Secondly, can you please tell your views on banking sector and ICICI Bank stock?
A10: I believe that the data for as many years as available should be analyzed. Here you see that I am
using 10 years data for two reasons:
1) If one analyses 10 years data then one can observe the company's performance during different
phases of economic cycles. 10 years r period usually contains at least one complete cycle of economic
upturn and downturn, hence it gives a picture of company's performance in different times.
2) It is easily available at screener.in
Views on ICICI Bank: I work for an Indian private sector bank. I do not want to comment/opine about
these stocks as knowingly or unknowingly, I might base my opinion on information which may not be in
public domain. Therefore, I request you to let me skip this query.
Q11: I want to know the source from where we can get all books recommended by you? If you dont mind can
you explain me what is the basic difference between fundamental analysis & technical analysis & how can I
relate this analysis with charts? One more thing, I want to send you some stock charts of a single stock: 5 day,
1 month, 3 month, 6 month & 1yr. Can you explain the same to me as I want to learn chart reading? Please
give your email address so I can send you the charts.
A11: The hyperlinks to the books would take you to page of these on Amazon site. These are affiliate
links. You may buy the books by clicking on these links. I no longer follow technical analysis, therefore,
would not be able to help you with chart reading.
Q&A: Cairn India Limited & Others

21
A new valuation perspective on Cairn India Limited by one of the readers, Nilesh Kumar.
How should one invest: Entire amount in one go or in a staggered manner
Importance of the sector of a company in stock analysis
Relevance of ROE & earnings yield as business metric parameters vs stock market return
parameters.
Investors concerns about an unlisted company about to acquire a listed company
Having a view on stocks for a time bound investment horizon
Q1: I have done some work on Cairn India Limited. Please share your views. Looking at the cash flows (CF) of
company on an average in last 8 years, I find that Cairn India Limited has 4,649 cr cash flow. Cairn India
Limited is debt free and holding cash of 16,363 cr. How much loan can be given to Cairn India Limited? If we
assume that Cairn India Limited can pay one third of its cash flow i.e. 4,649/3 = 1,550 cr, as interest, then
total loan amount would be 17,218 cr (9% pa). So 17,218 Cr is required to get one third of cash flow. If I
want to get entire CF then definitely that price would be higher than 17,218 Cr. So total worth of company
should be at least 17,218 + 16,363 (cash amount) = 33,481 Cr. Total number of share is 187 Cr, so
minimum price of a share should be 180. Currently share is trading @ 225, which not much higher than our
conservative valuation. Other financial ratio like P/E, BV etc. are also very attractive. Currently Cairn India
Limited is going through some problems like income tax notice and prices of crude have also affected its
business. But I think in long run crude prices will go up. Hence, its business will improve. Do you think that its
an opportunity for value investing or trap?
A1: I appreciate your perspective of analysis and a different approach to valuation. However, you would
appreciate that market factors many other parameters while deciding about stock price of any company.
In case of Cairn India, its crude is not one of the best qualities. It has very high sulphur content and
solidifies at room temperature. There are many challenges to transport it to refineries and only select
refineries can process it. Royalty of govt. is also another factor that is uncertain and involves frequent
issues. Above everything, the current management (Vedanta group) used cash reserves of cairn to give
loans to its group companies at very low interest rates (Libor+3%), which amounts to about 3.5% (6
month Libor is 0.4% currently). This rate is very low compared to 9-10% which cairn could have got by
keeping the money in bank FDs or liquid mutual funds. This amounts to loss of returns for cairn
shareholders. Thus there are doubts on shareholder friendliness of current management. And when
management intent is under question, then an investor should stay away from the company. These
factors among many others might be the reasons that its share price is trading at P/E of 4.37.
Q2: Can you enlighten me on how to go about buying such shares, which are hidden from major market
players? Please also tell in what proportion of ones capital, should these shares be bought. I know it depends
up on individual risk appetite. But suppose for an aggressive investor with capital (say about 500,000), how to
do it? Also if one decides to allocate say 20% of capital so about ( 100,000), how much quantity one has to
buy at one goes in the first purchase?
A2: You have rightly pointed out that the investment pattern would depend upon the risk appetite of the
investor. There cannot be any fix rule, which may meet requirements of all the investors. I believe that an
investor should invest only that much in markets so that she does not lose her night's sleep. However,
fund manager Peter Molluck recommends that while investing in stock markets, an investor should invest
her entire money in one shot. He has cited many studies in this aspect.
Q3: I see you don't mention anything based on sector related info when analyzing.
A3: I follow a bottom-up fundamental analysis approach in which I look for high growing companies
available at attractive stock prices. I agree with Peter Lynch that high growth companies in no growth
industries are very good investments. I believe that in bottom-up fundamental analysis, an investor should
not worry about the industry in which a company operates. Instead, she should focus on identifying
companies with sustainable distinct business advantage (Moat).
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Q3.1: I meant to say about the stock you are analyzing and not about the approach using which you
picked particular stock. Like when one analyze a stock from banking sector then few different ratios will
be needed to check. When analyzing stocks in realty/infra, then debt can be little high and one need to
give little pass through in that case. After reading your analysis, I got impression that you analyze using
flat approach for all kind of stocks.
A3.1: I appreciate your observation that I use a framework for analysing business performance of
different companies. The framework around few basic premises:
1. Companies need to grow
2. Maintain or improve profitability
3. Operate efficiently
4. Convert profits into free cash
5. Use internal cash accruals to fund future growth.
This premise remains the same for all businesses. Even though there can be a lot of other parameters to
access business performance, I believe that if an investor tracks performance of any company over the
years, on these five parameters, then she would be able to gauge the business performance of almost all
the companies. You are right in citing that companies in one industry would have different levels of ratios
(say profitability or D/E ratio) than companies in other industries. An investor might give a little pass while
comparing two companies of different sectors. However, if you analyse business performance of any
company over past, then the trend of change in its ratios when compared with previous years would
indicate, whether company is showing improved business performance or not. E.g. an infra company
might have higher debt than a pharma company. However, if the debt level is increasing year on year
without associated increase in sales and net worth, then it would indicate poor business performance for
both infra and pharma companies. I do not track Banking sector companies, therefore, would not extend
my views on that.
Q4:
Why Return on Equity (ROE) is not meaningful for Stock Market Investors!
1. The purpose of ROE metric is not to measure the "stock market returns". It's rather a
business return metric, which is completely different from earnings yield.
2. ROE when decomposed has three components, Profitability, Asset Turnover and
Leverage. You are right the Leverage component can be manipulated. But why would
management do that?
A4: You are right that ROE is more suitable as a business evaluation parameter. I believe that solely
chasing high ROE companies without looking at the price one pays for them, might not suit the investors.
Warren Buffett has highlighted it time and again to his shareholders. He says this in latest (2014) letter:
Of course, a business with terrific economics can be a bad investment if it is bought for too high a price.
This cheery prediction comes, however, with an important caution: If an investors entry point into
Berkshire stock is unusually high at a price, say, approaching double book value, which Berkshire
shares have occasionally reached it may well be many years before the investor can realize a profit. In
other words, a sound investment can morph into a rash speculation if it is bought at an elevated price.
Berkshire is not exempt from this truth. Management might have more than one reason to manipulate
ROE. Keeping ESOPs "in the money" can be one of them.
Q5: I am doing a detailed analysis of Gujarat Automotive Gears Limited (GAGL). Though the fundamentals
and valuations were satisfactory for me, HIM Technoforge - an unlisted company is likely to acquire GAGL
sooner. It seems this acquisition is a win-win situation for both companies in terms of business developments.
My concern is what will be the likely scenario if an unlisted company acquires a listed company? Will they
continue in the exchange / de-list / original promoters will buyback before closing the deal? Is it good to enter
the company at this stage (If valuation permits) or wait till to see the developments without burning our fingers?
23
A5: The news of HIM taking over GAGL has been doing rounds since 2013. I do not know whether any
acquisition has yet happened or not. Anyway, I do not buy stocks based on the tentative acquisition
scenario. If GAGL is a good company, I would invest. If its not, then I would not invest. Unlisted entity, if
takes over listed entity, then would acquire certain shares of promoters/controlling shareholder. Shares of
listed entity would keep trading. Substantial acquisition may trigger mandatory open offer. The company
may subsequently decide to delist or remain listed. There is no set path, which companies follow. If your
analysis indicates that GAGL in itself is a good business, then you may think about investing it.
Q6: I have two questions

1. How are you calculating "Total increase in m-cap in 10 yrs? Amtek m-cap on 2005 is
287 and on 2014 it's 3,127. Shouldn't it be 3,127-287=2,840?
2. I understand you are using the custom excel feature of screener.com I am in the mid of
creating it. But I wonder how you derive "Receivable Days" from the data sheet. Can you
give me that formula?
A6:
1) Market cap of 2005 (287 cr.) has been compared with the market cap of the date on which I did the
analysis (March 24, 2015: 44.55/- per share & market cap of 1,238 cr) Hence the increase of 951 cr.
(1238-287)
2) Receivables days: 365/ (sales/average of debtors at start and end of year)
Q7: I came across with Kanoria Chemicals and Industries Limited. Its debt has reduced and promoters stake
has increased recently. Last 3 yrs. ROE is around 31%. Book price is greater than current market price. But
they are venturing into various new verticals, which are not related each other. So please share your thoughts
in this for 3-5 yrs. prospective.
A7: If you are convinced with the business performance, then you should buy the stocks of the company.
Restricting the time horizon to 3 or 5 years might not be helpful, as stock markets are known to test the
patience of investors and keep ignoring the companies despite good business performance. I find myself
unable to provide any views with a time bound perspective. You already seem to have found out the key
strengths of the company. I believe that you should now take the decision based on your analysis.
Q&A: Vimta Labs, Shilp Gravures & Others

Brief analysis of Vimta Labs Limited
Explanation of capitalization of interest by a company
My reasons for neither tracking IT/ITeS companies nor analysing real estate stocks on the
website
Buying fundamentally sound stocks, which have run 10-12 times in the recent past
Different viewpoint on performance of Shilp Gravures Limited
Possibilities of an international company turning around an Indian company, it recently acquired
Clarifications about working capital cycle and capacity utilization of a company
Clarifications about analysis of operating performance parameters of companies
Q1: Can you please tell me about Vimta Labs Limited? I have bought the stock a week back as it showed
good signs of recovery from its years low with good volumes. My purchase price is 88. Vimta Labs Limited is
into clinical research and lab testing operations and has a state of the art facility established in Hyderabad
having 130 centralized AC rooms. This is one of its kind clinical research and lab analysis facility in South Asia.
Also, the company has top five customers from Forbes 500 companies. If I talk about the last couple of
quarters, the results haven't been that encouraging.
24
Sales have been flattish or have reduced.
Net profit has shown taken reduction.
I can hold the stock for a year and if its future is promising and continues to show improvement can hold
on for a longer time period.
A1: Vimta Labs Limited was performing very badly till FY2012. However, since FY2013, it seems to have
come into an entirely different phase of operations. Sales growth has returned and profitability has
improved. All the operating efficiency parameters of Vimta Labs Limited also seem to have been showing
positive changes. Vimta Labs Limited has been showing improved capital structure, as it has been able to
reduce its debt in recent years, which is a good sign. However, an investor needs to understand in depth
the reasons for this improved performance since last 2-3 years. Only post that one should take any
investment related decision in Vimta Labs Limited. Only financial analysis would not give insights into
these reasons. One should read the annual reports of last 10 years to understand the changes happening
at the company and the recent developments. I suggest you to go through the annual reports of the
company and decide whether the factors leading to improved performance can be sustained.
Q2: If Gulshan Polyols Limited is capitalizing the interest amount, wouldn't it require paying it sometimes in
future? How can debt providers allow company escape paying interest? Please explain for my/our knowledge.
Also do you think that Gulshan Polyols Limited is doing interest capitalization just to show-off bigger profits to
investors in this Bull Run? Or can there be any other reason?
A2: Gulshan Polyols Limited is capitalizing interest because the accounting rules allow it to. It is paying
this interest as you would understand that banks will not allow it to escape interest. However, it is not
mentioning the interest on debt taken for any new plant/fixed assets in the P&L. It is increasing the value
of new plant/fixed assets by the amount of interest it pays on its loan for this asset. This is allowed by
accounting rules. However, we must factor this interest as well while calculating the total interest outgo of
any company. An investor can get the amount of total interest paid by any company in the cash flow from
financing section of cash flow statement in the annual report.
Q3: Is there any specific reason for not tracking IT companies stocks by you?
A3: I have not yet spent time on their products, their requirements, competitive advantages and many
other such things, which are essential to have any opinion on the industry & its companies.
Q4: Like you, I am also a big fan of Screener. However, for last one year I have been struggling to identify
growth stocks. I saw your method of stock selection. I can understand all of these parameters apply to growth
investing. Do you have any specific experience, which you would like to share on spotting growth investing
stocks?
A4: You are right that the criteria mentioned by me under my stock selection strategies, are for selecting
stocks which are witnessing good growth in their business. However, I do not believe in overpaying for
their growth. In last one year, almost all stocks have run up in their prices, therefore, it has become
difficult to find good stocks available at reasonable prices. However, opportunities are still there, only the
effort needed to find them has increased.
Q5: I would like to have your views on a stock, which fulfills most of the parameters for being a good
investment like ROCE/ OPM/NPM/ Sales growth etc. But the stock has appreciated approx. 10-12 times in last
one year. Should the investor consider it for investment, because it seems that 10-12 times appreciation has
left little scope for near future (2-3 Years) gains?
A5: The past history of price rise or fall is not relevant till the time a stock is available at reasonable prices
when compared to its fundamental strengths. Stock prices do not have any ceiling.
Q6: As we see retained earnings are 30 cr and mkt cap has just risen by 13 cr over last 10 years. Doesnt it
make the stock more attractive by Grahams standards? Sales have not risen that much as company is part of
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capital goods industry in which the capex from industry seems to be cyclical and next phase of growth might
be good.
A6: There are different ways of interpreting the financial data and different investors take different
decisions based on same data. I do not like to invest in companies which show deteriorating operating
performance, however, there would always be another person at the opposite end of the trade whenever
someone sells or buys a share. If you believe that the numbers present a good opportunity, you should
take your investment decision accordingly.
Q7: In between Sunteck Realty Limited and Poddar Developers Limited, which one offers great value?
If I look at Sunteck Reality Limited; in terms of financial performance they are one of the best
financial performance in the sector. Sunteck Reality Limited had the track record of working with
Larsen & Toubro Limited and other renowned players known for timely delivery and quality.
Whereas in case of Poddar Developers Limited; they are working in the space, which most of
Indians ask for low cost housing. Financial performance is also good.
Though Sunteck Realty Limited has low P/E and Poddar Developers Limited has high P/E.
These companies are doing better in last 5 years whereas most of the players in this industry are
struggling with debt and inventory.
Can I hold any of them for 5-10 years? Does it come under cyclical nature of realty stocks? How come
they can able to manage to maintain their debt while operating under capital intensive business?
A7: Real estate is a sector where the financial data presented by various websites like screener, money
control etc. is not of much use to assess the business of the company. One needs to understand the
individual projects being executed by the company. Therefore, I would not be able to give any opinion
about the two companies mentioned by you.
Q8: My question is on International Paper APPM Limited:

The ratios are not good at all.
But looking at International Paper buying stake in Andhra Pradesh Paper Mills Limited (APPM) in
2011 for about $257 million.
Managements view as per John Faraci, chairman and chief executive officer of International Paper:
Andhra Pradesh Paper Mills Limited is an excellent platform for International Paper to grow within the
Indian paper and packaging markets. We believe that International Paper's global operations and
technical expertise can accelerate that growth and create value for customers as well as International
Paper and Andhra Pradesh Paper Mills Limited shareholders. What is your take on whole paper and
packaging market? Some ratios:
Return on equity last 10 years 2%.
Stock is trading at 3.15 times its book value
Contingent liabilities of Rs.583.82 Cr.
The company has delivered a poor growth of 11.70% over past five years
I am not interested is past results. But can the management turn around the company in next decade?
What is your take on this company?
A8: You main query seem to be related to:

1) Outlook of paper industry: I am indifferent to industry in my analysis. I prefer buying good performing
companies in stagnant industries.
2) Turnaround of Andhra Pradesh Paper Mills Limited by International Paper: Your guess is as good as
mine. History is full of example for both good turnarounds as well as investors throwing good money after
bad in hope of turnarounds and finally burning their fingers. However, instances of failed turnarounds are
more. This is not to indicate that Andhra Pradesh Paper Mills Limited would not see the turnaround, but
26
only that no one know as of now. It is more of a speculative call. I think that an investor should wait for the
impact of new management to get reflected in financial results before taking any investment decision in
this company.
Q9: I want to ask two very basic questions which I am stuck with since I have very little financial knowledge.
They are:
1. How do you analyze the working capital cycle of a company?
2. How to analyze the capacity expansion and utilization from a company's balance sheet?
A9:
1) Working capital cycle is Inventory days + Receivables days - payables days. You may find the formulas
about calculation of these easily on google. You can calculate all these from the data in the balance
sheet.
2) Total capacity and utilization are usually given in annual report (esp. directors report or management
discussion & analysis). You may find them sometimes in the credit rating reports as well. It may be
mentioned by equity research report of the company published by brokers who interact with management.
Q10: Basically I am technical investor nowadays. I began to invest in good fundamental companies with some
distance stop loss. Your articles amazed me that the way you pick stocks and your conviction to hold the
stocks even when it goes below buying price. This attracts me to work more on fundamental analysis. Actually
I wanted to ask about this company in your Q&A Analysis. Its my luck that you have already given your
analysis about this company. Now I working in fundamental analysis based on the guidance given on your
website. I took Metalyst Forgings Limited (erstwhile Ahmednagar Forgings Limited) for studying purpose. The
calculation which I got for receivable days and inventory turnover was not matching with your calculation I
could not understand how to get these figures using screener data. Here are the figures I got from screener
default excel sheet of this company. Please see the attached file. So please guide me about how you derive
these numbers from screener Data
A10: I am happy that you are doing your own analysis and calculating all the ratios at your end before you
take any final decision about the company. The difference between the ratios calculated by you and me is
due to the data assumptions: You have taken inventory and receivables at the year-end values, whereas I
have taken the average of values of inventory & receivables at start and end of the year. Financial
analysis is mix of science and art. Science is in calculation and art is in assumptions, interpretation &
taking the decision. In case, you believe that the year-end value is better to calculate the ratios, then you
should use it and take the investment decision whether buy or avoid or hold or sell.
Q&A: Future Market Networks, V2 Retail, Pioneer

Embroideries & Others
Opinion about Agre Developers Limited (Future Market Networks Limited)
Opinion about V2 Retail Limited and Pioneer Embroideries Limited
Clarification about relationship between fixed asset turnover and ROE/ROCE
Clarification about creation/destruction of value for shareholders by retaining profits and not
distributing them to shareholders
Difference in financial ratios reports by multiple source of data for same company
Opinion about investing in stock of companies with high PE ratios
Clarification about consolidation of account for subsidiaries with 51% stake of parent company
Clarifications about contingent liabilities and whether they should be treated as debt
Readers observations about the qualities of good businesses
27
Clarification about only marginal increase in share capital of a company when it raises additional
equity
Clarification about impact of fundamental factors on price movements
Q1: This is regarding my query on a stock I am holding in my portfolio and would like to know your views. As
instructed by you, I am writing answer to all 4 questions about this stock - Agre Developers Limited (Future
Market Networks Limited):
1. Holding period - 4 years
2. Average cost of buying - 26 (Quantity 6,000)
3. Qualities noticed while investing -- Demerged from Pantaloons Fashion & Retail Ltd.
Company was available at mkt cap of 40 crore with real estate assets of close to 300
crores,
4. Performance - Company has not at all performed and the share price is one fourth now.
But since it has the real estate (malls etc.) I was hoping that value unlocking will happen someday. Since
apart from stocks you also have expertise in real estate, I was hoping to have this analyzed by you. I
know you have been very generous and thus have a huge backlog of stocks to be analyzed. I would wait
till you come to this one.
A1: Future Market Networks Limited (FMN) owns real estate. But it gives these properties on lease to its
group entities (Future group). Its not known whether the lease rental it receives from these group entities
are at arm's length (at prevailing market rate). However, looking at the financials it seems that the current
business performance not in favour of long term benefit of shareholders. The operating profit over years,
has been in range of 30-40 cr. which is not sufficient to meet interest expense of 80-90cr. The question
of creation of wealth for shareholders seems irrelevant.
Q2: Vishal Retails (Now V2 Retail Limited), promoted by Ram Chandra Agarwal was a hot stock ever since its
listing. The company came out with an IPO in 2007 @ 270, which oversubscribed by a whopping 81 times.
Stock hits a high of 1,001 in 2008, which now quoting around 10. In June 2007, Vishal raised 110 crore
(1.1 billion) through an IPO but this was not enough to meet its scorching growth. It had 50 stores by then
and was looking to add 130 more in a year. It tapped the short-term debt market. Company sold its old
business to TPG and Sriram Group in 2011 for 70 Cr (liabilities to the extent of 823.20 Crores and assets of
393.78 Crores transferred in this deal). Major overhang for this company is the contingent liabilities and the
court disputes. I am fully convinced with company's business and have confidence in RC Agrawal. Now need
your views regarding this. Pioneer Embroideries Ltd. Is looking like a turnaround story. It is making every effort
to retire its debt and hopefully would make improvement in its situation by this financial year end. Let us hope
for the best .One of the biggest embroidery brand 'Hakoba' is owned by the company.
A2: V2 Retail Limited as well as Pioneer Embroideries Limited, both are loss making companies. They
might be a turnaround stories, but I do not prefer venturing into turnaround segment, when there are
enough opportunities available in stock markets in profit making, fundamentally sound companies. There
are many investors who invest in loss making companies. You may look investment opportunities in them
post doing your own research. However, I believe that an investor should prefer profit making,
fundamentally sound companies over loss making companies.
Q3: Is there any relation between fixed asset turnover and ROE/ROCE? I understand that both are similar as
one has topline and the other has bottom-line in the numerator (bottom line is proportional to top line with NPM
as proportionate constant). In denominator, one has fixed assets and other has equity (I understood both are
similar as equity converts to fixed assets to generate sales). Now in case of Ahmednagar Forgings Limited, as
you described asset turnover is low but its ROE is high. How should we understand this? Is it because of high
cost of acquisitions? Please enlighten me.
A3: I would like to highlight 2-3 things to address your concern:

NPM is not a constant. It keeps changing year on year. So in a year when sales are high, fixed
asset turnover (FAT) would be high, but if in this year NPM is low, say due to high raw material
prices, then ROE (NPM/Equity) would be low.
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Fixed asset may be funded by debt as well apart from equity.
Low FAT and high ROE is typical of companies which use high debt and low equity to fund their
assets. Inefficient use of large asset base would produce low FAT, whereas small equity base
would show good ROE even at low profits.
This is one of the reason I believe that ROE is not a very relevant factor for investors.
Q4: Regarding Analysis of Jayant Agro-Organics Limited, I am trying to understand the below statement
and your thought process behind saying shareholders money is eroded. Isn't the retained earnings,
shareholders money? Jayant Agro-Organics Limited has generated a market value of only 118 cr. from the
earnings of 137 cr retained by the management over last 10 years (FY2005-14). Management has effectively,
eroded shareholders' wealth over the years
A4: As an individual shareholder, I cannot sell the company and realize the value of its assets to claim
retained earnings, which you rightly said, is shareholders money. Value for an individual shareholder is
the market value of shares she has in her demat account. If a company is retaining profits, then it should
create market value for shareholders from it, otherwise distribute profits as dividend. Value creation from
retained earnings may differ from year to year, but over long periods, say 10 years, at least value equal to
retained profits should be created.
Q5: I was also checking Nitin Spinner. On Economic times - Debt/equity = 0.9. and on Edelweiss it is 1.65.
Screener = 1.1. I read at many places that cotton price will be under pressure. So, if that is true then Nitin
Spinner should gain from that in margin!
A5: Every site would have different assumptions about what to include in debt or equity. It is important
that the assumptions remain same over the entire past data that an investor analyses. It is advised that
before making final investment decision, an investor should calculate all the ratios herself by taking
financial data from the annual report. If raw material prices go down, then normally margins should
increase until the time company has to pass on the benefits to customers due to competitive pressures.
Q6: I have a query on unique and thematic businesses that are characterized by steep PE multiples,
disregarding DCF or other sane measures of value.
Stock P/E: 69.95,
Book Value: 14.61,
ROCE3yr average: 16.80%,
Debt: 3.36Cr. ,
EPS: 4.06,
Market Cap: 284.00 Crores
Compounded Sales Growth: 10 YEARS:52.43% 5 YEARS:129.47% 3 YEARS: 1230.26%
TTM:110.54%
Compounded Profit Growth: 10 YEARS:None% 5 YEARS:None% 3 YEARS: None% TTM:
165.36%
Return on Equity: 10 YEARS:None% 5 YEARS:None% 3 YEARS:13.14% LAST YEAR: 14.53%
Is it a good company or what?
A6: Whatever be the growth and profitability numbers, I would never be comfortable investing in a
company at P/E ratio of 69.95. It does not offer any margin of safety. In fact, it has negative margin of
safety. However, there are investors in the stock market who follow different investing strategies and may
invest in such a stock. I would like to delineate a belief that I hold about investing:
"There is no one path to success in stock market investing. Investors have made money in markets by
following high P/E growth investing, low P/E value investing, mix of both, arbitrage, technical investing,
large cap investing, mid/small cap investing and many other such approaches. Therefore, I believe that
there is no single standard path to succeed/make money in markets. The path an investor should follow is
the one she is convinced with and feels comfortable with." Therefore, I would advise that you do your own
due diligence before taking any investment decision.
29
Q7: I compared standalone and consolidated figures of P&L of last few years of Indian Toners & Developers
Limitedfrom screener and it seems that company is shifting its business from Indian Toners & Developers
Limited to its subsidiary company where it has only 51% stake and rest is with the promoters. This can be one
of the reasons why market doesnt want to give high P/E to this company. Correct me if I am wrong, as I don't
know much about the accounting treatment of subsidiary companies in income statement. I think consolidated
income statement is prepared with only 51% of figures of subsidiaries.
A7: You are right that in case market notices that promoters are using the listed company as a means to
further their personal interests, at the cost of public shareholders, then market gives it lower multiple or
P/E ratio. You are right that according to current accounting rules, a company needs to consolidate all
assets, liabilities, revenue etc. for entities where it has majority shareholding.
Q8: I recently bought Nitin Spinners Ltd so was checking again. I read that contingent liabilities is very high -
approx. 250 cr. I missed this part earlier. Also after reading about contingent liabilities, I think that all these
are to be paid and decisions cannot go anyway in favor of the company. So, why do they mention these dues
in contingent liabilities? To me these part are looking like a debt. Is it cheating or I read it incorrectly? I am not
good in understanding this part. If you please give few minutes then you can dissect easily. (On Screener, I
have created "Contingent Liabilities to Sales" few months back.)
A8: Contingent liabilities mean liabilities which the companies might need to pay in future, however, at
this point in time, it is uncertain. Showing such liabilities under contingent is not cheating. Not disclosing it
in annual report is cheating. Investors can read these liabilities and interpret them accordingly. If investors
believe that they would be crystallized for sure, like you have done in Nitin Spinner's case, then you
should add it to debt/liabilities and then analyse the company accordingly.
Q9: Are only 6 stocks in your portfolio enough for wealth creation or any new additions are advised? Please
reply.
A9: I do not have any targeted number of stocks in my portfolio; however, I try to keep this number as low
as possible. Currently, I believe that 6 is enough as I am getting opportunities of additional investment in
existing portfolio. Once all the stocks exceed my purchasing criteria, then I will look to add new stock.
Q10: I am seeing a pattern here. Companies with high ratios of fixed asset & inventory turnover, lower
receivable days are continuing their up move in the market, while others are sideways or moving down after
initial up move in May-Oct 2014 rally ! Is this how it's working now?
A10: You can't imagine, how happy I am after reading your this comment! You have nailed it. The features
which you just described are the characteristics of excellent companies. If companies perform well in their
business, market always rewards them, though timing of market's response may be a bit delayed. If an
investor chooses and invests in companies which are operating their business efficiently, she may expect
to make significant wealth from stock markets.
Q11:
Analysis: Avanti Feeds Limited
Difference between PAT and CFO is 28 cr whereas equity raised is 2.54cr. Can we related these two?
A11: The equity raised of 2.54 cr. that you are referring to is the par value/face value of the incremental
shares issued to investors. Actual amount raised is higher than par/face value. The different between the
actual investment value and par/face value is shown in securities premium account as part of reserves
and surplus.
Q12: The asset turnover ratio/Inventory turnover ratio for both Suven Life Sciences Limited and Alkyl
Amines Chemical Ltd are comparable but I can see Suven is showing upward trend while Alkyl is showing
some down/recovery trend. Then how confidently we can say that these ratio are very much correct to identify
30
a potentially good stock? Although, I can see that Alkyl is having D/E ratio (0.97) greater than Suven (0.25).
And also what can be safe/good value for this ratio (around 10)? Thanks in advance.
A12: Stock analysis is a never ending process. Every parameter gives some information about the
stocks. No parameter is complete in itself. An investor should use multiple parameters in conjunction to
identify good stocks. As far as analysing price movements of any stock is concerned, it is always
guesswork. It can't be said with certainty, what parameters market is weighing more, while giving certain
value to any stock.
Q&A: Self-Sustainable Growth Rate (SSGR) - Part 1

Self-Sustainable Growth Rate (SSGR), is based on multiple business characteristics of any company.
These parameters are:
Net Profit Margin (NPM)
Dividend Payout Ratio (DPR)
Depreciation (Dep)
Net Fixed Assets Turnover (NFAT)
These parameters when combined in the following formula, give an investor a growth rate as an output,
which is the debt-free Self-Sustainable Growth Rate (SSGR) of a company:
SSGR = [(1-Dep) + NFAT*NPM*(1-DPR)] - 1
Overtime, a lot of readers have provided their inputs and asked many queries related to various aspects
of Self-Sustainable Growth Rate (SSGR). The current article is an attempt to put together the knowledge
shared by different readers about Self-Sustainable Growth Rate (SSGR) so that all the readers can get
benefited from it. This article contains the queries raised by readers about:
Similarities & differences between SSGR and sustainable growth rate (SGR)
Similarities & differences between SSGR and return on capital employed (ROCE)
Clarification about companies able to reduce debt despite SSGR being less than current sales
growth rate
Q1: Is there any difference in SGR (sustainable growth rate) calculated by ROE x (1 - dividend-payout ratio) as
described in Investopedia and Self-Sustainable Growth Rate (SSGR)? Both give similar assessment of
companies operating efficiency and profit generation.
A1: You would be able to appreciate the differences and similarities, if you try to analyse the components
of ROE and Self-Sustainable Growth Rate (SSGR). You may use the DuPont analysis for ROE and the
components of SSGR detailed in the article above. I suggest that you do the analysis and share your
observations. I would be happy to provide my inputs on your observations.
Q1.1: I have done the analysis of both Self-Sustainable Growth Rate (SSGR) and sustainable growth rate
(SGR) for some of the companies and I have found there is differences in the both the parameters in
different combinations as we use different parameters to calculate it. Some categories:
High SSGR with High SGR
High SSGR with low SGR
Both SSGR and SGR in the same levels
Low SSGR with high SGR
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I personally feel Self-Sustainable Growth Rate (SSGR) give better reflection as it includes the NPM, Net
asset, depreciation and dividend payout ratio (DPR) for calculations. I would like to hear your
observations and opinions in this matter.
A1.1: Finance is a very interesting field which allows any investor be as creative as she wants and tweak
existing ratios or create all together new ratios and use them for stock analysis. An investor may use any
ratio as per her convenience and conviction. SGR is derived from ROE and therefore its interpretation is
more or less same as ROE. An investor may use DuPonts analysis to delve deeper into understanding of
ROE or similarly SGR. I like Self-Sustainable Growth Rate (SSGR) from SGR as I believe that SSGR tells
about the debt free growth potential whereas SGR will tell about the growth while keeping the current
capital structure (i.e. debt and equity mix). ROE and SGR can be easily increased by increasing leverage.
Regarding many categories of comparative SSGR and SGR values, its great to know that you did the
comparative analysis. Such analytical exercises provide good learning opportunities for investors.
Q2: I think that Self-Sustainable Growth Rate (SSGR) is a modified version of return on capital employed
(ROCE), a very helpful one though. I generally prefer to invest in companies with high ROCE even if such a
company is available at a bit high valuation. As far as there is a high difference between ROCE and cost of
capital (CoC), one shouldn't worry too much about the debt. But I think with your SSGR model, one can easily
analyse companies with moderate ROCE. Thank you for sharing this.
A2: It depends on how you calculate ROCE. There are investors who use only PAT in numerator while
calculating ROCE whereas, there are others who use EBIT in numerator. Self-Sustainable Growth Rate
(SSGR) on the other hand, does not add back interest in numerator at any stage.
Q.3: I was analysing the concept of Self-Sustainable Growth Rate (SSGR). I tried running it on few companies
- Ambika Cotton Mills Limited doesn't qualify this test positively, yet its debt levels and equity dilution is under
check. I checked the Self-Sustainable Growth Rate (SSGR) of Ambika cotton it is nearly 0-1%, but the YOY
sales growth is 10-19%. I have some confusion on this: How to take decision if company is growing, but SSGR
is 0-1%, Is SSGR is so influential to take any decision of buying of stock? Please guide.
A3: Stock buying decision should be based on multiple factors. Self-Sustainable Growth Rate (SSGR)
can be one of these factors. Growth in absence of supportive SSGR is usually funded from funds other
than profits. Cases similar to Ambika with low Self-Sustainable Growth Rate (SSGR) but reducing debt
have been discussed in SSGR article. You would find similar cases discussed in interpretations section of
the article in the part C: Companies that have SSGR less than current growth rate, but still manage to
reduce debt over the years.
Q4: I have tried calculating the Self-Sustainable Growth Rate (SSGR) of one company, but I am unable to get
the correct value. For the time being, I have not taken the average of three years. Could you please let me
know where I am going wrong? I have few independent queries which I am not able to understand.
1. What is face value?
2. What is share capital? Is it the (number of shares*face value) OR (number of
shares*issue price)?
3. If the sales of a company are greater than market cap of a company, is it a good sign?
A4: Relation of sales with market cap is used as a valuation parameter during stock research. The
concept of Self-Sustainable Growth Rate (SSGR) along with the steps to calculate it has been described
in the article on SSGR. You may calculate it using one year figures or 3 years average as per your
preference (the number of SSGR would be different as per your assumptions). There is no hard & fast
rule to adhere to. I have elaborated on my step as addendum in the article. I would suggest you to follow
the steps and go ahead with SSGR results as per your preference and assumptions. It would be difficult
for me to vet the calculations of readers individually.
Share Capital: Issued & paid up share capital is number of shares*face value whereas number of
shares*issue price is equal to issued & paid up share capital + amount in the securities premium account.
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You may google for reading more about face value and share capital. You would find many good articles
& resources provide information for your queries. I prefer Investopedia.com.
Q&A: NMDC, Sintex, Sharda Cropchem, Dish TV India &

others
Opinion on: NMDC Limited, Sintex Industries Limited, Sharda Cropchem Limited and Dish TV
India Limited
How to track the dilution of equity when profits are rising
Taking cues from insider buying
Calculating retained earnings and increase in market cap in last 10 years
Q1: I am going to ask your opinion about 2 stocks, which I own. I shall try to give the information in the format
you have provided.
NMDC Limited:
Holding it for about 2 years.
Average cost 120, Quantity = 1,600
Very good fundamentals. Available at very reasonable P/E ratio.
Although in commodity business, demand for iron ore will always exceed supply in India,
however, domestic prices of ore are very competitive compared to landed price of imported ore.
Even during current recessionary phase in international iron ore prices, NMDC Limited has
suffered a very mild correction in its price.
NMDC Limiteds gross margin is more than 65%. Being a PSU their dividend paying record is
very good.
NMDC Limiteds performance is consistently good without any serious issues.
Sintex Industries Limited:

Holding it for about 9 months
Average price 90. Quantity = 1,500
Sintex Industries Limited's product, water tanks, has tremendous brand value as well as growing
demand. They are also making many other products like doors, toilets etc., which will have huge
demand because of the new Govt. policies. Recent growth in top and bottom line has been
spectacular
Sintex Industries Limited's financial performance was badly affected because of the losses they
suffered in foreign exchange speculation. But now, I think, the management has learnt the lesson
and financial performance is improving.
Debt levels are going down. FCCBs are getting converted into shares, which is a good
development as it shows the faith of lenders in the company.
In my opinion both, NMDC Limited and Sintex Industries Limited, at current prices are underpriced and
good investments but I would like to get your valued opinion and attention to any adverse factors, which I
might have missed.
A1:
NMDC Limited: Sales growth has been slowing down in recent years, though profitability is maintained.
However, operating performance has taken a hit. Profits are not getting converted into cash as money is
getting stuck in inventory and receivables. Operating efficiency is getting hit as fixed asset turnover is
decreasing year on year. Company does not seem to be performing good during recent years.
33
Sintex Industries Limited: Sales growth has been slowing down in recent years. Operating profit
margins are maintained, however, net profit margins have taken a hit due to increasing interest costs.
Interest cost has increased as the companys debt levels have increased 10 times in last 10 years.
Increase in debt is due to very low asset turnover, which is characteristic of capital intensive businesses.
Operating performance also has deteriorated. Fixed asset turnover is decreasing and receivables days
are increasing. Overall, companys performance seems to be deteriorating year on year.
Q2: It will be helpful if you can share your thoughts on Sharda Cropchem Limited. The numbers are very
confusing (at least to me) and I am hoping that you would be able to share your 2 cents as always :)
Source of data is: screener and bseindia
Sharda Cropchem Limited is into 3 business - agro chemical, conveyor belts and industrial
chemicals.
The company is showing great last 3 yrs. return for both sales and profit growth.
ROE has also increased over the years last year being the highest,
But on the other hand cash flow has gone into negative with last year being the highest.
There is considerable cash that has gone into investment activity.
Also march 2015 they were asked to submit clarification w.r.t to abrupt increase in trading
volume.
Shareholding: promoters => 75%, institutions => 13.3%, FII => 5.7%. All 75% of promoters
holding is locked in
Current market rate 399
compounded Sales Growth => 5yrs = 16.32%, 3yrs = 30.00%
compounded Profit Growth => 5yrs = 18.52%, 3yrs = 63.43%
RoE => 5yrs = 14.2%, 3yrs = 15.58%, last year = 17.43%
P/E => 37.94
Price to book value = 6.21
Dividend payout => 0.5 / share
EPS = -0.01 for Dec 2014, 2.10 for Sept 2014
52 wk high/low => 217 / 408
Pros:
Operating profit margin is increasing
Net profit margin is increasing
Return on net worth is increasing
ROCE is increasing
Interest coverage is 214
A1 CRISIL rating
Cons:
High PE
Low EPS
No depreciation claimed in last 5yrs
I have been tracking Sharda Cropchem Limited for close to 3 weeks and it was upper circuit today,
without any announcement/disclosure made by the management or any news by any of the news
agencies. I am wondering whether Sharda Cropchem Limited is stock for investment or it is one of those
stocks where prices are manipulated by an operator.
A2: I am not able to understand the exact business of Sharda Cropchem Limited. I am not aware how it
plans to monetize its registrations of agro-chemicals in regulated markets. Therefore any comment would
be mere conjecture. Overall, financial numbers of Sharda Cropchem Limited seem ok. Sales are growing.
Profitability is maintained. No debt. Increasing dividends. Only concern is very high receivables days. You
34
must understand the reasons behind such high receivables days. You should try to understand business
of Sharda Cropchem Limited properly before taking any investment decision about it. Current P/E ratio of
Sharda Cropchem Limited is very high and does not offer any margin of safety. I would not be able to offer
any opinion about its market price movements.
Q3: I should have shared my analysis of Dish TV India Limited, Here it is:
I am positive on the management (although the performance is not good) but can't go in the detail
here.
Dish TV India Limited was the largest DTH operator in India (it's still is, but marginally), in terms of
subscriber base. It has contracted with 450+ channels, which is highest in the industry.
Consumer base has been grown 16 times, revenue has grown from 190 cr in 2005-06 to 2,508
cr in 2013-14. But the company was bleeding cash and is under huge losses. For that, it has
constantly raised money.
Net worth is negative.
There is a high probability that Industry might face a threat from Internet Protocol Television
(IPTV) and 4G Internet.
90% of revenue of the Dish TV India Limited comes from subscription money and rest from
Teleport Services, Consumer Premise Equipment, Advertising, etc. Hence, 90% of revenue (from
subscription) is under threat.
The industry requires heavy recurring expenditure, unlike telecom industry.
Can you guess why the leader is in loss and followers are in profit? Will you categorize the DTH service
as a commodity? Because I don't see any way to differentiate the product from the products of
competitors (may be that is the reason management is not performing). Further, how would the industry
react to economy, I mean will it be cyclical, counter cyclical or resistant. I think industry could be resistant
as consumers have to pay very little portion of their budget for dish TV subscription. Possibly, economic
fluctuation may not impact it. My purpose for doing the research is not investment this time, I am
interested in this industry. I found that Dish TV India Limited is making loss and some experts were
recommending it, so I thought it would be the best candidate if I want to learn the economics of the
industry. I follow Charlie Munger, and he says "tell me where I will die, and I wont go there." I know you
follow the bottom-up approach, that's why I asked for valuations and little about its prospects. How much
would you pay, if any, for this sinking ship?
A3: You summed everything in the last line of your write-up:

"I know you follow the bottom-up approach, that's why I asked for valuations and littler about prospects."
While reading your query, I was constantly wondering while I would be able to add any value to what you
already know. In the end, I realized that you also know that I do not analyse stocks from top-down
perspective. I focus on finding companies which have proven themselves by their performance for over a
decade. If some company has not done that, then I simply ignore it and start searching for other
companies. I am comfortable buying growing companies in declining industries but wont buy loss making
companies in whatever industry. As far as: "How much would you pay, if any, for this sinking ship?" is
concerned, I would not pay anything for it.
Q4: I have been investing from last 2 year. I have sent you a post. I liked your article and it is good. I too follow
similar approach like this with free cash flows (FCF). I have just one question. The post does not mention
about EPS. Do u think that it is ok not to track EPS apart from Net profit? Also, how do track whether profit is
increasing but equity getting diluted (may not be for this case). It would be great full if you clarify.
A4: If there is no equity dilution year on year then EPS growth and net profit growth would represent one
and the same thing, whether the no. of shares remain the same or increase due to split or bonus shares.
In such cases, the % ownership of existing shareholders remains the same. However, the two would not
remain same if no. of shares increases due to issue of new shares which reduces the % shareholding of
existing shareholders. In such cases from investor's perspective, EPS growth would be more pertinent
than Net Profit Growth. However, in both these cases, net profit would keep retaining its significance in
terms of profitability margins and the attractiveness of the business. You can assess the dilution impact by
35
looking at the share capital of the company. If share capital has increased then you should explore
whether the same is due to bonus shares or issue of new shares. In case of Ambika Cotton Mills Limited,
the share capital has been constant from 2006 till date at 5.88 cr.
Q5: I come from engineering background. I do not have much financial knowledge. So I try to stick on to
diversifying my portfolio among various stocks, which render quality. Insider buying and buybacks still remain a
strong force for my selection as they make the search easier. Don't you agree?
A5: Financial background is not required to become a good stock investor. However, one needs to put in
the required effort to learn about selecting stocks. You are right that we should pay attention to stocks
where insiders are buying as they are the people who have the most intimate knowledge about the
company.
Q6: How to calculate Total retained profits of last 10 years? I think it is the amount of reserves money in the
companys balance sheet (in moneycontrol balance sheet). Am I right, Sir? If wrong, the please clarify, how to
calculate them? And also how to calculate Total increase in market capitalization in 10 years? I read your
valuable article, but these 2 queries are not resolved. Please teach me.
A6: Conversion of profits into market cap is one of the important parameter to assess the management
efficiency of any company:
Retained profits = Net profit after tax - dividend paid
Market cap increase in 10 years = current market cap - market cap in 2005
Screener excel has all these data points.
Q&A: Financial Analysis of Stocks, Capex & Others

How to find out whether a company is capitalizing its interest cost and not showing it as interest
expense in the P&L statement
How should an investor approach contingent liabilities
How to calculate capex and in turn free cash flow (FCF) for any company
Standalone or consolidated financials: which ones the investor should analyse?
Clarifications about analysing well-known vs unknown companies
Clarification about considering minimum NPM of 8% as a stock filtering criteria
Impact of El Nino and INR depreciation on profitability of spinning firms
Roadmap for a beginner investor to learn stock investing
What are Operators Stock and should a retail investor be worried about them
The best book to learn stock investing
Understanding how the profits get stuck in the working capital and do not always lead to cash
flow from operations
Q1: I made a mistake in adding the PAT for 10 years. You have gone a step further in evaluating the operating
performance of the company. It makes the picture clearer. I believe that all manufacturing companies, currently,
are riddled with these issues of Asset Turnover Ratio. Also in the current market phase of high cost of debt,
further makes the sales growth trajectory by way of raising debt futile, considering the capital nature of most
manufacturing companies. But most manufacturing companies are saddled with this issue and making
investments in such companies become harder. Doesn't this speak a lot about the general business
environment in the country, not just the country but the competitive nature of industries around the world? Fact
is that most of the industries are working with commodities, which are cyclical in nature by way of their demand
vs the price. When the demand rises the commodity prices rise and hit the bottom-line of the companies but
this fact is usually disregarded as in such times the growth in sales leads to profits growth. When the demand
36
cools down the commodity prices fall resulting in poor sales performance of the company but better margins
due to lower cost of goods sold. This improved profitability due to lower commodity prices could be hampered
if the specific company is a supplier to an original equipment manufacturer (OEM) as the OEM would suck the
benefit of cooling raw material prices out of the supplier in any possible way. This impacts most of the auto
ancillary companies like Munjal Auto Industries Limited and Motherson Sumi Systems Limited. Perhaps this is
a general comment. My specific questions are the following:
1) Why would a company raise debt and hide it in the Capital Work in Progress (CWIP) and not pay the
interest on debt and thereby reduce its taxes:
I believe that one reason could to show to the investors that the company has strong Net Profit
Margin (NPM), which otherwise would look terrible. Is that correct?
Also how can the company not pay interest on the debt raised or is it possible by deferring the
interest liability for the gestation period of the new projects.
2) How do you get the data for the receivable days and Inventory Turnover?
I exported the data from screener and in the balance sheet column found the data on debtor days and
inventory turnover. However, that data is different in your sheet as compared to what is in the exported
file. I have read your article "Simple Steps To Analyze Operating Performance Of Companies" where
you have given the underlying principles, but I need to understand how you calculate the same from the
excel sheet if what I am referring to above, is different from your method of investigating.
A1: Bottom-up investing is all about analysing individual companies which are performing well despite
challenging economic scenario. Commodity cycles>>fluctuating profitability might be true for most of the
companies, but then, an investor has a choice of ignoring most of these companies and keep searching
until she finds a company which she likes. There are thousands of companies in the listed universe. It is
advised to keep searching until the investor is satisfied. Debt is not hidden in CWIP. Debt details are be
there in balance sheet in the liabilities section (Non-Current Liabilities and Current Liabilities). It is the
interest cost that is added to CWIP and not deducted from sales while calculating net profits. It is legal as
per accounting standards. Only thing is that an investor should know that 3,500cr debt would never have
only 25 cr of interest cost. Actual interest paid in a year, which should be about 350cr considering 10%
rate of interest. Total amount of interest paid by a company would be visible in cash flow statement under
cash flow from financing (CFF). Banks would never defer interest payments. It has to be paid monthly,
irrespective of whether you show it in P&L or CWIP. The article mentioned by you on analysing operating
performance of companies, clearly states the formula for calculation of receivables days. All the data
needed is in the screener excel. I suggest you to try again. You may take help of google to read some
other articles to understand receivables days better.
Q2: I would like to know how the contingent liability is seen by the market. I mean what is contingent liability
and does it affect the price of the stock? Also, Sir, I would like to analyse a company based on the Free Cash
Flow (FCF) it is generating over 10 yr. period time. I mean each yr. how much FCF it is generating. How can
we find the free cash flow of a company from Screener?
A2: It depends on what kind of contingent liability it is:

Corporate guarantees given on behalf of subsidiaries should definitely be considered as debt.
Performance guarantees given as part of contracts are normal part of business and are ok.
Therefore, there no one way to deal with all contingent liabilities. You may calculate capex by following
formula:
NFA = Net fixed assets
CWIP= Capital work in progress
Dep= Depreciation
Capex = capital expenditure
37
(NFA+CWIP) at Year end = (NFA+CWIP) at start of year - Dep+Capex
Therefore,
Capex = (NFA+CWIP) at year end - (NFA+CWIP) at start of year + Dep
You can calculate free cash flow (FCF) for any company as:
FCF = CFO - Capex
Q3: I have a question related to analyzing a company which is diversified like Balmer Lawrie & Company
Limited. Basically, my query is about analysing Balmer Lawrie & Company Limited at standalone &
consolidated basis or both. As I have seen that many a times a stock gets effected by a bad consolidated
result although the standalone results are really good.
A3: Consolidated financials carry more weightage as they represent the combined results of all the
assets/investments of a company whether in the plants & machinery on its own books or through its
subsidiaries/JVs etc.
Q4: I have a few queries:

1. I see that the market cap in the excel output of a particular company does not match the
market cap stated on other websites like edelweiss. One reason I can think of is that they
are of different time periods. However the values are far different. Is it because of the free
float vs actual market capitalization?
2. Secondly, I see that you have created a portfolio of small and mid-cap companies, which
are excellent companies for the purpose of investment. Also you do not worry too much
about these companies on account of the stock markets. I assume that your view would
be to stay invested for the period of more than 5 years because even with excellent
results of the company the stock may not come into the notice of institutional investors
which restricts the gains due to the sentiments associated in the market.
On the contrary companies that are darlings of the stock markets also to a large extent create value for
the shareholders. You have not given any method for making assessments of these companies for long
periods of investments. Please share your views for companies of such nature.
A4: Ideally the market cap figure would mention whether it is free float or total market cap. If its not
mentioned, then you have to judge it yourself by spending some more time analysing it. I focus on
companies below 500 cr. market cap. There is no single road to success and companies in various other
segments would also make wealth for investors. However, every investor frames her favourite style of
investing.
I would like to delineate a belief that I hold about investing: "There is no one path to success in stock
market investing. Investors have made money in markets by following high P/E growth investing, low P/E
value investing, and mix of both, arbitrage, technical investing, large cap investing, mid/small cap
investing and many other such approaches. Therefore, I believe that there is no single standard path to
succeed/make money in markets. The path an investor should follow is the one she is convinced with and
feels comfortable with."
Readers are right when they mention that good business may not be available at low P/E ratios (a
P/E<10). An investor is free to invest in businesses with high P/E, if she is comfortable. However, I believe
in investing fundamentally sound companies, which are yet to be recognized by the markets. I believe that
such companies are present in the markets. Such opportunities might not be aplenty; however, I believe
that an investor does not need to find dozens of good companies. My experience in markets says that
one company a year is enough. Nevertheless, there is no one path to success in markets and therefore, if
an investor believes in investing high P/E companies, which are valued fairly, then she should invest in
such companies without any second thoughts. Investing methods are personal choice.
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Q5: I have a query:
Why do you take the minimum net profit margin (NPM) rate as 8%?
I mean why you consider 8%.
Does it have any correlation with 15% sales growth?
Why is minimum NPM rate almost half of minimum sales growth rate?
Why is there big gap?
Does such gap exists in all industries?
A5: There is no correlation. These are the levels that I like in the companies in which I feel like investing.
An investor should have her own criteria for selecting stocks. Depending on her preference, I suggest that
the investor should tweak these parameters to the levels that she feels good.
Q6:
I read your article on Analysis: APM Industries Limited and Nitin Spinners Limited
Since 83% of the products are cotton textiles and they depend upon cotton yarn, which is an agricultural
product and as El Nino is predicted, cotton yarn prices may go up substantially. If it happens, then NPM
might be hit badly in 2016. And INR is depreciating and at 63.5 per US dollar (as of now), this may
compensate for the losses due to the increase in the price of raw materials as 68% out the output is
exported. Present capacity of 77,616 spindles and 2,936 rotors for cotton yarn with installed
manufacturing capacity of 22,650 TPA and 3,900 TPA of knitted fabrics. After expansion spindle count will
reach 150,096 and the manufacturing capacity will be 37,800 TPA of cotton yarn and 8,600 TPA of knitted
fabrics. As the manufacturing capacity would be almost doubled, how these two factors would affect the
profitability? Need your inputs on this Dr.
A6: If the cotton price hike and rupee depreciation predicted by you actually happens in the proportion
assumed by you, then they might nullify each other. And if alongside it, the capacity doubles and
assuming the company is able to sell its entire production, then the profitability would increase slightly due
to economies of scale. However, there are many ifs & buts in your assumptions and my explanation.
Reality in all probability would be different.
Q7: I am a 19 years old investor jumping between technical and fundamental analysis. I have now settled at
fundamental analysis as I believe that the stocks are pieces of great businesses, which I cannot own just like a
piece of paper to trade back & forth. I also know that everybody has their own style of investing. Some follow
growth investing, others follow value investing. Some are seasoned investors whereas other are just pure
speculators. At this Moment, I truly want to be a long term value + growth investor as time is on my side. I am
determined to be a complete value investor and currently, reading the book Security Analysis. Sir, the only
help I want is to get a detailed path for a 19 year old so that I do not make wrong decisions. I want some kind
of roadmap towards investing for the rest of my life. I am sorry for the long query.
A7: Its great that you have started thinking about investing at an early age. You are right that time is on
your side. I would suggest that you read books written by great investors. You should have the faith in
equity markets and no doubt that you would be able to make good wealth.
Q8: While analyzing some small cap companies, I am frequently coming across a word in some forums -
"Operator Stock".
What it mean to a retail value investor?
How a retail investor can identify the trap?
Your detailed view will be highly helpful.
A8: "Operator stock" is usually referred to the stock whose price is manipulated by different people. Small
cap stocks have low market cap and operators need very low money to influence its price. E.g. to
increase the price to double for a 20cr. market cap company, an operator needs much less money than
a 2.5 lakh cr market cap company. As a fundamental long term investor, I do not worry about operators
being active in a stock, until the time I am convinced that company has a good business and is improving
39
its operating performance. Once you buy a stock, the holding or selling decision are rarely decided by
market price of stock. Operators may come and go. If the company is good, then an investor should hold
on to the stock irrespective of short term price movements.
Q9: Which is the best book to understand the financial statement analysis and stock valuation for a beginner
who has no background in accounting and finance?
A9: The Intelligent Investor by Benjamin Graham is the best book.
Q10: I have gone through a lot of topics that you have covered here in the blog including some of the
companies analysis. There is one parameter that I am not able to understand. It is about the analysis that you
do on the cash flows in which you infer whether the company is able to collect its profit in cash or not. Can you
please cover this topic in a post with the details like using a hypothetical example? I dont understand:
How a company can survive if its not collecting it profit in cash, although it is showing that in
profits?
How its related to receivables?
A10: I would suggest that you should read the cash flow statement in the annual report of any company,
which would show step by step calculation of CFO from PAT/PBT. The calculation would clearly show how
the profits get stuck in working capital. It would be a good learning exercise for you. In case after reading
the cash flow calculation, you have any query, then I would be happy to provide my inputs for its
resolution.
Q&A: South Indian Bank, Nucleus Software, Gold ETF &

Others
A readers (Hari Balaji) views about South Indian Bank Limited
A readers (Sridhar Govardhanan) views about Nucleus Software Exports Limited
Use of enterprise value in stock valuation
Clarifications about gold exchange traded funds (Gold ETFs)
Clarifications about P/E ratio, PEG ratio and Margin of Safety
Sources for finding production & capacity utilization information for a company
Finding opportunities in existing stocks in an investors existing portfolio first.
Reasons for not analysing stocks of banking & financial services on the website
Reasons for analysing financial performance for 10 years while doing stock selection
Clarification about demerger of companies
Q1: I have been following your blog for quite some time and I find it extremely educative. Your work is nothing
short of being service to society by creating awareness. Based on you framework, I have analyzed the stock
South Indian Bank Limited. Please find below my investment rationale.
Stock is trading at 0.89 times its book value
South Indian Bank Limited has good consistent profit growth of 21.21% over 5 years
It has a compounded annual sales growth of 25.35% over a period of 10 years
It been consistently paying dividend of over 15 percent in the past 10 years
It has consistently been improving its EPS
South Indian Bank Limited has been maintaining a decent Operating margin of a little over 15%
on an average
No negative news about promoters or about the South Indian Bank Limited
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The bank has been consistently gr owing its fee bases income. (Other income)
At the current market price of 24.25, its available at a PE of 8.80 which provides decent margin
of safety
South Indian Bank Limited operates in an industry which has a strong entry barrier
South Indian Bank Limited has been maintaining non-performing assets (NPA) at below industry
average
South Indian Bank Limited has a very strong regional presence in Kerala
The company has a positive cash flow from operations, the cumulative net profits for the past 5
years is 1,937 crores, whereas the CFO for the same period is 6,066 crores
Please let me know your opinion.
A1: If I see the points highlighted by you about South Indian Bank, it looks great. However, analysis of
Banks/financial institutions involves many other factors like asset liability mismatch, sources & breakup of
funding profile, capital adequacy ratio & its breakup, NPA movements and other weak credit parameters,
borrower wise concentration analysis, which are not readily available in the data sources like screener.
Therefore, due to lack of ready availability of pertinent data, I am not able to provide any opinion about
SIB.
Q2: I am presenting my views on Nucleus Software Exports Limited. I would be happy to hear your views on
my analysis and about your view of future prospects of Nucleus Software Exports Limited.
Sales Growth was in an increasing trend from 2005-2008. Negative growth was observed during
2008-2011. Nucleus Software Exports Limited started to pick growth around 2013 and has been
increasing since then. Sales growth in the last quarter was good
OPM is also in an increasing trend for last 3 Yr., fluctuating between 15%-20% between (2012-
2015).
NPM is between 17% in last 3Yr.
Tax % is fluctuating no-line with corporate tax slab.
D/E is 0, which is really great.
Debtor days have been reduced from 113 to 43 days. Good sign.
Dividend payout is constantly good. Recently announced a 5/Share dividend.
Stock is in the process of getting re-rated. Recently, it has had a run-up of prices, which has
pushed P/E from 10 to 15.
Its products are doing very good in global markets. Nucleus Software Exports Limited has
showing promising growth.
With its specialization of lending & transaction banking products, Nucleus Software Exports Limited can
command a higher P/E of above 25. Below is an excerpt from Nucleus Software Exports Limiteds recent
press release. "For the 7th year in a row we were ranked as having the worlds best-selling lending
solution. In FY2014-2015, Nucleus Software introduced FinnOne NeoTM the next-generation End-to-End
Loan Lifecycle Management product that enables innovative banks and finance companies to manage all
types of lending from personal and home loans to commercial lending and finance against securities. The
new solution uses the latest, proven technology and can be delivered via public cloud, private cloud or on
customers own servers." I am already invested in Nucleus Software Exports Limited for over a year and
am bullish on it. I I would like to know your thoughts on Nucleus Software Exports Limited. I am not taking
much consideration on inventory turnover & fixed asset ratio, since its an IT company. Please suggest if
this is the right approach.
Query:
Also please throw some light of enterprise value calculation. I hear a lot of experts and market
gurus talk about on enterprise value and the gap between market-cap and enterprise value of the
stock.
How can one calculate enterprise value and see if the stock is underpriced?
A2: Enterprise Value (EV) is calculated as (value of equity + total debt -cash). Investors usually compare
stocks within an industry by comparing their EV/EBITDA ratios. Regarding Nucleus Software Exports
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Limited, I do not track IT/ITeS companies, therefore, would not be able to help you. If you believe that it is
a good company, then you should go ahead and invest.
Q3: I am planning to invest in gold because of its present low rate. I want to buy an exchange traded fund
(ETF). Regarding an ETF, I have a few doubts. Kindly clarify:
Are there any parameters to value gold like P/E, P/BV ratios of stocks?
Where do gold ETF managers invest our money? I mean in commodity market or physical gold or
anywhere else?
If they invest in physical gold, where do they store that much gold quantity?
How to believe the managers of ETF or trust behind it (I mean are they really investing or running
fake ETF)
Where can I check the quantity of Gold that an ETF is having?
A3:
1. Gold does not generate any cash flow like companies. So P/E etc. does not apply to it.
2. As far as I know, ETF managers invest in physical gold.
3. ETFs keep the gold in secure vaults.
4. All ETFs are SEBI regulated and regularly audited. Chances of fraud are very low.
5. You may not be able to check the quantity in person. However, the annual report of the
ETF management company should have the details about the amount of gold they have.
Q4: I am new to value investing and currently following your step by step analysis approach towards my
investment career. I have a few queries on the valuation analysis done by you:
1. Regarding PE Ratio: Screener uses the last reported EPS for calculating PE Ratio. But
other websites uses TTM (trailing twelve months) earnings. Which PE Ratio must we
consider during valuation?
2. PEG Ratio: Can you please give me details about how you have calculated PEG ratio,
because most websites take EPS growth estimate. How are you calculating it?
3. You have given reference to PE Ratio of <10 mentioned by Benjamin Graham in his book
The Intelligent Investor. I am reading this book and Graham has mentioned PE ratios
between 20 and 25. What does he mean by these in his book?
A4:
1) PE ratio: Each of the websites and similarly, each of the investors has her own preferences. I use TTM
(trailing twelve months) earnings with a pinch of salt, if there is a sudden jump in recent earnings. Warren
Buffett takes average earnings of past few years.
2) PEG ratio: Whenever, I use PEG ratio, I use growth rate of EPS achieved in the past.
3) P/E ratio threshold is a factor of margin of safety: Graham uses P/E ratio of 20-25 because during
those times in US, the govt. bond rates were in range of 4-5%. I have elaborated on Margin of Safety in
the following article. Reading the above article would help an investor in understanding that during low
interest rate scenarios, the P/E ratios that provide a margin of safety, moves up.
Q5: Please let me know where we can find the below information for the "Increase in Production Capacity and
Sales Volume" section:
1. Production capacity (tonnes per annum)
2. Quantity sold (tonnes) (A)
3. Sales price per tonne (INR) (B)
4. Total sales (INR Cr. /10 Million) (A*B)
I couldn't find it in screener.
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A5: You would find this information in the annual report of the company and in the credit rating report (if
the company is rated by any credit rating agency).
Q6: Your philosophy states very clearly that you invest in the company for its business and management
strength and not on the basis of how the stock market views its stock. If the fundamentals of the company are
affected, then there is no reason to stay invested? It is a very good and sound advice. I think it would be
worthwhile if you explain to us: how you keep investing into your small portfolio over a period of time,
considering that some of the stocks in your portfolio have done very well and some are still lagging behind
purely from the stock markets point of view? For example stocks like Vinati Organics Limited and Mayur
Uniquoters Limited have done well and therefore have become expensive but others are still not expensive by
way of PE value.
How do you channelize your investments in such cases?
Do you still invest more capital into the expensive stocks or you ignore the expensive stocks and
buy into the ones that are still cheap?
If so, how do you re-balance your portfolio?
That would be very insightful for the new investors like me.
A6: I invest additional money in those existing stocks in my portfolio, which are still cheap. When I do not
find any existing stock cheap enough to put additional money, then I look for a new stock. However, I
might write a separate article answering your query.
Q7: I am reading your articles daily at least one. I just want to know one thing from you: Why are you not
analysing any banking stocks? Any particular reason behind it?
A7: The analysis of banks/financial institutions involves many special factors like asset liability mismatch,
sources & breakup of funding profile, capital adequacy ratio & its breakup, NPA movements and other
weak credit parameters, borrower wise concentration analysis, which are not readily available in the data
sources like screener and moneycontrol. Therefore, due to lack of ready availability of pertinent data, I do
not provide analysis of bank/financial institutions on my website.
Q8: I have a few questions:

We have analyzed data from 2004-2014 and bought at 2014, is it that we would be buying too
late?
The reason that I am asking is: suppose we analyse a company financially for the past 10 years,
its quite likely that the stock price would have run up a lot already. And since it is making profits
since the past 10 years, one loss making year wont affect it financially but the stock price may
drop.
Are we having the odds in our favour in such a case?
A8: An investor should buy a good stock whenever she comes across it. There is no such thing as early
or late. I analyse stocks with history of 10 years because the period of 10 years provides me enough
history of companys performance over one or more business cycles and I can see the decisions taken by
the management during different situations and the impacts of their decisions on the company. If a
company reports a loss after many years in profits and the loss is not due to any permanent factor, then
the stock price fall is the best opportunity to buy more stocks.
Q9: I am invested in Sterlite Technologies Limited since last one year. Today it announced its March quarter
results. Results are promising and Sterlite Technologies Limited shows potential of good growth in the future.
Today, it also announced the company restructuring plan, in which they are demerging Sterlite Power from
Sterlite Technologies Limited. Sir my query is that I am not able to understand the implication of the demerger?
It be helpful if you can guide me on this.
43
A9: Demerger means that some of the existing value of Sterlite Technologies Limited (parent), which is in
the form of its power business (child) will be removed from it into a separate company. The value of power
business (child), which would be removed from the shareholder of Sterlite Technologies Limited (parent)
would need to be compensated. As a compensation for this loss of value, the shareholders of parent are
usually given shares of Child Company. You need to analyse what is the form in which investors are being
compensated by the management of Sterlite Technologies Limited for letting go the power business and
whether the amount of compensation/shares is being provided is a justifiable price for the value, which is
being let go in power business.
Q&A: Diversification, CFO, Inventory, Face Value (8)

Sharing of his investment philosophy by a reader, Ashish Malhotra
Clarifications about Change in Inventory expense and pledging of shares
A readers (Vikrant Yadav) perspective on diversification
Treatment of interest expense while preparing cash flow statements
Clarification about importance of face value of stocks in investing
Importance of macroeconomic factors and asset bubbles for investors
Q1: I am just 3 months old into the world of investing and have been learning about the investment methods
quite intently. I have read The Intelligent Investor by Benjamin Graham and I am currently reading Security
Analysis, by Dodd and Graham. These are profound books on investing. Dr. Malik comes very close to the
concept of investment as suggested by Graham and he has presented a more practical approach by way of
step-by-step approach. For a defensive investor, one should invest in index funds without trying to time the
markets. Again, an important aspect is to look for value proposition in these index funds by way of looking at
their PE ratios. If one has a long investment horizon and invests regularly by way of systematic investment
plans (SIPs), then there is no threat of losing money. A little knowledge of ups and downs of an index would
come handy in getting good return from your investments as one can take advantage of the boom and gloom
periods. This statement is better explained by Warren Buffett "Be fearful when others are greedy and be
greedy when others are fearful." I count myself to be a defensive investor at the moment until I gain enough
insight and understanding of our stock markets and identify & shortlist stocks that I would be comfortable
investing for a long period of time. Dr. Malik has given the first hand understanding of how stocks should be
chosen and invested into. I appreciate both the depth of his understanding and a simple and unnerving way of
deciding the stocks that one would like to invest in. If we gain the basic understanding, follow his guidelines in
identifying stocks and courageously back our investments and hold on to our nerves during the irrational
exuberance of highs and lows we would do reasonably well in growing our wealth. Stock markets in the short
run are voting machines and in the long run are weighing machines, which have to do an auto correction over
a long period of time. Stock markets are like mandis, where there are buyers for every seller, if there are
more buyers than sellers, individual stocks would go up and vice versa. Stock movements are random
movements which one should take advantage of as much as possible. Although these are distractions for
investors, these distractions make certain stocks very expensive and others very cheap and therefore an
important behavior of the stock market is to shuffle the funds/investments. This movement/shuffling of funds is
very well explained by Warren Buffett's statement that the stock markets is a machine for putting the money
from the impatient to the patient. For us as investors, as long as we can understand this phenomenon we
should be more appreciative of this behavior. I, being a defensive investor, have started to buy banking
exchange traded funds (ETFs), infrastructure ETFs and energy stocks, which are selling cheap by way of
valuations. These stocks do not look to be darlings of the stock markets currently but should do well in the 3-5
year horizon. However, with a better understanding learned from Dr. Malik and more learning with various
articles online, I have started to create my own portfolio as well, which I would build as a portion of my
investment. Based on my experience in the next 3-5 years, I would change the ratio of my investments from
defensive side to the enterprising investor like Dr. Malik. I would sincerely appreciate Dr. Malik's comments on
44
my strategy: Should I be continuing with this approach or should do some course correction? I would like to
learn more and would welcome suggestions for good books to read for refining my approach further.
A1: It feels good to see that you have started to build a good foundation for your investing journey, by
reading Benjamin Graham. He is indeed one of the greatest teachers of stock investing to a common
investor. I can appreciate that you have been inculcating teachings of great investors when you mention:
"Be fearful when others are greedy and be greedy when others are fearful." Stock markets in the short
run are voting machines and in the long run are weighing machines which have to do auto correction over
a long period of time. The stock markets are a machine for putting the money from the impatient to the
patient. You are right in saying that an investor should get the basic understanding of stock investing,
make a system/framework for identifying stocks, courageously back her investments and hold on to her
nerves during the irrational exuberance of highs and lows, then she would do reasonably well in growing
her wealth. And until an investor feels that she has got the requisite expertise of stock investing, she can
always choose to invest in mutual funds so that her errors of stock selection during initial phases do not
have a lot of impact on her portfolio. Later on with gaining expertise, she can shift her money from mutual
funds to her direct stock portfolio. I feel happy that you have started in the right direction. After reading
Benjamin Graham, you may read Peter Lynch.
Q2:
1) I want to understand the 'Change in inventory' (CIN) expense in the financial statements. For example,
lets take Sanghi Industries Limited: CIN is shown negative ( 24.22 cr) this quarter in expenses section
which means the expenses reduced and hence the Profit increased.
Will this negative entry be included as an expense in next quarter and which will mean a
reduction in the Profits?
Does this effect stock price?
2) Does 'Change in Inventory' in negative means that the inventory was not sold in that quarter?
3) Also what does 'release of pledge' means?
A2:
1) The raw material or goods that are purchased in a quarter may or may not be sold in the same quarter.
If they are not sold in the same quarter and are available as inventory with the company; however their
purchase cost is included in the cost of goods consumed, then the value of increase in inventory is
deducted from the expenses. Moreover, if inventory already available at start of the quarter is sold, then
the value of decrease in inventory is added to expenses.
2) You are right that negative entry under inventory expense (CIN) means that the inventory was not sold
in that quarter.
3) Release of pledge means that the shares, which were given as security to lenders for loans taken, are
now released by lenders. Most common reason for release of shares is that loan has been repaid.
Q3: Amount invested will of course determine the number of stocks. However the holding period may not be
easily adhered to. Quite a few stocks go up by 5-12% in the short time of 5-15 days and retract too similarly
and one finds it convenient to catch the see-saw movement. Dividend alone is not the criteria as one can, even
in short term trading, get much more. Of course this is for a full time observer and not one who is engaged in
some employment/business full time. Determining 'r' is not easy. A few shares give more returns if traded
comfortably in short term investment buy and sell even in small quantity than the annual dividend dished out.
A3: I followed technical analysis as a trader for 2 years before I found that fundamental analysis is more
suited to investors like me. I left short term trading after I learnt fundamental investing.
Q4: It was a pleasure reading your posts about Shilpi Cable Technologies Limited among others. You have
brought out some interesting facts, which hadnt caught my eye before. I would like to point out its cash flow
from operations on page 156 of Annual Report for FY2014. Under cash from operations it has added 52cr as
45
financial charges (inflow) and it has deducted a similar amount from cash from finance activity (outflow). Is it a
routine thing or it smells like a boomerang transaction? It has done the same previous year too.
A4: It is a routine and correct entry. The impact of this entry is to remove the effect of interest (which is
financing activity) from cash from operations and classify it under cash from financing, where it actually
belongs.
Q5: Face value of 10 or above is good or we can invest in companies with face value of 5, 2 or 1 as well.
I have noticed that all good companies like Page Industries Limited, Eicher Motors Limited or MRF Limited are
with face value of 10
A5: It does not make any difference in the stock analysis. Investor should be indifferent to the face value.
Q6: I have some general queries relating to the aesthetics of the macroeconomic environment today. The ECB
has started its own quantitative easing a few months back and the FED has almost done with that. A question
which bothers me is that with all this money floating in the markets the economic fundamentals are still at a low
indicating that this money is creating some asset bubbles. Of late we have seen that the Indian tech startup
environment has also begun receiving voluminous amounts of funding despite a weak revenue generation by
these companies (the tech startups). This brings me to my question which is the possibility of a bubble being
created in the Indian economy.
A6: The bubble might be there or might not be there. It might be there in certain asset classes and might
not be there in others. My reading of other investors as well as investing experience over last 9 years has
established a belief that the investor should select quality stocks regardless of their industries and buy
them at attractive prices. If stock prices go down due to general economic situation, then it provides
excellent buying opportunities. Therefore, I would advise that investors should not pay attention to macro-
economic factors and focus on buying good stocks at attractive prices.
Q&A: Balkrishna Industries and Jayant Agro Chemicals

