AcumenPhilipFisher PDF

Series 1 - PHILIP FISHER
April-May 2019
Researched and Authored by

Siddharth Vora
Karan Fatnani
INSIDE THIS ISSUE EDITOR’S NOTE

We are pleased to release the complete version of Acumen – Series 1.
1. Editor’s Note
Every single world-class investor comes with their own set of special
2. Investor Overview qualities. These investors are not just academics, but they have a long
term-track record of outperformance that backs their investment
3. Investment Strategy –
philosophies.
Scuttlebutt Technique
Developing the right perspective, mental models and decision-making
4. Highlights of Fisher’s framework is the key to successful investing. A successful investor
15-point Checklist needs to commit his time and efforts to research and uncover
5. Fishing in the Right Pond information that others do not know.
How can you develop such an approach? As many of you would be
6. Top 3 Don’ts
aware, in Series-1 we focus on the investment insights of ace investor
7. Stock Monitoring and Philip Fisher. Fisher is often credited for influencing legendary investor
When to Sell? Warren Buffett. Buffett has often acknowledged the teachings of
Fisher behind some of his famous investments like Apple and Coca-
8. Fisher’s View on Cola.
Dividends
Phil Fisher introduced investors to the Scuttlebutt technique through
9. The 15-Point Checklist in his famous book— “Common Stocks and Uncommon Profits”. He is a
the Indian Context strong advocate of selecting companies that have products or services
which can generate sustainable long-term growth in sales and
10.Key Takeaways earnings.
In this complete issue, we apply Phil Fisher’s 15-point checklist in the
Indian context.
We hope the insights of Phil Fisher will help you pick stocks that make
“If the job has been correctly money and avoid those that won’t.
done when a common stock is
Regards,
purchased, the time to sell is
– almost never” Siddharth Vora
– Philip Fisher CA-CFA-MSc
Investment Research & Products Strategy
Philip Fisher
INVESTOR OVERVIEW
Philip Fisher
“Reading the printed financial records about a
company is never enough to justify an investment.
One of the major steps in prudent investment must

be to find out about a company's affairs from those
who have some direct familiarity with them”
About
Philip Arthur Fisher (aka Phil Fisher), is a renowned investor and author of the famous book
“Common Stocks and Uncommon Profits”. In fact, Warren Buffett used the teachings of Mr.
Fisher’s book to build his famous investments in Apple, American Express and Coca-Cola. At
a time when analysts create complex valuation models, Mr. Fisher’s approach is deeply
rooted in the idea that intangible factors have an enormous impact on the long-term value
of a stock.
Company Founded
Fisher & Company.
Nationality
American - Born on September 8, 1907 in California, United States
Tenure in Investment Management
His investment career spanned from 1928 to 1999
Education
Stanford School of Business (dropout)
Books Authored
Common Stocks And Uncommon Profits, Conservative Investors Sleep Well, Paths To Wealth
Through Common Stocks and Developing An Investment Philosophy.
Famous Investments
Dow Chemical, FMC Corporation, Motorola, Texas Instruments, Raychem and, Reynolds and
Reynolds.
Investment Strategy Research Desk |2

Philip Fisher
INVESTMENT STRATEGY
“There are two approaches to accumulating wealth in the stock market. One is to
time the market, buying stocks when they are cheap, and selling when they are
expensive. The other is to find outstanding companies and hold them.”
Fisher preferred the latter. He sought companies run by high-quality management, which were
leaders in a growing industry, and those with a long history of above-average profit margins or low
cost structures vis-a-vis the industry. Additionally, he specialized in identifying innovative companies
driven by research and development. His growth investing style stems from the “15-point Checklist”
also known as the “Scuttlebutt” approach.
What is the Scuttlebutt Technique?
‘Scuttlebutt’ is an informal term that refers to a rumor or gossip. Phil Fisher popularized the term
among investors and made it more meaningful. For investors, Scuttlebutt is about getting first-hand
information of a company from authentic market sources.
The Scuttlebutt technique refers to a method of learning about a company and its investment merits
by talking to all the people in the company and industry, through which you can to educate yourself
thoroughly before making an investment. This is, of course, beyond the investment analysis and due
diligence required by an investor.
Asking suppliers, vendors, customers, competition, trade association executives, research scientists
from universities or in government and previous employees may all be intangible sources of
qualitative information. However, Fisher believed or in fact noticed that most investors never used
this approach. Instead, they relied on local rumors spread by publicists and Wall Street noise—the
main motto of which is to sell you a product.
Fisher in his book “Common Stock and Uncommon Profits” mentioned the importance of a business
grapevine, thereby explaining the best sources from where one could get the best understanding of
the business while carrying out the Scuttlebutt technique.

Philip Fisher
We list the key sources for the Scuttlebutt technique

Representatives of Competitors
Talking to sales representatives of a company’s competitors is one of the best practices as per Fisher.
Most people, when there is no danger of being quoted, will talk rather freely about their
competitors. He therefore says,
“Go to five companies in an industry, ask each of them intelligent questions about
the strength and weakness of the other four, and nine times out of ten a
surprisingly detailed and accurate picture of all five will emerge”
Former Employees
Another great source of information is a group of former employees. At the same time, it could be
more harmful than helpful, if the investor does not use good judgment and does not cross-check the
information with others. Employees often have a real inside view with regard to their former
employer’s strengths and weaknesses. Equally important, ex-employees will usually talk freely about
it and hence it is equally important to check carefully into why employees left the company.
Suppliers
One may also speak to the suppliers of the company and understand not only the relation that the
company maintains with them, but also get insights on the real sales-volume growth of the
company. After talking to the suppliers, if one concludes that the supplier wasn’t impressed, it gives
an indication that the supplier’s other customers are doing well and ordering more.
Customers
It is often helpful to talk to a company’s customers to understand what drives their buying decisions.
One can also query about the after sales service of a company and estimate its impact on future
sales.
Kenneth Fisher, son of Philip Fisher, has also explained the importance of Scuttlebutt Technique in
the preface of his father’s book “Common Stock and Uncommon Profits” published in 2003. He
pointed out that if one had applied the “15-point checklist” and thereby sourced the information
from “Main Street” instead of Wall Street, one would never have bought scandal stocks like Enron,
Tyco and WorldCom, as it was very easy to avoid such stocks then. As per the Scuttlebutt approach,
investors who put money in such stocks may have relied more on gossip and Wall Street’s opinion.