Limited
The current article in this series provides responses related to queries on analysis of:
Balkrishna Industries Limited and
Jayant Agro Chemicals Limited
Balkrishna Industries Limited
Q1:
1) I was going through the management concalls of Balkrishna Industries Limited and as per them, all the
debt taken by Balkrishna Industries Limited is at 3% because it is borrowed from outside. However
interest on 3,500 Cr comes up to 105 Cr. Even I wasn't able to understand why they are reporting 25
Cr in P&L.
2) I calculated the ratios from the numbers taken from annual reports. Inventory turnover has deteriorated
from 7.15 in FY09 to 3.55 in FY14. Inventory days have doubled from 51 days to 102 days. I checked the
data on screener website and found that there is a discrepancy in the data that I have calculated and
what the data that screener website has. I used cost of goods sold (COGS)/average inventory to calculate
the inventory turnover whereas the screener website may have used sales/avg inventory. I wanted to
understand why inventory days have gone up from 51 days to 102 days. One reason could be that the
management is stocking up inventory as they anticipate raw material prices to go up. What other factors
would have caused this?
46
3) Fixed asset turnover and total asset turnover have also deteriorated. Both these ratios stand at 1.42
and 0.82 in FY14 as compared to 2.17 and 1.07 in FY09. Reasons that I could think of is that the
management has completed its expansion in Bhuj and the capex spent is shown on the balance sheet,
however sales from Bhuj plant will take time to pick up. Further clarification is needed from management
on inventory and asset turnover
4) Management has also indicated that they will retire all debt in the next 2-3 years
I feel Balkrishna Industries Limited is unlike other tyre companies because it operates in niche off the road
(OTR) segment. Players like Michelin and Continental are not interested in this segment and that is
evident from their drop in market share from 50% to 35%. I feel that this is an opportunity for Balkrishna
Industries Limited.
I have prepared notes for Balkrishna Industries Limited which cover points from annual report, investor
presentations, industry articles and concalls. I am happy to share the notes with you.
A1:
1) Management would have charged rest of the interest to fixed assets/CWIP as part of the project cost. It
would get expensed as part of depreciation in future years. To get idea about exact interest paid in a year,
an investor should look for interest outflow in CFF section of cash flow.
2) Analysis of annual report in terms of sales, inventory levels, COGS, quantity sold would give you the
answer of your query about inventory turnover.
3) Large capex done by the company seems to be one of the major reasons for declining fixed asset
turnover.
4) Your guess is as good as mine about management predictions.
It would be helpful for author and other readers, if you are willing to share your notes of annual report and
other documents. I appreciate the time & effort spent by you in going through these documents.
Q2: Can you elaborate threat from Alliance? As alliance MD is Ex Balkrishna Industries Limited MD.
Family rivalry at its best productive use. It is very much a threat for Balkrishna Industries Limited
I feel that as Alliance knows each and every thing about Balkrishna Industries Limited MOAT, within 6-7
years Alliance can create such huge empire that can compete with Balkrishna Industries Limited.
Balkrishna Industries Limited was set up by Alliance MD and his father after Balkrishna Industries Limited
promoter recognized the value of Balkrishna Industries Limited and ditch Alliance MD duo.
A2: Such changes are always subjective and the cause-effect relationship is most of the times very
obscure. However, the argument presented by you is logical and it remains to be seen whether the things
pan out as explained by you.
Jayant Agro Chemicals Limited
Q3: I liked the idea that "Shareholders money" is/should get reflected in share price of the stock. Also
another point of interest that I would like to point out is "Return on Capital Employed"
ROCE = Earnings before Interest and Tax (EBIT) / Capital Employed
where Capital Employed = (Total Assets - Current Liabilities)
I calculated this figure for Jayant Agro-Organics Limited (Standalone/Consolidated) and got the following
numbers:
2009: Standalone: 22.34%/Consolidated: 27.57%
47
6 yrs. AVG ROCE (2009-2014): Standalone 26.80%, Consolidated: 27.57%

=============
So even though Jayant Agro-Organics Limited looks like a very low profit margin business. ROCE is
pretty high consistently. I think this is one of the reason the company has been paying dividends every
year for last 21 yrs. clearly showing that they have the ability to earn profits consistently (surely would
have faced number of issues in 21 yrs. which could have impacted earning potential). So are we just too
much concentrating on Net Profit margin. Are there businesses with low net profit but high ROCE and
how do they achieve this? Because 27.57% avg ROCE over 6 yrs. is definitely attractive for a company
when Market cap is 150Cr and 3 yrs. avg PBDIT is 95Cr
=============
I would like to get your views on this High ROCE low Net Profit margin and how to evaluate this type of
business.
A3: Capital employed is effectively Equity + Non-Current liabilities including debt. ROCE suffers from the
shortcomings of ROE in the manner that by increasing the leverage, a poor profitability can be shown
better as high ROCE. Over past 10 years (2005-14), it has made total profits of 183 cr. and had to do
capex of about 250 cr. Its profits are not sufficient to meet business requirements; therefore, it had to
raise incremental 290 cr. of debt. One way of looking at the company can be that all the dividends have
come from debt. Low profitability can only be made to look good by using leverage. Derivatives are a
good example of it. Low NPM with high ROCE is a game of leverage, which I believe should be looked
very cautiously. Stock market seems to have recognized it and therefore, against 215 cr. of retained
earnings in last 11 years (2005-15), the increase in market cap is only 99 cr. The company seems to
have failed to generate wealth for shareholders.
Q4: Here's my take on High Return on Capital Employed (ROCE) on Low Profit margin business.
=================
Lets look at a hypothetical business with 2% profit margin and say your investment is 100/= and you
make 2% profit on it. Thats Sales: 100/= Net Profit 2/=
Net Profit Margin: Profit/Sales = 2/100 = 2%

Return On Capital Employed: Profit/Capital employed = 2/100 = 2%
Well now consider one small change suppose 100/= is the sales done in 1 month then.
Annual (12 months sales) = 12 x 100 = 1,200/=
Annual (12 months profit) = 12 x 2 = 24/=
Now the key is to understand how much capital is employed,
here the 100/= bucks capital is free after the first month to be used again in next 11 months so actual
capital employed is only 100/= , lets calculate Net Profit margin and Return on capital employed
Net Profit margin = Profit / Sales = 24/1200 = 2%

Return on Capital Employed = Profit/Capital employed = 24/100 = 24%
So the 2% profit margin business, since it can sell its inventory & reinvest the capital again 12 times a
year, capital employed actually gets a return of 24%
=================
So a low Profit Margin (+) high turnover of Capital = High Return on Capital Employed.
48
Jayant Agro-Organics Limited debt:
================
2012 Long term debt: 50.60 cr
2012 Short term debt: 189.94cr
=================
============
======
=====
So debt is generally short term and long term debt is just 16cr and even in 2012 Long term debt was just
50.60cr so long term debt is minor part of short term debt.
================
In 2004 revenues was 267.9cr which grew to 620cr in 2005. Annual report shows 202.49cr is
diamond trade related sales. Actual castor related sales in 2005 was 417.87cr
So from 2005 sales of 417.87cr to 2014 1,538cr its a 4 times increase in topline in 9yrs. which is pretty
fast. Company has been expanding its capacity.
2005 segment Assets castor oil: 60.97cr

2005 segment Assets castor derivatives: 42.08cr
2005 total Assets: 103.05cr
============
2014 segment Assets castor oil: 326.82cr
2014 segment Assets castor derivatives: 361.17cr
2014 total assets: 687.99cr
==========
Consolidated Gross Block 2005: 35.95cr
Consolidated Gross Block 2014: 283Cr
==========
As one can see in this 9 year period assets have increased from 103.05cr to 687.99cr thats 6x.
So in the given period 2005 to 2014 (9 yrs.) sales (castor & castor derivatives) have increased 4x.
Castor & Castor derivatives sales have increased 4x from 417.87Cr to 1,538Cr
9 yrs. Asset have increased 6x from 103.05 to 687.99Cr
9 yrs. Debt has increased 5.5x from 65cr to 357Cr
==============
In March 2014 Annual report for Jayant Agro-Organics Limited Management Discussion:
============
Your company is in the cusp. It is in between a small size and a midsize company. It is important to
recognize that companies need to reinvent themselves at the different stages of their growth in order to
have a sustainable growing future. Though these initiatives are leading to additional cost in the initial
years, we believe that the pay-off will be well worth the cost and the efforts in the future. Your company is
willing to sacrifice some profits in a short for long term benefits.
============
Conclusion: Jayant Agro-Organics Limited seems to be in growth mode in the period under discussion
where sales and assets have increased substantially along with Debt.
49
A closer look at the debt shows long-term debt is very small part of the total debt (10% of the total debt)
and decreasing.
My take is the asset creation phase is coming to an end and which has strained the balance sheet for
Jayant agro. However, in the future we could expect the next phase of growth where the capital
expenditure drops and we could see higher free cash flows. The lower working capital requirements. Yes
that still does not answer the problem of low profit margins. But we could see a drop in working capital
requirements & debt.
So I think the key is reduction in working capital requirements and debt which will directly add to the
bottom-line. Higher gross margin would be a great profit multiplier(X Factor) if the company can achieve
that with higher value adds we have a multibaggers.
What adds comfort to all this is the confidence other Specialty chemical MNC have placed in Jayant Agro-
Organics Limited.
=========
Arkema (7 billion Euro sales) forming a JV with Jayant Agro-Organics Limited taking a 24.9% stake in
Jayant agro subsidiary Ihsedu agrochem for 30Cr
http://www.bseindia.com/xml-da...
=========
Mitsui Chemicals & Itoh Oil: (JV: Jayant Agro-Organics Limited: 50%, Mitsui: 40%, ITOH OIL: 10% - Vithal
Polyol India Pvt Limited) to manufacture Green Plant based Polyol for Asian Automotive sector
==========
Tail Wind:
Govt regulations like REACH which prohibit low cost plasticizers derived from crude oil as they are
categorized as "Substances of Very High Concern" and can cause Cancer and Birth Defects. These
regulations are going to come into effect from Feb 2015 in Euro Zone
Companies based on these new regulatory requirements are adopting Castor oil& its derivatives: Ford
cars use Castor derivatives, Nike Shoes use castor derivatives, other consumer Products are replacing
crude oil derivatives by Castor derivatives
=======
Castor oil and its derivatives are well established green chemicals; castor oil derivatives are used for the
preparation of thousands of chemical intermediates to replace crude oil in the chemical industry - Indian
institute of Chemical technology - Hyderabad
------------
I would suggest investors to do a deep dive and then only start investing. My personal opinion is Jayant
Agro-Organics Limited is the worlds largest producer of castor oil and castor oil Derivatives. And @
Market Cap of around 150Cr is a steal. Considering the fact that its reported 95Cr PBDIT in past 3 yrs.
One needs to be a long term investor to really get the maximum benefit as the stock could go up 10x from
these levels as Jayant enters the next stage of growth.
Sorry for the long post I hope it is beneficial to all readers and investors.
A4: Low profitability margins and high asset turnovers are usually found in trading companies, which have
business models around high volumes and low margins. Trading companies usually do not have high
sustainable business advantages. Coming to the case of Jayant Agro-Organics Limited, its asset turnover
has been declining continuously with major capex being completed in FY2012. This is not to indicate that
the turnover might not increase in future or the management is wrong in showing optimistic picture. In
fact, I wish that things improve and all the stakeholders come out happy. However, investor needs to keep
a close watch on its operating efficiency. Having high amount of short term debt is not a desirable feature
for any company. Short term debt is usually repayable on demand and in any case payable within one
year. Therefore, most of this debt is refinanced/rolled over every year. During tough times like economic
slowdown or credit crunch, if the lenders refuse to refinance/roll over their debt, then the company is
50
bound to face a tough situation. I advise investors to prefer low or nil debt companies. However, as is true
for markets, no one knows which way the tide is going to turn. No one knows what would be the level of
any stock in future. I wish that your predictions of price rise of Jayant Agro-Organics Limited comes true
and the shareholders of Jayant Agro-Organics Limited be proved right in their decision of investing in
Jayant Agro-Organics Limited.
Q&A: Atul Auto Limited & Others

Queries on analysis of Atul Auto Limited
Views about high dividend paying companies
Views about using discounted cash flows (DCF) method of valuation
Views about margin of safety
Calculation of total debt of any company
Atul Auto Limited
Q1: I completely agree with your analysis of Atul Auto Limited and Amit Gupta who carried out a deep
dive and sound research. Atul Auto Limited is a great company. I had this company on my radar for quite
a few months. The one question which is paramount is: What is the right price for a stock or for Atul Auto
Limited? Atul Auto Limited has given a 1:1 bonus. The stock was at 800 and then the bonus brought it to
half price - which is perfectly ok. We all face this challenge: MRF Limited is a great company, Alkyl
Amines Chemicals Limited is awesome, Supreme Industries Limited is fabulous but what is the right price
to venture into a stock. Even if we keep accumulating on dips, how do we justify the price?
Like Warren Buffet says:

It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
So my question is: we are on the same page that Atul Auto Limited is a great company, excellent
management, strong fundamentals, and good return to investors but is it worth to buy the stock at this
price or wait for a correction. Since we are long-term investors, we are not looking at buy today & sell
tomorrow or same day trading.
What is your suggestion?
A1: As far as buying price of Atul Auto Limited or any other stock is concerned, every investor has a
different take on it. I would be happy to elaborate on my purchase price criterion. I believe in following the
criterion set by Benjamin Graham in his book Intelligent Investor. Graham defines margin of safety as
the difference by which the earnings yield of a stock is higher than the long term treasury rate. As the G-
sec or comparative Bank FD rates in India are currently about 9-10%, therefore the maximum P/E that I
feel comfortable buying a stock is about 10-11. The P/E criteria would keep getting a bit relaxed as the
interest rates fall. However, the lower the P/E the better. Many readers have commented that I might be
missing out on a lot of potential growth opportunities by the strict P/E criterion. Many other investors (like
Prof. Sanjay Bakshi) have recommended to pay for growth upfront in terms of higher P/E. However, as I
mentioned previously, every investor has her own criteria for deciding the purchase price. Hope it clarifies
my criteria for deciding the buying price level of Atul Auto or any other such stock. I suggest the investors
to keep waiting until she finds the fundamentally sound stock trading at attractive valuations. She should
not become impatient and buy stocks without margin of safety. It would be good if you could share your
criterion for deciding the buying price of any stock with the author and the readers of this website. It would
be helpful for everyone.
Q2: I am currently in learning phase and this is my first stock valuation. Your blog has been extremely
helpful to me. Please point out any mistake, if I make, during the process. The theory which has most
convinced me about stock valuation is that Stock price, or market cap, is a sum of present values of all
51
future cash flows and current book value. Considering Atul Auto Limited TTM EPS of 18 and assuming a
cautious EPS growth of 15% for next 10 years (in last ten years EPS CAGR@ 26% and in last 5 years @
49%), terminal growth 3% for 15 years (assumed as long term inflation) and book value of 60, the
current fair price works out to be 606.
What is your view on above valuation?
A2: I do not use the discounted cash flow model for valuation (which you have mentioned as present
value of all future cash flows). Future is always uncertain. The present value would vary by huge margin
by small changes in the assumptions. Therefore, I do not have any view on the value arrived using this
method.
Q3: Can you please tell me why a debt free stock like Atul Auto Limited has been corrected 35% in this
year?
A3: I do not know the reasons behind the stock movements in the short term. Stock prices in the long run
are expected to follow the business performance. Stock prices of companies showing good business
performance are expected to increase and those with bad performance are expected to decrease.
However, the reasons for short term stock price movements are not explainable in most of the situations.
Q4: How can we conclude that debt reduction was done by using its profits generated and not by raising
additional equity? Also how do u get receivables days and payable days?
A4: To see whether the company has raised additional capital, the investor should analyse the share
capital year on year. If there has not been any bonus share issue, then the increase in share capital is
due to fresh equity issue. Payable days: similar to receivables days but use cost of goods sold/ (average
trade payables outstanding)
Q5: I have problem with High dividend payout companies. I feel that these companies give their profits to
shareholders instead of using that money for expansions or acquisition etc. which can increase the business
growth
A5: There is no one yardstick to measure all the companies. Companies may be paying high dividend
when they feel that investing in their business might not be a good investment and its better to give/return
money to shareholders so that shareholders can decide for themselves about the best opportunities to
invest the capital/money. The problem arises when poorly performing companies & their managements do
not give dividends and destroy the value for shareholders. Therefore, it depends case to case, whether
the dividend policy of any company is sound or not.
Q6: More of a behavioral question. Every day, I try to read about the processes and books related to investing
or the blogs. But when it comes to reading the annual report or doing the fundamental analysis of any stock, I
somehow lose patience or I find it very boring or I am not able to find it exciting and skip over some sections.
Would be great if you can share if you had similar experiences and how did you overcome that. How do I
create the discipline in me? Looking forward to your response
A6: Reading annual report is not a choice but a necessity for any stock investor. An investor needs to
understand this fact. If she is not reading annual reports, then knowingly or unknowingly she is hurting her
development as an investor.
Q7: Is total debt is equal to current liabilities plus fixed liabilities?
A7: Total debt is sum of short term debt and long term debt. It is primarily the total amount a company
owes to its lenders. It does not include the entire part of current liabilities as parts like trade/account
payables are not part of total debt.
52
Q8: Do you even use the DCF method by taking a base case scenario for growth rate. After all valuation is
more about the free cash flow generated than the earnings. Additionally do you calculate the trailing PE for
PEG ratio as it will be a much precise measure for valuation?
A8: I do not use DCF for valuation. I believe that every investor has her own way of arriving at value. As
rightly mentioned by you, many investor use DCF to assign a fair value to any stock. However, I do not
assign any such value to stocks, which I plan to invest. I try to gauze whether the particular company has
the potential to grow in future and if yes, then is it currently available at a price which can give a margin of
safety. If these criteria are met and the management impresses me by way of their past actions &
behavior, then I find such company to be a good investment candidate. I do not try to put any particular
number to the potential level to any stock and rise or its fair value. I use trailing P/E for calculating PEG
ratio. PEG is one of the criteria that is used by many investors to judge the valuation level. I do not put
very high focus on it as I give absolute P/E a lot more weightage in my assessment. If PEG is <1 for a
company growing at 25% CAGR and available at trailing (TTM) P/E of 20, then I might not be interested
in investing in it as P/E of 20 is not giving me any margin of safety. I would love to invest in a company
with 25% CAGR but only if it is available at P/E of <10 which gives a margin of safety.
Q9: How do you measure the margin of safety if you do not calculate the value of the company?
A9: I use the concept of margin of safety. "The concept of MoS by Benjamin Graham is based on EY.
Graham says that the higher the difference between EY and G-Sec/Treasury Yield, the safer is the stock
investment. To illustrate, suppose the investor buys a stock of company ABC Ltd at INR 100. If EPS of
ABC Ltd is INR 10 then P/E ratio would be 10 and the EY would be 1/10 or 10%. As current G-Sec yield is
8%, ABC Ltd is a good investment. Suppose, after the investor buys ABC stock, its price falls and become
INR 50, then the P/E ratio would become 5 and the EY would become 1/5 i.e. 20%. EY of 20% would
attract more and more investors to shift money from bonds markets and use it to buy ABC stock as it
yields 20% against G-Sec yield of 8%. This new demand for ABC stock will increase its stock price and
limit the downfall. Herein, Graham says that higher the difference between EY and G-Sec/Treasury yield,
higher is the Margin of Safety."
Q10: I have learnt a lot from your blog and I have started my analysis on the stocks as you have described in
this blog. But getting a problem with the available data in the internet. Like in the Business Analysis segment
as you have mentioned to check for a parameter "Increase In Production Capacity And Sales Volume" but for
this the quantity sold (i.e. Sales Volume) and Price is not available in all the annual reports of a company even
the production capacity is also sometimes not there like other data we can have from Balance Sheet or Cash
Flow Statement. Is there any alternative source to find those data?
A10: You are right that the information of production capacity and volume is many a times not available in
the annual report. You may try to get it from either credit rating press release of the rating agency, which
would have rated the company or from any equity research report, if publicly available. Otherwise you
might need to contact the management.
Q&A: Page Industries Limited & Others

Queries on analysis of Page Industries Limited
Queries on valuation analysis of companies
Return on Equity (ROE) and other balance sheet queries
Page Industries Limited
53
Q1: I have a few more points:
1. Sustainable Growth Rate (SGR) for page is around 28 to 31% based on 10year
avg RoE or 3 year avg RoE, using SGR=RoE*(1-DPR). I am confused with your
Self-Sustainable Growth Rate (SSGR) number of 40 to 50% being more than
SGR.
2. 3 year SGR is greater than 3y avg sales growth of 30% and 3yr avg profit growth
of 30%. This implies, debt should come down. In fact debt/equity ratio has come
down from 0.93 to 0.35 in the last 5 years. However, your analysis indicates likely
rise in debt.
3. Company gets debt at 6% rate under TUFF scheme and hence it pays dividend
and at the same time uses debt to grow. Nothing wrong here.
4. Management has gradually reduced its stake to 51% by selling mainly to retail
investors, right from 450 level to 17,000 level over the last 5 years.
5. It is a licensee company.
6. Market cap is 15,280 Cr and it is reported that entire market size of innerwear
market is 1,800 Cr. I am unable to understand this as a valuation indicator.
7. Rate of return analysis: Assuming 30% CAGR in eps for next 10 years, and
assuming sustainable P/E of 30 at the end of 10 years, the likely price CAGR is
18% over next 10 years. Therefore, its high growth in earnings will be negated by
PE contraction in future and one may end up with 18% price CAGR.
I would like to have your opinion on above points especially 1, 2 & 6.
A1:
1&2) SGR (based on ROE and DPR) and SSGR though seemingly similar, are not exactly the
same. The same has been discussed in the comments to the SSGR article as response to queries
of other readers. I suggest you to read these queries and my responses on the SSGR article. I am
sure that your queries 1 & 2 would be resolved post reading those comments.
6) I would like to point out that the estimate of market size might or might not be correct.
However, assuming that market size if indeed only 1,800 cr., there is no limitation that market
cap of any company or industry cannot exceed market size. Assume there is only one company
(say Page Industries) in entire industry and it meets the entire demand of 1,800cr. With 13%
PAT margin, this company would earn 234cr. in profits (1800*0.13). Now even if the market
size stays constant at 1,800 cr., the annual stream of profits of 234 cr. would be valued at least
at 2,340 cr. Assuming 10% rate of return (or interest rates/FD rates) i.e. 234/0.10. (This uses
present value of an annuity). Moreover, if market size increases even by minuscule amount every
year, say 2% every year, then the value of annuity would be more at about 2,925 cr. (234/
(0.10-0.02)). Therefore, I would like to point out that there is no upper cap on market cap limited
by industry size. Stressing again, I do not think that entire market size if 1,800 cr. otherwise it
would mean that current sale of Page of 1,500 cr. has already captured, whatever was there to
be captured. There are many other competitors having their niches, huge unorganized segment.
Therefore, I believe that market size is more than 1,800 cr.
54
Q1.1: It was a typo. Market size is 17,000 to 18,000 Cr not 1,800 Cr. In the original write-
up I had mentioned it as 17,000 cr.
A1.1: In any way, the conceptual analysis stays the same as discussed in the earlier response.
Q2: The difficulty is we will not get quality businesses at cheap valuations in a normal market. Here
are some thoughts:
1. Absolute value of PE does not reveal much and hence keeping a limit for PE like 10 may not be
appropriate. For ex: HDFC Bank always commands PE of 20 to 30 since it has always grown at 30%. Its
NPA level, management quality, risk control measures, NIM, RoA etc. ensure that it gets higher PE in the
market. It is impossible to get such quality businesses at PE below 10.
2. PEG theory is a very simplified approach though it correlates to growth in earnings and is better than
PE alone. However, PEG=1 for fair valuation is also difficult to apply since high quality companies always
get premium valuation and quote at PEG of 1.5, 2 or 3. For ex: Great businesses like HUL, Nestle, and
Asian Paints etc. always command high PEG.
3. Earnings yield considering future growth is a better approach. Earnings yield presently may be below
8% but if it achieves it in next 2 to 3 years, then the valuation can be considered attractive. However, if a
company requires 5 years or more to achieve an earnings yield of 8%, we can say that stock is
overvalued.
4. Intrinsic value suggested by Warren Buffett, John Burr Williams is good but applies only to secular
growth companies where future earnings can be predicted for 10 years or so. However, here the difficulty
is in assuming second phase growth rate (normally taken as 5%).
These are my views. I would like to know your views also on above thoughts.
A2: I would be happy to provide my views on your comments, as requested by you, however, I would like
to delineate a belief that I hold about investing:
"There is no one path to success in stock market investing. Investors have made money in markets by
following high P/E growth investing, low P/E value investing, and mix of both, arbitrage, technical
investing, large cap investing, mid/small cap investing and many other such approaches. Therefore, I
believe that there is no single standard path to succeed/make money in markets. The path an investor
should follow is the one she is convinced with and feel comfortable with."
Now let me provide my views on your comments:
1. You are right that good business may not be available at a P/E<10. An investor is free to invest in
businesses with high P/E if she is comfortable. However, I believe in investing fundamentally sound
companies which are yet to be recognized by the markets, which I believe are present in the segment
targeted in the above article. I agree that such opportunities are not a plenty, however, I believe that an
investor does not need to find dozens of good companies. My experience in markets says that finding one
company in a year is enough. Stock investing to me is a treasure hunt and I love treating it that way.
Finding fundamentally sound companies at mouthwatering valuations is like finding needle in a haystack
and it requires equivalent effort. I have experienced that such companies if found at low P/E and invested
early in their life cycle, then they have the potential of creating significant wealth for investor.
Nevertheless, there is no one path to success in markets and therefore, if an investor believes in investing
high P/E companies, which are valued fairly, then she should invest in such companies without any
second thoughts. Investing methods are personal choice.
2. Part of the response to this comment is already included in the response above. I believe that if an
investor follows my checklist of sales growth >15% and P/E <10 religiously for screening stocks, then
PEG ratio becomes irrelevant as all the selected stocks would have PEG <1.
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3&4: I do not rely on future projections. I believe in associating myself with a sound management running
a fundamentally good company and riding the investing journey with them. I try not to project earnings 5-
10 year down the road. Therefore, I do not use any parameter for analysis based on future values.
However, again like I said above, it is personal choice of investors to use any parameter she is
comfortable.
Therefore, if an investor believes that she can predict with reasonable certainty, the future, then she can
always use future values for analysis. After all, its her own money and she is free to invest it as per her
choice. As is said, many roads lead to Rome.
As requested, these are my views. In case, any further clarity is needed, then I would be happy to provide
further elaboration.
Q3: Looking at DHPs annual report of 2013-2014, I found that it has 1.78 crore invested in equity and debt
mutual funds. I find many other good, profitable companies like Control print, Narmada gelatins, etc. - also
have investments in mutual funds and shares. Why do these companies make such investments- just to keep
their cash somewhere and gain returns? My understanding is that the company should give out surplus
amount as dividend or reinvest in its own business. Is it advisable to invest in companies which make
investments in mutual fund and share markets?
A3: I appreciate the important observation made by you for these companies. I agree that the ideally, a
company should either reinvest or distribute its profits. However, many a times, a company might not
have the reinvesting opportunity immediately when the profits are generated and they might have
investment plans some time down the line. Therefore, to temporary deploy the cash; they invest in
alternate avenues like mutual funds. It is important to understand, how long this idle cash has been with
the company. If it is many year, then I would question it. However, you should remember that one such
company which kept on investing is cash into such other assets (like stocks etc.) is Berkshire Hathaway
managed by Warren Buffett. Berkshire was a textile company, however, the return from its investment
exceeded textile business returns and it became one the best investment opportunities in the life time of
mankind.
Q4: I am new to this forum and not an expert on finance but I have been investing since year 2000. I feel that
in this article you are trying to relate RoE with valuation which is not correct. RoE represents efficiency of a
company in using its resources. It has nothing to do with CMP. RoE should never be used as valuation tool.
We have to focus on other tools such as sales growth, NPM, debt/equity etc. In fact RoCE takes care of debt
part and hence RoE and RoCE can be used together. For valuation we can use P/E or its inverse earnings
yield, PEG, Rate of return
A4: You are right that by definition, ROE measures business performance. However, the article aims to
highlight that focusing on ROE alone without factoring in the price that an investor pays to buy that ROE,
should not be the preferred approach. The article uses the concept of Price to Book value (P/B ratio) to
substantiate the concept of Effective Profitability Ratio.
Q&A: Control Print Limited, use of Credit Rating Reports &

others
Queries on analysis of Control Print Limited
Use of credit rating reports in stocks analysis
Readers (Naveen Kumar) inputs on detecting accounting frauds
Other queries on balance sheet and stock selection
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Q1: I am posting the following doubts 5 months after the post; I hope they will still be useful for newbies like
me. While researching control print, I found that the promoters have issued themselves 3.75 lakh convertible
warrants in 2013. The company does not have any debt. Why does management issues preferential warrants
to itself:
As part of compensation or for funding the company?
Is it better than taking debt?
I see that over the last few years, that the total number of shares in issue has increased and the
percentage of promoter has also increased. Is it in shareholder's interest when the number of shares
increases without any bonus shares or splits?
A1: As different individuals have different risk appetite, similarly it is with the companies. Some seem to
prefer debt when short of funds, others prefer equity. Issuing warrants to raise funds (equity) would
depend upon the risk appetite of company. At end of the day, equity owners won't ask their money back in
tough times. An existing investor in a company should be concerned about the exercise price of the
warrants. If it allows the promoters to convert it into share at attractive terms, then it becomes a tool for
promoters to benefit at the cost of public shareholders. Warrants are a form of stock option. If exercise
price is sufficiently higher than current price considering the time after which warrants become
convertible, then no concern for other shareholders. Equity dilution (increasing number of shares without
split or bonus) is generally not perceived to be good by investors. However, I believe that it is a
company's decision which also behaves like individuals do when it comes to raising debt or not.
Therefore, an investor should decide from case to case basis depending upon the terms of
warrants/convertible securities and the purpose of equity dilution.
Q2: I was researching about the company Control Print Limited. I found that its credit rating by CRISIL
was A3+ but it was suspended on November 2013. According to CRISIL FAQs, rating is suspended when
disclosure level by the company is low. Is this a bad thing if a company does not have a credit rating? Also,
when I look for credit rating in screener.in, many good, debt-free companies like Symphony
Limited and DHP India Limited are not rated by any credit rating agency. Are such companies not looking
for a credit rating because they do not need to raise debt any time soon in future?
A2: A company might stop getting rated by credit rating agencies when it has repaid all its debt, as annual
rating has costs attached to it. Rating might be suspended by one agency when the borrower decides to
shift to another agency, and then there might not be any problem with disclosure levels of the company.
Otherwise, there can be a real issue and a borrower going through a bad patch may stop rating fearing
downgrades. All these are situations, which an investor has to judge.
Q3: Something which is rarely covered or discussed. Value investors generally give less weightage to credit
agency reports and analysis, focusing more on annual reports and financial statements. However, this article
clearly shows why credit rating reports cannot be ignored rather can be used to ones advantage. I have couple
of quick questions:
1. Do you think companies paying to get them evaluated by credit agency, will generally get
its positives highlighted more than its negatives due to incentives bias (Whose bread I
eat, His song I sing)? How do we put that in perspective? Similar thing happened in
2008-09 crises in US and since then credit agencies have lost bit of their trust in fair
analysis.
2. Do you think, this information is in market (public) hence will immediately get reflected in
price?
A3:
1) I do not know whether there has been any case where any company would have managed to get a
favorable rating; however, I do not think that rating industry survives on earning money by giving positive
ratings to borrowers. Credibility of rating agencies depends on their independence and more or less their
outputs reflect it. However, this is not to vouch that every rating is right. An investor would have to take
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her call in this matter. Anyway, I prefer to focus on the trend of rating movement rather than any particular
rating.
2) I am not sure about what all factors the market price at any point of time, reflects. Market price
movements defy all logic and I try not to have any opinion in this regard.
Q4: I have a similar but simpler rule of thumb: Over a period of years, a company should be able to increase
book value at the same time reducing debt and if debt is already zero then dividends should be increasing.
This is probably not as deep as your formula but as a rule of thumb it removes a large number of companies,
which would also be removed using your formula. In either case, the idea is the same - we want to find
companies, which are generating enough cash that further capex is being internally funded and enough free
cash flow (FCF) that shareholders are getting benefited.
A4: You are right that the rule of thumb described by you, does has the potential of segregating "good"
companies from a number of "not so good" companies.
Q5: I have a question regarding this blog, although I might find its solution later in your strategies mentioned
but I thought its better to ask as I go along. You mentioned in the article: Book Review - The Intelligent
Investor by Benjamin Graham. Graham advises the defensive investor against buying growth stocks as they
are usually overpriced and carry high risk. Risk in growth stocks arises not from the fear that such companies
would de-grow in future, but from the risk that they might not grow as expected by markets. The book gives
example of companies where profits grew 5% but the share price declined >20% because market had
expected 10% growth. Please mention if in case we find a good company according to the selection criteria
and have a good profit, how will we know what the market have expected for the share and how can we be
cautious of such measures when we already have found a very good company by fundamental analysis.
A5: Regarding your query: I do not know of any way to know for sure, what the market's expected growth
rate from a company is. Most of the times, it is believed that market expects high P/E stocks to grow at
fast pace. Or should be inverse this logic and say, the stocks which market expects to grow at fast pace, it
assigns high P/E to them. Therefore, the logic can be extended that market expects low P/E stocks to
grow at a very slow pace, however, if any investor can find a company among the low P/E stocks, which
is fundamentally good and is able to grow at a fast pace, then she can earn good returns when market
recognizes its potential and assigns it high P/E. Therefore, I would say that to allay the concerns
highlighted by you, an investor should invest in fundamentally strong low P/E stocks.
Q6: I have a query with regards to this chapter. All the analysis that you have shown compare a company after
10-15 years of growth but by this time Mr. Market might have already assigned it its correct valuation. These
companies might look really good at hindsight but the trick is finding good companies in early stages and
believing that these companies are capable of such high valuations at later stage. How do we do this in
industry/business analysis as there are no forecasts provided in the above analysis?
A6: It is not always true that Mr. Market assigns true valuation after 10 years of good performance.
Undervalued opportunities are always there in markets. An investor should keep looking. I, as an investor,
get comfort only when a company has been around for long (say 10 years) and has proved that it can
generate profits. I advise the same to other investors including reader of www.drvijaymalik.com. I believe
that this approach would work for individual investors who work with limited capital, have limited risk
appetite and can spend limited time for stock analysis. I say this because while investing in early
phase/start companies, which venture capital or private equity funds do, the investors invest in a large
number of companies expecting that a few of the bets would go right and cover the losses on those that
did not go right. No one knows the future with certainty and institutional investors mitigate it by having a
large portfolio with many investee companies. If an investor believes that she has the skill to analyse
businesses in early phase and has the requisite risk appetite, then she should invest in companies with
short history.
Q7: Few more additional things which can be added to the checklist could be:
1. Auditor disclosures/comments about non-recognizable income
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2. Increase in other income to inflate profits (Capitalizing arbitration income whose
outcomes are uncertain),
3. Promoter background, & frequent changes in key management persons (CFO, board of
directors etc.),
4. Consistency in Tax rate (very difficult to analyze, request you to write about it sometime
about various tax outgo),
5. Increase in Loans and Advances, corporate guarantee and contingent liabilities are few
signs which should raise alarm about the authenticity of their result.
A7: I thank you on behalf of all the readers of www.drvijaymalik.com for your valuable inputs! I might write
an article about corporate tax, however, it might take some time.
Q8: I want your view on 1 situation: If a company is expanding its business & growing at decent growth rate
(>30%) and if the expansion depends on a combination of equity and debt instruments that include issue of
fresh equity shares, non-convertible debentures (NCDs) and fixed deposits. Should we invest in such company
where we know that equity dilution is going to happen?
A8: There is no one road to success. It depends on the risk appetite of the investor, which companies she
should invest in. If an investor finds the business good enough and feels comfortable in investing the
company with features described by you, then she can take the decision she feels convinced about. It
cannot be said with certainty that the company described by you will not see rise in its stock price.
Q9: Is there a way to get receivable days in trailing twelve months (TTM) basis? Where can I get it?
A9: You can calculate it twice a year. Once at year end and another time after Sept quarter results, when
trade receivables are disclosed in the summary balance sheet as part of results. You would have to do it
manually for Sept data.
Q&A: How to decide Buying Price / Timing the Market &

Others
Queries about deciding the buying price of any stock and timing the market purchases
Readers inputs on analysis of Amtek India Limited (Castex Technologies Limited) and Ambika
Cotton Mills Limited
Queries about other balance sheet items including calculation of capital expenditure (capex)
Q1: Firstly, I want to thank you for the wonderful work you have done on your website, it the best website that I
have come across till date on stock market for common investor. I have few queries:
1. Please could you define in simple term/formula/tip by which we can determine right price
(entry/valuation price) of a stock? I am very keen on buying Mayur Uniquoters Limited &
Vinati Organics Limited.
2. In layman terms would prices close to 52week low, serve as an entry price for a new
investor?
I had bought Indag Rubber Limited on Aug 24, 2015 when it fell x% and plan to buy it on dips going
ahead. I plan to invest as a long term investor 5-8 years in line with my personal goals. I like your portfolio
and doing my own analysis before making a decision.
A1:
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1. You may find the steps to do valuation analysis of the stock in the following article: How to do
Valuation Analysis of a Company
2. 52 week or 52 week high price levels are irrelevant. I suggest that investors should have opinion about
valuation levels based on current price irrespective of it being near 52 week high or low. There might be
stocks which are attractively priced despite being at 52 week high and there may be stocks which are still
costly despite being at 52 week low. Reading the above article on valuation analysis would help you
decide about the current valuation levels (overvalued, undervalued or fair valued) of a stock.
Q2: Please could you tell us how to spot and load up on quality stocks in this fall?
A2: The approach to select stocks does not change with temporary changes in the market sentiment. An
investor may follow the framework approach described in the article series: "Selecting Top Stocks to Buy"
to find fundamentally sound companies for investment:
Q3: I'm a beginner and want to understand more about how to identify right time to enter a stock? Lets say I
find Ambika Cotton Mills Limited an attractive option to invest for its strong fundamentals & YOY growth but if I
entered 1 month before my holding will be almost -35% now. To get back to my invested money now Ambika
cotton mills have to grow approx. 53% from CMP. So I understood finding out bottom value for stock is very
important and would like to know more from you on this. Also like to know your views whether an investor need
to average their stock in every dip? Even to do so finding out how much the stock can possibly break to lowest
is an important thing again.
A3: The right to invest in a stock is: whenever the investor has surplus money to invest and the stock is at
attractive valuations. No one can tell the bottom a stock price will touch before it bounces back.
Therefore, if an investor believes that a stock is a good buy below P/E ratio of 10, then she should invest
when the stock fall below P/E of 10 and she has money to invest. No one can predict market price
movements and it can happen in all probability that post her purchase, the price can fall further 50-60-
80%. However, in such a scenario, if the investor has done hard work before selecting the stock, then she
would have the confidence to remain invested through such bear phase. If her confidence is shaken by
stock price decline and she starts to question her analysis and stock selection, then it would mean that
she needs to develop her stock selection and emotional stability further to be a successful stock market
investor. I would suggest that such investor, who panics by stock price declines, should stay away from
stock markets.
Q4: In regard to mischievous adventures / misjudgments of credit agencies comes with the fresh example and
a case to study. You have already analyzed Amtek Auto Limited very well and gave your opinion on high debt
which can bring company some trouble in future. The inevitable happened sooner than later and Amtek is
running for cover and so kudos to your analysis and judgment. However, I want to bring to your notice, how
credit agencies ignored such a prominent fact and both CRISIL and CARE gave AA rating and then CARE
downgraded them directly from AA to "no rating" once this issue heated up. These are exactly the cases I am
worried about, if one goes by credit ratings and their wisdom to analyse business health. Please do provide
your views on it.
A4: All the companies of Amtek group have high debt and the problems were visible when I analyzed
Amtek India Limited and Ahmednagar Forgings Limited. I believe that they can be representative cases
where investors can learn about the impact high debt can have on any company. Regarding your concern
that an investor may get hurt "if one goes by credit ratings and their wisdom to analyse business health", I
would say that if an investor uses credit ratings as a replacement for her own hard work then there is a
very high probability that she would encounter surprises like Amtek. However, this is true for any case
when the investor makes investment decisions based on other's recommendations and not by her own
research. This is equally applicable in case of equity research reports, following high net worth investors;
media market specialists or any other source of stock recommendations. Thus, every investor should
understand that there is no alternative to own research. www.drvijaymalik.com is one such attempt to help
common investors do their own research. Having said that, does it mean that investors should stop
60
reading credit rating reports? The answer is no. Credit rating reports have a lot of relevant information for
investors, which has been described in the article. The article states that:
"G) Rather than a Rating, it's the Movement of Credit Rating, which is More Important"
Ignoring the vital information contained in the credit rating reports and focus only on the absolute rating is
not desired. Therefore, I believe that an investor should not discredit the entire credit rating document
because of cases like Amtek. Credit rating reports provide vital information which is helpful in stock
analysis and an investor should not ignore it.
Q5: You were spot on about Amtek India Limited. Now the stock is coming down almost daily due to the huge
debt on their books.
A5: The issues in the business model of Amtek along with the problems of debt servicing were apparent
during the financial analysis. However, the exact trigger point for share price decline cannot be predicted.
Neither it can be said with certainty that share price will not rise/stay sideways in future. However, over
long periods of time, share prices of companies with strong business model, lots of free cash generation
tends to go up and generate wealth for shareholders.
Q6: You found loop holes in Amtek India Limited very early and now market is realizing this now.
A6: I merely provided my interpretation of the financial numbers of Amtek India.
I believe that if a framework approach is followed as described in the article series: "Selecting Top Stocks
to Buy", then any investor can differentiate between fundamentally sound companies from weaker ones.
Q7: I can clearly see that past scenario of the company has been really good and we should definitely give
credits to the management. But my only contention is to what extent!! In my own personal experience, only 3-4
of my colleagues out of the top 20 rankers have consistently performed well throughout even after schooling
(change in business dynamics/competition etc.) Well others might have reverted to the mean. When we take a
sizeable positions in our pf (like I see you own only 5 stocks in pf i.e. high concentration) while independent
past data due diligence is extremely important, it would be great if we can understand what dynamics can a
particular business face and how well is the management positioned to face those dynamics and keep
competition still at the shore. I agree, its not very easy to understand a particular niche industry very much in
depth without domain expertise but as active group of investors we should try to understand why the past
figures are so consistent with consistently high IRR's. May be we can find the answers to our question which
will help us understand business much better and we can hold with higher level of conviction. I will try from my
side if I can get something additional on this. You have created a fabulous website and doing an amazing job
to educate all of us.
A7: I agree that an investor must have the conviction to hold the stock through thick and thins of business
cycles and also that the sources of conviction are different for each investor. At the end, it all boils down to
putting time and effort towards gaining knowledge of what an investor feels the most important factors.
Q8: Just to clarify some of the annual reports do not contain information of tangible assets but rather have
information as property plant and equipment which seems similar. Please let me know is net fixed assets =
property plant and equipment (adjusted for accumulated depreciation)?
A8: Every company would describe its accounting policies in a separate section. An investor should read
this section to get clarity about the items included in PPE (property, plant and equipment) section. Most of
the time it is similar to fixed assets. However, there might be certain differences which the company would
have detailed in its accounting policies section.
Q9: Is capes equal to Cash from investing activity??
Q10: Please elaborate Capex outflow. What is the formula of this? And where will I find cash paid for
acquisitions from financial statements?
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A: Capex is only part of Cash from Investing (CFI) activity. There are other items over and above capex
like purchase/sale of investments, dividend income etc. which are also part of CFI. You may calculate
capex by following formula.
NFA = Net fixed assets
CWIP= Capital work in progress
Dep= Depreciation
Capex = capital expenditure
(NFA+CWIP) at Year end = (NFA+CWIP) at start of year - Dep+Capex
Therefore,
Capex = (NFA+CWIP) at year end - (NFA+CWIP) at start of year + Dep
Q&A: Investment Checklist, Macroeconomic Factors &

Others
Queries on investment checklist
Impact of macroeconomic factors on stock selection
Clarification about assessing accuracy of reported earnings
Queries on margin of safety
Books for learning fundamental investing
Q1: I saw your yesterday's tweet where you had mentioned about promising stocks in 150/150 segment. I
refer to the checklist you had posted, which had the list of criteria's one should look for when choosing a stock,
esp. for long term investing (e.g.: PE ratio of < 10, Avg 5 yrs. Sales CAGR of > 20%, PAT margin > 10% etc.,). I
wanted to understand your thought process when you hunt for small and emerging companies (in 150/150
segments):
1. which of the checklist criteria would you give more weightage than others while looking at
such micro-caps
2. which one's you may ignore (as I'm not sure if there'll be micro-cap companies which
would satisfy all the criteria mentioned in the checklist)
Note: BTW, I use screener.in to search for companies for further study (reading ARs, company
presentations etc.,) based on the checklist you had blogged beginning of the year
A1: I have mentioned that 150/150 segment (150 cr. market cap / 150 cr. sales) has surprised me with
promising stock picks. This is because whenever I have search for stocks, I noticed that most of the
stocks meeting my criteria have been from this segment and have given good returns to me. Another
point to be stressed here is that I do not specifically put filters of sales= 150 cr. or market cap = 150 cr.
while searching for companies. Its just that most of the stocks that pass the filters are incidentally from
150/150 segment. Coming to your specific queries:
1. All the criteria are equally important. No parameter is more or less important than other.
An investor should analyse the stocks and satisfy herself on all the parameters.
2. An investor should not ignore any parameter. It might be difficult/time consuming to find
stocks meeting all the parameters. However, an investor does not need to find hundreds
of stocks meeting all the parameters. Finding one or two stocks in a year, is good
enough.
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However, once an investor has spent enough time in the market and has analyzed many companies, then
she would have formed her own approach to stock investing. She would have created her own set of
criteria to select stocks which would suit her investing style and temperament. Then she would realize
that her criteria might or might not be same as the checklist shared by me on this website.
Q2: I have been made to understand that a good barometer for analyzing the value of a stock is to plot its
historical price trend against its earnings. I tried to navigate some sites where this could be done however, was
unsuccessful. Question, do you know of any websites that can plot this for Indian stocks? Peter Lynch used
this tool for selecting his 10 baggers. He used a multiple of 15 to do this. Is it good in the context of India or
should be take a higher multiple? I am associating your comments that the P/E multiple is more a function of
interest rates than an individual stock. Please comment on this. It would be nice if you can write an article to
highlight this investing idea.
A2: Once an investor becomes habitual of conducting her own stock research, then she starts using her
own criteria for stock analysis. This is common place as analysing more & more stocks gives her insights
about companies' behavior. She is able to feel the characteristics of good companies and define new
parameters of "Value". The method you mentioned has been used apparently by Peter Lynch. I do not
use it. Do I have anything against using this parameter? No. However, once you do stock analysis, you
start to realize that there are many parameters to judge value, which can be used to analyse value. An
investor may use any one or more of them. Its good that you are trying out different methods to judge
value. I do not know of any website, which can plot price trends against earnings. You may create this
chart yourself by getting data from various public sources. Thanks for the idea of an article on this topic. I
have not yet thought about it. I might touch this topic in future. However, that might take some time.
Q3: Query on Vinati Organics Limited: with crude oil being sustained below $60 for more than one year, EOR
(enhanced oil recovery) due to high cost could slow down. Vinati Organics Limited has more than 40% sales
coming from ATBS which has EOR has one of key customer segment. Do you think it can slow down sales
growth in ATBS and thus the company?
A3: I do not have any views on such changing business environments. Such changes will keep on
coming in future as well. It is the job of management to deal with such scenarios. An investor should first
decide whether the management is competent enough to deal with changing scenarios. Analysis of past
performance over a decade or so will help the investor assess the management better. If the investor
finds that the management is competent and have steered the company well in the past, then the investor
should relax and let the management deal with these challenges. However, if the investor finds that the
management has not shown enough competence in the past, then she should exit the company
immediately.
Q4: A few more questions:

1. how will you keep in check if the earnings are manipulated or not as if you are investing
on the basis of PE, earnings has to be precise?
2. Also what is your opinion on stocks which are low in PE and have a good business
record like J&K Bank
A4: It is the role of the investor to assess whether the financials are genuine or manipulated. Usually a
comparative analysis of financial statements (B/S & P&L and CF) would give signs. E.g. if sales are
increasing but cash not getting collected and resulting in increasing receivables days. Cumulative CFO
over the years being much less than cumulative PAT over the years. Cumulative Tax shown in P&L being
much higher than actual cumulative tax paid as per CF. There are many signs, which if an investor keeps
an eye on, then she can get an idea about the genuineness of financials. I do not analyse banking stock
as the information shown in annual reports is not sufficient to get an idea about the actual situation.
Q5: I understood the way you calculate the margin of safety. I mean that if you do not measure the safety
margin, for example, a publicly company traded at 80 and is worth 100, therefore, it has a safety margin of
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20%. You measure the difference between the dividend yield and the G-SEC yield and then say that it has
"more or less" margin of safety, but not 20%, 30%, 40% etc. safety margin, a specific number.
A5: You got it right that I do not assign any value (say fair value) to the stock and therefore, do not find
margin of safety by comparing how current market price stands vis-a-vis the fair value. As rightly
mentioned by you, I look at how attractive the earnings yield is in relation to the fixed income returns.
Having said that I do not mean that every stock with high earnings yield (i.e. low P/E) is a good stock to
invest. An investor needs to analyse low P/E stocks carefully, to avoid investing poorly performing
companies, which deserve low P/E ratios.
Q6: I wanted to know the cases in which CFO>PAT could be considered as healthy sign? Whether we need to
have current ratio for last ten year or preceding year and quarter is enough?
A6: Looking at current ratio and CFO>PAT, both is important. They are not replacement for each other.
High current ratio and CFO>PAT, both are healthy signs of good companies. For any parameter, I prefer
using historical trend to assess the performance of any company rather than recent performance like last
quarter or year.
Q7:
1. Please let me know how you obtain the total retained profit in case of Vinati Organics
Limited and Tata Steel Limited.
2. Are Reserves the same as the amount retained by company? Or it should be Reserves -
Dividend?
3. Also how to obtain total increase in market capitalization?
A7: Retained profit for one year: Net Profit after tax - Dividend Paid. I calculate increase in total market
capitalization by deducting 2005 market cap from current market cap. All the required data for calculating
these is present in publically available information including annual reports.
Q8: I started reading articles on stock market investing and I came across with this fantastic blog. I am
completely newbie in this field and I do not have any background in economics or money management. I am
software engineer. I think that is the reason I could not able to understand Intelligent Investor book (have read
only first 50 pages). I want to know the basics that we have to know to start learning fundamental analysis. Are
there any books which give complete basic idea about fundamental analysis, so that I can understand when I
start reading Intelligent Investor again?
A8: Its great that you have started reading and learning about investing on your own. I believe that a
person does not need to have a background in finance for becoming a successful stock market investor
provided he/she is willing to put in the required time and effort for learning about stock analysis. Intelligent
investor is a great book. However, many readers find it bit technical for its use of accounting terms.
Nevertheless, it provides one of the most elaborate and detailed description of accounting from the
perspective of an amateur stock investor. It is highly recommended that an investor should complete this
book. If you want a book, which is easier to read than Intelligent Investor, then you should read One Up
on the Wall Street by Peter Lynch. Both the books, One up on the Wall Street and Intelligent Investor,
are recommended reading for stock investors. Therefore you may read One up on the Wall Street first.
You would already be using google to find out more about the accounting terms being discussed in the
Intelligent Investor. You should keep doing it.
Q&A: DHFL, KRBL, HMVL, Shilpi Cables & Others

Readers (Krishnakumar) inputs about Dewan Housing Finance Limited
Clarifications on analysis of: Shilpi Cables Technologies Limited, KRBL Limited, Hindustan Media
Ventures Limited
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Queries on assessment of management quality of companies
Clarifications about analysis of Cash Flows & Profitability of any company
Lump sum or staggered investments
Q1: I could not find your analysis on any NBFC/Bank in you blog. Can you please give your views on Dewan
Housing Finance Limited?
Market Cap = 6,418 Crore
Pros:
10 year sales growth = 43%
10 year profit growth = 36%
Zero annual drops in sales/profit in last 10 years, i.e., the company results are not cyclical even
though it is lending for a business which is cyclical (real estate).
P/E ratio = 9.5
P/B Ratio = 1.29
P/E * P/B = 12.255 < 22.5, providing a good margin of safety
Credit rating has been increased last year to AAA.
Current ratio = 4.85
Has paid dividend on every year since 2000.
Total salary of all Directors including Managing Director (FY-2015) = 2.32 crore out of net profit
of 621 crore
Cons:
Frequent equity dilution - Equity capital increased from 67.79 March 2006 to 145.68 in March
2015; All Housing finance companies seem to be doing this.
Promoter holding < 35%
FII Holding > 25%
Return on capital employed has decreased from 22% in 2010 to 15% in 2010 according to
valueresearchonline data.
Gross NPA = 0.95%, Net NPA = 0.68% has been increasing for past 3 years.
Dividend payout ratio has been decreasing.
Interest coverage ratio has always been just around 1.2-1.3.
Tax rate for past 5 years has been increasing from 24% to 34% in past 5 years.
Regarding NPA, I find that other housing finance companies like Gruh Finance, HDFC and Can Finance
have much lower numbers. However DHFL's NPA is lesser than that of banks. I feel that NPA is less
relevant in case of housing finance since they can get most of the money owed by selling off the property,
unlike banks which may be lending to corporates. Please correct me if I am wrong. I find that cash flow
statement for Financial institutions are very different from other companies and that their CFO is negative,
hence PAT and CFO are not matching.
Same is the case with Debt to equity which is at 10.54.
I could not understand how tax rate for company in FY2015 is 34% while corporate tax rate is 30%. Why
would the company pay extra tax? From FY15 Annual report, I found that the company has issued Zero
coupon debentures worth 191 crore which is increase from 49 crore in FY14. How is the interest cost
calculated for such debentures every year? Will there be a huge expense on premium when the
debentures are redeemed?
A1: I do not analyse Bank/FI stocks on the blog. I have already communicated about it on the page above
as P.S.
"4) Currently, I do not provide analysis of companies of following sectors, therefore, I request readers not
to ask queries for companies in these sectors: IT/ITeS: I do not understand this sector, Banking/FI/NBFC:
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the data needed for their analysis like asset-liability mismatch, funding profile, CAR & its breakup, NPA
movement, borrower-wise concentration etc. are not available on open sources like moneycontrol,
screener etc.). "
I would not be able to provide my inputs on Dewan Housing Finance Limited currently.
However, I appreciate the effort that you have put and would keep note of your analysis on Dewan
Housing Finance Limited. If any time, I start analysing Bank/FIs for putting their analysis on the blog, then
I would analyse Dewan Housing Finance Limited and respond to your this query again. Currently, I would
suggest that you go ahead with your analysis.
Q2: As you said about the company paying dividends with borrowed money, is extremely correct. I too have
the same view. The company should ideally stop paying dividends and instead pay off the debt over the years.
This would have increased the profits and hence shareholder value. Running only behind growth can be
disastrous. It is a double edged sword. Cash is always THE king. Let me know your views.
A2: I have provided my views regarding companies (Ahmednagar Forgings Limited and Amtek India
Limited) where growth is associated with increasing debt.
Q3: I was going through the annual reports of Shilpi Cables Technologies Limited but I could not understand
one thing that since the company exports finished products outside India still foreign currency outflows are 3
times higher than inflows for past few years (330 crores of foreign exchange outflows vs 110crore inflow last
year). Can someone explain this to me?
A3: Forex outflows would involve sum total of all the payment sent outside India including those for raw
material purchases, principal & interest payment if the company has taken a loan in foreign currency,
travel & consultation expenses, sales commissions etc. You should read the annual report of the said
company again to find out whether it has any other liability to be paid in foreign currency other than raw
material purchases.
Q4: Thanks Sir for detailed analysis of Hindustan Media Ventures Limited. How do you judge the management
team as they have been low on dividend payment terms and holding cash for long time?
A4: An investor needs to take this decision on her whether she would want to partner with any
management. Some of the aspects have been highlighted in the above article.
Q5: This raises a follow-up question. What risk management process do you have in place? It is possible that
the stock you have invested in can crash after your purchase due to various reasons. Usually the bad news
comes in after the stock has completed a huge decline and the investor suffers huge losses. You may be
following a process to get out of the stock in the event of a huge decline and minimize your loss.
A5: I understand from your comment that you believe that fall in stock price is bad for an investor. I
believe that it is not so. It gives the investor to accumulate the stock at lower levels. It is possible that the
stock an investor has invested in can crash after her purchase due to various reasons. However, if the
investor becomes worried about every decline in market price, then she should learn about the required
qualities from a stock market investor. One may read the below article for my view on required attributes
from a stock market investor, in which patience and emotional stability in times of price declines/market
corrections is paramount: I do follow a framework to sell stocks. However, none of my selling criteria is
dependent upon the current market price of stock.
Q6: I have read your detailed analysis on Fine Yarn maker Ambika Cotton Limited, on the same lines I found
another company names Century Enka Limited (A BK Birla Group Company). It manufactures Nylon Yarn and
has very good margin too. Based on your inputs on how to financially analyse the stock, I found this company
to generate free cash flow, low debt and healthy dividend. I would like to know of how to judge the
management of the company and also if the lower crude oil prices will affect the company's input cost.
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A6: You may read the annual report of the company to get an idea about how much of its raw material is
crude oil derivatives and further study the impact of changes in crude oil prices on its raw material costs in
past year. This exercise would help you judge the impact of crude oil prices on company's input costs.
Q7: I learnt from your blog that we should always look Net profit along with CFO. While looking at calculation
of Cash flow from Operations in annual reports, I observe that, interest paid and depreciation are added into
the net CFO. I find that CFO in some high debt companies like Suzlon energy is much greater than net profit
since interest is included in CFO and not in net profit. This could seriously mislead our analysis. Shouldn't we
remove these from CFO when we are comparing 10 year cPAT and cCFO? - Or, shall we compare (cCFO +
tax paid) with cEBITDA.
A7: I am happy that you are doing your own stock analysis and are envisaging different
scenarios/ratios/formulas which as per you represent the correct picture of financial position of the
company. I congratulate you for questioning the set mindset of company analysis.
Krishna, the annual reports are prepared in a standard format as per the accounting rules of any country.
Rules dictate that interest should be shown as CFF and not CFO, that's why it is added back in net profit
to arrive at CFO. However, the analysis in finance by the investor is not bound by any rules. You may use
any formula as you deem fit for gauging the correct situation of any company. I would suggest that you try
analysing companies on the tweaked formulas presented by you and take a call whether these new
formulas are able to present the actual financial strength or weakness of the company, better than rule
bound CFO.
Q8: I have a question about investing in a stock. If you have decided to invest 1 Lakh in a stock of your
selection, do you put the entire 1 lakh in hat stock in one go or do you segregate the purchase over a time.
A8: The answer would differ from person to person depending upon her risk taking appetite. However, as
you have asked what I would do if I have to invest 1 Lakh in a stock, I would invest this amount in one
go.
Q9: I am currently investing through mutual funds. I have full time job and is it possible to invest in stocks with
full time job in hand? I would like to invest in stocks with only surplus cash which I do not need for 10 years.
How to start?
A9: I believe that a person does not need to have a background in finance as well as dedicate full day for
becoming a successful stock market investor provided he/she is willing to put in the required time (over
weekends) and effort for learning about stock analysis.
Q10: I have two questions. Could you please clarify that?
1. Where do you read the financial statements in newspaper or screener sites (of course I know you
recommend screener.in)? Just want to know.
2. As Buffett style, we should invest in the companies that we are aware about the business. Where
can I learn about the business? I see only stock recommendations in internet where can I get true
knowledge about business and evaluate them. Say how I can read business like banks, cements
(Where can I read to understand these businesses).
A10:
1) I read financial statements on BSE company filings, Annual reports, screener and currently
moneycontrol
2) You may read about how to learn new businesses, in the article I have written.
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Q&A: Stock Selection, Margin of Safety, Cash Flow
Statement & Others
Queries about stock selection process
Treatment of amortization by Emami Limited
Impact of recent changes in balance sheet presentation format on total debt calculation
Dilemma faced by mutual funds while investing and margin of safety for institutional investors
Clarifications on cash flow statement
Amount of time an investor should spend on stock analysis
Steps to reduce number of stock in ones portfolio
Amount of capital needed to invest in stocks
Q1: I have few queries and would like you to shed some light on it.
1) Do you find the concepts of multi-disciplinary thinking (mental models- Charlie Munger)
usable in common investing ,if yes, how can they be utilized ,a case study will be
appreciated.
2) How can we discover some financial or non-financial factors that can seriously dent price
of stock before any bad news hits them?
3) Also how much is past data useful to determine the future of stock as things are
unpredictable and any sudden hiccup can crash price of stock. Please mentions the
parameters to include and exclude
4) Finally, if u want to create a stock screener which parameter will you use and give priority
to.
A1:
1) I do not specifically use any multidisciplinary thinking in stock analysis. However, as most of the
investors has multidisciplinary background: Science, Engineering, Commerce, Medicine etc. before they
start investing in stock markets, it becomes indistinguishable that their prior education/experience would
have some impact on their approach to stock investing. The same, if impacts my stock analysis, then it
would be there. Else, I like to keep the stock investing simple and straight forward and have a checklist
handy to assess whether any stock meets my criteria.
2) Discovering financial/non-financial factors impacting the companies in the portfolio is part of regular
monitoring of the stocks in the portfolio.
3) I believe that past performance data is the most essential input to assess the quality of the business
and the competence of the management of any company. These two factors, if found satisfactory, would
tell an investor whether the company and its management would be able to face the unpredictable future
by taking timely steps in the changing environment or not.
4) Stock screening parameters: As mentioned above, I use a checklist for stock analysis. Most of the
parameters in the checklist are objective parameters which can be used as a filter in the stock screening
software.
Q2: I need to understand the treatment of amortization by Emami Limited with your help:
1) Can you please help me understand how the amortization calculation is done? I am
unable to link changes in reserves & surplus in balance sheet and changes in P&L
statement for amortization?
2) What is the advantage of this operation? If amortization amount is added back to profits,
would it not have an implication on taxes paid out?
A2:
1) Amortization is to goodwill/intangible assets what depreciation is to fixed assets/tangible assets. Emami
has explained its amortization policy in its annual report. I advise you to read the annual report of Emami
Limited to get further clarity on the policy it follows.
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2) For linking amortization charge in P&L, changes in the reserves & surplus, advantages of transferring
amount from reserves to P&L, I suggest that you prepare an excel file with calculation of P&L and balance
sheet. You should try putting different values for the amortization charge, transfer from general reserve in
the P&L and see its impact on profit before tax. You would come to know the impact it would have on the
tax outgo in P&L. This would be a good learning exercise for you.
Q3: I just want to clarify how total debt of a company is calculated from balance sheet? I looked at your views
on FIEM Industries Limited and got stuck at calculating total debt! It was mentioned 87cr total debt for yearend
Mar-14 in article: Analysis: FIEM Industries Limited . But when I looked at Balance Sheet at screener, I am
not able to get - how you got 87cr as total debt for Mar-14? Please clarify me - how I can calculate total debt of
a company from balance sheet?
A3: You would notice that the debt figures from March 2012 onwards are different from the ones
mentioned in the article and the ones presented by screener now. The data presented in the article was
taken from screener in June 2015. In August 2015, the screener website has undergone a change and it
has changed the way it presents/classifies the data on its website. From 2012, the presentation of
financial statements had undergone a change on account of change in Schedule VI. From August 2015,
screener has updated its data presentation and has factored in the changes in presentation of financial
statements from FY2012 onwards. Before August 2015, it seems to be calculating data as per its template
which was prepared in the older format of annual reports. The changed presentation of data by screener
is the reason that you are not able to find debt data of March 2014 as 87cr. It is advised that before
taking any investment decision, an investor should check the financial figures from the annual report of
the company as annual report is the most authentic sources of data.
Q4: Though mutual funds keep a portion as cash, they would normally be compelled to buy fresh shares
whenever new funds are pumped in. And this often happens more in a bull market. So, how can they follow the
valuation part of the shares? Can they keep a margin-of-safety after a DCF or any other type of valuation?
A4: You are right that mutual funds usually face a peculiar dilemma. They get more money for investment,
when the markets are going up and shares are becoming expensive every day. They get more
redemption requests and have to sell shares in bear markets when shares are becoming cheaper every
day. This situation leads to mutual funds buying stocks when they are becoming expensive and sell
stocks when they are becoming cheap. In the end, this process hampers the returns the mutual funds can
generate for investors. This is precisely the reason, I believe that an individual investor who does not
have to face such challenges, can do very well in markets. She is not answerable to anyone and can buy
stocks when prices are down. Regarding valuation part/margin of safety: Valuation method does not have
to depend on someone being a mutual fund manager or a retail investor. It is person dependent. Every
investor has a personality and the valuation and stock selection methods vary from person to person.
Some may like technical analysis, some like fundamental analysis. Some are growth investors; others are
value investors and so on.
Q5: I am having doubts with +ve & -ve numbers in CFO, CFI, and CFF as below -
# CFO:
-ve : ?
+ve: company generated cash from operations
# CFI:
-ve: company funding its expansion plans or investments by a mix of CFO & CFF
+ve: ?
# CFF:
-ve: company paid debt
+ve: company taken credit
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Please clarify & correct me, if I am wrong in understanding.
A5: -ve CFO: company is not able to generate surplus cash from operations. Possible reasons: either
company is making losses &/or cash is getting stuck in working capital. +ve CFI: Company has liquidated
its assets. It might be sale of fixed assets or investments like MF etc. CFF can be -ve due to dividend
payments and +ve due to equity dilution as well.
Q6:
1) Typically how many hours of research do you do on a stock before deciding whether to
add to your portfolio or not?
2) Do you buy stocks in lump sum or staggered manner? If staggered, please can you
explain your methodology?
A6:
1) It may take few seconds/minutes to a few hours to decide if I decide not to invest in a stock.
However, it may take about a week while I analyse, get convinced and invest in a stock.
2) I prefer investing the entire surplus available at any time in a stock, when I find an attractive
stock. Its another story that I keep on buying it from my monthly savings until its valuation is
within my buying range.
Q7: I need your help to reduce the number of stocks in my portfolio. At the moment there are more than 30
stocks. How I can reduce to 15 or 20?
A7: If you follow the different parameters highlighted for deciding about selling a stock from the portfolio,
then you would be able to arrive at/zero in the stocks that you should exit so that you may remain with the
desired number of stocks in your portfolio.
Q8: Most of the positive features of this company was due to management's efforts during the period of 3-5
years or before, while all the negative features are recent developments. Does it mean that the management
has changed for bad and the company is in a declining mode?
A8: Assessment of management is very subjective just like assessment of one's friends. Therefore, it is
advised that the investor takes due care while analysing the management of any company as it is the
most important parameter of stock investment.
Q9: To be more successful should we need more capital? If we consider small capital, days of Rakesh
Jhunjhunwala and Warren Buffett are over right?
A9: Days for hardworking investors are never over. Their days would get over only when the markets
would cease to exit. Both Rakesh Jhunjhunwala and Warren Buffett started with small capital and worked
hard to make it grow. In the same manner other investors, if work hard, can expect to grow their wealth
over the years.
Q9.1: If you suggest for capital, how much you say?
A9.1: There is no minimum or maximum limit on the capital that a stock market investor can start with. I
guess, the minimum capital is the minimum order size that the broker accepts, which is in the range of
500-1000/-, I guess.
Q10: Please help me to know, how to get below 3 parameters .I am not getting it from screener/balance sheet.
1) Inventory turnover ratio
2) Receivable days
3) Market Capitalization (M-Cap) of last 10 yrs.
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A10: You may find the calculation of ITR and Rec. days in the article. Gain in M-Cap of last 10 years is
the change in market cap from 1st April 2005 to current date. Historical share price (adjusted for splits and
bonuses) can be found at BSE, NSE websites.
Q&A: Self-Sustainable Growth Rate (SSGR) - Part 2

On June 6, 2015, I wrote an article explaining my approach to find out companies, which have the
potential to grow their business from their profits without relying on external financing like debt. In the
article, I described a financial ratio I use to judge this capability of companies to keep on growing in debt
free manner. This ratio has been named as Self-Sustainable Growth Rate (SSGR). The companies which
have SSGR more than current growth of their business invariably have very low debt on their balance
sheet. Self-Sustainable Growth Rate (SSGR), is based on multiple business characteristics of any
company. These parameters are:
Net Profit Margin (NPM)
Dividend Payout Ratio (DPR)
Depreciation (Dep)
Net Fixed Assets Turnover (NFAT)
These parameters when combined in the following formula, give an investor a growth rate as an output,
which is the debt-free Self-Sustainable Growth Rate (SSGR) of a company:
SSGR = [(1-Dep) + NFAT*NPM*(1-DPR)] - 1
Overtime, a lot of readers have provided their inputs and asked many queries related to various aspects
of Self-Sustainable Growth Rate (SSGR). The current article is an attempt to put together the knowledge
shared by different readers about Self-Sustainable Growth Rate (SSGR) so that all the readers can get
benefited from it.

Comparison of SSGR with ROE/ROCE/ROIC
Usage of net profit margin instead of operating profit margin in calculation of SSGR
Impact of cash holdings of a company on its SSGR
Reasons of declining SSGR of Coal India Limited
Applicability of SSGR to Banks/HFCs/NBFCs
Q1: I have few questions, hope u consider them democratic and not a sign of rebellious or haughty! (I might be
completely naive). All in academic context!
1) The central theme of your SSGR is "amount of funds available for reinvestment and then, the efficiency
level with which these invested funds are utilized". Is this not similar to Return on Capital? Can you let us
know which meritorious aspects of SSGR (equity apart) would I be missing if I am simply using
ROC/ROIC Capital instead of SSGR? Especially the way SSGR includes Depreciation as a key factor
which is almost nonexistent (compared to other balance sheet figures) in financial companies. I am also
skeptical about taking Net profit Margins rather than Operating Profit margin since you are already
negating the effect depreciation. Net profit margins do vary due to Exceptional losses and other income
and outliers can easily distort the 3 year averages and even the 5 year ones. In addition growing
companies pay minimal dividend and using SSGR with a dividend in formula to measure growth is not
self-serving. So if a company is earning more than 35% on ROCE which in turn indicates the company is
able to generate significant returns on the capital it is ploughing in , this itself is a good indicator which
smoothens all the aspects as long as the Accounts receivable and debt levels are stable
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2) Graham's margin of safety concept, especially reluctance to accept anything over 11 PE levels does
look quite out of sync with the modern times especially in easy money scenarios globally. Does it require
a revisit to adapt the margin of safety as per bull and bear period rather than sticking with margin of safety
and missing a whole set of baggers?
A1: Your queries range from comparison of SSGR & ROC/ROIC/ROCE, applicability of SSGR in financial
services companies, margin of safety. Lets try to address them one by one:
SSGR vs ROC/ROIC/ROCE:
There are many parameters, which are used by investors for measuring the attractiveness of businesses.
ROE, ROC, ROCE, ROIC, ROA. All of them are different variants of measuring the ratio of profits a
company generates utilizing its assets. These formulas use multiple variants of assets like total assets in
ROA, only equity funded assets i.e. book value in ROE and other such variants. Similarly there are
multiple variants of profitability, which are used in such calculations: some use net profit after tax (PAT),
some use profit before tax (PBT), some use earnings before interest but after tax EBI which means
EBIT*(1-T).
There are followers of each of the above discussed parameter and then there are investors who do not
like them. However, finance as a field is very versatile as it gives full freedom for investors to follow her
own choice of parameters and also to make new parameters. Therefore, I would not go into the debate
that whether someone should use SSGR and discard all other parameters or whether SSGR serves the
same purpose for investors which other parameters like ROC, ROCE, ROIC do. SSGR tells us what is the
growth rate, a company can sustain with current profitability, dividend policy and operating efficiency and
lets an investor gauge whether the growth of the company is intrinsically funded or externally funded. If I
have to relate SSGR to any other conventional parameter, then I would probably place it much closer to
free cash flow generation. Companies with high SSGR are majorly free cash generation (post capex)
business and vice versa. SSGR is mainly suited for manufacturing companies and does not have much
relevance to financial services companies as one of the cornerstone of SSGR, which is net fixed asset
turnover ratio, does not have much relevance for financial services companies.
NPM vs OPM:
I prefer net profit margins post exceptional/one time/non-operating items, as most of the times these items
are also derived from some impact related to operations only: like non-operating income can be
interest/dividend on investments done from past profits, profit on sale of assets is also similarly derived
from assets purchased out of funds earned in past, forex losses are part of operating environment etc. I
agree that such onetime/non-operating items may put ratios out of normal trend, which may not give a
stable SSGR ratio year after year despite using average data of last 3 or 5 years. I personally do not
believe in changing the SSGR formula in order to smoothen the earnings performance. I wish to get the
output from SSGR as it is supposed to work and then interpret it. An investor might accept or reject its
outcome. There are many other parameter to stock analysis other than SSGR, which are also very
important. An investor can always give more weightage to other parameters as per her choice. Moreover,
as I mentioned above: "finance as a field is very versatile as it gives full freedom for investors to follow her
own choice of parameters and also to make new parameters". Similar logic goes for using funds post
dividend declaration. I stress on analysing SSGR while assuming the companies maintaining their current
policies. High current dividend payout indicates that the company has a cushion to raise funds internally
and increase growth rate. Companies which pay minimal dividend do not have this option. In effect they
do not have this cushion.
Margin of Safety:
I do not believe in changing the criteria of margin of safety as per market scenario. It is like shifting the
goal post as per ones need. On the contrary, such habit is discouraged as it amounts to letting markets
take charge of an investor's investing philosophy. P/E ratio is one parameter of margin of safety. Over the
years, I have come across certain other parameters as well, which I consider that are akin to margin of
safety. SSGR is one of them. SSGR which is much higher than current growth rate means that the
company has the cushion of tolerating low profitability in future while maintaining current sales growth
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rate. Therefore, an investor may use different parameters as margin of safety as per her conviction.
However, I am not in favour of changing the parameters as per market cycles. I believe that such
changing approaches might lead to the investor getting stuck in overpriced stocks at the peak of the
cycle, which is not a desired situation to be in.
Q2: What is the impact of cash that company holding for years on SSGR? I think you are counting it in re-
investable funds in above explanation. However if my understanding is correct it is not treated as fixed asset
so not considered in NFAT. Would amount of cash distort the SSGR? How to interpret it in those cases.
A2: SSGR is an estimate of the growth rate, which the company can achieve without leveraging itself.
Whether the company actually achieves or not, is dependent upon whether the company uses all the
possible resources/levers in its business model or not. If an investor analyses the derivation of SSGR
calculation formula, then she would notice that SSGR uses the post dividend funds accruals (average of
last 3 years) to extrapolate the potential sales growth, these funds can generate. If a company is
maintaining high cash balances consistently year on year, then SSGR calculation will assume this as its
current business model/strategy and use the non-operating income (interest on cash/FD) as its business
revenue in the net profits, while calculating the potential of future growth rate. Effectively, SSGR will
reflect the future growth based on the funds utilization shown by the company over last 3 years (if the
investor uses average of last 3 years for different parameters of SSGR). If the company keeps cash on its
books, and FD return is less than the return this cash could earn, if invested in fixed assets, then the
SSGR of the company would be lower to that extent.
Q3: I have tried to Analyze Coal India with the method of SSGR you described. Its SSGR is decreasing from
61% to 14%, does this mean the moat for coal India does not exist anymore. Also, it is being stated that
company has improved its operational efficiency which is not reflecting in the results. Any thoughts for this?
Following is my calculations.
A3: SSGR, as mentioned in its dedicated article, factors in the dividend payout ratio in its formula. As the
dividend payout increases, the amount of money for reinvestment in the business decreases and as a
result the SSGR decreases. You would notice that in recent years the govt. has been asking Coal India to
pay hefty dividend to meet its fiscal deficit targets. As a result, the money retained by Coal India is going
down, which has led to decrease in SSGR.
Q4: I have really enjoyed reading your blog. You have great clarity in your thoughts and presentation. Many
have only the former and hence are not great teachers. Can you please clarify if it makes sense to compute
SSGR for HFCs and other financial institutions with some tweaks or it does not? If we can tweak it, can you
elaborate further? I tried replacing NFAT with Net Long Term Loans and using a Depreciation rate of 0. What
are your thoughts?
A4: SSGR is primarily useful for manufacturing companies and would not be very useful for sectors like
financial institutions like Banks/NBFCs/HFCs. Further, to complicate the matters, the information shared
in the annual report of financial institutions is not sufficient to assess their financial position; therefore, I do
not attempt to tweak/adjust the SSGR to suit FIs. I would suggest you to proceed with you adjustments to
SSGR formula with Net Long Term Loans and other such parameters and see the outputs to determine
whether it is able to differentiate between good & poor performers in HFCs and other FIs.
Q&A: Noida Toll Bridge, Fundamental VS Technical, Market