Philip Fisher
Highlights of Fisher’s 15-point Checklist
1) Expanding Market – Companies should have products and/or services that have an
expanding market.
2) Management must have determination to Develop New Products – No product can remain
successful and yet remain the same.
3) Efficient research and development – Look at how much the company has gained in
revenue per rupee spent on research
4) Above-average sales organization – This is the most basic activity of an organization and
should be seen that it is handled better than its competitors
5) Pick companies with Handsome Profit Margin – Look at how much each rupee in sales
produces in operating profits. The higher it is, the greater is the cushion in bad times.
6) Keeping that Profit Margin – A company not only needs to
generate good profit margins today, but it also needs to do
everything to maintain them in the future. Thus, it is important to
check how efficiently a company has been in cutting costs.
7) Great labour relations – Most investors underestimate the
importance of strong employee relations. It is important for the
companies to have great relations with their employees as they
are the roots of the organization
8) Awesome executive relations – If the relations with blue collars
are important, a firm’s relationship with its executive personnel is
vital. These are the people that can make or break any venture
9) Depth in Management – You want to invest in a business that has
depth in its management. A one man show can be successful for a
while, but organizations where people grow can stay successful
forever
10) Great Cost Analysis – Without this, a firm cannot know where to
allocate its resources most effectively. It’s difficult to decide if a
company is truly outstanding in this perspective but it’s easy to
identify if they are deficient
11) Great Industry specifics – The key strengths of a business differs from one industry to the
other. For a retailer, it might be how they handle their inventory. For an airline, it might be
how efficient they are at pricing every available seat. Find that strength.
12) Long range on profits – Few businesses create great profits today at the expense of profits
tomorrow. But, for long-term investors this is undesirable. A company aiming for profits in
the long-run creates a sustainable business plan.
13) Low risk for dilution – Seek out companies having strong cash positions and/or great
borrowing opportunities that would avoid the need to dilute shareholder’s equity.
14) Communicates risks too – Avoid firms where the management brags about good news as
soon as they get a chance to, but don’t reveal bad ones until absolutely necessary
15) Unquestionable integrity – The management is much closer to the assets of the company
than the investors are, and the number of ways that they can benefit at the expense of the
shareholders legally is infinite. Therefore, this is the only one of the 15-points that is
absolute. Which means, if it’s not fulfilled, you should not invest.

Philip Fisher
FISHING IN THE RIGHT POND

Evaluating a stock idea takes a considerable amount of work. It is virtually impossible to apply all of
Fisher’s 15 points for every publicly traded company. You would spend too much time researching
cases that you could have dropped much earlier. Therefore, you need a process that can quickly
separate the winners from the losers. In investing terms, we refer to this as “screening”. To make big
money on investments, it’s unnecessary to get an answer to every investment possibility—it is more
important to get the right answer for the select few.
Fisher’s Fishing Process
Fisher streamlines his approach. Firstly, he talks to people within the investment industry. He will
consider around 250 companies from various sources of people that he trusts in the industry.
Unfortunately, an average investor might not have such connections.
Thankfully, several digital platforms, with advanced screeners and scanners offer a decision support
system for the modern investor. There are portals such as Trendlyne, Screener.in, MarketsMojo,
Ratestar, StockEdge, etc. You can freely see portfolios of successful investors on these platforms,
along with screening stocks with your own filters. Through these platforms, one can easily conduct
the initial screening process to arrive at the first 250 stocks.
Fisher then aims to narrow down the list to 50 companies from 250. At this stage, he won’t do an in-
depth analysis, but he will glance over the balance sheet, look at the breakdown of total sales by
product lines, profit margins and evaluate the competition.
Now we’re finally ready to apply the “Scuttlebutt” technique as outlined earlier. Out of 50
companies, only 2-3 of them will actually survive, as it’s hard to tick all 15 boxes of Fisher’s checklist.
The final stage involves visiting the management of the business. Out of the 2-3 companies visited by
him, Fisher typically invested in only one of them. This is a thorough process to find a single
company and that’s the reason Fisher is considered as one of the greatest of all time.
Consider around 250 companies from various

sources of people in the investment industry
Narrow down the list to 50 companies from 250,

through quantitative screening using digital
portals based on company’s financial data
Apply the “Scuttlebutt” technique using the15-

point Checklist to the 50 shortlisted, only 2-3 of
them will remain
Final Stage: visiting the management of the

business. Out of 2-3 companies, Fisher typically
invested in only one of them

Philip Fisher
How to arrive at1 Stock out of 250 Stocks?
Once you have identified 250 companies from various sources, both physical and digital, you can
follow the below process.
Step 1
Highlight companies that can achieve sustainable sales growth and profits greater than the overall
market and thereby delivering much higher returns
Step 2
Favour them opportunistically, either when

 the market temporarily undervalues the company due to unexpected bad news, or
 when the overall markets are depressed
Step 3
Investigate further, in order to identify potential companies that are either in or entering into an
area with opportunities for unusual sales growth, but in which other newcomers or competitors
would struggle.
Step 4
Examine the financial statements of potential companies for a thorough understanding of the nature
of the business, primarily:
 Capital structure and Financial position
 Profit Margins
 Breakdown of Total Sales by Product lines
 Extent of Research Activity
 Earning statement figures that throw light on depreciation and abnormal or non-
recurring costs in prior years' operations
 Major owners of the stock
 Degree of ownership by management
Step 5
Use “Scuttlebutt” approach – i.e. answer Fisher’s Checklist (based on three broad categories;
Management’s Qualities, Characteristics of the Business and Functional Items) after talking to
competitors, analysts, and other stakeholders or people who have a decent understanding of the
company.
Step 6
Invest in companies fulfilling most of the above 15 points.

Philip Fisher
Fisher’s Comprehensive Checklist based on 3 Broad Categories
BUSINESS CHARACTERISTICS
Increasing□
1 What are the trends in the profit to sales ratios for the company?
Decreasing □
Does the firm operate so efficiently that high margins are protected by that
2 Yes □No □
efficiency?
3 Is the firm’s competitive advantage easy to identify? Yes □ No □
Does the firm have the ability to enter new markets and compete against
4 Yes □ No □
established players in those markets?
When the company enters a new market, does it use ingenuity or novelty to
5 Yes □ No □
gain traction?
Does the company display excellence in areas such as technology that will
6 Yes □ No □
help it guard against competition?
MANAGEMENT QUALITIES:
Does the company have a leader with a determined entrepreneurial
1 personality combining the drive, the original ideas, and the skills necessary Yes □ No □
to build the fortunes?
2 Has management shown an ability to work as a team? Yes □ No □
Does the company usually find its CEO from inside the firm? (Outside hires
3 should be watched carefully) Yes □ No □
Does the company change the way it does things in order to improve
4 processes? Yes □ No □
When changes are made, does the management turn a blind eye to the
5 risks of those changes? Yes □ No □
6 Do employees feel invested in the company and its success? Yes □ No □

7 Do employees believe they are treated well? Yes □ No □
8 Do employees feel motivated by benefits and work environment? Yes □ No □
9 Do employees feel comfortable expressing concerns with managers? Yes □ No □
FUNCTIONAL ITEMS:
1 Is the company a low cost producer? Yes □ No □
Does the company have a customer relationship that allows it to react
2 quickly to changes in tastes and preferences? Yes □ No □
Does the company have an effective marketing program that keeps a close
3 eye on costs and effectiveness? Yes □ No □
Does the firm have a strong research capability that allows it to produce
4 new products/better products or for non-manufacturing firms to provide Yes □ No □
services more effectively or efficiently?
5 Does the company focus on high margin lines of business? Yes □ No □
6 Does the company deploy its capital wisely and deliberately? Yes □ No □
Does the company have a system that warns management of potential
7 threats to profits with sufficient lead time to adjust to those threats? Yes □ No □