P/E & Others
Finding value in a value-trap
Investing in mutual funds when an investor can confidently select stocks
Fundamental vs technical investing approach
73
Use of market P/E ratio while selecting stocks
Usage of standalone vs consolidated financials in stock research
Q1: I am interested in knowing if there is a situation where the company's retained earnings are increasing &
its market capitalization is decreasing & if an investor is interested in earning passive income by way of tax
free dividend, does it really matter whether the stock price is really going up or down? Even if the stock price
has gone down can we say it has destroyed value for the shareholders because in reality it has earned &
retained some income & added value for the shareholders? May be for some shareholders who bought the
shares when the prices were relatively high it could be the case of value destroyer but for those who are
holding the shares even before that & intends to do so how can it be a value destroyer ? As long as the
business is doing as is expected from it & adding value how does it matter how the market is reacting to it? PS:
I am not holding this stock .This discussion is purely from the educational point of view.
A1: The return from any stock is a combination of two factors: dividends and capital gains (share price
increase). It means that if a stock gave a dividend of 10 during investors holding period but lost 10 in
share price, then an investor effectively did not make any return over her holding period. Therefore,
dividends and share price increase both are important. Retained earnings mean the profits which are not
distributed to shareholders. If any company retains any profits (i.e. does not give them to shareholders),
then it must invest them in a way that the value of the company increases. It is agreed that the
investments may not increase the value of share (price of share) immediately or over a few years, but
over long periods e.g. 10 years, the earnings retained must get reflected in increase in share price.
Otherwise, it is better that the company does not retain any profit and distribute 100% of it to
shareholders. A shareholder, as an owner of the company, has appointed the management to create
value from the investments being done. If the management/company is not creating value, then it has no
reason to be in existence.
Q2: I would like to know whether you are investing only in direct stocks or also in mutual funds. If you are not
investing in mutual funds what is the reason for the same. After reading your blog about number of stocks to
hold, I have finalized around 8 stocks & I am happy about it as I got around 14 % within 1 year even during this
volatile period (I am holding them still). I am confused whether I should continue my SIP in mutual funds or to
stop (I am investing in sector funds SBI Pharma fund, UTI transportation & logistics fund & Franklin High
growth companies fund).
A2: I am happy to see that you have started doing your own stock research and have built up a portfolio.
I invest in mutual funds (only in equity linked savings scheme ELSS) only to the extent it is needed to
complete my 80C investment limit post factoring in the EPF contribution. Rest of my portfolio is
investment in direct stocks. I do not put additional money in mutual funds, as the purpose of equity mutual
funds is to hire services of a fund manager to select stocks for us. If we believe that we can ourselves
select stocks, then there is no point in bearing the costs of mutual fund, management fees etc. Such
fees/costs are about 1.5-2% of portfolio value, which can be significant over long periods of investment
horizon. I believe that the fund manager of mutual fund is also a human being looking at same
information/data to make investment decision about different stocks. There is no point giving fee to
someone else for doing us, what we can do on our own.
Q3: Ben also talked about margin of safety. Anyway, I enjoyed reading your article and criticism of technical
analysis. I think u have made good use of contrarian approach with your stock selection technique. I also think
u would have made more if u had followed the trend and technical analysis strategies; u would have certainly
had more returns (add opportunity cost of holding investment) if u had used trend analysis- buying Allahabad
Bank during April-May 2009 (break of downtrend) than buying in Jun 2008 and similarly for others.
Fundamental analysis is important but its not everything; without a doubt for long term investing value
investing is superior method but it will be difficult to practice for small investors- u got to have lots of money so
that u can buy in every dip. Small investors, who can't hold for ages, will cry if breakout takes longer than
anticipation. For a small investor, technical analysis in conjunction with money management (position sizing),
risk management (stop loss) can also win big- I have made 82% while market provided only 12% in 9 months
period. The most importing thing is profitable belief about the stock, trading discipline and knows how to cut
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losses short and let profit run using a trading system. I bet u can't completely ignore technical analysis if u want
to make your investment decision objective and profitable.
A3: I agree that there are many approaches, which investors use to invest/trade in the markets be it
fundamental investing, technical investing, value investing, growth investing and so on. Each approach is
suitable for different investors depending on their personal preferences like aptitude, availability of time
etc. I do not think that value investing needs an investor to have lots of money. I find that every person
who has surplus money to invest, irrespective of the quantum of money, can practice value investing and
benefit from it. Value investing requires discipline and regular investing and not the quantum of money, to
succeed. As mentioned by you, I have provided my views about fundamental investing vs. technical
investing in the earlier article. I believe that fundamental investing is more suited to my investing approach
and wish to keep following it going ahead.
Q4: First of all, when somebody says that market PE is this much, it means that they are talking about nifty,
which itself is not the nest indicator of market. As an amateur investor even I looked at these numbers but they
did not give me exact evidence of market crash until I gathered data of various companies and did analysis. I
gathered data of top 300 companies (average transaction value wise) and found that whenever their avg PB
when above 4, market would crash. Avg price to book value of these 300 stocks went as low as 1.79 after 2008
market crash. On 14th December avg price to book value was 4.8. Guess what? We will see market crash
soon. I will not be surprised if avg P/B of these 300 stocks become less than 2.5. I have exited equities.
A4: Being a bottom-up investor, I do not give much weight to market/industry P/E ratio while making my
investment decisions and advice the readers to ignore the macro parameters and focus more on stock
specific factors for investing.
Q5: I am trying to do the exercise mentioned above for Lloyd Electric. But I am confused between standalone
and consolidated numbers. Request you to share your views on which one must be taken into consideration
while carrying out the financial analysis and why.
A5: An investor should use consolidated financials.
Q6: I have been trying to follow your stock picking methods keenly. Analysis: Haldyn Glass Limited. In
above article you mentioned that you "decided to sell Haldyn after Petroleum and Natural Gas Regulatory
Board (PNGRB) decided to cut supply of natural gas to many companies including Haldyn Glass Ltd. Haldyn
cut its production capacity by 20% after the Petroleum ministry did not provide any respite". As a beginner in
this field, I would like to know, how to get such kind of details which directly affects a company's financial status
and also how company is reacting to such decisions.
A6: Tracking the developments related to stocks in the portfolio, is one of the essential activities, which an
investor needs to do. You may learn more about the steps to be followed to monitor stocks in an investor's
portfolio in the earlier article
Q7: In the last couple of weeks many analysts are saying 2016 will not be a good year for Indian and global
equities. Some are even mentioning situations not exactly like 2008 recession but pretty similar to it. What are
your views on these statements?
A7: I do not have any views on the markets or these statements. I believe that an investor should look for
fundamentally good companies and keep on investing in them until the time they are available at
attractive valuations irrespective of level of general markets.
Q&A: SSGR, CFO vs PAT, Margin of Safety & Valuation

Analysis
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Self-Sustainable Growth Rate (SSGR)
Cash flow from operations and CFO vs PAT analysis
Valuation analysis of companies
Margin of Safety (MoS)
Q1: While trying to practice (based on Container Corporation of India Limited using Screener data), I have
following questions:
1) SSGR is calculated using stand-alone instead of consolidated numbers? Any reason why
we're doing that.
2) Dividend payout in screener comes as % now. While comparing that with the data of
Container Corporation of India in the SSGR article, it looks very different.
I would appreciate all your great effort to teach every investor. Looking forward.
A1:
1) There is no specific reason for using standalone financials. SSGR works well for both standalone as
well as consolidated financials. I would advise the investors to prefer using consolidated financials,
wherever consolidated financials are available.
2) You are right that the data of Container Corporation of India, currently shown by screener is different
than what is reflecting in the above article. However, it is due to the update/change in data presentation at
the end of screener. The data used in the article is the data taken from screener in June 2015.
Subsequently, screener has undergone an overhaul from Aug 2015 to Feb 2016. I understand that it has
undergone a lot of updations in terms of data collation and presentation. This might be a reason for
change in the current financial data of Container Corporation provided by screener from the past data.
This is one of the reasons that I advise investors to use public sources of data only for preliminary
analysis and use the data from annual reports for final analysis before making the investment decision.
Q2: I am trying to discuss Krishna Kumar's question in the following article: Readers' Queries: DHFL, KRBL,
HMVL, Shilpi Cables & Others (I may be completely wrong here because I am from non-finance background
and hence have very limited knowledge.) . The way I would reason why interest and depreciation are added
back is something like this:
1) First the company earns OP (operating profit).
2) From that they set aside money for meeting debt obligations (interest and principal
repayments), money for replacing machinery (depreciation- I have over simplified it a lot
here), taxes, dividends and any others.
3) So CFO should be ideally close to OP. if you look at the Cash Flow statement, CFO starts
with adding back things to PBT. (I guess the P/L, BS and CF statements follow some
accounting standards and that is what tweaks the picture a lot. Again I am guessing the
auditing guys use some ledger entries to decide where each entry should go like CFO or
CFF).
4) The part that always trips me is the fixed assets and investments. For e.g. look at the
Cash flow statement of MUL in this article. Sale of Fixed assets: there is one entry that
goes into CFO and one goes into CFF. Same is the case for Interest income which
appears once in CFO and once in CFF. (The nature of the expense as differentiated by
ledger entries decides which fixed assets go where? I dont know. )
The way I look at CFO is: I try to see how close or far CFO is from OP. Again I am just a beginner, so you
can completely ignore my reasoning
A2: If you notice that in MUL's cash flow statement, sale of investments is shown as part of CFO as well
as CFI. The reason is that profit from sale of investments has been included in calculation of PAT,
whereas the sale of investment is not an operating activity, therefore, this profit has been deducted
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(negative entry) from PAT while arriving at CFO. As sale or purchase of investments is investing activity,
the entire sum received from sale of investment is shown as part of inflow (positive entry) under CFI.
Similarly, income from interest on the investments, which is included in the PAT, has been deducted to
arrive at CFO as the interest income is not an operating income but an investment income. The same has
been included in the CFI segment as a positive entry.
Q3: Why we are considering CFO vs PAT? Why not sales VS money received from customer? We receive
money from customer against our sales not against profit then why we are comparing PAT vs CFO? What is
CFO? As per your statement money received from customer. Which means we receive money against our
sales then why we are comparing PAT that is only the profit. I know I am confused a lot so please explain me
to calculate CFO. Also please explain, suppose company sold 1000 INR worth of product but company not
received the amount from customer, is it still include in operating profit and net profit?
A3: We compare CFO to PAT, as the CFO just like PAT is after deduction of all the expenses incurred to
earn the profits like: cost of raw material, employee salaries, advertisement expenses, fuel expenses etc.
You can notice in CFO calculation in any annual report that it is calculated from PAT/PBT. Comparing
CFO to Sales would be comparing apples to oranges.
Q4: I have a specific query that I can't seem to figure out by myself and would appreciate your help in sorting
the issue: What is the correlation between market capitalization of a company and its balance
sheet/sales/profitability? Specifically, if there are two companies (unrelated and perhaps in different sectors)
with same market capitalization but different sales turnover/different profitability; does it have anything to do
with the net worth or the book value or retained earnings/reserves or anything for that matter on the balance
sheet? My reason for asking is perhaps this could help find mispriced or undervalued securities in the markets
while applying your principles for stock selection and evaluating between candidates for investments. I hope I
have tried to explain my question clearly and look forward to hearing from you. Also I would like to take this
opportunity to nudge you to please post more articles like you were doing before.
A4: Your query is related to the presence of ratio of market capitalization (MCap) with balance
sheet/sales/profitability and their usage. Such ratios already exist and are in wide usage: MCap to
balance sheet ratio: the most common used ratio is price to book value, which is effectively market cap to
net worth (current share price * number of share)/ (book value * number of shares). MCap to sales
ratio: this ratio is already widely used by investors by the same name. MCap to profitability: the very
famous price to earnings (P/E) ratio is derived from it: (current share price * no. of shares)/ (earnings per
share * no. of shares). These are parts of valuation analysis of stocks and you may read more about them
in the earlier article. I am not able to devote much time to blog due to other personal and professional
engagements which are taking a bit of time. I would write more articles whenever I get some time to
spare.
Q5: I have a doubt here which arose as I was reading an interesting article from Anil Tulasiram who did a great
study on correlation of growth and returns. So my question is how important role does growth play in margin of
safety (MoS)? I understand that Self Sustainable Growth Rate (SSGR) covers it well, but how can we
anticipate future growth of a company and build it in margin of safety when its in huge capes which will give
FCF in future down the line.
A5: I do not use future growth, cash flow projections/DCF in my analysis. SSGR uses the past
performance data to have an idea of the potential growth that a company is capable of generating.
Whether the company will achieve this growth rate (SSGR) or not, will depend upon the management
using its resources well. I do not advise investors to use any future projection in the assessment of margin
of safety (MoS). Multiple times, it has been proved in the markets that future projections do not hold true
and the MoS which supposedly existed on excel did not prove right in the real world. Hope it clarifies your
doubt.
Q6: I want to know that how to a value loss making company like United Spirits Limited (USL). For example,
when we use price to sales (P/S) ratio for a loss making company, the fair value arrived for USL is Rs 1,800.
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But my concern is that the company has been making profits for last three quarters. Total EPS is Rs 18 so if we
see P/E, its available at 100 P/E, so I am confused now. Please help me out, how to solve this problem?
A6: I do not advise investing in loss making companies. Therefore, would not be able to help you in this
query.
Q7: I have a question, while reading below analysis statements I am unable to interpret the below:
When a report says stock trades at 30.6x FY18E, what does it exactly say, is it like it would be 30 PE or it
Earnings yield and how is it calculated. I know it may a very basic question, but could you please help me
on this. However the stock trades at 30.6x FY18E earnings and we would advise to wait for better buying
opportunity. We retain HOLD with revised target price of Rs 229.
A7: 30.6x FY2018E means that the current stock price is 30.6 times of the earnings that the analyst
expects the company to earn in FY2018.
Q&A: Intrinsic Value, ROE, Promoters' Salary & Others

Assessment of intrinsic value of a stock
Return on equity (ROE)
Reasonable levels of promoters salary
Portfolio concentration
Treatment of inventory
Q1: I was recently reading an article titled "The Super investors of Graha-Doddsville". In that he says when
talking about Walter Schloss that he doesn't really try to estimate next qtr. or year earnings. Rick Gurien also
asks the question how much is the business selling for and how much is the business worth (value). They
always look for gaps in price and value. In the same article Buffett says that when Washington Post was selling
at $80m where as it was worth $400m. He says that it is the intrinsic value (IV). I generally read he rarely
reveals the IV. I also know that he doesn't use DCF. Now I collected the 1971, 1972, 1973 annual reports. I
don't know he has arrived at an IV of $400m. All I can see is $160m in assets on the balance sheet (in 1972).
Unless he has realized that there is some land/property which was quoted at historic prices and he had rough
idea of what they were worth actually in 1972 (which I doubt), I feel he should have still used some projections.
Or maybe I am missing something in those balance sheets/Annual reports. I know this topic may not be any
interest to you, but I wanted to see if I there is a way to estimate and see if I can get close to the same IV and
hence the lessons learnt from the exercise can be applied to my own investing. Can you please point me what
to look for in those annual reports? I have already looked at the things that are obvious. I just googled and got
all the reports and the 1984 article. Let me know if I have to send them on your email.
A1: I am happy to see the efforts you are putting in assessing the value of a stock. It is commendable that
you dug deeper into Buffett's assessment of business value and read the past annual reports of
Washington Post. Unfortunately, I would not be able to help you in arriving at the intrinsic value of
Washington Post ($400m). There are many reasons for it:
1) I do not try to assign any definite intrinsic/target value to a company. Buffett might have used some
projections or any of his own valuation technique. However, I believe that it is very difficult for me to tell
anyone including myself that the company is worth "X" amount of money. Economic environment keeps
on changing constantly and any of the assumption/projection devised today is bound to be proved wrong
tomorrow. We may find many such examples in Indian markets as well, where companies thought to be
darlings of investors did not perform. While investing, I try to find out a management which has reflected
in its actions until now that it is a competent & shareholder friendly. And if I find that this management is
running a business, which is not cash guzzling, then I buy the stock. I buy it with a faith on the
management that they will keep steering the company through future changing scenarios and I as a
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minority shareholder would benefit by being a partner with them. Buffett might have his own assumptions
to arrive at $400m value to Washington Post from the annual report, if he did so, but I believe that
Washington Post would not have generated good returns for him if the management was not competent.
If without assessing management, his assumptions came true, then I would say that Buffett was plain
lucky.
2) Currently, due to paucity of time, I would not be able to devote time to reading these balance sheets.
Once again, I appreciate your efforts to improve your stock investing skills by analysing the stock picking
approach of great investors. You are taking good initiatives to learn the skill.
Q2: I am an American investor and I do use return on equity (ROE) in my inputs, although I use it in the same
way you do. i.e. if I find a company that earns roughly 10% ROE but is trading at 0.5BV, then as an investor I
am earning a 20% return. However, I would add that I believe ROE is very important in the long-run. If a
company retains all its earnings and earns 20% ROE, that company will be worth much more than one that
earns 10% ROE. For example: We have one company that earns 10% ROE and trades at book value of 1 both
when you purchase it and when you sell it, after 10 years, this hypothetically company would be worth 2.59.
Your return is over 150%. Now, we have another company that earns 20% ROE and trades at 4x book value of
1 but then declines to a more "fair value" of 2.5x book value over ten years. So book value grows to become
6.19, but since you paid 4x book value, your cost is 4. So your return is only 50%. Now if you take these two
same companies but only change the time period to twenty years you get a different result. The first company's
book value grows to 6.7 from your purchase price of 1, a 570% return! The second company grows book value
to 38.3 from a purchase price of 4 (4x book value), for a return of 9.6x your money or 860%. Your criticism may
well be that 20 years is a long time for most people to wait, but this is what Buffett is talking about when he
says time is the friend of the wonderful business.
A2: Your calculation and depiction of different scenarios is insightful. 20 years should be the time horizon
for investors and therefore, is not a very long term horizon. As mentioned in the article, I advise readers to
focus more on individual assessment parameters of any company instead of composite parameters like
ROE (citing the example of DuPonts analysis). I have noticed that whenever, I have found a
fundamentally strong company with good business growth rate and handsome profitability margins, which
is conservatively funded, always has a good ROE. Therefore, I advise readers to focus on each
parameter separately. Looking only at one composite parameter like ROE many times hides some
important aspects of assessment like leverage. You have correctly identified that a company with good
business performance is bound to reward shareholders. However, the more an investor pays for a
company in terms of initial purchase price, the longer she has to wait to realize return.
Q3: Analysis: Indo Borax and Chemicals Limited , just going through the annual report I have seen that that
the owners has taken salary at 1cr each which is almost 10% of the PAT, does it raise a red flag ?
A3: As far as level of promoters' salary is concerned, it is not a straight forward yes or no decision. An
investor needs to see many factors like the absolute amount of salary, trend of salary increase/decrease
during times of business uptrend/slowdown etc. and whether promoters bring any specialized skill which
is not available in the market in general. Even at the end of this complete analysis, the interpretation of
these parameters would differ from one investor to another. Therefore, I would suggest that you analyse
the performance of promoters on different parameter suggested in the earlier article and then take your
decision about them:
Q4: I know you have and recommend a concentrated stocks portfolio. Can you share what are your views on
stock portfolio rebalancing? I am having 5 stocks for past 5 years.
A4: I do not advise selling stocks for re-balancing of portfolio, unless the particular stock shows signs of
weakness. Selling decision should be based solely on assessment of the stock itself. Any good
performing stock becoming a large part of portfolio is not a reason for selling it. Instead, the investor
should hold it and reap the benefits until the company is performing well.
Q5: Could you please explain what is mean by Purchase of Stock-in-Trade? As for as I know from internet,
company produced more product then it sold. The company deducts the cost incurred in manufacturing the
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extra goods from the current year costs. The company will add this cost when they manage to sell these extra
products sometime in future. This cost, which the company adds back later, will be included in the Purchases
of Stock in Trade line item. Is it correct? In that case company will include the total product cost or only
expenses?
A5: It is very essential to have a good understanding about the business of the companies, which an
investor plans to analyse. Your understanding is right. The cost related to the goods is recognized in P&L
when these goods are sold. Otherwise, the cost is deducted from the cost of materials purchased in the
year and is shown in the balance sheet under current assets/inventory.
Q&A: Fair Value, Industry P/E, Torrent Pharma, Current

Ratio
Assessment of fair/intrinsic value of a stock
Current ratio of companies
Clarifications on P/E ratio of Industries
Queries: Torrent Pharmaceuticals Limited
Investing in loss making companies
Identification of low cost producers in an industry
Query
I want to solve my problem of calculating the fair value of a stock. We invest in stocks today in the view of
future increase of its stock price. In other words, we are expecting its future earnings to grow. (Assuming
we have already made a decision on company A)
1) Lets say Company A at Rs 100 stock price is growing 10% every year till yesterday. At
their annual results update, they are giving a guidance of 15% for next year. So keeping
this in mind, the ideal price for this stock by end of the next year should be 115. So, for
some reason if the stock price goes up to 115 the very same day or in a month. Can we
safely say the stock price is currently priced in the earnings for next year? And therefore
a good time to exit? (Assuming Company A's fair value is 100)
2) For some reason, the price tanks by 20% to 80. Then given the guidance of 15% from the
company and looking at past growth of 10% at the minimum, Can I assume its available
at a discount?
I may be going by the guidance of the company but that's just taking into some past and relatively
moderate future expectations of the company. If my above assumptions are correct then I am interested
in finding the fair value. Can u pls help me arrive at a simple valuation formula which is more or less
closer to the intrinsic value of the stock?
A1: I do not try to assign any definite intrinsic/target value to a company. The company might have used
some projections estimates or some other technique to give guidance. However, I believe that it is very
difficult for me to tell anyone including myself that the company is worth "X" amount of money. Economic
environment keeps on changing constantly and any of the assumption/projection devised today is bound
to be proved wrong tomorrow. We may find many such examples in Indian markets as well, where
companies thought to be darlings of investors did not perform. Management guidance prove wrong
almost all the time and almost every time managements have plausible reasons to convince investors
why they are not able to meet guidance. Whereas the actual reason is that the management had
expected certain economic environment which did not pan out as they had expected, which no one can
predict. While investing I try to find out a management which has reflected in its actions until now that it is
a competent & shareholder friendly. And if I find that this management is running a business, which is not
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cash guzzling, then I buy the stock. I buy it with a faith on the management that they will keep steering the
company through future changing scenarios and I as a minority shareholder would benefit by being a
partner with them. Therefore, I advise reader to look at the past performance of the company and at
current stock price to assess if the company has margin of safety and then decide to invest or avoid. An
investor should rely on future guidance.
Query
One query around current ratio, just checked few companies form Auto sector like hero, Bajaj auto Eicher
and found that CR for them is 0.8 currently, how does that impact, kindly share more insights around this.
A2: In recent years, due to new companies act, the classification of balance sheet items has undergone a
lot of change. Therefore, many items, which earlier did not use to be part of current liabilities, are now
being included in current liabilities (esp. other current liabilities section). Therefore, the current ratio needs
to be seen in conjunction with the kind of item included in current assets and current liabilities. I prefer to
calculate current ratio as (Inventory + Receivables + Cash & equivalents + Current investments)/ (trade
payables). Therefore, I advise investors to calculate current ratio on their own from the balance sheet
section of the annual report and not rely on the ratio computed by financial websites like moneycontrol
etc. You should recheck the current ratios for the above companies by taking the above information from
the annual reports.
Query
Industry PE does give an idea about the relative position of the company within the industry, but it can be
deceptive at times, particular when there is an excess optimism surrounds that industry, better known as
fads. Consider year 2000. Wipro and Infosys were quoting at 100 +PE multiples. Due to high multiples, it
became very easy for fly by night operators (companies) to join the bandwagon as it was easy to get a PE
of 30 to 40. And even after 40 PE, it was still at a steep discount to the leading player, which attract even
more investors to these stocks (they found the bargain!!). There were companies, which had hardly
anything to do with IT, changed their names and added Infosys at the end and their share price got the
sudden boost. Consider a case of a company which is getting PE of 30. Traditionally, to get a PE of 30,
you need the very strong competitive advantage, for example, ITC today (PE of 25). But just because the
company happens to be in IT, it was fetching higher multiples - considering Industry PE. I think the
company on its own need to stand investing merits. Industry PE can be a guiding factor in evaluation, but
relying too much on it can be hazardous to investment returns.
A3: You have highlighted very pertinent points with respect to the pitfalls of investment in high P/E ratios
at the time of euphoric conditions. Other renowned investors have also cautioned the investors that most
of the investment mistakes have happened when investors buy cheap quality at expensive prices during
the height of bull market. I have written an article dedicated to the risks of investing in high P/E stocks. I
hope that you would find it interesting.
Query
Analysis: Torrent Pharmaceuticals Limited. Nice analysis on Torrent Pharmaceuticals. There are few
points which I would like to bring to your notice. Although the receivables are high but they are more or
less balanced by high payables. The cash conversion cycle for the last five years are as follows FY15
(10.54); FY14 (3.25); FY13 (7.50); FY12 (-7.86); FY11 (17.68). Therefore, the efficiency of working capital
is very good in my opinion. This is the reason they have been able to maintain high ROE (26-40%) in last
5 years. Moreover, if you look at their cost of debt then it falls between 5-7% in last five years which again
is very low. FY15 (175/2740 = 6.39%); FY14 (59/1132 = 5.21%) and so on. They might have raised cheap
debt from abroad. This might be one of the reason why they are keeping high cash balance without
retiring debt. Please post your opinion on the same.
A4: Here are my views about the two points raised by you:
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1) A company can maintain its working capital cycle/cash conversion cycle despite
increasing receivables days by delaying payments to vendors. However, conceptually
both rising receivables and payables are sign of financial strains. Payments should be
done and collected within timelines. Long overdue receivables lead to bad debtors and
long overdue payables lead to withdrawal of good credit terms by vendors. However,
cash conversion cycle being a composite parameter is not able to highlight these issues.
This is one of the reasons that I do not prefer using composite parameters like CCC and
even ROE/ROCE.
2) The cost of debt calculated by you is based on the interest expense shown in the P&L.
Companies capitalize interest cost of capex as part of fixed assets/CWIP, which is not
shown in P&L. I prefer using entire interest outgo (both P&L and capitalized amount) for
estimating the interest burden of a company.
Query
How do you value a company, if its making stringent losses for consecutive years? Because of its losses
its share price gets beaten down. Would u like to buy that company in such situation hoping a turn around
and do u like to buy net nets which are trading at 1/3 of its working capital? What about buying beaten
down sectors like power, infra, metals, oil & gas?
A5: I do not believe in investing in loss making companies or turnaround stories. Similarly I do not look for
asset plays or net net investing. I look for companies which are growing at a good pace with sustained
profitability and are conservatively financed with proven management competence.
Query
How can anyone find whether a company is a low cost producer compared to its peers in the same
industry by looking in to the annual report?
A6: You may compare the operating margins or EBITDA margins of different peers. The company with
highest operating margin or EBITDA margin is usually the lowest cost producer.
Query
Does u use the same checklist while investing in cyclical and commodity businesses, since they have
varying sales and profits all the time? And how do u analyse such companies?
A7: I do not follow any separate criteria designed specifically for cyclical stocks. I believe that
fundamentally sound stocks, which are conservatively financed if bought and held for duration long
enough that cover many business cycles would help an investor in seasonal stock price variations.
Q&A: Justifiable P/E Ratio, Portfolio Concentration, D/E

ratio & Annual Report Queries
Justifiable P/E ratio for a stock
Investing in companies having low growth and questionable governance standards
Share premium account and Impact of split/bonus on share capital
Portfolio concentration/diversification
Calculation of Debt to Equity (D/E) ratio from the annual report of a company
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Sources of data for production capacity and utilization levels for companies
Sources to get historical share price data of a stock
Query about credit of dividends in the investors account
Query
Please write something about how much minimum P/E a stock will command by simply seeing his net
profit, sales growth, or eps growth. To my knowledge, minimum P/E should be equivalent to eps growth
YoY. Please throw some light on - how to determine minimum P/E a stock must command, by seeing his
fundamentals. Some good stocks are available at very high p/e like sequent scintific,8k miles, and they
continue to trade at such high p/e like 300 -1400 p/e, and a company with very good fundamentals
continue to trade at very low p/e, why it is so?
A1: P/E is a factor that depends on many factors like consistency of earnings, capital structure, general
market sentiment, promoter's perception, company & products' brand image, liquid float in the market etc.
All these factors are fluctuating in nature. Out of these multiple factors the consistency of earnings, liquid
float etc. are the less fluctuating whereas factors like market sentiment, market perception etc. keep
fluctuating a lot. Therefore, assigning or predicting a P/E ratio for stocks is very uncertain. This is one of
the reasons that I do not try to assign any target price or intrinsic value to any stock. I prefer to buy good
stocks at a low P/E ratio, which provides margin of safety and then trust the markets that they will take the
market price higher as the consistent growth in earnings continues in future. I advise the readers and
investor too not to predict the P/E ratio and instead focus on buying fundamentally sound companies at a
cheap price i.e. low P/E ratio, which provides good margin of safety. I also advise readers to avoid
investing in high P/E companies as they have a lot of hidden risks, which have high probability of
impacting the returns of an investor. At the same time, I believe that investing in low P/E companies is a
good way to create wealth in stock market.
Query
Hidden Risk of Investing in High P/E Stocks. I would request your inputs and views.
(1) am tending to prefer a hero motor or Bajaj over Eicher cos of the established business and
comparatively lower valuations; same time (2) am preferring a Kotak/ HDFC bank over PSUs or axis or
ICICI because of its track record and long road ahead; same is the case with a Gruh over LIC housing or
Indiabulls housing. If avoiding low-growth and non-governance companies has a cost, then shouldnt we
be taking that cost (not in all cases, but in most cases)? Because that cost in long-run would protect our
capital. Is even looking at low-growth (in foreseeable future) and mis-governance companies, right,
considering they are the ones predominantly trading at low PEs now.
A2: I believe that every investor should have her own stock selection strategy as market is a place for
different investors to come together and enter into a transaction, which reflected their individual views.
There are investors who follow arbitrage, technical, fundamental, low P/E, high P/E, turnaround etc.
among many prevalent strategies. However, I advise investors to focus on companies which have
achieved a growth rate of 15% or more over past 10 years, are conservatively financed, managed by
competent personnel with integrity and available at a low P/E ratio. I do not believe in investing in low
growth companies. Moreover, companies with governance issues must be avoided whether these are low
growth or high growth.
Query
I have query again. Please clarify. The query is about share capital. The Company completed its Initial
Public Offering (IPO) pursuant to which 4,20,06,038 equity shares of the company of Rs.10 Each were
allotted at a price of Rs.47 per equity share. As per above and balance sheet, share capital will be
4,20,06,038 x 10 = 4,20,060,380. But company is collecting 47 INR from investor in that case share
capital should be 4,20,06,038 x 47. What about remaining 37INR? Why we are multiplying with face
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value? Also as per my understanding bonus and split will affect share capital, is that correct? Please
confirm.
A3: Here are my views about your queries:

1. remaining 37/- is shown part of share premium account in the section "Reserves &
Surplus"
2. Bonus increases the share capital as the total number of shares increase without any
change in face value. Split does not have any impact on share capital as the increase in
number of shares is inversely proportional to change in face value.
Query
How Many Stock You Should Own in Your Portfolio. It is mentioned that owning more than 30 stocks
wouldn't benefit the diversification as all the stocks fall equally during crisis. By this aren't we suggesting
that stock performance is bad due to 'external factors' (the entire economy doing badly). Also, it is
proposed that we should concentrate our portfolio so that we could benefit from good. But doesnt that
suggest that when a stock rise it is due to 'internal factor' (great management, business etc.)
A4: I would want to clarify that the article mentions that

"The above graph from Financial Analysts Journal, indicates that if an investor adds more stocks in the
portfolio beyond 30 stocks, it would not reduce any further risk in the portfolio.". This is because with each
addition of a new stock the diversification benefit reduces as shown in the graph. It is not due to the
reason that all stocks would equally. Concentrating the portfolio makes the portfolio more manageable
and easily track able. Continuous tracking would protect the investor from negative surprises in her
portfolio as she would be able to spend more time studying each stock in her portfolio.
Query
Today I have another query. For Vinati Organics Limited Balance sheet figure, when I check the
screener.in site in the year 2014 the total equity is Rs. 310.07 cr. However the debt is shown as
borrowings Rs. 161.78 cr and other liabilities Rs 80.93 cr, taking the total debt to equity as
(161.78+80.93)/310.07 = 0.78. However, Sir, as per your calculation the secured Loans are Rs. 88 cr. and
unsecured loans Rs. 34 cr making the D/E ratio 0.4. I am new to these financial ratios. I am trying to
learn. My query is how you have arrived at debt figure of Rs. 122 cr. in FY 2014 whereas screener.in
shows it to be Rs. 242.51 cr.
A5: In August 2015, the screener website has undergone a change and it has changed the way it
presents/classifies the data on its website. From 2012, the presentation of financial statements had
undergone a change on account of change in Schedule VI. From August 2015, screener has updated its
data presentation and has factored in the changes in presentation of financial statements from FY2012
onwards. Before August 2015, it seems to be calculating data as per its template which was prepared in
the older format of annual reports. The data presented in the article was taken from screener in
December 2014. The changed presentation of data by screener is the reason that you are not able to find
debt data of March 2014 as 121cr. If you read Vinati Organics annual report for FY2014 page no. 42,
then you would notice that at March 31, 2014, Vinati had shown long term debt of 109.9 cr. and short
term debt of 12.26cr. cumulating to total debt of 121cr shown by screener in its previous template and
thereby used in the article above. However, the actual data of total debt at March 31, 2014 should also
include the current maturity of long term debt of 39.34 cr. shown in the annual report at page no. 52 in
schedule 8 "other current liabilities. Therefore the actual total debt is 109.9 + 12.26 + 39.34 = 161.5 cr.
Other liabilities include provisions, customer advances, dividends to be paid etc., which are usually not
factored as debt in debt to equity ratio. An investor would notice that the presentation of data in annual
reports keeps on changing over time and there is a time lag with which public sources of data adjust to
the new format. As in the current case, it took a lot of time for screener to adjust its template to new debt
presentation format of annual report. Therefore, it is advised that before taking any investment decision,
an investor should check the financial figures from the annual report of the company as annual report is
the most authentic sources of data.
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Query
Read: How to do Business Analysis of Companies. I find your articles very informative. I have a query
regarding the business and industry analysis. Not all the annual reports of companies provide data for
production capacity. So in that case how does one compare sales CAGR with production capacity
CAGR?
A6: I agree that now a days, some companies do not publish production capacity and utilization numbers
in the annual report. However, most of the companies still provide it. Alternatively, you may get capacity
details from the investor presentations, news articles related to the company, credit rating reports,
management interviews etc.
Query
I have a question again. Nowadays screener.in is not up to date, values are sometimes wrong. So could
you please share with me if you know any similar websites to refer 10 years data other than money
control and NSE? As per your guidance I have created my won excel sheet for analysis the last 10 year
data, I almost complete the excel, but I don't know where to find the average price of the share to
calculate each year P/E and PEG ratio so please advise me.
A7: Congratulations that you have prepared your own excel file and have started to do own analysis. I am
happy to hear about it. Screener & money control are the two most used data sources. Beyond them, I
guess one should take data directly from the annual report of the companies. You may get past data of
share price from both NSE and BSE websites, which you may use to calculate the ratios.
Query
If I hold some shares and want to receive dividend on it then what is the procedure to receive it and to
whom should I intimate?
A8: An investor does not need to intimate anyone. If she owns shares in her demat account on the record
date i.e. she has bought it before the ex-date, then the company would automatically deposit the dividend
in her linked bank account on its own. Dividends are usually deposited within 3-4 weeks after the record
date declared by the company.
Q&A: Cash Flow, NIM & Spread, P/E, SSGR, Margin of

Safety, Management Analysis
Net interest margin & spread
Treatment of interest expense / finance charges in cash flow statement
Capex and Cash flow from Investing (CFI)
Factors that influence P/E ratio of a company
Self-Sustainable Growth Rate
Assessment of Margin of Safety
Usage of financial projections in assessment of companies
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Stake sale by promoters
Assessing independence of independent directors
Operating & financial leverage
Tax payout ratio of a company
Query
I need your clarification about net interest margin (NIM) and interest spread. I try to understand from
internet but I couldnt. Please confirm my below understanding
NIM = (Interest Income - Interest Expense) / Interest earning assets
Spread, on the other hand, is the difference between yield and cost of borrowing, where yield is
the interest income earned on interest earning assets and cost of borrowing is interest expense
charged on interest bearing liabilities. Spread = (Interest Income/ Interest earning assets) -
(Interest Expense/ Interest bearing Liabilities)
E.g.
If Interest income = Rs. 150 crore
Interest expense = Rs. 80 crore
Interest earning assets = Rs. 2,250 crore
Interest bearing liabilities = Rs. 3,000 crore
NIM = (150 - 80) / 2250= 3.11%
Spread = (150 / 2,250) - (80 / 3,000)= 4%
Some websites explains spread = (interest earned - interest expenses)
E.g.: interest expenses= 8%, interest earned = 12% Spread= 4%
A1: I am happy that you are trying to understand different key concepts relevant to understanding stocks
of different industries and referring to different resources for them. Different resources would always
define different ratios differently as per their preference. From you calculations, I find that you have
understood the basic behind NIM/Spread. Therefore, the first thing that you need to take care while using
NIM &/or spread is that before taking the NIM/spread value mentioned on any website/source for granted,
you should calculate it on your own from the annual report data and secondly, you should compare any
two stocks for NIM/Spread by calculating their values by similar method.
Query
Read: Analysis - Premco Global Limited. I have learnt more in the last week reading your blog that I
learnt (and apply) during MBA days. I have read most of the articles and have now felt much more
confident on stock investing. My perspective has changed totally. For instance, Premco has been on my
radar for many months now. I watch the stock price every week to see when I can buy. Now I have done a
detailed analysis and feel much more confident on my decision. I have one question on Premco Global. I
noticed in the cash flow statement, they have a line item called "Financial Expenses." This particular line
item appears both in CFO (as a positive figure) and CFF (as a negative figure). They have been
consistently doing this from beginning. Mathematically, it seems like nullifying effect. Just wanted to make
sure this is not some accounting gimmick. I want to understand if this is "conceptually" correct. This
reconciles correctly in the P&L as Finance expenses, though. So I wanted to get your views.
A2: Financial charges pertain to financial activities; therefore, these pertain to cash flow from financing
activities (CFF). An investor would appreciate that companies need to deduct financial charges from
profits before arriving at net profit after tax (PAT). As a result, while calculating cash flow from operations
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(CFO) from PAT/PBT, financial charges are added back to PAT (positive entry) and are deducted from
CFF (outflow/negative entry) to classify them correctly in the cash flow statement.
Query
Can we consider capex as close to "Cash from Investing Activity" from the cash flow statement?
A3: Capex is not equivalent to cash from investing activities (CFI). Capex is a part of CFI and CFI
includes many other elements other than capex.
Query
a} Does market's perception or market price of share increases with increase in eps or is there any other
factors involved ?
b} Can P/E ratio for a company be constant with increase in eps ?
A4: P/E ratio measures how much market is willing to pay for a company. P/E will depend on many
factors. Many of these factors are measurable like EPS growth; debt levels etc. how many are subjective
like market perception. Therefore, there is no definite answer to your query. P/E may increase or remain
constant with increasing EPS depending upon other factors that influence a company's performance.
Query
Read: Self Sustainable Growth Rate (SSGR): a measure of Inherent Growth Potential of a
Company. Could you help me understand why you have taken Net fixed asset instead of gross? Also I
was going through the illustration of FDC and Fiem, unable to tally the NFA number published in screener.
NFA = Gross block less accumulated depreciation? Is my understanding right? Else could you explain
how you have arrived at NFA?
A5: You are right that Net Fixed Assets/Net Block = Gross Block - Accumulated Depreciation. Net block
has been used in SSGR calculation as I believe that net block is the better representative of value of fixed
assets currently in use as it factors in wear & tear (by deducting depreciation) as well as maintenance
capex done to reinstate wear & tear (addition of maintenance capex year on year). Using only gross block
has the potential of inflating the value of assets under use. Screener website underwent maintenance
update last year after which it has changed classification of some of the balance sheet items for past
years, especially previous to FY2012. The article on SSGR was written in June 2015 before the changes
in the screener website took place. Therefore, you are noticing difference in the data.
Query
Read: 3 Simple Ways to Find Out Margin of Safety in a Stock. Since SSGR uses depreciation as one
of its component to compute, is it equally fair to use this measure on labour intensive businesses that rely
less on physical assets to assess its margin of safety? Secondly, why do we use FCF/ CFO instead of
FCF/ revenue as a ratio to gauge its ability to generate free cash flow? Which one is the better take?
A6: I have been using SSGR primarily to assess manufacturing companies. You may try to use it for other
companies and see how the results pan out. We use FCF/CFO as both factors relate to cash. Comparing
FCF to revenue would not be appropriate as revenue is an accrual accounting concept, which might not
represent the actual cash received by the company in a period of time.
Query
I am following your blogs which is very useful in to gain the knowledge in fundamental analysis, but you
haven't use the financial projection of financial data of company, so is it not useful to select the stock in
right time ?
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A7: I do not rely on future projections. I believe in associating myself with a sound management running a
fundamentally good company and riding the investing journey with them. I try not to project earnings 5-10
years down the road. Therefore, I do not use any parameter for analysis based on future values.
However, I believe that it is a personal choice of the investors to use any parameter she is comfortable.
Therefore, if an investor believes that she can predict with reasonable certainty, the future, then she can
always use future values for analysis. After all, it's her own money and she is free to invest it as per her
choice. As is said, many roads lead to Rome.
Query
Read: How to do Management Analysis of Companies. I kind of do not understand your point where
you say that it might not always be a negative sign when a promoter sells her stake a little. My argument
is how these rich promoters have a need of a little money for personal reasons. I would also love to hear
your views on what you think of Siddhartha Lal family of reducing the stake in Eicher Motors by 4%.
A8: It is usually not preferable to have the cash parked in bank accounts if an investor can find better
productive uses/investment opportunities for it. The same is applicable for investors and promoters alike.
Therefore, it is assumed that promoters of good businesses usually have most of their net worth invested
in their company and any funds requirement which is more than normal day to day requirement needs to
be me through company shares. I do not track Eicher and therefore do not have any views on Eicher
promoters' stake sale.
Query
Read: Analysis - National Fittings Limited. In the management analysis of national fittings ltd, I don't
think that there is a big problem. Obviously, Muthuswami Lognatan (independent director) may not be an
independent director in true sense. But the fact that he has stake in many other private co's of promoters
does not stop him from acting as a good director of national fittings ltd. Moreover, 3 out of 4 directors
being close to promoters is only good for the company as they will have an emotional attachment with the
company i.e. they will feel that it's their company. Loans given as interest free is quite alarming but the
company were able to purchase products from these entities for'' competitive prices'' which in a very small
way is a MOAT.
A9: I believe that if >=75% of directors are close to promoters/majority shareholder, then any
decision/proposal being put forward by promoter would be passed irrespective of merit/suitability of
minority shareholders. The decision to outsource the purchase of products might be one such decision.
Markets have investors having opposite interpretations from same set of information inputs. That makes
the market participants take opposite views on the future of the stock and makes the trade (buy and sell)
possible at any point in time.
Query
In the web portals, I find the formulas of Degree of operate leverage, degree of financial leverage of
degree of total leverage. I simply want to know what is operating leverage and its, formula to compute.
And what is financial leverage and its formula. I also what to know from you on IRR. IRR is the rate which
makes NPV zero. If a project has IRR on 15% for 5 years means, Its NPV is zero or say the projects Initial
cost is equivalent with discounted value of projected cash flow of first 5 years, isn't it? If so, the future
projected cash flow generated by the project from 6th year are the return for the investors of the project?
Please simply educate me or if you have any links of your article on such, please provide. I would be very
grateful with you.
A10: Operating leverage: when fixed costs are high, then with increasing sales, profits increase faster
than sales in % and vice versa. Financial leverage: company boosts its assets by raising additional
resources (debt) over its equity IRR is compared to cost of funds or risk free rate. The higher is the IRR
than cost of funds or risk free rate, the more rewarding is the project.
88
Query
I had a doubt regarding the 30%+ tax rate for the past 4 years. How is that a good thing from an investor's
point of view?
A11: A company with good accounting and corporate governance standards would want to pay all
legitimate taxes to the government. In India corporate tax rate is 30% for Indian companies and 40% for
foreign companies. There are many tax incentive schemes for different companies/industries/states etc,
that provide many tax saving avenues that companies use to lower tax expense. Nevertheless,
abnormally low tax payouts should raise red flags and must be analysed.
Q&A: Sandesh Limited, Fund Flow Analysis, Cash Flow,

P/E Ratio, P&L
The Sandesh Limited
Fund flow statement
Cash flow statement
Increase/decrease in stock in Profit & Loss Statement
Factors determining P/E ratio of any stock
Query
After reading this and a book written by John greenbalt I searched in screener and found and analysed
with the knowledge I learned from your blog. Please have a look and correct me if you have any spare
time thanks and regards
The Sandesh Limited
At today price of 800 the enterprise value is 485 cr which comes to 4 EV/EBITDA and the earning yield
is 25% and assuming the MCap to be at 750 cr the enterprise value is 645 cr operating profit of 125 cr the
EV/EBITDA 5 and the PE Will be 10.
At the present EBIT/ enterprise value the EARNING YIELD IS 25% and at 750 cr MCap and EV
OF 645 the EARNING YIELD IS 20%
Even on taking the media alone the revenue is 341 cr and operating profit is 95 Cr and the net
profit is 58 cr on media alone even if media segment to be valued at 10 EV/EBITDA this comes to
950 cr
Or even on market cap to sales of 2 it is 700 cr without finance segment
Now the current investment and non-current investment comes to nearly 110 which I have not
considered
On finance segment there is 300 cr which is fetching around 29 cr operating profit and 21 cr net
profit. This at least we can give a 50 cr MCap
Lastly 209 cr investment in debentures in the real estate
The sales growth has consistently above 8% profit growth above 15% this time is above 30%
even if take the total balance sheet value as asset which is 637 cr and net profit 81 the return on
the total assets is above 12.5% the RoCE is consistent above 30% the return on equity this Fy is
15%.
The growth factor is 6 P SCORE IS 9 and Alt Z score is 6 and modified c score 1 the current book
value is 700.
No debt 90 yr. history the management is conservative in rewarding dividend but has never given
negative result in last many years.
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Finally if they decide to merge the Sandesh Procon Pvt. Ltd with the parent company the same
way they merged Sandesh Digital that value unlocking has huge potential.
Now for an enterprise value of just 485 cr backed by asset and cash and equity of more than 880
cr there can be very limited down side from here and even assuming a fare EV/EBITDA of 5/6 the
market cap should be above 750/850 cr
Discl. I have bought a small qty
A1: I appreciate the work done by you while analysing the company from "Sum of the parts" methodology
in which you have tried to look at each of the business segments, assets, investments done by the
company and have tried to opine the valuation levels at which the company is available currently. I as an
investor believe that when we try to analyse any company from sum of the parts method, then we should
analyse each segment as a separate company altogether and assess the performance of such parts
under the framework of financial, business, management competence for this segment, operating
efficiency of each segment, comparison with peers of each segment. Once we have done the in-depth
analysis of each of the parts as separate businesses, only then we should combine them together. Many
a times, when investors value the holding companies or conglomerates, then I have noticed that each
business segment does not get the deserved attention of in-depth analysis that it would have, if the
business segment were a different company altogether. Moreover, due to lack of granular information
details, many a times, it is not possible to properly analyse each business segment. Therefore, most of
the times, conglomerates/holding companies trade at a discount to the scenario where all the business
segments are hived off into different companies. On similar lines of the above argument, the value
unlocking happens mostly when a business segment is demerged from a holding company. Therefore, I
am not sure whether merging an entity in itself would lead to value unlocking. After reading your analysis,
I find that you may conduct further in depth analysis of each business segment before you make a final
opinion about the company.
Query
Read Fund Flow Analysis in the following article: Understanding & Interpreting Quarterly Results
Filings of Companies. Though I read funds flow statement in MBA, never really applied it while
analysing a company. Of course, I used to look at the movement of assets and liabilities, and check the
cash flow statement, however, putting it down and seeing the movement does help. I have already
incorporated this to a few companies that I am tracking now. Just one question. When we check the
overall figure, should the funds received be greater than or at least equal to funds used, for us to safely
infer that the company is using the primary source of funds to repay debt? Have you come across any
instance where the total funds used are greater than total funds received? Sorry if this is a stupid
question.
A2: I am happy that you have started using the funds flow in your stock analysis. It is a very good tool to
weed out shareholder unfriendly managements. The funds movement also follows double entry system
and therefore, the sources of funds (received) will always be equal to usage of funds (usage). In the
above example, I have done some rounding off, therefore, there might be some mismatches in receipts
and usage. Otherwise, if you conduct this exercise by transferring the summary balance sheet in excel,
then usage would match the receipts.
Query
What does negative number in cash flow mean, under the head 'cash from operations'? I read in your
article on Ambika Cotton that you must compare PAT and Cash from operations of a company for the
last 10 years and see that the difference is not much. But in most cases the number for cash from
operations is negative for few years (3 or 4 years out of 10)... Why would that be and is it good or Bad? Is
it that these companies have invested in some CAPEX etc. and used internal accruals for the same? But
that would still not impact 'cash from operations' right?
90
A3: A negative number in CFO means that the company did not make cash from operations and on the
contrary it used up cash from other sources like investing (sale of assets) and financing (debt or equity) to
meet its operating requirements. To understand this relationship, I would suggest you to read the cash
flow statement in the annual report of any company, which would show step by step calculation of CFO
from PAT/PBT. This calculation would clearly show how the profits/funds get stuck in or get released
working capital and the impact of depreciation. It would be a good learning exercise for you to understand
in which cases PAT would be higher than CFO and in which cases it would be lower. In case after reading
and analysing the cash flow calculation of company from its annual report, you have any query, then I
would be happy to provide my inputs on your analysis and query resolution.
Query
I want to know what is increase /decrease in stock in profit and loss statement" and also I want to know
where to see inventories detail of companies QoQ whether inventories are increasing or decreasing.
A4: "Increase & decrease in stock" in the P&L arises in situations when the company sells lower or higher
amount of goods than what produced from the raw material bought in a particular year. If it sold lesser
amount of goods than the raw material it bought, the remaining raw material/inventory leads to "increase
in stock". As this increase in stock would be sold in future years and therefore is not an expense of
current year, therefore, the amount equal to increase in stock is deducted from expenses of current year.
On the other hand, if the company sells more goods in a year than the raw material it bought in that year,
then it would mean that the company used some of the existing inventory to meet the sales demand in the
year. The utilization of existing inventory leads to decrease in stock. As this amount is over and above the
money spent to buy raw material in the year, it is added to expenses for the year. Just to clarify that
"Stock" means inventory.
Query
I want to know about how to do analysis of cement, sugar and power company. Pls does detailed analysis
of any cement sugar and power industry u like, so that I can learn from that as cement and sugar are the
hottest sector these days but I have one in mind yes of course Im invested in that "kakatiya cement,
sugar, power Ind". Also sir I want to know how one company in cement sector like shree cement trading at
88 P/E, while ultratech is trading at only 40 p/e, why it is so, as it is very difficult to know that in future
market will give what p/e to any company.
A5: P/E ratio measures how much market is willing to pay for a company. P/E will depend on many
factors. Many of these factors are measurable like EPS growth; debt levels etc. however many others are
subjective like market perception. Therefore, there is no definite answer to your query. P/E may increase
or remain constant with increasing EPS depending upon other factors that influence a company's
performance. Moreover, you may use the framework in the earlier article to learn more about the
companies that operating in industries, which are new to you.
Q&A: Cash Flow, Credit Rating Report, Annual Report,

Market Timing, Predicting Future Performance
Cash flow statement
Credit rating reports
Assessing investment in companies with falling share price/business performance
Timing investments based on broad market (Nifty) P/E ratio
Reading and analysing annual reports
Clarifications about the regulatory disclosures
Predicting future performance of the company
Assessing other income of the company
91
Query
I have a query regarding dividend paid out and interest paid. I came across a situation where dividend
paid out in balanced sheet (reserves and capital Note) and dividend paid out in cash flow statement (CFF)
with different set of numbers. So, to find out dividend per share which set of numbers should be used?
Similar for interest paid out?
A1: You may find different numbers for dividend paid out as the number in cash flow statement includes
all the dividends paid out during the year, whereas the number in the balance sheet might include only the
dividend which remains to be paid out at the balance sheet date (March 31) and for which provisions have
been done. For interest, you should take the number from the cash flow statement as this includes the
entire interest outgo during the year. Whereas the number in the P&L is only the amount of interest which
is expensed during the year and excludes the interest which is capitalized during the year in the form of
fixed assets or WIP. However, it is best to calculate the interest outgo on your own by taking average of
the debt outstanding at the start and the end of the year and by assuming a reasonable applicable rate as
many a times companies do not give the actual interest data in either P&L or CF statement.
Query
Read: 7 Important Reasons Why Every Stock Investor should read Credit Rating Reports. I was
wondering if credit rating reports can also somehow help to learn about the competitors of the company
(both organised and unorganized). If yes, how? If not, then what should be the ideal place to look for the
peers and competitors (excluding sector/industry list provided by BSE and also various sites like screener
which may or may not pick the right peer/competitor)?
A2: The summary credit reports, which are available freely for public download, do not contain entire
details about the competitors. However, many reports sometimes highlight/give passing reference to the
competitors. But it is not a standard part of all the reports. You may get it in some of the reports. However,
you can get the details of competitors from other public sources. Like trade databases to check competing
exporters etc. A google search would help. Then you may read the credit rating reports of the competitors,
if they are credit rated, to improve your understanding of the sector.
Query
1. After the fundamental analysis we invest in a company. After some time the
company produces poor sales from the prev years and so the price falls down. In
that situation since we are invested in the company do we prefer to add to our
positions or we hold or exit the stock. How long we can give time for a company
to recover from its position since it has good past records, considering how the
company is performing in the sector with its peers.
2. In most of the analysis I find the sector leader has good moat advantage and
sure they have high PE at which we r not going to invest.
So what if the moat of the company is avg but which has good fundamentals with the all the criteria that
ticks our box to buy. I do accept if there is moat advantage that company is going to have considerable
growth apart from the others in the future. But what if we cannot find a moat but has good fundamentals
and how do we react to this situation
A3:
1) It is advised that investors should keep on buying stocks of a company, even when the stock price is
falling, until the time they are convinced that the problems being faced by the company are temporary in
nature i.e. are because of the external factors and not because of the poor management decisions. Such
an opportunity provides great investment avenues.
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2) Usually good fundamentals and moat go hand in hand. Rarely, an investor would find that a company
has good fundamental but no moat. Therefore, I would suggest that an investor should invest in a
company with good fundamental even though she is not able to find out the sources of its moat. She
should rest assured that if the company has good fundamentals, then it would have some advantages
over its peer, though these advantages may not be visible in cursory analysis.
Query
I have a question. Do you think for an average investor, buying NIFTY ETFs at historical low PE which is
around 12-14 and selling at high PE >20 will fetch very good returns? Is there any problem which I am
blind to in this approach?
A4: The approach of waiting for Nifty to correct to low P/E for 12-14 and then waiting for the P/E to rise to
>20, resembles timing the market. There is no defined timeline with in which the P/E will get to the
expected levels of the investor. However, the investor might miss the investment opportunities during this
waiting period. I believe that investors should not try to time the markets but stay in the markets
irrespective of the market conditions.
Query
Can you please show where can we find the following information in annual report of a company?
1. Production capacity (tonnes per annum)
2. Quantity sold (tonnes) (A)
3. Sales price per tonne (INR) (B)
A5: Production capacity and quantity sold used to be disclosed in the annual reports until a few years
back, I guess up to FY20012, if I am not wrong. Now companies do not have to compulsorily disclose it.
However, many companies still disclose this data as part of corporate presentations, result presentations,
annual reports etc. Sales price per tonne is a calculated figure from Total Sales/Quantity Sold.
Query
Read: Analysis: National Fittings Limited. I have a doubt regarding the capacity utilization of the plants
running, and that can we estimate the increase in capacity after it receives the 20 cr loan? Only then we
will be able to get an idea of the future sales growth rate I believe.
A6: The approach of estimating the timings of future capex, capacity utilization and the sales growth is
one of the ways used by analysts to ascertain future sales growth. You may take reasonable assumptions
about it. However, you may need to check the progress/sustainability of these assumptions whenever the
company comes out with new disclosure about whether it has received the loan, started the capex etc.
However, I as an investor do not use and neither recommend drawing future projections for arriving at the
opinion about the stock/company.
Query
Suppose I have the annual report (AR) of 2014-15 with me, but the related party transactions or the salary
increase or any other benefit was passed on to the promoter in the year 2011-12. So that wont get
reflected very obviously in the 2014-15 AR. How to cope with this?
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A7: You are right that the past event would not be obvious, if the investor reads only the latest annual
report. This is one the reasons that it is advised that the investors should read annual reports for at least
last 10 years before making the final investment decision about any stock.
Query
Its great that new premium services are being offered which will help a lot of new as well as old investors.
I cant thank you enough for your yeomen services. However I had a query. You had initially mentioned
that you were disclosing the portfolio stocks (not the price, quantity and other details) as it was a
regulatory requirement for SEBI registered Investment Adviser. The home page of your blog still states I
have disclosed stocks in my portfolio on a dedicated page: My Portfolio. I suggest you see the list of
stocks I own before you interact with the website & me because it is assumed that my views can be
biased when I opine about any stock which I own and therefore, have a financial interest.. You may need
to remove this paragraph if its conflicting with the regulations. Regards
A8: The SEBI guideline states the following: Research analyst or research entity shall disclose the
following in research report and in public appearance with regard to ownership and material conflicts of
interest:
(a) whether the research analyst or research entity or his associate or his relative has any financial
interest in the subject company and the nature of such financial interest;
Therefore, a disclosure about whether the analyst owns shares of the company about which she is giving
an opinion, is sufficient to meet the regulatory requirement. Disclosing the list of all the stocks of personal
portfolio is not envisaged in the regulations. Otherwise, you would have noticed all the equity research
reports containing a separate section containing the list of stocks of all junior & senior equity analysts
whose names are mentioned in the equity research reports. Similarly, if the intention of the regulations
was to get full disclosure of the list of stocks in the analyst's portfolio whenever they opine about any
stock in public media, then you would have seen the market experts on the financial media carrying the
list of their portfolio stocks with them in the programs and reading it out each time they opine about any
stock. The dedicated portfolio page containing the list of stocks in my personal portfolio was a disclosure
over and above what the regulator has stipulated, which I have now converted into a premium service. I
thank you for bring the disclosure at the "About" page to my attention. I have edited it, as the
description/contents of the portfolio page have since undergone a change and I have edited the
disclosure on the "About" page accordingly.
Query
Please guide me, how to calculate or estimate coming quarter profits by seeing its previous quarter
profits, sales or inventory, as we see that every channel and analyst estimates coming quarter earnings,
how can we predict sales of any company and profits?
A9: I do not rely on future projections. I believe in associating myself with a sound management running a
fundamentally good company and riding the investing journey with them. I try not to project earnings 5-10
years down the road. Therefore, I do not use any parameter for analysis based on future values and
would be unable to help you in the matter of estimating results of upcoming quarters.
Query
For other income, we are supposed to compare with cash + investment. Do you mean we have to do
other income/cash+ investment * 100 to check whether its return is less than or equal Bank's FD?
A10: Using the figure of other income/(cash + investments) and comparing it with bank FD return might
not be very accurate as the investments in the data provided by the screener clubs current investments
(mutual funds etc.) as well as the equity investments in the JVs etc. (from where the company might
receive only dividends). I use the bank FD returns to compare it with the PBT/Net Fixed Assets to assess
whether it makes sense to have all the assets and take the pains of running a company. In case PBT/NFA
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is not more than bank FD return, then it seems like selling the entire assets and investing in FD would be
beneficial for shareholders.
Q&A: Management Analysis, Buying & Accumulating

Criteria, Chaman Lal Setia Exports Ltd
Management analysis of companies
Buying & accumulating criteria
Chaman Lal Setia Exports Limited
Query
Kindly provide your inputs:

1. What kind of managerial remuneration is considered good?
In your management analysis section you mentioned 2-4% of profits is ideal. If its greater than 5 % of
profits and is in the range of 10-12% then is it ok? For e.g. greenply management pays itself ~12% of
profits. Would you be comfortable with such % of remuneration?
2. When a company shows someone as an independent director, but in reality they are not
independent, then how would you see the management?
Would you see it as a red flag on management or just consider it as a kind of yellow flag? For e.g.,
greenply industries shows Sonali Dalal (AR 2016, page 82) as independent director. But she is also the
director of greenlam. So for all practical purposes she is not independent. Similarly in the case of APM
industries, Ram Ratan Bhagri is shown as independent directors (AR 2015 page 17). But Ram Bhagri
was previously director of Faridabad paper mills in which Sanjay Rajgharia (son of R.K Rajgharia, director
APM) is a director. So he is not truly independent. What do you think of such managements? Would you
be comfortable with investing with them?
3. What kind of remuneration is justified for independent directors?

For example in greenply industries the independent directors are getting a lot of commission (10 lacs
each). I think higher pay for independent directors takes away their independence. They should be only
paid a nominal sitting fees. Would like to know your views on the same.
4. Greenply industries is capitalizing loss on borrowing cost on account of fluctuation in foreign exchange
(AR 2016, page 175, notes to fixed assets). Whereas century ply is charging it directly to earnings
statement under Finance costs (AR 2016, page 187). I think capitalizing this cost if a shenanigan since
foreign exchange losses are operational losses. Please let me know your views on this.
5. I would like to know your views on the usage of revaluation reserve.

For e.g. APM revalued its fixed assets and created a revaluation reserve. Now due to this the depreciation
has increased. So APM takes this depreciation amount (pertaining to increased fixed asset value) from its
revaluation reserve and transfers it to depreciation account under P&L. This is to avoid reduction in
earnings. This is permitted under accounting rules and many companies, including century ply, do this. I
personally think that they should not use revaluation reserve as a cookie jar. If they are revaluing the
assets then they should bear the additional depreciation burden and charge them directly against
earnings.
6. Some companies use W.D.V method of depreciation instead of S.L.M (like century ply and DHP India).
I think using any of them is ok. Would like to know whether this is ok.
A1: First of all, let me appreciate you for the hard work and the diligence that you have put in while
analysing the companies. It's my good luck that readers like you visit my website and provide their inputs.
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Here are my views to your queries:
1) Opining on management remuneration is a very subjective arena. It has to be assessed on case to
case basis. If a management has pulled the company from dire straits and revived it from deep losses into
healthy profits, then I am ok with them taking the maximum salary permitted under the statue. However, a
management that takes steep hikes while the business dwindles or stagnates, then I would wish to avoid
it.
2 & 3) Independent directors: It's again a subjective area. If it is a company specializing in a unique area
where there is a dearth of professionals then you might find repeatedly same people on boards but still be
ok with it. Whereas in a run of the mill business, such repetition might not be ok. Even otherwise, we have
seen that independent directors are rarely able to safeguard minority shareholders.
E.g. In Satyam case, the merger of the software company Satyam with real estate & infra company
Maytas was approved by a committee which had only independent directors and these directors were
who's who of corporate & academic world. Therefore, most of the times, an investor's only safeguard is to
have a shareholder friendly majority shareholder. On similar lines, the salary/commission of independent
directors is immaterial if the majority shareholder is not concerned for minority shareholders.
4) Such losses are usually capitalized and added to the project cost under fixed assets, if they pertain to a
specific project/s. otherwise, they are charged to P&L. Request you to first check whether we are
comparing similar cases here and not apples with oranges. If the cases are similar, then the company that
is charging it to P&L seems to be following conservative accounting practices and does score higher on
investment criteria.
5) Similar to the above answer, a company that directly charges depreciation to reserves is following
aggressive accounting than the one which does not. The conclusion is same as point no. 4 above.
Another company that follows the practice highlighted by you is Emami Limited:
6) Because of reasons like 4, 5 & 6, I focus more on the cash flows than earnings. Especially on Free
Cash Flows, which is post capex and takes care of capitalized part as well. Once you have analysing all
the above areas, then I would definitely appreciate you for understanding the "Art" aspect of the stock
investing.
Query
Read: When to sell a stock. You have mentioned criteria to Buy and Sell. What about Accumulate?
When should an investor accumulate? Say I buy a particular stock whose PE is 8 (and assuming other
factors as elaborated by you are also good). 1 year later, say the PE is 15 while other factors continue to
stay good. Should I accumulate more of the stock or not? The reason I ask is, when we identify a stock,
we may have only so much capital with us. A few months down the line, when we get more capital, should
we reinvest in the stock already discovered or not? There are only so many good stocks in the market
whereas capital availability happens numerous times over any reasonable time period. I guess another
way of asking is should the criteria for Buy and Accumulate be the same or not?
A2:
Buy and Accumulate criteria:
I would advise to see each buy decision as a separate decision independent of what price the investor
has paid for the stock in the past. The P/E ratio at which an investor should buy a stock depends upon the
margin of safety in the stock price and in the business. I have elaborated on the margin of safety in the
stock price and in the business in the following article: If after the initial purchase, the interest rates have
gone down, then the investor can think of purchasing the stock at a higher P/E ratio. If the SSGR of the
company is very high than current sales growth rate and the capex needs are very low in comparison to
the free cash flow being generated by the company, then the investor can think of paying a higher P/E to
the stock. However, it is not objectively defined that at what level of SSGR in comparison to sales growth
or at what level of Capex as percentage of FCF, what should be the maximum P/E ratio that the investor
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pay for the stock. Nevertheless, lets suppose that the investor decides that looking at the interest rates,
SSGR, Capex/FCF levels that she would be willing to pay a P/E ratio of 14 for the company, then she can
accumulate the stock up to P/E ratio of 14 irrespective of her initial purchase price P/E ratio. Moreover,
the fact of being invested in a company after doing analysis, brings in additional knowledge about the
company, its products, its industry etc., which deepens the understanding of the investor about the
company, therefore, an investor can think of paying a little higher P/E to the existing stocks of the portfolio
for accumulation than adding a altogether new stock. I hope that the above argument is able to guide you
into the direction of deciding the maximum amount to pay for a stock while buying and accumulating. I
understand that the answer is not giving you objective answers. However, it would definitely help to take a
step in that direction, which is the "art" aspect of investing.
Query
Read: Analysis: Chaman Lal Setia Exports Limited (Maharani Basmati Rice). Here are my
observations and questions.
1. This is a very cheap stock given the growth it has shown. Companies with such growth is seen
quoting at even 5-10 times its PE. How do I understand if I am being too choosy or not for this PE? Does
the Cash Flow track record indicate long term growth rate would reduce to 8% kind? (Ref. PEG=1)
2. The efficiency of Debt is increasing over the years (Sales/Debt, Net-Profit/Debt, D/E, Interest
Cover) but the weakness in Cash Flow still is leading to increasing the absolute Debt. The 20-25% CAGR
in Sales is aggravating that because it needs more stocking of rice. From stock market's point of view,
instead, should a company target to get a less aggressive Sales CAGR that Free Cash Flow can self-
sustain? Where's the trade-off in Market Capitalization terms?
3.
(A) With 15 crore Dividends, 20 crore Cash Flow, one way to look at the Plant CAPEX
could be that the company managed 5 crore from internal accruals. For the rest it took on Debt.
(ROCE >> CoC).
(b) Loans by Promoters states "no risk of default on Principal as well as Interest". With
15% returns in FY'14-15 and non-payment in FY'15-16 it may effectively feel like cumulative
Preference Shares with a lazy arrangement - but kind of fair.
(c) with 23-31000 T of production per year, average usage of 14 TPH plant capacity is
still between 4.5-7.5 hours a day. Or is that already a bottleneck for Sales growth?
A3: Let's now address the queries raised by you:
1 &2) It is essential for any company to make free cash flows to survive and create value for shareholders
in the long term. Otherwise, the company is a continuous cash drain, which consumes the entire cash that
it generates from operations as well as additional cash from debt/equity. There have been many cases
where companies perished as a result of debt funded growth: Therefore, I always prefer to invest in
companies which generate free cash flow. At some stage in future, the additional cash from debt &/or
equity starts becoming unavailable and the whole business crumbles. In an extreme sense, it looks like a
ponzi scheme.
3A) Loan by promoters should ideally be equity. I believe that a promoters should earn by way of
dividends and if working as an executive, then as a way of salary. Any other format of taking cash from
the company should be looked with caution. Here also the interest rate being paid to promoters is much
higher than the market rate, which further deepens my belief that any form of promoter's money in the
company, other than equity should usually be seen with caution.
3b) Faisal has shared very good calculation of capacity utilization and future potential in the above article
on Chaman Lal Setia Exports Limited. You may take guidance from his calculations.
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Q&A: Rattanmani Metals & Tubes Ltd, Operating
Performance, Small Cap Investing, Market Cycles
Ratnamani Metals & Tubes Limited
Operating performance of companies
CFO vs PAT
Small cap investing
Determining investable P/E ratio of stocks
Management analysis
Market cycles
Margin of safety
Query
Read: Analysis: Ratnamani Metals & Tubes Limited
1. Receipt and repayment of exact loan amounts to a subsidiary and the MD

2. Significant outstanding to promoters (~ Rs 23 Cr)
In the Contingent Liabilities section (AR 2015), I observe the following -

1. Range of tax/custom/excise disputes
2. Outstanding bills (to the tune of Rs 100 Cr
The above observations (coupled with the high salary paid to the promoters) make me uncomfortable
What are your thoughts?
Elaborations:
1. They have a long list of outstanding tax dues/disputes (pg. 69 of AR 2015). I have seen most firms
have only 1 - 3 disputes
One of the above items relates to Employee State Insurance - are they not giving employees their
due?
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2. There is a Contingent Liability worth Rs 100 Cr (pg. 123) with no details other than saying bills
discounted but not matured
3. In Related Parties Disclosure, there is a receipt and repayment of loans worth Rs 6.5 Cr with promoter
and a subsidiary (pg. 127). Why receive and repay in such a short duration?
No info on the interest paid to promoter for this loan
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4. In Related Parties Disclosure, there are huge payables (Rs 23 Cr) to promoters (pg. 128). No clarity on
what this is - unpaid commissions or something else?
A1:
1) Outstanding tax dues/disputes: These are normal in day to day business mostly due to difference in
the treatment of certain items and related tax assessment. The number of disputes being 1-3 for other
companies is mere co-incidence. Disputes may be higher depending upon the diligence of the tax
assessing officer. Disputes do not tell anything about whether the company is at fault or the tax assessing
officer has erred in assessment. Only thing to be focused by the investor is that whether there is any tax
demand which is large enough that it might hamper the liquidity position of the company. If there is any
such demand, then the investor should analyse it further before she takes a final decision about investing
in the company.
2) Contingent liability of 100 cr. for bills discounting: Many a times the seller sells the goods to the
buyer on credit. These sales might be backed by a letter of credit (LC) or by invoices accepted by large
corporate buyers. In normal parlance, the seller would receive the payment after 45-90 days, as per the
credit period agreed by the seller and the buyer. However, the seller may take the LC/accepted bill to the
bank and raise loan against it. The bank gives money today and gets the repayment when the money is
received from the buyer after 45-90 days. During the tenor of this loan taken by seller against the LC/bills,
the seller has received the money which would be paid once the money is received from the buyer.
However, if the buyer does not pay, then ultimate liability is on the seller to repay the bank. That's why the
loan/money received from discounting of LC/bills is shown as contingent liability until the buyer pays up
the money. Usually, the companies do not disclose the names of the buyers whose bills/LCs are
discounted by them.
3 & 4) ESI dispute, deals with the promoters: I would suggest that you should write directly to the
company and seek clarifications on the same.
Q1.1: Quick follow up question regarding Inventory Turnover - you mentioned Inventory Turnover
improved from 3 to 5 from 2011 to 2015 which true, but over a 10 year period from 2007 to 2015, it has
remained largely static at around 5. So, how would you interpret this? It appears the management hasn't
been able to make any meaningful progress in this front?
A1.1: Both the interpretations are right. However, it depends upon the investor, which interpretation she
assumes while taking the final investment decision. As investing is an art and not a science, therefore
such situation of different investors interpreting same data differently and moreover, same investor
interpreting same data differently at different times would always be common place. Therefore, I advise
that investor should not base their investment decision on any single parameter (like inventory turnover)
and take a comprehensive view by factoring in multiple aspects.
Query
Read: Analysis: Ahmednagar Forgings Limited. Please confirm my understanding as per the above
article. If company wants to grow 25% in sales then net fixed asset turnover ratio also need to grow 25%
100
from the previous year? Is it correct? If company NFA is not growing 25% then company need to raise
some capital from outside to meet the 25% sales growth. Is it correct? Please confirm.
A2: If company wants to grow sales by 25% and not invest in fresh net fixed assets, then it needs to
improve the utilization of existing fixed assets by 25%. However, if it is willing to invest in new fixed
assets, then assuming all other things remain constant, then it can increase sales by 25% by keeping
same efficiency of fixed assets utilization/turnover ratio by creating 25% more fixed assets by additional
investment. If the company decides to create additional fixed assets to the extent of 25%, but it is not able
to make sufficient money from its operations to invest in its plant, then it will have to raise capital from
outside.
Query
Could you please confirm how you relate Inventory and receivables with CFO & PAT? As per my
understanding PAT is outstanding balance from customer after sale of product, CFO is balance received
against product sale. I think it is very basic question but I don't know how to relate this. I try to google it
but I can't understand.
A2: The outstanding money to be received from product sales is called account/trade receivables. To
understand the relationship between PAT and CFO, I would suggest you to read the cash flow statement
in the annual report of any company, which would show step by step calculation of CFO from PAT/PBT.
This calculation would clearly show how the profits/funds get stuck in or get released working capital and
the impact of depreciation. It would be a good learning exercise for you to understand in which cases PAT
would be higher than CFO and in which cases it would be lower. In case after reading and analysing the
cash flow calculation of company from its annual report, you have any query, then I would be happy to
provide my inputs on your analysis and query resolution.
Query
After getting through your investments and stock selection I came to know that you are investing in small
cap stocks which are hidden gems. Are small cap stocks investing via SIP better than investing directly as
they have some peculiarities like:
1. they are high risk
2. highly illiquid
3. highly volatile
4. less information public available
In such a situation how an investor can invest large amount of money even though it might be a
fundamentally sound company, of course there are positives like
1. huge growth potential
2. low valuations
3. early entrance advantage
4. under researched
5. emerging sectors
But small caps are double edged swords so going via mutual funds sip will benefit monthly saving
investments in case of ups and downs in markets
A3: I believe that for stocks in any market cap segment the main difference between mutual funds and
the direct stock investing is that in direct stock investing, an investor has full control over the stocks that
she is buying in her portfolio and saves on the expenses related to fund management. There are many
other key differences like mutual funds face redemption when markets fall and are not able to deploy
funds at the very time when stocks become cheap, which hurts portfolio return over long time. On the
contrary, while directly investing in stocks, an investor can take her decision without any such pressure
and can earn returns as per her effort and conviction. Nevertheless, market has a place for all kinds of
investors. Some investors prefer to choose mutual funds and some investors choose direct stock
investing. I believe that a person does not need to have a background in finance for becoming a
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successful stock market investor provided he/she is willing to put in the required time and effort for
learning about stock analysis. Therefore, I recommend direct stock investing approach to investors.
Query
Read: 3 Principles to Decide the Investable P/E Ratio of Stocks. Please confirm my understanding:-
Point: - "I keep a rough guideline of a premium of incremental P/E ratio of 1 for every 10% cushion of free
cash flow (FCF) % above minimum 25-30% for companies that have been growing their sales above 15%
per annum for last 10 years". My understanding: - If my FCF% is 40 % then my premium of incremental
PE can be: - {(40%-25%)/10%} =1.5 so I can give premium of 1 to 2. Please confirm.
A4: It is great that you have got the concept right. You may tweak this calculation as per your preference.
You may keep any threshold that you prefer: higher or lower than 25-30%, a premium of higher or lower
than 1 P/E for every 10% cushion. Similarly, I look for companies with annual sales growth of history of
15% or more. This is because, the companies which are not growing, they are not doing capex and
therefore, are expected to report higher FCF. You may customize the growth parameter as well as per
your preference.
Query
I read your article regarding Mr Nandakumar, promoter of Manappuram finance Ltd .If we come across
such a promoter in our research can we invest in that company even fundamentals of such company are
not so encouraging.
A5: There can be different combinations of management and business.