Philip Fisher
FISHER’S TOP 3 DON’TS

Fisher identified three don'ts when approaching a stock investment. He explained this elaborately in
his book, "Common Stocks and Uncommon Profits." These cautions provide investors with timeless
advice on how to avoid common pitfalls that lead to underperformance.
1. Don’t overstress diversification
“I don’t want a lot of good investments; I want a few outstanding ones”

One should not over-diversify his portfolio, unless confident about the nature and actual business
activities of the company. Sufficient diversification would cover an investment in 10 or 12 larger
companies in a variety of industries with different characteristics, and an holding of over 20
companies is probably too much as per Fisher’s philosophy. Wall Street tells you not to “put all your
eggs in one basket.” However, Fisher states that over-diversification can lead to lower returns and it
would be hard to keep a track of all the investments.
Investors who are oversold on diversification put far too little money into companies they
thoroughly understand, and far too much in others about which they know nothing at all. But the
more companies you have, the less you know about each of them, thus increasing the risk of the
unknown.
2. Don’t quibble over eighths and quarters
One should not quibble over small differences if the market price is attractive for a fundamentally
sound company. Attempting to shave points off the price often results in a trade not going through,
and the investor misses a long-term investment in an outstanding firm.
EXAMPLE: TITAN COMPANY LTD
Exactly two years ago, when Titan was trading around 450-460 levels (mid March-2017), an investor
wanted to buy 200 shares at Rs 420 a share. He knew that the company was fundamentally strong,
but just to save a few bucks he didn’t execute the order. Unfortunately, by the end of December
2017, the share price had reached Rs 850 and he gave up his chase. Today, Titan is trading around Rs
1,130 levels, that is 2.5x to its price compared to two years ago. Had he not thought much on saving
Rs 6000-8000, the stock would’ve added nearly Rs 1.3 lakh to his portfolio.
Fisher therefore advises investors to keep their investing activity little flexible for companies that are
fundamentally strong and it can add great value to one’s portfolio.

Philip Fisher
3. Don’t follow the crowd
One really has to be contrarian at heart to follow Fisher’s footsteps. Contrarian in this regard
means to avoid following fads and styles of the stock market, but instead, search for
stocks in the areas the crowd has left behind. Fisher particularly liked to purchase
stocks during macroeconomic gloom, or when a particular sector was disfavored by
the investment community. Many times depressed sectors resulted in unduly
discounted companies.
EXAMPLE: BAJAJ FINANCE
In the second half of 2018, the NBFC crisis rocked the markets. IL&FS, an Indian infrastructure
development and finance company, defaulted on its obligations for the first time. It was then DSP
Mutual Fund, offloaded Rs 200-300 crore worth of commercial papers of DHFL at higher yields, in
what seemed like a fire sale. All the NBFCs stocks including IndiaBulls Finance, DHFL, Edelweiss
Finance and PNB Housing tanked during that period losing anywhere between 10% and 65% of their
market capitalization, signaling concerns of their ability to rollover their credit and raise fresh
borrowings.
Due to the crisis, investors started losing confidence in stocks like Bajaj Finance even though it had
strong fundamentals. This dragged the stock price to as low as Rs 1,974 in October. However, a Philip
Fisher follower would’ve taken a contrarian view by buying Bajaj Finance purely on the basis of the
company’s fundamentals and ignoring the panic sell-off by other investors across the sector. The
company posted solid Q3 numbers with 54% net profit growth (YoY) led by robust loan book growth
and controlled expenses.
From the below graph we can see that companies like Bajaj Finance don’t stay in the dark for very
long and stand out during tough times. One could have bought the stock when it was trading around
Rs 1,970 levels and would have made more than 75% (as on 27thMay, 2019) on his investment in just
over 6 months.
Price Performance
Bajaj Finance Ltd.
Up
76%
Down
34%
(Source: ACE Equity, Moneycontrol)
Investment Strategy Research Desk | 10

Philip Fisher
STOCK MONITORING & WHEN TO SELL?

Philip Fisher was a strong advocate of long-term investing, advising investors to hold onto their
stocks until he’s not encountered with either of the followings:
1. Wrong Facts
Fisher advises selling "mistakes" quickly, once they are

recognized. There are times after a security is purchased when
the investor realizes that the facts do not support the idea
behind the original purchase. It’s probably the case where the
investor has made an error in his/her assessment of the
company. If the purchase thesis was initially built on a shaky
foundation, then the shares should be sold.
2. Changing Facts
One should sell the stock if a company has deteriorated in some

way and no longer meets Fisher's 15 points for purchasing a stock.
Fisher specifically points out that if the company's growth slows
to a rate similar to that of the economy, the stock should probably
be sold. He suggested that investors use a three-year rule for
judging results. One should have the courage to hold the stock
and see it underperform the market for a period of three years,
keeping other things constant. However, if the stock continues to
underperform beyond that period, then he recommends the
investor to sell the stock.
3. Scarcity of Cash
One should sell the stock of a company if there is a

shortage of cash and at the same time the investor
finds a better company which promises higher
long-term results after factoring in capital gains. If
a unique opportunity presents itself, it would be
imprudent to let such a good opportunity go. Thus
an investor should be selling some of his or her
existing holdings to take advantage of the new
opportunity. But, caution is advised here because
it is crucial that we are well-informed about the
new opportunity

Philip Fisher
FISHER’S VIEW ON DIVIDENDS

When it comes to dividends, unlike other investors, Fisher argued that high dividend payments are
not always preffered. At the end of the day, the important factor is where the capital can be
employed in order to provide the highest value to the shareholder. Earnings that are retained could
be used for new manufacturing plants, major cost-saving initiatives over the long run, or product
development. Whether or not the highest value for the shareholder would be achieved through
dividends or through the management retaining earnings is therefore a subject that must be
examined from time to time.
We take an example to understand why Fisher is not interested in current dividends:
Let’s assume two investors planned to infuse around Rs 6800 in tyre stocks in 2010. Investor A, who
prefers to invest in high dividend paying stocks, invested in Goodyear India by looking at the
dividend payout history of the company. On the contrary, Investor B who favors growth companies
and gives least importance to high dividend paying companies invests in MRF Ltd.
Between 2010 and 2018, Goodyear India dividend payout ratio averaged around 23.5%, whereas
MRF was concentrating more on its growth and paid just over 2.25% (on an average) to its
shareholders during the same period. MRF preferred utilizing its profits for capacity expansion (over
high dividend payments) thereby making a conscious move to maximize its shareholders’ wealth in
the longer run.
Investment
Company Month-Year Share Price No.of Investment
Rs Shares Rs
Investor A Goodyear March-10 272 25 6,800
Investor B MRF Ltd March-10 6800 1 6,800
Over the 8-year holding period, Goodyear paid out a total dividend of Rs 1,937, while MRF paid out
just Rs 400. By looking at dividend numbers one might think that Investor A made a wise decision,
however, let’s look at the total wealth the each investor accumulated during the same period.
Total Wealth Accumulated:
Invested CMP (Mar- No. of Capital Dividends Total

19) Shares Appreciation
Value
Investor A (Goodyear) 6800 935 25 23375 1937 25312
Investor B (MRF Ltd) 6800 56900 1 56900 400 57800
One can now notice that Investor B made a wise decision and generated more than 750% return
compared to Investor B who made just barely 300% between 2010 and 2019.
From the above table we can also notice that MRF’s strategy worked well in the favor of
shareholders as the revenues and profits of the company grew at a CAGR of 9.7% and 16.6%
between 2010 and 2018, whereas it only grew by a meagre 3.5% and 7.9% respectively in the case of
Goodyear India Ltd. By this example, one can understand that current dividends don’t always stand a
chance against future growth prospects.