1. Good business + good management: Best possible investment opportunity
2. Good business + not so good management: avoidable situation
3. Not so good business + good management: investment decision is subjective to what the
management is doing to turn the not so good business into a good business. If the
management is not doing anything and is continuing with status quo, then the
management is not a good management.
4. Not so good business + not so good management: Avoid
Query
In a time frame of 5 years how many bull &bear phases does the stock market face and the cycle is same
or it changes
A6: There is no certainty of any fixed period of cycles. I do not try to adjust my investing pattern to match
it with expected turn of business/market cycles and do not advise it to other investors as well. Moreover,
you may find many articles about it on the internet, which would have views of many other investors on
market cycles.
Q&A: CCL Products Limited, Promoters' Share Pledge,

Financial Ratios, Contacting Companies
Management analysis of CCL Products Limited
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Promoters share pledge
Calculation of ratios in changed balance sheet formats
Calculation of retained earnings
Reasonable sales growth level of companies
Contacting companies for detailed information
Fund flow analysis
Query
I have done only management analysis of CCL Products Ltd and details are as below.
My observations are as below
1. Promoter salary increased in FY11 even though profit was less: I feel initially when
company is small promoter goes for salary hike but not high % change.
2. Chairman is making 32lakh/p.a payment to his wife (also promoter) towards rent as third
party transaction. I do not understand why this is necessary, promoter being HUF (Hindu
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undivided family). I understand this is very small amount compared to business turnover
but needs to know from business perspective.
3. In FY11 and FY12 there is a -ve FCF but still dividend is paid. I feel this would have
avoided.
4. Every year there seems to be trend in introducing new director who is either ex-
bureaucrat or present bureaucrat. I do not understand why only bureaucrat as directors?
5. In 2011 resolution passed saying MD pay should not exceed 5% of net profit but in 2012
FY he got
6. 6.37% of his salary with further resolution stating minimum salary must be 5%.
7. Promoter shareholding is 44.73% but same person name used in different combination to
make count as 6 promoters. Ex. Srishant Challa has been used thrice saying C. Srishant
and Chall Srishant. What was the motive behind this is not clear to me.
Kindly request you to give a feedback on my analysis and also your understanding and views on above 6
points.
A1:
1) The promoter usually compensate them by multiple sources: Salary, commission, dividends, interest on
the loans provided by them to the company. Promoters of different companies use different modes to
compensate them. It's advised that the investors should take a comprehensive view about the
management assessment by looking at the overall outcome of all the management assessment
parameters.
2) Rent payment to a promoter also falls under the preview of getting benefitted from the company as
mentioned in the above parameter. Initially all the companies find it easy to operate out of
family/acquaintance owned premises to keep costs lower. Once the business gains traction, then the
company may start paying the market rate to the property owner. An investor should check whether the
rent is as per market rate prevalent in the area or above it. If the rate is above the prevalent market rate,
then the investor should be cautious.
3) Ideally, companies should not pay dividend if they are not making free cash flows. However, dividend is
a major source of income for the promoters who are mostly the majority shareholders.
4) Many a times companies appoint ex-bureaucrats to help them in liasoning with different govt.
departments for getting contracts etc. This practice is prevalent in companies which supply to PSUs or
Govt. departments.
5) Many a times companies split the remuneration into salary and commission and stipulate the cap on
any one part of this compensation structure. The regulatory cap is 10% on the total compensation given
to all the directors of the company. A company needs to take central govt. approval if it wants to give
higher compensation to its directors.
6) You may take direct clarification from the company whether the name mentioned repeatedly pertains to
the same person or different individuals or the same person holding shares in different capacities.
Further Query:
Regarding Point 3: It looks attitude towards benefits a little suspicious because compensation also
increased and amount in the form of Dividend also increase when there is no free cash flow.
104
Regarding Point 5. Promoter has taken compensation more than cap in FY-12 to FY-14. Now where can I
find that promoter has taken central Govt approval?
Regarding Point 6: Its the same person. Please let me know what will be consequences?
A2: It's advised that if an investor is not comfortable with the promoter/management, then she should stay
away from the company. Because at the end of the day, equity investing is nothing but a call/punt on the
management of the company.
Management is the single biggest factor that would make or break the investor's returns.
Query
My question is how to get information regarding quality of management through Promoter stake pledge
if company is in good profits last several years. Ex: Navneet Education. How to analyze promoters
pledge?
A3: Ideally, any pledge of shareholding of promoters' should be seen with caution. However, many a
times, banks stress on promoters of small companies to pledge their shares in favour of banks, in order to
mitigate their risk and to increase the commitment of the promoters in repaying their loan. If the promoter
is a small time entrepreneur, then he/she has no other option but to pledge the shares, however,
promoters of large companies have many other competing financial institutions, which can give them
loans. Therefore, if the shareholding of the promoter of a large company when pledged, should be seen
with extreme caution and should be analysed further to know whether the promoters' shareholding is
pledged for loans taken by the company or for loans taken by promoter in its personal capacity. The
annual report of the company contains required information to make this judgment. Therefore, any
pledging of shareholding by promoters of large companies should be treated with caution.
Query
Query: Since balance sheet presentation has changed, so I am little bit confused on how to calculate D/E
ratio and current ratio (CR), probably due to non-accounting background. For calculating the debt of a
company do we have to take all items mentioned in non-current and current liabilities? Noncurrent
liabilities: Long term borrowings, Net deferred tax liabilities, Other Long term liabilities, long term
Provisions. Current liabilities: Short term borrowings, trade payables, other current liabilities, short term
provisions. Or just long term borrowings, short term borrowings and short term provisions only
While calculating CR:
Should we take all items mentioned in current assets and liabilities? Current assets: Inventories, Trade
receivables, Cash and cash equivalents, Short term loans and advances, other current assets (confused
about whether current assets must be included in calculation). Similarly in current liabilities we add only
short term borrowings and provisions or taken as a whole as mentioned in balance sheet. If you don't
mind can u please explain all these items included in liabilities and assets in simple terms.
A4: Finance is a very versatile field which allows users to tweak the ratios as per their preferences. There
is no right or wrong way of calculating the ratio until the time the investor understands what are the
individual items which are becoming part of the ratios. This is the primary reason that we notice different
investors using their own preferred or custom made ratios to analyse stocks. You may try using different
combinations of items as part of calculating D/E or CR and see which ratio formula works for you the best.
Let me tell you how I prefer to calculate D/E and current ratios: D/E: (Long term debt + short term debt +
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current maturity of long term debt shown under other current liabilities)/Shareholder's funds. Current ratio:
(Cash & equivalents + current investments + account receivables + inventory)/(trade payables). An
investor may tweak these ratios as per her preferences.
Query
Retained earnings is the money which the company puts back in the business. So shouldn't capital
expenditure be deducted along with dividend paid because thats also an expense right? Further,
shouldn't depreciation and amortization be added back to PAT while calculating retained earnings? (Im
just a beginner)
A5:
1) Capital expenditure is done by the company from the earnings that it retains after paying out dividend.
Therefore, capex is not deducted while calculating retained earnings.
2) Adding depreciation and amortization (DA) into PAT takes the investor towards cash flow from
operations, whereas retained earnings is a profitability figure which factors in the DA expense as part of
the capital expenditure the company did in the past years on its fixed assets. DA should be deducted
while calculating retained earnings and should be added back while calculating CFO.
Query
I have attended your workshop in Mumbai and I must say it was one of best class I have ever attended. I
have many doubt sir, which I encountered after returning home. I will send you my query one by one.
Right now, my doubt is related to sales growth. Is it necessary to keep sales growth > 15% for past 10
years or range of 12-15% is also enough.
A6: Choosing the criteria for selection of stocks is purely an investor's prerogative. I would prefer the
growth rate to be as high as possible unless it crosses >30% at the level the growth rates become a bit
unsustainable in the long run. However, if an investor believes that a company that she has found has all
other good parameters in place and is growing within 12-15% range, then she may go ahead with that
company.
Query
You mentioned "For any clarity, we should always call the company secretary or investors relations officer
of the company before we commit our hard-earned money to any stock.". What kind of information
should we ask the company secretary? As a retail investor, would she entertain us? Please share your
experience on calling the company secretary, if any.
A7: You may approach them for any doubt that you have after going through the annual report. I had
approached Haldyn Glass Limited, where once the company secretary arranged a call back by a person
in senior management who explained me their business model in a very simple and lucid manner.
However, on another occasion, I did not receive the required information. Therefore, the response that
you would get would differ from the company to company and within the same company from person to
person. However, if the investor does not call the company, then the doubts would not be clarified at all.
Query
106
Read fund flow analysis in the following article: Understanding the Quarterly Results Filings of
Companies. If there is increase in cash and cash equivalent of current asset section, is it not inflow of
money rather than outflow? How it can be outflow of a fund?
A8: Increase in cash & equivalents is an increase in asset (bank balance), which can be understood as
cash outflow from company to the Banks which leads to an increase in asset of bank balance. It is similar
to the cash outflow from company when it buys any investment product. Investment in such products
leads to cash outflow from the company and resultant increase in holding of the financial/investment
product like mutual funds etc.
Q&A: ICDs, Capital Allocation Skills, Management Analysis,

Role of Macro-Economic Factors and Premium Services
Inter-corporate deposits to related parties
Hedging by careful stock selection while creating portfolio
Clarifications on the terminologies in the Stock Analysis Excel Template (compatible with
Screener.in)
Capital allocation skills of promoters
Management analysis of Chaman Lal Setia Exports Limited
Role of macro-economic factors in the stock selection
Clarifications about the premium service: "Follow My Portfolio" with Latest Buy/Sell
Transactions Updates
Sources of annual reports for companies
Best source of screening companies in Indian stock markets
Query
Should inter-corporate deposit given by company to its promoters or subsidiary should be considered as a
red flag completely??What if company has given the deposit at particular interest rate???If it is given at
an interest rate, how much should be the rate??
A1: Analysis and conclusions about investment parameters are never black & white. Final conclusion is
always dependent upon the investors' own judgment and these conclusions vary from one investor to
another. For the same information two investors take exactly opposite views and therefore, one investor
buys a stock and another one sells the same stock, which leads to occurrence of a trade. Your doubts are
very genuine. Ideally, deposits given to promoters are a red flag and should be seen with caution. Interest
rate alone is not the key parameter. It might be that the promoter is willing to show high interest rate but is
not paying the interest due, which get reflected as interest receivable in the related party section of the
annual report. Instead of loan/deposit, the promoters can always take money in the form of dividends,
which along with promoters also give the money to other shareholders as well. Therefore, you would
appreciate that the assessment of management quality is highly subjective and the investor should move
ahead with her own conclusions.
Query
I have a hypothetical question for you ,in case if I own two different businesses shares in which one
supplies an important chemical which is used in Tyre manufacturing industry and other one is in
retreading business which is a substitute for Tyre industry ,in such a case there is "conflict of interest"
which means one business is actually supporting Tyre industry growth and another one is not supporting
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the growth of the Tyre industry in such a case can I own both the businesses which are mutually
contradicting one other.
A2: Such a scenario leads to two situations:

1. In case one of the companies does not do well, it is expected that the other company
would do well. This is called hedging/risk management.
2. It can be a win-lose situation, if the overall market size if constant and one company can
benefit only at the cost of another company. However, if the market size is increasing,
then it might be win-win situation as both the companies would be able to grow their
business without eating into each others markets.
Query
I need some detailed meanings of terms used in screenshot of excel template shared by you: Stock
Analysis Excel Template (compatible with Screener.in). Please elaborate with terms used in
Screener & some of the following terms in detail-
1. Total Debt = (Borrowings + Liabilities) or Only Borrowings
2. Receivable Days = from where and how you calculated this?
3. MCap = how you calculated or taken for last 10 years each?
4. Cash + Equivalent = (Cash & Bank) or (Cash & Bank + Reserves)
5. FCF = does it mean Net Cash Flow
6. Book Value = How did you calculated or taken from where for each of last 10 years?
7. In Capex NFA means "Net Block" or something else? Also how to calculate or what figure
you have taken for WIP Change?
A3: All the data has been used from the default data provided by screener.in
1) Total Debt = (Borrowings + Liabilities) or Only Borrowings

Total debt = long term debt + short term debt + current maturity of long term debt
2) Receivable Days = from where and how you calculated this?

You may see the formula in the following article: How To Analyse Operating Performance of
Companies
3) MCap = how you calculated or taken for last 10 years each?

You may find further clarification in the following article: Q&A: NMDC, Sintex, Sharda Cropchem, Dish
TV India & others
4) Cash + Equivalent = (Cash & Bank) or (Cash & Bank + Reserves)

The excel template refers to Cash + Investments which equals: Cash & equivalents (bank balance + FD
etc.) + current investments + noncurrent investments
5) FCF = does it mean Net Cash Flow

It is free cash flow. You may find formula and the further clarification in the following article: 3 Simple
Ways to Assess "Margin of Safety": The Cornerstone of StockInvesting
6) Book Value = How did you calculated or taken from where for each of last 10 years?
It is calculated from the latest annual report data provided by screener.in
7) In Capex NFA means "Net Block" or something else? Also how to calculate or what figure you
have taken for WIP Change?
NFA is net block/net fixed assets. The data has been provided by screener.in in default data sheet.
Query
108
I have a query regarding assessment of "capital allocation skill" of promoter/management. Many
companies earn healthy profits and have FCF also but when it comes to placement of this fund, they fail
at this stage by unnecessary acquisitions or move in the business that they dont know. Promoters
decision to generate more profit or keep cash on hand is very crucial for investors. Please provide your
views.
A4: You have raised a pertinent point as the efficient allocation of funds by the promoters is a key
parameter. Many investors use incremental ROE as the parameter for this assessment. However, I do not
prefer sticking to the incremental ROE, and like to assess the allocation in terms of
1. Whether the new deployment of funds is in the related area/unrelated area
2. Whether the project/expansion was completed smoothly within time & cost projections
and
3. Whether the new plant has begun production in time and the impact is visible in the
financial results.
The new capacity might not start producing to the full capacity immediately, therefore, the same needs to
be kept in mind. Putting oneself in the shoes of the promoter would help in such a situation.
Query
What are the ways through which i can know that whether any share at current market price is overpriced
or underpriced? I have been using your premium calculator from a while but the problem is it doesn't
show that whether a share at current market price is overpriced or underpriced. I know stocks move &
have deep connection with emotions & also operators can do anything in the short term. But I want to
know exactly.
A5: The excel file [Stock Analysis Excel Template (compatible with Screener.in)] provides the P/E
ratio at the current prices. I have detailed my approach to decide about the investable P/E ratio of stocks
for value investors in the earlier article. You may use the guidelines to arrive at the preferred investable
P/E range for the stock, which you may like and similarly, you may arrive at the price at which you might
be comfortable buying it.
Query
Read: Analysis: Chaman Lal Setia Exports Limited (Maharani Basmati Rice). On page no. 21 of the
annual report for FY 2016 remuneration, experience and education background of top ten employees of
the company is given. From the given information it feels like the company has no managing staff of
significant importance. Even after considering that its a family run business, the remuneration and
education background of highest paid employees looks insignificant compared to the newly joined third
generation of the family, i.e., Ankit, Sukarn and Sankesh. Further, the educational background of Ankit,
Sukarn and Sankesh is not mentioned which creates doubt about their capability of running the business
in the future. Also, as discussed earlier, the remuneration of the promoters is higher than the maximum
allowable limits. Are these worrying signs of high nepotism? And how important is it from investors
perspective?
A6: You have beautifully explained your point of view. However, as with assessing people in general, the
assessment of management of a company also has significant amount of subjective component.
Therefore, every investor needs to make her own point of view about the management. In general, I
personally would be ok with the promoter family being completely in charge until they are leading the
company well and generating good growth in the business along with taking care of the minority
shareholders, I am ok with the promoters driven organization.
Query
109
I have gone through in details about your website and almost all term and articles and got much more
confidence in stock investment. I appreciate your work on such excellent website in short and sweet
guidance. I have analysed some good business and want to invest but awaiting since some of fear
factors.
Please clarify some of my concerns.
1. There is global economic fear about US and Europe recession in coming years (I read lot
for same), I have 60% invested in gilt funds and want to shift to stocks so should I invest
now or wait to have good opportunity to come.
2. Almost tensions are there in geo politics, Indo- Pak-China, USA- Russia etc. factors.
3. All this external factors should I consider for investment in good company or there will be
minor impact of such factors in future if company business is good.
4. Which is bad for investment from your point of view sir- Wait for some time and invest in
late or invest in current time with good business.
A7:
1, 2, 3) All these queries are related to external macro factors and their impacts on stocks. As detailed in
my stock picking approach on the website, I am a bottom up investor and do not base my investment
decisions on macro factors. I ignore all the macro factors while investing.
4) The best time to invest is whenever the investor has money to spare and invest in markets. Whenever
an investor is able to find good opportunities, she should invest.
Query
Read: Subscribe to "Follow My Portfolio" with Latest Buy/Sell Transactions Updates. My

experience shows that on an average I add one new stock in my portfolio in a year. This is the pattern
since last 3-4 years. However, the number of buy transactions are frequent. I am confused. First
statement says that you add 1 stock (buy 1 stock) in a year. Second statement, says, that buy
transactions are frequent. So do you buy once a year (based on history) or do you buy frequently (more
than once a year?)
A8:
1) "On an average I add one new stock in my portfolio in a year"
refers to adding a new stock to the existing stocks in the portfolio.
2) "the number of buy transactions are frequent"
means that I invest additional money in the existing stocks of the portfolio.
Query
Read: Analysis: Ultramarine & Pigments Limited (OOB brand of detergents). This analysis helped
me a lot to include some more components on my stock checklist in terms of management behavioral
analysis. I've one question to you, do you know how to get the current ratio from screener excel sheet?
The main sheet (Data sheet) doesn't have separate component for Current Asset and Liability. Would it be
possible to help me on this?
A9: You are right that the current assets and current liabilities figures, which are conventionally used to
calculate current ratio are not available in the Screener data sheet. Therefore, it's advisable to calculate
CR from either the annual report or the data from any other source like moneycontrol
Query
110
Where can we find annual report of a company before the year 2010 and in my Google search I am
getting from report junction.com which is a paid service, can you please mention any sources other than
that.
A10: You may try finding the annual reports at: 1) Company website, 2) BSE website 3) Moneycontrol
website. Additionally, you may try google and see if the annual report has been uploaded by anybody on
any other public source.
Query
I am searching for a good stock screener for fundamental analysis, I find some screeners but those are
showing some mistakes, in my view which is Best stock screener for Indian stocks sir? Please give your
free time sir. Thanks in advance sir.
A11: I find that screener.in is one of the best sources to screen stocks in Indian markets based on
fundamental parameters.
Q&A: Virinchi Limited, Investment Books, Investing Terms,

P/E Ratio, Balance Sheet Items, Peers
Queries about Virinchi Limited
Books to learn stock market investing
Different terms related to equity markets & investing
Queries about net fixed asset turnover (NFAT)
Clarification about the investable P/E ratio of stocks
Calculating different balance sheet items like assets and liabilities from databases
Finding industry peers of different companies
Query
Virinchi Ltd is small cap company with 130 crore market cap, it has been growing over 30% for the past
5 years and available at a low PE ratio of 7. It is a software company, but now they have started a 500
bed hospital (3-4 months back) with investment around 500 crore in Hyderabad, numbers from the
hospital business will be reflected in the quarterly results? If yes, isn't the stock available cheap?
A1: Assessment of the competitive advantage of an IT company is difficult in the light of ever changing
technological environment in which such businesses operate. Sustainability of the past growth in future,
would determine whether the stock is available cheap or it is justified at current valuations. The investor
should understand further the kind of products/services the company provides, its competitors etc. to
make an opinion about the future sustainability of the demand of its products/services. Regarding start of
the hospital, it remains to be seen whether the management is able to successfully execute and run the
hospital profitably. There have been many instances where hospitals have not been able to run profitably
and have proved to be a drain on the wealth of shareholders. Therefore, assigning any value to the future
earnings of hospital should be done with a pinch of salt and it is advised to wait and see the execution
ability of the management before arriving at any view about the under/fair/over valuation of the company's
stock price. You may take guidance from the following article for learning more about the companies,
which operate in industries that are new to you:
Query
I am an avid reader of your blog and highly appreciate your simplicity in explaining the things which is
essential to common man for understanding the complex nature of finance. I am interested in
111
understanding the companies balance sheets, what are the norms and rule of accounting practices used
by them and what actually things mean beneath the surface. I believe merely computing numbers don't
lead to insight, it's required that I understand the underlying principle and intention behind them. A lot of
areas like employee benefits (insurance, pension obligations etc.) , currency hedging , adjustment
entries , capitalization of assets and debt and their deprecation or amortization, related party transactions
and understanding consolidated balance still need further deeper understanding to complete the analysis.
Kindly suggest me accounting and finance books that is relevant to Indian companies and Indian laws
and is also easy to understand and serves as complete resource for any information and clarification.
This will enable me understand things for clearly and ask relevant questions.
A2: It's pleasing to know that you wish to read more about accounting concepts. It is important as
accounting is the language of the business and the proficiency at accounting is definitely an asset for
every stock investor. I believe that for investors who do not have background in finance in terms of formal
finance education, they should read 2 books by Benjamin Graham: The Intelligent Investor and Security
Analysis. These books are very intuitive to investors as I could learn a lot about finance and accounting,
when I read Benjamin Graham in 2008-09 before I received formal finance education as part of MBA
(2009-11). Further the investor should read the book: Financial Shenanigan by Howard M. Schilit, which is
a very good book on understanding accounting juggleries used by smart management to cook their books
and present a rosy picture, which things are not as bright. I guess that after reading these 3 books, the
investor would be very well verse with the general concepts, which are applicable across markets. As
accounting rule within specific markets e.g. India, keep on changing year on year, therefore, it is advised
that after reading the above recommended books, the investor should refer internet for further clarity on
individual accounting clarification. As the latest articles on the internet would have explanations as per
latest accounting rules applicable.
Query
1. Different categories of stocks, based on Market cap

2. Terms such as Upper circuit, lower circuit and how these are decided and where one
should see for them
3. Volumes of shares exchanged and how to make sense of this data
4. Different categories of Market cap and limitations set by market regulators for thinly
traded stocks
5. How to disclose only partial buy quantity so as to not increase share price
A3:
1) Different categories of stocks, based on Market cap: They are usually classified as large cap, mid cap,
small cap. Different sources decide different threshold for classifying stocks in to these categories.
2) Terms such as Upper circuit, lower circuit and how these are decided and where one should see for
them: They are maximum amount of up move or down move that the exchange would permit before it
stops the trading in a particular stock or market. An investor can find the criteria about deciding the circuit
filters at the exchange websites: BSE and NSE for Indian markets
3) Volumes of shares exchanged and how to make sense of this data. For fundamental investors, volume
of shares is essential to decide about the liquidity of a stock before investing. For technical analysts, the
volume data is used in calculation of many indicators, which are used to decide the buying/selling
triggers. At www.drvijaymalik.com we follow fundamental analysis and do not use technical analysis for
our investment decisions.
4) Different categories of Market cap and limitations set by market regulators for thinly traded stocks:
Same as per point 1 above. Market regulators like SEBI as well as stock exchanges, which also have
quasi regulatory functions, they stipulate different rule for trading and delivery of thinly traded stocks to
avoid manipulation of stock prices of such stocks so that retail investors do not get stuck in such stock,
which are many a times stock operators driven. Such restrictions include rules like compulsory delivery of
112
some stocks. An investor may learn more about such restrictions on the websites of SEBI and stock
exchanges (NSE, BSE).
5) How to disclose only partial buy quantity so as to not increase share price. Disclosing partial buy
quantity is a feature offered by many stock brokers to their investors. Many brokers offer options to
disclose minimum quantities like 10% of the total order quantity or 1000 stocks, whichever is lower. An
investor may get to know more about such facilities/features offered by their brokers at their respective
website. There is a lot of literature available on the internet about the points discussed above. You may
read other articles available online to learn more about these concepts. If you need any further specific
clarifications about the doubts which you have after reading those articles available on internet, then feel
free to write to us.
Query
I saw this recently in a forum

1) Total Public shareholding:
A) No of shareholders -- xxx
B) Total no of shares held by public-- yyyy
C) Total number of de-materialized shares available -- xxx
My query:
1. What is the meaning of 1, A, B, C?
2. Where can we get this data?
3. Can a listed company, be part private and part public to avoid hostile takeover?
A4:
1) Total public shareholding: it is self-explanatory. It indicates the % of shares held by general public (i.e.
people other than promoters)
A: Number of shareholders: it is self-explanatory
B: Total number of shares held by public: means the number of shares which constitute the total public
shareholding in (1) above
C: Total number of De-materialized shares available: the number of shares which are not held as physical
certificates and can be electronically transferred.
2) We can get this data from the annual report and the quarterly shareholding disclosures filed by the
company to the stock exchanges
3) A company cannot be part private & part public. However, there are certain shares (like the shares held
by promoters), which are not available for others to buy as promoters do not sell these shares easily.
Query
When you say "invest in fixed assets to improve its plant & machinery/technology (leading to lower
NFAT)", you mean "leading to higher NFAT?
A5: I mean to say "leading to lower NFAT"
NFAT = Sales/NFA
Therefore, when a company invests in fixed assets, then the denominator increases in value. However,
the numerator, which is sales, take some time to pick up as it takes some time to find buyers for the new
113
capacity and to reach optimal utilization levels of new capacity. Therefore, the numerator increases with a
time lag. In the interim period of doing the capex and resultant increase in sales, the NFAT levels come
down. You may read the following article to understand more about NFAT and other operating efficiency
parameters of companies:
Query
Read: 3 Principles to Decide the Investable P/E Ratio of Stocks

1. What is 10% in the denominator? Is it sales growth %? Or 10% cushion?
2. So in your above example, when you say "premium of P/E ratio of 2", we mean, if the
current P/E is 13 then we can invest up to P/E of 15 (i.e. 13 + 2)?
A6:
1) 10% in the denominator is cushion. It means that for every 10% cushion, a premium of P/E ratio by 1
can be paid. If the cushion is 30%, then a premium of P/E ratio by 3 can be paid. This is the rough
guideline that I follow while making investments. An investor can tweak these guidelines as per her
preferences.
2) Premium of P/E ratio of 2 should be paid above the benchmark P/E arrived from G-sec yield. To
elaborate further: As mentioned in the above article: "In case of such companies, an investor may choose
to pay a premium (higher P/E ratio) over and above the P/E ratio arrived at after considering ongoing 10
years G-Sec yield"
The article also gives examples of calculating the benchmark P/E ratio from G-Sec yield:
1. If the 10 years G-Sec yield is 10%, then the investor may decide about the maximum P/E
ratio to be paid for a stock as 10 (i.e. 1/10%)
2. If the 10 years G-Sec yield declines to 8%, then the investor may be comfortable at
paying a P/E ratio of 12.5 (1/8%) for the stocks.
3. If the 10 years G-Sec yield rises to 12.5%, then the investors should pay only a P/E ratio
of 8 to the stock (1/12.5%)
An investor may also use 10 year SBI FD rate instead of 10 year G-Sec yield. So if the benchmark P/E
arrived at from the above method from 10 year G-Sec yield is 10 and the premium P/E from SSGR
cushion is 2, then the investor may decide to pay a P/E ratio of 10+2 = 12 for the stock.
Query
I am unable to calculate other asset and other liabilities from screener website balance sheet. If you don't
mind can u please explain how screener calculate the other asset and other liabilities?
A7: As per my understanding, the screener balance sheet data has the following classification:
Equity Share Capital = directly from balance sheet

Reserves = directly from balance sheet
Borrowings = Long term borrowings + Short term borrowings + current maturity of long term
debt presented in Other Current Liabilities in the annual report
Other Liabilities = All other liabilities + Payables + Provisions etc.
Total = equal to the balance sheet total liabilities
Net Block = tangible + Intangible net fixed assets directly from balance sheet
Capital Work in Progress = directly from balance sheet
Investments = current investments + non-current investments
114
Other Assets = rest all the assets/working capital/inventory/receivables/long & short term loans &
advances etc.
Total = equal to total assets in balance sheet
There might be minor adjustments in these items based on the details provided by the companies in their
schedules/notes to accounts. In case you need any further clarifications, then I would request you to write
to screener directly and update us as well.
Query
However Im getting stuck with finding suitable peers in industry, as Im researching Kanpur Plastipack
Limited.so when it comes to its peer comparison. I cant find because Kanpur Plastipack Limited main
product is IFBC and I dont know how to find other suitable players in IFBC or in that industry reliably...so
is there any way out for such case...
A: You are right that many a times, finding exact peers becomes a challenge. This is routinely a case in
SMEs, where a particular company may be operating in a niche area. A web search would help you get
details of more suppliers for the exact product who are present on whole sale portals like Indiamart etc.
Alternatively, you may try contacting the dealers/distributors or call the company directly.
Q&A: Investing Books, SSGR, Alkyl Amines, Ruchira

Papers, Management Remuneration & Others
Guidelines for improving investment skills, investing books etc.
Clarifications related to Self-Sustainable Growth Rate (SSGR)
Queries on Alkyl Amines Chemicals Limited and net fixed asset turnover (NFAT)
Queries on Ruchira Papers Limited and managerial remuneration
Finding asset light businesses
Importance of conference calls and investor presentations
Queries on turnaround stories & BIFR companies
Query
I am presently working as a software engineer. I wanted to learn about investing from 2 years back, but I
didn't know where to start, what courses to take. I tried reading a few books but of no use. A year back
while surfing the internet, I came across your articles. That was the starting point and what exactly I
wanted to learn and thanks for your articles as well. I have a few questions to ask
Question 1
I want to get in-depth understanding and knowledge of evaluating stocks, more than stock evaluation how
to develop in-depth business analytical thinking. What can you suggest to me based on your experience
like where to start?
Question 2
Since I can squeeze 3-4 hrs a day on investing. How do you want me to allocate my time? Reading books
or analysing stocks.
Question 3
For reading other than books. What should I read (read more annual reports, research articles, case
studies)?
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Question 4
At present, I have no idea of valuation. Could you suggest a good book to understand valuation for non-
finance backgrounds which is easy to understand?
Question 5
Any other suggestions apart from these to become a better investor. Doing what make us a better
investor.
A1:
1, 2 &3)
I advise readers of the website that the learning stock analysis and investing has two aspects: theoretical
and practical. The theoretical aspects gets adequately covered by reading two books:
i) The Intelligent Investor by Benjamin Graham
ii) One Up on the Wall Street by Peter Lynch
In addition, readers may go through the articles on www.drvijaymalik.com to get the simplified
understanding of a lot of concepts. For the practical aspect, the investor needs to read more and more
annual reports and then do the company and stock analysis on her own. I believe that the above-
mentioned books would teach an investor most of the relevant stock analysis concepts and thereafter
studying many annual reports would improve her stock analysis skills.
4)
Valuation is a very subjective concept. I prefer to use P/E as the key criteria and have accordingly
explained my thought on the P/E to be paid for any stock in the earlier article.
5)
If choosing between reading more theoretical books and reading more annual reports, then I would advise
investors that after reading the two books mentioned above, the investor should read more annual
reports.
Query
Read: Finding Self Sustainable Growth Rate (SSGR): a measure of Inherent Growth Potential of a
Company. You have mentioned about Ambika Cotton Mills limited and its great shareholder friendly
management. But after using your screener calculator it is showing SSGR in the range of 2-3% which is
well below its sales growth rate of 15% but it has FCF/CFO of an excess of 50% which is a good sign. In
your article of Margin of safety in the business, you have mentioned the importance of both SSGR and
FCF. Here, Ambika Cotton Mills Limited is having very low SSGR which does not provide any margin of
safety. Accordingly, it is not good for the investment I guess. What should an investor do when he
encounters with a company having good management, good ratios, Positive FCF but poor SSGR? Please
explain such scenario where FCF is good but SSGR is lower than that of sales growth as I have
encountered with Ambika Cotton Mills Limited.
A2: I appreciate the in-depth understanding that you are bringing to the concepts of SSGR and FCF. As
per the above article on SSGR: Ambika Cotton Mills Limited falls in part C. It has improved its inventory
turnover as well as receivables days and has managed to reduce its debt and fund its growth by
improving its operating efficiency. In the case of choosing between SSGR and FCF, I would advise that
choosing FCF would provide better objective results.
Q2.1: It means if a company comes under Part C of SSGR where the company is improving its operating
efficiency and has FCF in positive then it can be treated as good for investment? Doesnt it reduces the
use of SSGR when FCF is positive in a company as is the case of Ambika Cotton Mills Ltd?
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A2.1: The article highlights that SSGR does not factor in working capital changes, which are also a
source of cash/avenue of consumption of cash for companies. The changes related to working capital are
captured in FCF calculations.
Query
Article: Analysis: Alkyl Amines Chemicals Limited. I loved the way you have explained. Sir does it
mean that if the company has CFO>PAT which means its operational efficiency is good. But if the
company is still increasing its debt it is only because of poor NFAT even after the company has increased
its NFAT at 2.9 as explained above. How did you come up to the conclusion that debt is increased
because of its poor NFAT even after it is more than 1?
A2.1: I appreciate that you are going through the past articles and are reasoning out with different
concepts to conduct the stock analysis. In the case of Alkyl Amine, the debt seems to have increased due
to the debt funded CapEx. As per the latest data available for FY2007-16 in screener export to excel:
FY2007-16 PAT: INR 223 cr. and CFO: INR 373 cr. Therefore, the profits have been converted into cash
without any issues. However, during the same period of 10 years (FY2007-16), the company has done
CapEx of about INR 206 cr., Paid interest on its debt during this period of about INR 125 cr. and paid
dividends of about INR 58 cr., leading to a total outflow of about INR 390 cr. As a result, we notice that the
debt of the company has increased from INR 82 cr. in FY2007 to INR 111 cr. in FY2016.
Query
Article: Analysis: Ruchira Papers Limited. I think the act says that the remuneration should be 10% of
net profit before tax (and not after tax) as per section 198 of companies act 2013. Can you please
confirm? Please refer to the article from EY on CSR spend guidelines. According to this, the net profit is
calculated as per section 198 of companies act 2013. Please refer page 7. In there the income tax falls
under non-permissible deductions". So income tax cannot be deducted from profit for calculation of net
profit (this would increase the CSR spend required). Hence, as per the act, net profit for calculating CSR
and WTD remuneration is inclusive of tax.
A3: It seems that for managerial remuneration, income tax as well as the remuneration of managers need
to be adjusted. The applicable section is 197 of companies act 2013: "The total managerial remuneration
payable by a public company, to its directors, including managing director and whole-time director, and its
manager in respect of any financial year shall not exceed eleven percent of the net profits of that
company for that financial year computed in the manner laid down in section 198 except that the
remuneration of the directors shall not be deducted from the gross profits"
Also, apparently, the company has declared that it does not have adequate profits for payment of
managerial remuneration under section 197 or schedule 5 of companies act 2013. At page 34 of the
FY2016 annual report: "During the Financial Year ended 31st March 2016, the Company did not have
adequate profits for payment of managerial remuneration under section 197 and Schedule V of the
Companies Act, 2013. The profitability has increased during the year but the remuneration proposed does
not fall under the limits as specified under section 197 resulted inadequacy of profits during the F.Y. 2015-
16. ". Anyway, by any means, the salary being paid to the promoter managers and the relatives is higher
than reasonable levels.
Query
My question: sectors in India having asset-light business model and how to search them in screener
Ratios to look into---
High Fixed asset t/o ratio,
Low debtor's receivables days,
High inventory t/o ratio,
High creditors payable ratio.
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Also having low investment in securities for emergency purposes and reasonable cash balance to meet
working capital requirements. Sectors according to me which is asset light are FMCG, pharma. Waiting
for ur inputs on this and what is ur criteria when u r doing research on a particular sector or stock.
A4: You may screen the companies by the following ratios in screener to get the companies, which are
asset light:
Inventory turnover,
Days of sales outstanding i.e. receivables days
Screener has ready built ratios for the above ratios. For the asset turnover, you may create a custom ratio
in screener as (netblock/sales). I do not screen stocks based on asset turnover, however, I do look at it as
one of the parameters while making the final decision.
Q&A: Buybacks, Mutual Funds vs Direct Equity,

Differences in P&L and CF
Clarification about buyback of shares by companies
Choosing between mutual funds and direct equity
Differences between interest and tax expense in P&L and CF statements
Query
1. Why do companies announce buy backs? Without announcing, Can't they just go and
start buying shares like we do?
2. Any times companies announce share buyback at a max price which is higher than
existing market price, so is this not almost certain that share price is undervalued and will
definitely increase? It's almost like declaring that your share is undervalued?
3. When can share buyback be a red flag? Can you give any examples?
A1:
1) Companies need to announce buybacks while complying with all the statutory requirements. The law
mandates them to announce it in advance. Buyback offer an alternative way of paying shareholders other
than dividends. Now a days, for many shareholders, buybacks are more tax efficient than dividends.
Buybacks also present an opportunity for the company to invest the money in its own shares. Buybacks
increase the value for remaining shareholders as it increase the EPS for remaining shares.
2) Valuation level of a stock/company has to be decided by the investor on her own without reference to
the price point shown by management by way of buyback. Many a times, companies might declare
buyback at a much higher price to benefit insiders who wish to sell shares at a much higher price than the
current market price, then it would mean that the remaining shareholders are funding the gains of the
outgoing shareholders. Buybacks at a very high price might also be announced when the companies are
in a rush to reduce the excess number of shares, which they might have issued as part of liberal ESOPs
so that EPS can be maintained at pre ESOP exercise levels.
3) Buybacks are red flag when announced at a much higher price than the current market price. You may
find many such examples in Indian markets.
Query
One question I have. Rather doing all these due diligence would it be better for any retail investor deploy
her money through MF route? Because if she is not able to generate a return more than well performing
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MF then, would it make sense to spend enough effort to this process? It would be really helpful if you can
spend few minutes and clarify if I'm thinking pessimistically and/or I'm missing something.
A2: If an investor believes that she does not have time to do stock analysis on her own, then she may
utilize the services of MF or PMS. However, if the investor has the time & can put in required efforts to do
her own stock selection, then she can capitalize on the multiple advantages that being a retail investor
brings to her. This is in addition to the savings on the annual expense ratio of about 2%, which MF and
PMS charge, which amounts to a very significant sum over long periods. You may get the idea about the
advantages, which retail investors enjoy over institutional investors as below:
A) No dependence on equity portfolio/markets for day to day living expenses:

A retail investor does not have to depend upon her earnings from equity portfolio to meet her day to day
expenses like rent, EMI, children school fee, kitchen expenses etc. Her salary from the day time job is
most of the times sufficient for these expenses. She does not need to get under stress if a company in her
portfolio does not declare a dividend in any quarter. Whereas a full-time investor might face cash shortfall
in meeting her household expenses, if her portfolio earnings are not as per expectations.
B) Gets investible funds at every month-end:

A retail investor, if she manages her household expenses well, is able to save some surplus funds at the
end of every month from her salary. This surplus or savings provide her regular source of funds, which
she can invest in her equity portfolio. The fact that these funds are not dependent upon the performance
of equity markets, empowers the retail investor to have the discipline of investing regularly irrespective of
market performance. She can easily invest this additional money in new opportunities, without
unnecessary churning in her equity portfolio. A full time investor, whose only source of income is from
equity markets, does not enjoy this benefit of regular source of funds every months for deployment in her
equity portfolio. A full time investor might have to churn her portfolio i.e. sell existing stocks to generate
funds, in case she finds an attractive opportunity in the equity markets. This portfolio churning might or
might not prove to be a successful decision every time.
C) Can take long-term investment views:

A retail investor does not have to prove her portfolio performance to anyone. She is not being judged by
markets/third parties based on the performance of her equity portfolio. As a result, a retail investor can
afford to stay calm and behave in a peaceful manner irrespective of equity market results. She can easily
focus her aim at the long term performance of the companies in her portfolio as she is not being
questioned about her portfolio on a regular basis. An institutional investor does not enjoy such freedom.
The fund management team is continuously under scrutiny for the performance of the funds that are
under their management. Most of the institutional investors, mutual funds (MF), private equity (PE) funds
etc. have to disclose their performance to their investors regularly (daily for MFs, quarterly for PE etc.).
The fund manager is continuously under pressure to showcase good performance whenever she sends
out the periodic performance report to the investors. Even otherwise, large investors of the funds keep on
calling/enquiring the fund managers about performance of their money. Such continuous monitoring of
performance, many a times, leads to short term defensive investment approach by fund managers, which
is focused on avoiding tough questions from investors.
D) Can benefit from bear phases/lower stock prices by buying more:

As mentioned above, a retail investor is not answerable to anyone for her investment decisions. She can
take her portfolio decisions without the need of such decisions looking justifiable to others. This ability
gives an immense power to the retail investor to benefit from bear markets when she can add on to her
favourite stocks, which are available at cheap prices. She can keep on buying stocks despite a
continuous decline in stock prices. An institutional investor does not have this unrestricted freedom. As
mentioned above, all her decisions have to be approved by a board of trustees and have to be justified to
large investors. In such a situation, institutional fund managers, most of the times avoid buying stocks
when prices are falling as the fund manager might have to face tough questions on underperformance of
the fund if the stock price of her newly bought companies does not recover soon enough.
E) Hold back buying when stock prices are high:
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A retail investor does not have an obligation to invest her surplus funds in the equity markets as and when
she get the salary. The retail investor can hold back the buying decision and sit on cash until she believes
that the stock prices are available at attractive levels. Many institutional investors like mutual funds, do not
have such freedom. Mutual funds have to invest a certain portion of their funds in equities, which is
determined by their fund guidelines/prospectus. E.g. if a mutual funds has the mandate of investing 90-
100% of its funds in equities, then it has to keep at least 90% of funds invested in equities all the time
irrespective of valuation levels of stocks in the markets. Such mandated guidelines create hard times for
mutual fund managers, who face fund movements at precisely the wrong times. Most of the mutual funds
see higher investment by investors in bull markets when stock prices are rising. As a result, to maintain
the minimum equity investment proportion, the mutual fund manager has to invest the fresh funds in
stocks despite high valuations. On the contrary, many a times investors withdraw their funds from mutual
funds in bear markets. The fund manager to meet the fund requirement of redemptions has to sell the
stocks when the stock prices are falling. As a result, the mutual fund managers end up buying stocks in
rising markets and selling stocks in falling markets. This is buying high and selling low, which is against
the key principle of equity investment, which says that investors should buy low and sell high. A retail
investor is spared this forced buy high and sell low situation faced by mutual funds, as she does not have
any obligation to invest funds available to her as she does not have a mandated equity allocation to be
followed all the time irrespective of market valuation levels.
Query
I have a query regarding a textile company Vardhman Textiles Ltd. In 2016 Annual report, page no. 71,
Standalone Tax expenses was Rs. 211.58 Cr. and 2016 Standalone Interest expenses was Rs. 86.85 Cr.
But in the Cash Flow Statement Tax expenses was Rs. 232.34 Cr. and Interest expenses was Rs. 133.31
Cr. Could you please explain why this kind of huge difference in Tax and Interest expenses between Profit
& Loss statement and Cash Flow statement ? Are these worrying signs? And how important is it from
investors perspective?
A3: Companies show the tax expense in the P&L, which is calculated as per the rules of the Companies
Act. However, in the CF statement, the tax outflow shown is the amount paid to income tax as per the
rules of Income Tax Act. As many a times, the two acts treat many expenses differently, therefore, the
profit of the company in P&L statement and the income tax return filing is different. Therefore, the
companies end up paying different amount in tax to Income Tax Dept. than what they have shown in the
P&L. These differences in the tax figures in P&L (as per Companies Act) and CFO (as per Income Tax
Act) form one of the basis of deferred tax assets & deferred tax liabilities. Similarly, the interest figure in
the CF statement includes the interest outflow which is expensed in the P&L as well as the interest
outflow, which is capitalized as part of the project cost and shown as part of fixed assets/CWIP. Therefore,
the interest expense figures in the P&L and CF may differ. This is normal accounting practice. An investor
should always assess the interest servicing capability of a company by considering both the P&L interest
figure as well as the capitalized interest figure.
How to Do Company Analysis & Read Annual Reports and

Management Analysis (Q&A)
Queries about my approach to company analysis and reading annual reports etc.
Management analysis of companies
Query
I have a few questions for you Sir.

1. How much time to you usually spend to analyse a particular company?
2. Should one set a time limit in the first place?
3. How do you know where to begin?
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4. And how does one realize which would logically be the next step? What to do in case one
does not find sufficient data (even though there is no dearth of sources of Secondary
Data) for a particular step in the framework of the analysis?
5. Most importantly in case data is not available how to use surrogate indices?
6. Because over and above the framework you have laid out to analyze businesses I have
seen in all your Stock Analysis" articles a story which connects the dots for the readers.
(For e.g. you began the analysis of this company by stating the health of the company
during FY 08-10.) How do you build upon this?
Once again I would like to thank you for sharing with us (especially for those who have interest but not a
relevant degree) such valuable information and I hope you continue doing so.
A1:
1) How much time to you usually spend to analyse a particular company?
It does not take a lot of times to reject a company, if it does not meet the basic criteria. The stock
analysis excel template (compatible with Screener) helps in this regard by presenting the relevant
data with parameters that I prefer to analyse as a dashboard and therefore, saves a lot of my time.
However, if I need to analyse a company in depth for personal investment if it meets the basic parameters
or when I analyse any company for response to any reader's query, then it usually takes 2-3 days. It took
2 days to analyse Indo Count Industries Limited.
2) Should one set a time limit in the first place?

One should put a check to the amount of material to be analysed and not a limit on the time spent. As an
investor analyses more & more companies, then the time required for him to analyse each additional
company would keep on falling with experience. Initially, the analysis would take more time and rightly so.
I prefer to analyse:
last 10 years' financial numbers,
read all the annual reports available in public domain
all the credit rating reports available since the start of rating coverage
go through entire company website,
read investor presentation on the company website,
read the quarterly results since last financial year end
do google search about the company and read key articles.
The material mentioned above would present an investor with the most of the relevant information
available about the company in the public domain.
3) How do you know where to begin?
For filtering, begin with Screener and filter companies based on one's preferred parameters.
Read: Shortlisting Companies For Detailed Analysis and then and keep on rejecting the
companies that do not meet basic criteria. The customisable excel template helps at this stage.
Download Dr Vijay Malik's Screener.in Stock Analysis Excel Template. Later on, the investor
should proceed with the study of the documents mentioned above.
4) And how does one realize which would logically be the next step?
While analysing the financial data and reading annual report etc., the investor will keep on facing
questions about the company and its activities. Seeking answers to these questions will keep on guiding
the investor ahead in the analysis journey.
5) What to do in case one does not find sufficient data (even though there is no dearth of sources
of Secondary Data) for a particular step in the framework of the analysis? Most importantly in
case data is not available how to use surrogate indices?
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It is advisable to avoid the company where sufficient data as per investor's preference is not available.
Such companies may present negative surprises to the investor later on. Also, there is no dearth of
companies in Indian markets. It is advised that the investor should move ahead to next company.
6) Because over and above the framework you have laid out to analyze businesses I have seen in
all your Stock Analysis" articles a story which connects the dots for the readers. (For e.g. you
began the analysis of this company by stating the health of the company during FY 08-10.) How
do you build upon this?
Thanks! I am happy that you could observe this. I appreciate the keen eye of observation that you
possess. As mentioned above in response to point no. (4), the attempt by the investor to keep finding the
answers to the questions that come to her mind while analysing the financial numbers and other
documents, keeps on leading the investor to other relevant aspects of the company and related
information. This lead to the investor getting clarity about what all is happening with the company at a
given point of time and what were the major decisions taken by the company in the past and preferably
the motivation of the company management/promoters behind those decisions.
Query
1) What tool/software do you use to highlight in red box in images?

2) How do you normally read and store annual reports, credit reports? Download, underline
with pen/pencil/ highlighter, store in box file OR everything is online because to read
online causes strain to the eyes
A2:
1) What tool/software do you use to highlight in red box in images?
I use a software: Paint.net for doing the highlighting on the images.
2) How do you normally read and store annual reports, credit reports? Download, underline with
pen/pencil/ highlighter, store in box file OR everything is online because to read online causes
strain to the eyes
I read annual reports on the laptop/tablet and keep making notes in a separate word document
simultaneously. I do not store these reports as they are readily available on public sources.
Query
Read: Analysis: Indo Count Industries Limited. Great microscopic findings regarding the warrants and
revaluation of assets. A layman would have looked only upon the phenomenal growth and turnaround of
this company. I just want to ask whether one should look the above two issues as a deterrent for entry or
they may be ignored. It's true that the promoters have pedaled the company through tough times and
converted it into a cash generating machine but it seems the promoters want to have the largest slice of
the fruit leaving little for the shareholders. Are they taking them for granted? The whole warrant episode
and its timing explains it all. Asset revaluation and leaving large expenditures without explanation is also
not acceptable. What should one do under such conditions? Please throw some light.
A3: The final investment decision has to be taken by an investor on her own by deciding whether the
company meets her investment criteria or not. However, it is important to know all the facts about the
company so that the investor is not faced with the negative surprises later on. In case of Indo Count
Industries Limited as well, an investor should keep in mind all the facts and then decide about the final
investment decision. Different investors interpret the same information differently and therefore take
different positions in a transaction. Therefore, I would not be able to advise what conclusion an investor
should derive from the information mentioned in the article apart from the fact that each investor should
take her decision with open eyes keeping all the relevant facts in front of her. Moreover, you may read my
views about promoters using warrants for personal benefits in the earlier article.
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Rights Issue, Revaluation Reserve & Other Queries (Q&A)
Rights Issue
Revaluation of assets by company and usage of revaluation reserves
Clarification about reserves & surplus
Query
1) What is the meaning of rights issue? - I understand it that the company allots ordinary
shares in a fixed ratio to existing shareholders. Correct me if I'm wrong
2) Why is this done?
3) Who decides the price? Could this pose a conflict of interest to majority shareholders?
4) Normally if this is done at a significant discount to market price, then share price falls
immediately. How to interpret this
5) Any red flags to be aware of during rights issue?
Anything else one needs to know about rights issue?
A1:
1) What is the meaning of rights issue? - I understand it that the company allots ordinary shares in
a fixed ratio to existing shareholders. Correct me if I'm wrong
You are right about the concept of rights issue. However, subscribing to rights issue is option for
shareholders and thereby not a mandatory event.
2) Why is this done?

To raise the additional resources for the company. Simply an alternative to follow on public offer (FPO)
etc. It many a times forces existing shareholders to subscribe to maintain their same percentage stake in
the company because if one does not subscribe, then her percentage shareholding would go down in the
company.
3) Who decides the price? Could this pose a conflict of interest to majority shareholders?
I could not find any regulatory reference to any pricing formula for rights issue. The rights issue logically
has to be at a discount to market price otherwise, the existing/new shareholders can always buy
additional shares at a cheaper price from the open market instead of subscribing to rights issue.
4) Normally if this is done at a significant discount to market price, then share price falls
immediately. How to interpret this?
Rights issue at a significant discount to market price indicates that the company believes that it would not
be able to raise sufficient money at a right issue price near the market price. That indicates lack of
confidence of the company about the right value of the share at the current market price. The market
would take this as a cue that the current market price is overvalued than the fair value of the stock and
thereby the market price takes a correction.
5) Any red flags to be aware of during rights issue? Anything else one needs to know about rights
issue?
I as an investor do not prefer companies going for rights issue for two reasons:
1) it indicates that the cash flow generation by the company is insufficient and it is growing
more than what its resources are permitting or it has bungled up things in the past and
needs these funds to repay existing lenders.
2) it arm twists existing shareholders to subscribe to maintain their percentage holding. If
one does not subscriber, then the earnings attributable to her share falls.
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Query
Read: Analysis: Indo Count Industries Limited. If the assets are revalued and depreciation is charged
on percentage basis it should be higher and would end up reducing the profit as well as the tax burden.
How it was used to increase profits is not very clear? How building, machinery and generator set can be
revalued up is another riddle. Dont income tax authorities and banks have any say in the matter?
Obviously the management is not overly investor friendly but their performance warrants investment
consideration at the current price.
A2: Company does not seems to have done anything contrary to the existing rules. However, the rules
many a times provide companies the opportunities to benefit from accounting practices e.g. in the case of
Indo Count, by revaluing the DG sets etc. the company could increase its assets & net worth and thereby
could show an improved/lower debt to equity ratio. Moreover, the company could avoid the logical impact
of higher assets on profits (means higher depreciation) by adjusting revaluation reserve against
depreciation. It's like benefiting at both ends. "Heads I win, tails also I win".
Query
Read: Why Management Assessment is the Most Critical Factor in Stock Investing? Considering
GAGL in management analysis (Part - 1), I am not able to differentiate between reserves & surplus and
cash + investments (CI+NCI). Is reserves & surplus notional value whereas cash + investments (CI+NCI)
is actual liquid cash available with the company?
A3: Reserve & surplus is a source of funds whereas cash & investments is a usage of funds. For
example, it might be that a company has 100 as reserves (e.g. from equity infusion or from profits) and
is holding all this amount as cash, then both reserves and cash would be almost equal at about 100 cr.
In another case, if the company invests the entire 100 from its reserves (e.g. from equity infusion or from
profits) in to plant & machinery, then the reserves and fixed assets would be almost equal at about 100
cr and there would be nil cash. There can be other situations apart from the above two hypothetical
situations cited above.
Q&A: Tax Expense, Debt to Equity Ratio, Margin of Safety,

Analyst Meets
Using tax payouts: from P&L or from CFO

Preferred level of debt to equity ratio
Margin of safety & preferred P/E levels
Analyst/investors meetings or conference calls, listing on stock exchanges
Sequence of reading annual reports
Query
While doing the tax analysis don't you think it's more accurate if we compare the actual tax paid (the
figure in cash flow statement) as a percentage of PBT over the years rather than taking the tax paid figure
from P&L.
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A1: P&L and cash flow statement differ many times from each other on account of the timing of the
receipt or payment of cash being different from the time when the revenue or expense become certain for
recognition. This marks the basis of accrual based accounting. Like many other revenue and expense
items, in the case of taxes as well, the timing of the tax being shown as payable in P&L and the tax being
actually paid are different. Such instances give rise to deferred tax assets (DTA) & liabilities (DTL). If an
investor wants to use cash flow statement based tax outflow instead of P&L tax expense, then she should
use it for the entire 10-year history of the financial data, which is usually used in fundamental analysis.
This is because there might be years in the past where P&L tax expense was high and cash flow tax
outflow was low. This would have led to the formation of DTL. In subsequent years, when the company
paid the tax liability to income tax dept., it might be the case that in this year P&L tax expense might be
lower than cash flow tax outflow. If the investor uses P&L tax expense for previous years and uses the
cash flow based tax outflow for the recent year, then she would be over-estimating the tax liability by
double counting a single tax liability. However, as an additional financial analysis parameter, it is advised
that an investor should compare the total P&L tax expense for 10 years with the total tax outflow as per
cash flow statement. Ideally, they should be similar to each other. In case, these two items are not similar,
then the investor should analyse it in detail.
Query
Why do you think the Debt to Equity ratio should be less than 50%? If the company gets the long term
loan on the cheapest rate, it would be beneficial for the company to finance its long-term projects.
Financing the projects with borrowed money than Equity is not expensive for the company?
A2: The stock investing approach along with the preferred investing parameters differ from one investor to
another. A market is a place where different investors with different investing approaches meet, which
results in a trade with two investors taking opposite decisions (buy & sell) with the same information
available to them. I prefer to invest in companies, which have as low debt as possible, preferably debt
free. An investor would appreciate that if the debt is taken, then a fixed liability of making interest and
principal repayments falls upon the company, which needs to be met irrespective of the
business/company performance. Many times, such liabilities lead to the companies selling their assets in
tough times and in infrequent situations, companies face bankruptcy as well. Moreover, the probability of
manipulating books to show good performance increases, when the company has debt on its books and it
needs to meet the performance conditions stipulated by lenders. All these factors become almost
irrelevant, though not non-existent, when a company does not have any debt on its books, which lends
stability to the business approach as well as peace to the investor. However, as mentioned above, the
investing approach is unique to each investor. Therefore, in case any investor believes that any company,
despite having high debt, is being run by good management that would use the additional funds in a very
good manner and this level of debt would not pose any risk to the company and the investors, then she
may go ahead with her conviction.
Query
Read: 3 Simple Ways to Find Out Margin of Safety in a Stock. I find your articles very useful. Thank
you for doing such a great job of contributing to the investor community. My query is relating to the Margin
of Safety (MoS) principle, wherein it says that 'higher the difference between the Earnings Yield (EY) and
125
10 year G-sec Yield, higher is the margin of safety'. So, you advise the investors to buy stocks that have
PE<10 with sound fundamentals. This was the case when you started writing the blog when the 10 year
G-sec yield was around 8%. But in today's economic scenario in India where the 10 year G-sec yields
have come down to ~6.23%, should an investor increase his PE parameter since a slightly higher PE
parameter of say 'PE<12' while screening the prospective companies for detailed analysis would still offer
a good margin of safety (as EY = 1/12 i.e. 8.33%) when compared to 10 years G-sec yield of ~6.23%.
Q2
Read: Final Checklist for Stocks Analysis I have one doubt regarding PE to be below 10. G-sec yield,
now, is around 6.24% based on which PE comes around 16. Should we not take PE<16 criteria as having
sufficient margin of safety? Or am I missing something?
A: You are right that the benchmark P/E ratio for comparison/arriving at the margin of safety keeps on
changing as per the interest rate scenario in the economy. In low-interest rate scenarios, the benchmark
P/E ratio increases when compared to scenarios of high-interest rate. You may read more about my
thoughts on the appropriate P/E ratio to be paid for stocks in the following article:
Query
One of my friends told me about you and introduced your site to me. I have just started reading your
articles on analysis and Q&A articles, and getting a different perspective on Stock Market and Shares. I
am not a big or full-time investor, very novice and till now I was not having any idea about value investing
and also did not have any ownership feeling of any of the companies for which I bought stocks. Now I
feel how important it is to have the ownership feeling on any of the companies whose stocks I am going to
buy. Also got the importance of Fundamental Analysis that need to be done before buying stocks. After
reading your articles I understood that how I had been misled all these days by market emotions, media
and other sources. I am a very novice to the Stock Market, I have few basic questions on Stock Market.
It would be great if you could answer these queries or you can direct me to a right source where I could
find the answers:
1) What will be discussed (or agenda) in the Analyst/Institutional Investors Meeting? And
normally who are the participants of this meeting?
2) How often the Analyst/Institutional Investors meeting happens in a year
3) Can everyone have access to the Minutes or the Summary of the outcome of Institutional
Investors meeting? If so, where can we get it?
4) Why some of the stocks are listed only on NSE or BSE.
5) What is the rationale or why companies prefer being listed in only one of the Stock
Exchanges, not on both?
I will continue to read your articles whenever I find time. Also started reading the book: "Intelligent
Investor"
A2: I am happy that you found the article useful. It's great that you are working towards doing your own
stock analysis and also have started reading "Intelligent Investor". It is a great book and you will find it
very helpful to develop the right attitude for a stock investor.
1. What will be discussed (or agenda) in the Analyst/Institutional Investors Meeting? And
normally who are the participants of this meeting?
Analyst/institutional meetings usually focus on the results & business performance updates about the
companies as well as all the latest developments about the company and their impacts on company's
business. From the company, mainly CEO/Chairman, CFO, company secretary/investor relationship
126
person etc. i.e. key senior management personnel, are usual participants. However, many times the
senior management also brings other key people like marketing head etc. to the Analyst meeting. From
participants side, usually, the investment analysts from stock brokerage firms, mutual funds, institutional
investors are the participants. However, individual investors like us also attend these meetings especially,
when they are held by way of telephonic conference calls.
2. How often the Analyst/Institutional Investors meeting happens in a year
These meetings usually happen each quarter or whenever any major development related to the
company, which is expected to have a material impact on the company, takes place.
3. Can everyone have access to the Minutes or the Summary of the outcome of Institutional
Investors meeting? If so, where can we get it?
Analyst meetings/conference call minutes/transcripts are available on websites like researchbytes.com.

However, the minutes of the closed-door institutional investors meetings, which happen one on one
between the company and potential investors are not disclosed in the public domain.
4. Why some of the stocks are listed only on NSE or BSE.
5. What is the rationale or why companies prefer being listed in only one of the Stock Exchanges,
not on both?
BSE has much more companies listed on it than NSE. As a result, many companies are listed exclusively
on BSE and there might be only a few companies, which are listed only on NSE. Reasons can be many:
A company might have got listed on BSE when NSE was not established (NSE was established in 1992.
And the might not have felt the need of getting an additional listing on NSE later on. Costs associated with
listing on additional exchange might be a factor. However, now a days, many companies, which have
been listed on BSE for many years are getting listed on NSE as well. Also, most of the new listings/IPO
are listed on both NSE and BSE simultaneously, therefore, the trend of being listed only on one exchange
seems to be on a decline.
Query
In what order do you recommend reading the ARs? The latest from older or older to
the latest?
A3: An investor may read the latest annual report first to judge whether it is worth spending further time
on the company. Once the investor has decided to analyse the company in depth, then it is advisable to
read the annual reports starting from the last year and then keep reading the annual reports of later years
on a sequential basis.
Q&A: Share Pledge, Revaluation Reserve, Meeting

Management, SSGR etc.
127
Queries on pledging of promoters shareholding

Revaluation reserves and its impact on taxes & valuation
Meeting with managements & share warrants
Capitalization of investments in wholly owned subsidiaries
Applicability of self-sustainable growth rate (SSGR) and free cash flow (FCF) metrics to
banks/NBFC/financial institutions
Usage of last 10 years of financial data for analysis of companies
Query
I have done a personal analysis of Cox and Kings and I am bullish on this stock due to strong financial
parameters. But one thing that concerns me is that the company has some 45% of promoters total
shareholding pledged. I know that pledge is dangerous and have seen the terrible consequences in the
past. But is it also dangerous when the company has solid interest coverage ratio and very good free
cash flow and future also looks pretty bright
A1: Ideally, any pledge of the shareholding of promoters' should be seen with caution. However, many
times, banks stress on promoters of small companies to pledge their shares in favour of banks, in order to
mitigate their risk and to increase the commitment of the promoters in repaying their loan. If the promoter
is a small time entrepreneur, then he/she has no other option but to pledge the shares, however,
promoters of large companies have many other competing financial institutions, which can give them
loans. Therefore, if the shareholding of the promoter of a large company when pledged, should be seen
with extreme caution and should be analysed further to know whether the promoters' shareholding is
pledged for loans taken by the company or for loans taken by the promoter in its personal capacity. The
annual report of the company contains required information to make this judgment. Therefore, any
pledging of shareholding by promoters of large companies should be treated with caution.
Query
Read: Analysis: Indo Count Industries Limited. The notes on Revaluation Reserves is very interesting.
Please clarify, does the company also considers the same methodology in calculating net depreciation
(after revaluation) for computation of corporate tax. If they do, whats the advantage as there will be more
tax outgo in initial years? Please correct me if I miss anything. Please also suggest me some company
Annual Reports you find it more interesting and knowledgeable.
A2: The company has been showing lesser tax in cash flow statement than the tax expense in profit &
loss statement. Even though the company has shown net tax paid (adjusting for refunds, if any), still, the
difference of the tax between P&L and CF statement is significant. Looking at the amount of difference in
tax between two statements for FY2016 (73 cr), it looks highly likely that there would be many other
factors other than the treatment of revaluation reserve, which has led to this difference. One reason might
be that the revaluation reserve, which is adjusted from depreciation in P&L might not be adjusted in IT
return filing, which can be one of the reasons leading to the higher tax payout in P&L. It needs to be
confirmed by any tax consultant or from the company. The higher tax payout as per P&L might not be a
very undesirable thing for promoters as even after payment of 33% tax on it, the balance 67% gets
reflected in PAT, which in turn increases the EPS and thereby increases the share price, which in majority
of cases is based on a P/E ratio. Therefore, as the EPS increases, the market sentiment towards the
stock changes and this, in turn, expands the P/E ratio as well, which in turn creates wealth. A similar case
128
was seen in Emami Limited. You may read its annual report as well as the analysis of Emami Limited
present on drvijaymalik.com
Query
Two questions:
1) How Important is meeting the management as companies typically do not disclose all the
details in annual reports and most of the information is not available online regarding the
company. What is your approach regarding this?
2) Since reading the Indo count analysis - I had a different thought, given that management
has increased stake in the company, definitely, they expect stocks to give them a better
return. Wouldn't it be in fact be likely for us to invest some portion and track the
progress? As we can see in the case of Indo count itself, it has a good return. I am sure
management would not risk their equity valuation going down.
What would be your take on this?
A3:
1) I do not believe that meeting the management is necessary for making an investment decision. On the
contrary, meeting the management might introduce biases in the investor's analysis. I believe that the
major stress should be given on analysis of publically available information about the company,
management's decisions and their outcomes to create an opinion about the competence and shareholder
friendliness of the management. An investor may attend analyst conference calls or meet investor
relations/company management to understand the business of the company, however, one should not get
influenced and misinterpret the management vision as a sign of competence.The investor should have
her own independent opinion about the management quality based on the data evidence.
2) The interpretation of the events like warrants allotment & their usage for personal benefits is dependent
on the investor. A market is a place where different people interpret same information differently and then
take opposite sides of the trade (buy & sell). I believe that an investor should choose an investing
approach, which she feels comfortable about. In case, an investor believes that the warrants subscription
by the promoters is a sign that share price is going to rise, then she may take an appropriate investing
decision. On the contrary, if an investor believes that such a step is like taking advantage of minority
shareholders, which most of the times, cannot influence such decisions, then she may refrain from
investing in such stocks.
Query
What are your views on capitalizing the WOS (Wholly Owned Subsidiaries) by Quick Heal Technologies
Limited?
A4: Looking at the disclosure, it seems that the company has made investments in its subsidiaries by
subscribing to shares of the subsidiaries. This is normal practice and such investments are reflected in
the non-current investments section of the balance sheet under equity investments. On the face of it, it
seems like a normal business transaction. The details of the treatment of the same in the FY2017 annual
report might throw some more light on the transaction.
Query
129
I had attended your 2nd peaceful investing workshop at Mumbai and this article was a great revision of
sorts. However, could you explain how the SSGR as formulated by you and the requirement to have FCF
can be used while studying financial institutions like NBFCs? Does the concept remain same?
A5: SSGR & FCF are highly relevant for companies, which have to rely on assets for generating new
business. This is because SSGR relies heavily on the net fixed asset turnover (NFAT) and FCF is a result
of capital expenditure (capex). For companies like financial institutions/NBFC/IT companies, which are
mainly service industries and new business does not depend a lot on the amount of fixed assets, SSGR &
FCF do not retain same importance.
Query
As I know your analytical approaches that we should watch at least past 10 years track record of the
company, but sir, if we take back 10 years back then I think the script which able to become multibagger
already became multibagger I mean already went up so much , how are u justify this sir, please explain.
thanks doc
A6: There are different investors in the market, who specialize in investing in companies at different
stages of their life cycle. There are some investors who believe in investing in newly formed business: like
seed funding, angel investors, venture capitalists. There are other investors, which invest in businesses
that have seen the light of the day and have a history of operations of a few years like private equity
funds. Then, there are investors who invest only in large established companies and prefer dividends and
safety of capital. It is, therefore, advised that an investor should find out her own preferred area of
investing and search for companies accordingly. In case, an investor believes that a company with 10
years of good performance would have already become a multibagger, then she should focus on
companies, which have a shorter period of good performance.
130

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Part3

Disc. I am invested in the Stock for over 2 years now.

A8.1: Thanks for your inputs.

Q&A: Ambika Cotton Mills Limited (1)

This article contains the queries raised by readers about:

Q4: I have 2 questions on the business side:

Q&A: Ambika Cotton Mills Limited (2)

This article contains the queries raised by readers about:

Q1: I have a couple of questions:

A1: Coming to your questions:

5 You may find capacity utilization data in the annual report.

6 I did not contact management. You may try it yourself.

Q6: I need 3 clarifications from the above analysis.

Q&A: Ambika Cotton Mills Limited (3)

This article contains the queries raised by readers about:

In-depth analysis of operating parameters of Ambika Cotton Mills Limited

Q&A: Asahi Songwon Colors Limited

Q&A: P/E Ratio, ROE, Selling Stocks & Others

Q&A: Portfolio Management, Valuation Assessment &

Q4: Premier Explosives Limited:

Q&A: P/B Ratio, ROE & Others

A6: As mentioned by me in the article on conducting business analysis of a company, I am a bottom up

Q9: I want to know:

Q&A: Cairn India Limited & Others

Q6: I have two questions

Q&A: Vimta Labs, Shilp Gravures & Others

Q8: My question is on International Paper APPM Limited:

A8: You main query seem to be related to:

Q&A: Future Market Networks, V2 Retail, Pioneer

A3: I would like to highlight 2-3 things to address your concern:

Q&A: Self-Sustainable Growth Rate (SSGR) - Part 1

SSGR = [(1-Dep) + NFAT*NPM*(1-DPR)] - 1

Q&A: NMDC, Sintex, Sharda Cropchem, Dish TV India &

Sintex Industries Limited:

A3: You summed everything in the last line of your write-up:

Q&A: Financial Analysis of Stocks, Capex & Others

A2: It depends on what kind of contingent liability it is:

Capex = (NFA+CWIP) at year end - (NFA+CWIP) at start of year + Dep

FCF = CFO - Capex

Q4: I have a few queries:

A9: The Intelligent Investor by Benjamin Graham is the best book.

Q&A: South Indian Bank, Nucleus Software, Gold ETF &

I couldn't find it in screener.

Q8: I have a few questions:

Q&A: Diversification, CFO, Inventory, Face Value (8)

Q&A: Balkrishna Industries and Jayant Agro Chemicals

Balkrishna Industries Limited

4) Your guess is as good as mine about management predictions.

Jayant Agro Chemicals Limited

ROCE = Earnings before Interest and Tax (EBIT) / Capital Employed

where Capital Employed = (Total Assets - Current Liabilities)

6 yrs. AVG ROCE (2009-2014): Standalone 26.80%, Consolidated: 27.57%

Net Profit Margin: Profit/Sales = 2/100 = 2%

Annual (12 months sales) = 12 x 100 = 1,200/=

Annual (12 months profit) = 12 x 2 = 24/=

Now the key is to understand how much capital is employed,

Net Profit margin = Profit / Sales = 24/1200 = 2%

2005 segment Assets castor oil: 60.97cr

Q&A: Atul Auto Limited & Others

Atul Auto Limited

Like Warren Buffet says:

What is your suggestion?

What is your view on above valuation?

Q7: Is total debt is equal to current liabilities plus fixed liabilities?

SSGR = [(1-Dep) + NFATNPM(1-DPR)] - 1

SSGR = [(1-Dep) + NFATNPM(1-DPR)] - 1