Philip Fisher
THE 15-POINT CHECKLIST IN THE

INDIAN CONTEXT
WE WILL NOW DELVE IN DETAIL ON THE 15 POINTS IN FISHER’S CHECKLIST
For each point on the checklist, we have provided a relevant example in the Indian market
1. Expanding Market – Page Industries
2. Product Development/Product Innovation – Saregama India
3. Efficient Research and Development activities –Divi’s Lab
4. Above Average Sales organization – Britannia Industries
5. Handsome Profit Margin – Colgate-Palmolive (India)
6. Initiatives to Improve Margins – Eicher Motors
7. Relations with Employees – Godrej Consumer Products
8. Relations with Executives – HDFC
9. Depth in Management – Hindustan Unilever Ltd (HUL)
10. Cost Analysis and Accounting controls – Avenue Supermarts
11. Industry Specific factors – HDFC Bank
12. Long Range on Profits – Reliance Jio Infocomm
13. Financial Strength (Avoid Equity Financing) – Tata Consultancy

Services (TCS)
14. Good Investor Relations/Disclosures – Kwality (as a negative example)
15. Unquestionable integrity – Vakrangee (as a negative example)

Philip Fisher
1. DOES THE COMPANY HAVE THE PRODUCTS OR SERVICES WITH SUFFICIENT MARKET
POTENTIAL TO MAKE POSSIBLE A SIZABLE INCREASE IN SALES FOR THE LONG TERM ?
Focus Area
A company seeking a sustained period of spectacular growth must have products that
address large and expanding markets.
EXAMPLE: PAGE INDUSTRIES

Page Industries is engaged in the business of manufacturing and trading of innerwear garments. It
offers a wide range of products for men, women and children under the Jockey and Speedo Brands.
Where the world’s population is growing at a rate of about 1.2%, India’s population is increasing 2%
every year. At the same time, innerwear market leader, Page Industries is growing more than 15%
per year in revenues. The company’s products have a short replacement cycle and one that cannot
be disrupted by technology. Irrespective of how the economy is performing or what the USD/INR
exchange rates are, one won’t stop buying these necessities. Jockey in itself is an aspirational brand
catering to all income groups by offering innerwears that starts from as low as Rs 160. Revenue and
Profits for the manufacturer has grown at a CAGR of 29.5% and 30.7% respectively in the last 10
years compared to India’s average GDP growth of 7.4%.
Size of the market Increase in Revenues Vs No of Excl. Brand Outlets

Current Global Apparel Market (2016) USD 1.7 Tn Revenue vs No of EBOs
3000 1200
Estimated Global Apparel Market (2025) USD 2.6 Tn 2500 Revenue (in Cr) - LHS 1000
2000 800
Current Indian Textile Market (2016) USD 85 Bn 1500
EBOs - RHS 600
1000 400
Estimated Indian Textile Market (2025) USD 220 Bn 500 200
0 0
Current Indian Innerwear Market (2016) USD 3.6 Bn
Price Performance
Page Industries Ltd
5,329%
(Total Return: Mar’08 to Mar’18 – 5,329%) (Source – ACE Equity, Annual Reports)

Philip Fisher
2. DOES THE MANAGEMENT HAVE A DETERMINATION TO CONTINUE DEVELOP PRODUCTS OR

PROCESSES THAT WILL FURTHER INCREASE TOTAL SALES POTENTIALS WHEN THE GROWTH
POTENTIALS OF CURRENTLY ATTRACTIVE PRODUCT LINES HAVE LARGELY BEEN EXPLOITED ?
Focus Area
All markets eventually mature, and to maintain above-average growth over a period of
decades, a company must continually develop new products to either expand existing
markets or enter new ones.
EXAMPLE: SAREGAMA INDIA

Saregama India Ltd is India's oldest music label (since 1902), youngest film studio and a multi-
langauge TV content producer. Since 2017, Saregama has been making headlines owing to the
launch of two unique initiatives, Saregama Carvaan and Yoodlee Films.
Story then
Being in operation for 16 years, the Music World chain was shut in the summer of 2013, as the
business of music retailing could not cope anymore with digital delivery channels and piracy.
Managers came and went, all acknowledging the intellectual wealth of the company, but no one
knew how to cash in on it to revive the enterprise. Saregama ventured into film-making, but from
the standpoint of profitability, the outcome was underwhelming. Not surprisingly, investors almost
wrote off Saregama—its shares were trading at a little over Rs200 each a year ago.
What was the turnaround for the company?
At a time when all marketers were chasing the millennials, Saregama targeted a market that was
largely ignored by other brands. Consumer research revealed that the fear of technology gets
stronger among people as they age. In addition to the 40+ demographic from non-metro cities and
towns, Saregama spoke to people in the 65+ age group in Mumbai to learn their sentiments. They
asked this group of people what they feared the most; the response the company was expecting was
“dying.” Instead, this urban group said what it feared the most was “being dependent on children.”
Armed with this consumer insight, the company set out with a clear vision to create a product for
people who grew up listening to iconic singers like Lata Mangeshkar, Asha Bhonsle, Kishore Kumar,
Mukesh, and Mohd. Rafi. The Saregama team then came up with Carvaan, a familiar and easy to use
interface that triggers nostalgia.

Philip Fisher
Story Now
“Carvaan? It’s disruptive,” says Sanjiv Goenka, the Chairman of RP-Sanjiv Goenka group, which
controls Saregama, after the leadership team hit upon the idea of an affordable speaker with pre-
recorded music from the company’s own library to be sold to people living in digital darkness.
Carvaan is a music player packed with 5000 classic Hindi songs, which one can listen to anytime
without any Internet connection. Apart from 5,000 songs, it comes with an in-built radio and
supports external devices such as USB and Bluetooth. It was and is a win-win situation for the
company as it owns rights to all the 5000 songs.
We can see that the quaterly revenues of the company skyrocketed from Rs 62 in Q1 2018 to Rs 151
crore in Q3 of 2019 as the company sold close to 3 lakhs units of Carvaan. With the increase in the
number of Carvaan sales, the gross margin from the product has also seen an uptick in the last 7
quarters.
Particulars Q1 FY18 Q2 FY18 Q3 FY18 Q4 FY18 Q1 FY19 Q2 FY19 Q3 FY19
Carvaan sales (units) 14,000 95,000 1,32,000 1,46,000 1,64,000 2,29,000 2,97,000
Revenues (in Rs Cr- music only) 45 73 82 92 100 126 139
Total Revenue (in Rs Cr) 62 84 94 105 111 138 151
Carvaan to Total Revenue % 73% 86% 87% 86% 89% 91% 91%
Carvaan Gross Margin % 17% 19% 20% 22% 23% 23% 24%
Share price (at qtr end) 282 418 835 657 679 516 598
Price Performance
Saregama India Ltd
112%
(Total Return: Jun’17 to Dec’18 – 112%)
(Source – ACE Equity, Investor Presentations, Mint Articles, Moneycontrol)

Philip Fisher
3. HOW EFFECTIVE ARE THE COMPANY ’S RESEARCH AND DEVELOPMENT EFFORTS IN

RELATION TO ITS SIZE ?
Focus Area
To develop new products, a company's research and development (R&D) should be both
efficient and effective. One should also evaluate how the revenues are increasing in relation
to per rupee spent on research and development activities. Comparing the costs with its
peers or the industry average can also give a fair understanding about the company’s efforts
with respect to R&D.
EXAMPLE: DIVI’S LABORATORIES LTD

As research and development is the core of pharmaceutical industry let’s look at a company in this
sector to better understand the importance of Fisher’s point relating to R&D.
Established in the year 1990, Divi’s is a leading manufacturer of Active Pharmaceutical Ingredients
(APIs) offering high quality products to over 95 countries. The company primarily manufactures
Generic APIs, Nutraceutical Ingredients and offers Custom Synthesis of APIs thereby providing a
competitive advantage over the entire life cycle of the products.
The company grew at a stupendous pace between 2010 and 2015. This was primarily because of an
effective and efficient R&D department full utlizing the company’s resources and helping the Pharma
major to earn huge profits.
Reasons for the growth:
1) Differentiated CRAMS player:
 Strong chemistry skills, which enable it to develop and commercialize more efficient
chemical processes for its consumers
 Low cost and flexible manufacturing processes, which enables the company to
remain competitive
 Collaborating with the innovator when a new chemical entity (NCE) is under
development, providing the innovator research and chemical custom services
2) Avoiding capital investments that do not make yield the desired returns:
 Avoiding commoditized products just to fill capacity
 Avoiding CAPEX until clear visibility emerges on client orders
 Swift execution of projects and quick capacity ramp up
3) Utilization of Multi-purpose plants at full capacity:
(From FY 2015 Annual Report)

Philip Fisher
Y-o-Y Increase in EBITDA to R&D:

As we know, R&D activities often relate to either developing of new products or improving processes
that would help in optimizing costs. In the case of Divi’s Lab, the company opted to leverage its R&D
activities to improve the processes with a motto to increase profits by reducing costs. Hence,
increase in the EBITDA numbers could be used to validate the efficiency of R&D activities as it takes
into account all the “controllable” costs.
From the below graph, one can therefore notice that the company saw an upward trend between
2010 and 2015 with respect to EBITDA earned per rupee of R&D spent.
EBITDA/R&D
45
40
35
30
25
20
15
10
5
0
2010 2011 2012 2013 2014 2015
Price Performance
Divi’s Laboratories Ltd
163%
(Total Return: Mar’10 to Mar’15 – 163%)
(Source – ACE Equity, Annual Report, Edelresearch, Motilal Oswal reports )

Philip Fisher
4. DOES THE COMPANY HAVE AN ABOVE AVERAGE SALES ORGANIZATION?
Focus Area
In this competitive age, the products or services of only a few companies are so outstanding
that they will sell to their maximum potential, even if they are not expertly merchandised. It
is the making of a sale that is the most basic single activity of any business. Fisher says, “It is
the making of repeat sales to satisfied customers that is the first benchmark of success.”
However, outstanding research, production and distribution are the three main columns
upon which such success is based.
EXAMPLE: BRITANNIA
Britannia Industries Ltd is one of India’s leading food companies with a 100-year legacy and is
engaged in the manufacture of biscuits, cakes and rusks. The Company's famous product brands
under biscuits category include Good Day, Crackers, NutriChoice, Treat, Marie Gold, Tiger and Milk
Bikis.
Britannia is India’s number one biscuit maker and owns 33% of the market share in this segment.
Also this segment churns 70% of Britannia’s total revenues. However, in the last few years the
company has been penetrating the rural markets to gain market share and thereby remain at the top
spot.
Focus points that helped BRIT gain market share and improve margins:
Below are the few strategies implemented by the company in optimizing various departmental
activities and fully utilizing its resources to become an above average sales organization.
1) Production activities
 Integrated Food Park in Maharashtra (Ranjangaon) with multiple product line plants
 Using energy efficient ovens to reduce the baking time
 Focus on adjacent categories bread, cake, rusk, etc
 Increase in In-house production up from 30% to nearly 60% in 2018
2) Marketing
 Opening smaller SKUs for wider visibility in the rural areas
 Strong product pipeline of premium products priced at Rs10, 15 and 20 which will
increase sales and improve mix

Philip Fisher
3) Distribution
 Initiatives on direct distribution expansion in place such as - adding 200,000-250,000
outlets every year
 Split route distribution that has improved the efficiency of sales and improved the
assortment with the dealers
 Lowering distance travelled of final products from 675 km to less than 400 km,
thereby lowering the logistics costs
 Reducing the time taken by directly supplying to the retail stores via 'zero-day
inventory' model
4) Sales Return & Trade Loads
 Anticipating the demand correctly and avoiding the push strategy to market
products thereby helping it to reduce the sales returns and costs associated with it
 Cost savings of 30% (between 2013 and 2016) by knocking off trade loads – lower
needs to revisit the discounts and schemes given to middlemen
Sustained rise in distribution:

The company has increased its presence in the market and now caters to the end consumers via 20.8
lakh outlets. To fasten its distribution channel in the rural areas, the company has also tied up with
nearly 17,900 rural preferred dealers.
Direct Reach - 2.8X Increase Number of RPDs 17,900

(No of Outlets - in Lacs) 20.8 (Rural Preferred Dealers) 14,400
18.4
15.5
10,000
12.6
10 8,000
6,600
7.3
Mar'14 Mar'15 Mar'16 Mar'17 Mar'18 Dec'18 Mar'15 Mar'16 Mar'17 Mar'18 Dec'18
Top-line & Profit Growth

The company not only showed consistent growth in the top-line numbers but also managed to
increase the profits margins by over 600 bps between 2013 and 2018.
Top-line - Consistency in Growths Net Profit (PAT) - Significant

(CAGR – 11%) Improvement in Profit Margin 10.2%
9,829
(CAGR – 31%)
1,004
Rs in Cr
Rs in Cr
5,936
4.2%
260
2012-13 2017-18 2012-13 2017-18

Philip Fisher
Plans for the future

 Entering one new country every year to increase the revenues from international business
 Increasing sales further from the so-called Hindi Belt i.e. focusing more on states like
Rajasthan, MP, UP and Gujarat has been company’s top priority.
 Premiumization in biscuits segment – Being a price sensitive category, BRIT’s plans to cut
prices for premium and super premium products in order to attract more consumers and
boost business could lead to higher revenue generation coupled with improving margins.
 Products additions – Croissant in 2 variants (Chocolate and Vanilla), new launches in
milkshakes and Dairy whitener.
 Plans to increase in-house production to 70% in terms of value.
Price Performance
Britannia Industries Ltd
848%
(Source – Investor Presentation, Annual Report)

Philip Fisher
5. DOES THE COMPANY HAVE A WORTHWHILE PROFIT MARGIN?
Focus Area
If the company isn't doing anything remarkable, nothing is changing, and its margins are
razor-thin, there's no point buying it. And therefore Fisher rightly says, "the greatest long-
range investment profits are never obtained by investing in marginal companies."
EXAMPLE: COLGATE-PALMOLIVE
Colgate-Palmolive (India) Limited manufactures and trades in personal and oral care products in
India. The company offers toothpastes, toothpowder, toothbrushes, and mouthwashes under the
Colgate name.
The company that is widely known for its oral care business competing primarily in the toothpaste
and toothbrush categories is the market leader having a market share of ~53% and ~45%
respectively as per FY18 end data.
Company’s past revenue and profit numbers are the evidence of how fast the company has grown
over these years. It has thereby have met investors’ expectations consistently. EBITDA margins in the
last 10 years ranged between 18-28%, which is difficult to maintain in this industry. It’s a perfect fit
as per Philip Fisher’s philosophy as the company’s profits are not just increasing every year but have
maintained a threshold of 12%+ at least for the last 10 years. Also the company’s stock has risen
from Rs200 a piece (December’08) to around Rs1300 levels today thereby giving a total return of
550% in the last decade.
Reasons for strong profit margin
 Because of brand recognition revenue of the company has grown at a CAGR of 9.5% in the last
10 years.
 Consistent in delivering innovative products across its portfolio. Recent launches include
products such as Colgate Neo toothbrush, Xtra Fresh MaxFresh toothpaste and Colgate
Swarna Vedshakti toothpaste.
 Reaching consumers via 1.5 million direct outlets.
 Increasing distribution in rural markets- Eg: 340 vans in 2012, now more than 1100 vans.
 Lowering dependence on wholesalers to cut costs and thereby increase margins.
 Offering scholarships and conducting free dental check-ups as part of their promotional
activities.

Philip Fisher
Below is an extract from the Income statement highlighting the profit margins of the company
against Sanwaria Consumer Ltd.
Colgate-Palmolive
Particulars (in Rs Cr)/FYE 2014 2015 2016 2017 2018
Revenue from operations 3,579 3,982 3,868 3,982 4,188
Operating Profit 664 822 939 944 1112
Operating Margin 19% 21% 24% 24% 27%
Profit After Tax 540 559 581 577 673
Profit Margin 14% 13% 13% 13% 16%
vs
Sanwaria Consumer Ltd
Particulars (in Rs Cr)/FYE 2014 2015 2016 2017 2018
Revenue from operations 2,459 2,645 2,695 3,512 5,055
Operating Profit 73 74 107 111 187
Operating Margin 3% 3% 4% 3% 4%
Profit After Tax 24 25 16 44 85
Profit Margin 1% 1% 1% 1% 2%
From the above tables we can notice that, though the total revenues of Sanwaria Consumer Ltd
doubled between 2014 and 2018, the profit margins were barely anything to excite shareholders.
However, in the case of Colgate-Palmolive, revenues increased by hardly 17%, but the operating
margin improved from 19% to 27% and the net profit margin remained at a level (13-16%) that was
much higher than compared to its competitor’s (1-2%)

Philip Fisher
Price Performance
Colgate-Palmolive (India) Ltd
103%
Sanwaria Consumer Ltd
-31%
(Total Return: Mar’13 to Mar’19 – -31%)
(Source – ACE Equity, Investor Presentation, Annual Reports)

Philip Fisher
6. WHAT IS THE COMPANY DOING TO MAINTAIN OR IMPROVE PROFIT MARGINS?
Focus Area
One should not look only at the profit margin achieved in the past, but also those of the
future.The latter is more important for investors. If the inflation is increasing, a company's
expenses and competitors will pressure profit margins and therefore for the same reason
investors should look at the management’s strategy for reducing costs and improving profit
margins over the long haul.
EXAMPLE: EICHER MOTORS

Eicher Motors Limited manufactures and sells motorcycles and commercial vehicles in India and
internationally. It owns the Royal Enfield motorcycle brand that offers Bullet, Classic, Himalayan,
Thunderbird, and Continental GT models.
Shift in Focus: Nearly 15 years back, Eicher motors was diversified into 15 businesses including
tractors, trucks, motorcycles, components, footwear and garments and still a profitable company
but none was a market leader. It was then in 2004 when Siddhartha Lal who had just taken over as
COO of Eicher group decided to divest 13 businesses and put all money and focus behind Royal
Enfield bikes and trucks business.
Cost Cutting: As fisher focuses on cutting costs to improve margins, Eicher followed a somewhat
similar strategy. In 2005, the company was selling nearly 25,000 bikes a year and planned to increase
this number to 1,00,000 thereby aiming to spread out their fixed costs. By 2010, the company was
selling 50,000 bikes but on three platforms and that was when Lal decided to build all Enfield bikes
on a single platform to maximize economies of scale.
Also 98.5% of the components sourced by Eicher are from suppliers within India and 60% of them
are located within a 100-kms radius of the plants thereby directly reducing the logistics costs.
Premium Segment: Premiumization is another way to improve the profit margins of a company. The
company was successful to increase its revenues from Royal Enfield business by consistently coming
up with new models and catering the mid-size premium segment market. The models launched
between 2009 and 2018 include Bullet, Classic, Himalayan, Thunderbird X, Interceptor and
Continental GT models. Royal Enfield’s market share in the mid size (250 cc – 750cc) is more than
90% today and volumes have grown at a CAGR of ~46% during 2010 to 2018.
The company’s share which was trading around Rs 200 in mid 2009 is now trading around 20,000
levels after hitting an all time high of Rs 32,236 in last September, thereby giving a 10,000% return in
less than a decade.
Brand Launch Classic Thunderbird Continental Himalayan (Standalone
GT numbers)
↓ ↓ ↓ ↓
Launch Year 2009 2012 2013 2016 (15m) 2018
Total Units Sold 51,955 113,432 178,121 508,099 820,492
Net Rev (in Rs Cr) 375 1,049 1,702 6,186 8,957
EBITDA Margin 14% 16% 21% 29% 35%
PAT Margin 9% 12% 15% 19% 19%
Market Cap (in Rs Cr) 830 7,838 13,457 51,983 77,246

Philip Fisher
EBITDA and PAT Margins

40%
35%
EBITDA Margin
30%
PAT Margin
25%
20%
15%
10%
5%
0%
CY'08 CY'09 CY'10 CY'11 CY'12 CY'13 CY'14 FY'16 FY'17 FY'18
*FY16 -15 months data

From the above table and graph we can notice how the operating and profit margins of the company
surged with the launch of Royal Enfield bikes in India and later with the launch of different models
within this category.
Price Performance
Eicher Motors Ltd
12,839%
(Total Return: Mar’09 to Mar’18 – 12,839%)
(Source –ACE Equity, Investor Presentation, Annual Report, ET Article)

Philip Fisher
7. DOES THE COMPANY HAVE OUTSTANDING LABOR AND PERSONNEL RELATIONS ?
Focus Area
A company with good labor relations tends to be more profitable than one with mediocre
relations, because happy employees are likely to be more productive. Companies with good
labor relations usually make every effort to settle employee grievances quickly. Hence,
investors should pay attention to the attitude of top management toward its employees.
EXAMPLE: GODREJ CONSUMER PRODUCTS

Godrej Consumer Products Limited (GCPL) is one of the leading Fast Moving Consumer Goods
(FMCG) companies in India. Currently the company is building its presence in three emerging
markets (Asia, Africa, Latin America), across three categories (home care, personal care, hair care).
Its biggest brands include Good knight, HIT, B Blunt, Godrej expert, Cinthol and Godrej No.1.
GCPL is ranked among the top 10 manufacturing workplaces according to the Great Place to Work
Institute study. Since the past two years (2017 & 2018), the company has been ranked at the 7th spot
and is also ahead of other listed companies such as Mahindra & Mahindra Financial Services, NTPC
limited, Marico limited and Apollo Tyres on the list.
Great Place to work and Economic Times have been publishing the list of ‘India’s Best Companies to
Work For’ since 2007. The companies are evaluated primarily on two lenses i.e. “Trust Index” and
“Culture Audit”. Trust Index measures the quality of employee experience by seeking anonymous
feedback from the employees. Culture Audit evaluates the people practices of an organization,
covering the entire employee life cycle.
Few of the best practices of Godrej Consumer Products Limited are:
Learning Cafe: It is an initiative or rather a platform for informal interactions between the business
heads and young managers to build better connections and accessibility.
Offer to Joining Engagement: Offer to Joining engagement plan for candidates includes a casual
meeting over coffee with the hiring manager and Function Head, invites to Friday Funda events for
Mumbai based candidates and access to the #Monday8am blog written by the MD. Candidates also
receive cash vouchers and gift hampers on the occasions of marriage, childbirth or birthdays during
the offer to joining period if any.
Sujhao Do! : It is a suggestion scheme wherein all kinds of suggestions are welcomed to improve the
functioning of GCPL’s factory units.
Grievance Redressal Committee at factories: At GCPL factories, employees are encouraged to
highlight issues to their immediate supervisor, who in turn discusses the issues raised with the
‘Grievance Redressal Committee’. Employees are also made aware that they can share their
concerns directly with any member of the committee in case of sensitive issues that they would not
want to share with their supervisor.
All these practices and initiatives by the company to keep its employees happy and therefore
productive have helped in increasing GCPL’s profits and share price over years.
Extract from Indeed:
(Rank: 2015-6; 2016-5; 2017-7; 2018-7)

Philip Fisher
Price Performance
Godrej Consumer Products Ltd
100%
(Total Return: Mar’15 to Mar’19 –100%)

(Source: Indeed, Economic Times, Great Places to Work website)
EXAMPLE: KOHINOOR FOODS

Similarly, companies like Kohinoor Foods Ltd often struggle in increasing profits as there are not
many initiatives undertaken by the company to keep its employees motivated. Therefore, in most
cases, share prices of such companies often remain volatile in the longer period and fail to multiple
shareholders’ wealth.
Extract from Indeed:
Price Performance
Kohinoor Foods Ltd
- 42%
(Total Return: Mar’15 to Mar’19 – -42%)

(Source: Indeed)

Philip Fisher
8. DOES THE COMPANY HAVE OUTSTANDING EXECUTIVE RELATIONS?
Focus Area
As earlier mentioned that having a good rapport with lower level employees is important, at
the same time creating a favorable atmosphere amongst executive personnel is vital. Fisher
makes a point that companies should focus on the executives’ performance and ability as
these are the people whose judgment, ingenuity, and teamwork will in time make or break
any venture.
Salary adjustments are reviewed regularly so that executives feel that merited increases will
come without having to be demanded.
EXAMPLE: HDFC
HDFC seems to be a perfect fit if one wants to understand Fisher’s point on company’s relations with
its executives. HDFC is a leading provider of Housing Finance in India with more than Rs 4400 billion
in gross loans outstanding as on 31st December, 2018. Till date the company has financed more than
6.8 million housing units and is the largest housing finance company by market cap in India.
Remuneration (Directors, CEO, CFO, CS) Vs Total Income& PAT
Remuneration vs Total Income Remuneration vs PAT

40 80000 40 12000
10000
30 60000 30
8000
20 40000 20 Remuneration 6000
Remuneration
PAT 4000
10 Total Income 20000 10
2000
0 0 0 0
2015 2016 2017 2018 2015 2016 2017 2018
(Note: Amount in Rs Cr; Net Sales & PAT LHS, Remuneration RHS)(Executives: Directors, CEO, CFO, CS)
Particulars (in Rs Cr)/FYE 2015 2016 2017 2018

Remuneration 25 27 31 35
PAT 6,951 7,974 8,629 9,566
Total income 48,316 53,223 61,034 69,118
Remuneration to PAT 0.36% 0.34% 0.36% 0.37%
Remuneration to Total Income 0.05% 0.05% 0.05% 0.05%
(Note: FY 18 – Adjusted PAT {Tax @ 30%})
From the above graphs one can easily infer that the remuneration of the key executives is in line
with the performance and profitability of the company. There is enough motivation in the form of
increase in salary and bonuses for the employees to grow the business by showing their full
potential. Also from the table we can notice that the executive remuneration as a percentage of
profits has been around 0.35%, whereas to that of sales its 0.05% in the last 4 years. This clearly
indicates that salaries and bonuses are not only reviewed regularly but are also directly linked to
revenue generated by them.

Philip Fisher
Executive Remuneration as a % of PAT

3.50%
3.00%
HDFC
2.50%
DHFL
2.00%
Indiabulls
1.50%
1.00%
0.50%
0.00%
2015 2016 2017 2018
HDFC is among one of the few companies that is consistent in paying its executives depending upon
the profits they earn for the company and its shareholders.
In case of DHFL we can see an upward trend in the portion of profits that is being paid to its
executives which further highlight that remuneration of CEO, CFO and other key managers is not
directly linked to the profits of the company. This ratio (of executive remuneration to profits) has
more than doubled in the last 4 years from 0.58% in 2015 to 1.28% in 2018.
On the contrary, though the ratio is decreasing in the case of Indiabulls Housing Finance it is still very
high compared to HDFC, DHFL and many other housing finance companies. Where paying the
executives 2.5-3% of the company’s profits seems unreasonably high, decreasing their salaries and
bonuses year on year may not be the best practice in the long run.
This might not only de-motivate the key executives to work in the best interest of the company and
shareholders but may also encourage them to exit the organization. Therefore, according to Fisher,
companies like HDFC with good executive climate offer greater investment opportunities than DHFL
and Indiabulls Housing Finance in terms of managing executive relations.
Price Performance
HDFC Ltd
39%

(Source – Annual Reports {Annexure to Directors’ -Schedule VI}, ACE Equity)

Philip Fisher
EXAMPLE: ICICI BANK

Remuneration vs Total Income Remuneration vs PAT
40 150000 40 15000
30 30
100000 10000
20 Remuneration 20 Remuneration
50000 5000
10 Total income 10 PAT
0 0 0 0
2015 2016 2017 2018 2015 2016 2017 2018
Gross and Net NPA

30000 60000
25000 Net NPA 50000
20000 Gross NPA 40000
15000 30000
10000 20000
5000 10000
0 0
2015 2016 2017 2018
(Note: Amount in Rs Cr; Total Income & PAT LHS, Remuneration (Executives: Directors, CEO, CFO, CS) RHS)
If we look at ICICI Bank, it’s quite evident that there has been an increase in executives’ pay along
with the total income of the bank, thereby justifying that they’re compensated based on the
business they get. However, during the same period NPAs have shot up considerably thereby
shrinking the profits of the bank. In the case of banks and other lending institutions, focus should be
given to the change in the profit numbers rather than the increase in revenue or total income, as it is
the asset quality that really determines the bank’s profitability. Therefore, one must also scan ROA,
ROE, NPA figures along with the change in total income to understand if the management is on the
right path in delivering stakeholders expectation.
On this issue, the RBI has recently proposed a new set of rules (for private and foreign banks)
relating to the compensation of CEO and whole time directors. Considering the criticality of NPAs in
banks, if the new rules are implemented then the banks’ chiefs will see a larger proportion (at least
50%) of their compensation come in the form of variable pay..
Price Performance
ICICI Bank Ltd
- 3%
(Total Return: Mar’15 to Mar’18 - -3%)

(Source – Annual Reports {Annexure to Directors’ -Schedule VI}, ACE Equity)

Philip Fisher
9. DOES THE COMPANY HAVE DEPTH IN ITS MANAGEMENT ?
Focus Area
A business can’t rely on a single person like for example a CEO. Companies that are able to
grow indefinitely focus on cultivating capabilities in individuals in an attempt to prepare
each employee for a top position. The most important policy in this regard is to provide
each individual the authority and freedom to perform tasks in an efficient and innovative
manner.
Also one should look for companies where the top management welcomes and evaluates
suggestions from personnel even if, at times, those suggestions carry with them adverse
criticism of current management practices.
EXAMPLE: HUL
We all know Reliance Industries because of Mr. Mukesh Ambani, Kotak Mahindra Bank because of
Mr.Uday Kotak and Aditya Birla Group because of Mr.Kumar Mangalam Birla. However has anyone
thought what would happen to the organization if any of these businessmen step down from their
respective duties?
However the consequences might not be worse in the case of HUL as the company is not dependent
on one man but rather is led by a group of talented people having expertise in different segments of
the business. One of the most important elements with respect to this point of Fisher’s checklist is
the delegation of authority. Fisher believes that if each level of executives is not given real authority
to carry out its assigned duties in an ingenious and efficient manner according to their ability, good
executives become much like those caged healthy young animals who cannot exercise.
Manvinder Singh Banga (Chairman 1998 to 2003) D Sundaram (Finance & IT head 1999 to 2007)
Douglas Baillie (2004 to 2007) R Sridhar (2009 to 2014)
Nitin Paranjpe (2008 to 2013) P B Balaji (2014 to 2017)
Sanjiv Mehta (since Oct 2013) Srinivas Phatak (Since Dec 2017)

Philip Fisher
Major Heads: Following is a diverse group of talented people who have acted as the brand
ambassadors of the organization and helped it to achieve huge success in the past two decades.
Majority of them joined as Management trainees and are now leading various departments which
also highlight the company’s motto of cultivating capabilities in every employee.
Foods Supply Chain Refreshments
Geetu Verma (Since 2012) Pradeep Banerjee (Since 2011) Sudhir Sitapati (Since 2017)
Shrijeet Mishra (2007 to 2011) Dhaval Buch (2005 to 2009) Geetu Verma (2015 to 2016)
S Ravindranath (2003 to 2006)
Home Care Personal Care Sales and Customer Development
Priya Nair (Since 2015) Sandeep Kohli (Since 2017) Srinandan Sundaram (Since 2017)
Hemant Bakshi (2012 to 2014) Samir Singh (2015 to 2016) Punit Misra (2015 to 2016)
Gopal Vittal (2008 to 2011) Hemant Bakshi (2012 to 2014) Manish Tiwary (2013 to 2014)
Nitin Paranjpe (2005 to 2007) Gopal Vittal (2008 to 2011) Hemant Bakshi (2008 to 2010)
Nitin Paranjpe (2005 to 2007) Sanjay Dube (2005 to 2006)
So how is HUL different from other organizations?

 In 2017, HUL carved out 15 teams within the organization for each category with separate
targets in sales and innovations in an effort to be more agile.
 The teams have representatives from all functions including R&D, sales and marketing,
supply chain and finance and run as independent groups with an entrepreneurial mindset.
 Most of the heads are in early 30s and are given the authority to run the business the way
they think is best.
 This would not only help the company to grow but will also provide a platform for mini-
entrepreneurs, with full responsibility and accountability for delivering the results.
 MD and CEO, Sanjiv Mehta on CCBT, “These are led by CCBT heads; most of them would be
in early 30s and are fully empowered to deliver the plan for the year. This has unleashed
huge amount of trapped capacity. Our job is to mentor and coach them.”
Implementation of such strategies has helped HUL to find talented managers that not only manage
the resources of the organization well but also act as pillars during crucial times.
Price Performance
Hindustan Unilever Ltd
1,160%
(Total Return: Jan’05 to Jan’19 – 1,160%)

(Source – Annual Reports, ET Articles)

Philip Fisher
10. HOW GOOD ARE THE COMPANY’S COST ANALYSIS AND ACCOUNTING CONTROLS?
Focus Area
A company should have a clear overview of what their costs per product line are, hence
empowering the management team to focus on cutting, optimizing and outsourcing where
it adds most value. A company cannot deliver outstanding results over the long term if it is
unable to closely track costs in each step of its operations. One can focus on cost
optimization strategies deployed by the company.
EXAMPLE: AVENUE SUPERMARTS (D-MART)

Avenue Supermarts Limited is engaged in the business of organized retail, and operates
supermarkets under the brand name of D-Mart. The company added 21 stores in FY 19 taking the
total stores to 176. The Radhakishan Damani-led D-Mart is a perfect fit for this point as the company
has been consistently focusing on cost-cutting and cost-optimization strategies, thereby giving a
tough competition to other national players like Reliance Retail and Future Retail.
Strategies implemented by the company to optimize costs:

1) Owned stores model
D-Mart owns close to 85% of its total outlets which helps it to remain well capitalized and debt-
light, while its operations generate spare cash. As real estate leasing usually eats up 4-6 % of
revenues, the ownership model followed by D-Mart has kept costs low. All the money that is
saved using this strategy is eventually offered back to the customers in the form of discounts.
2) Lease arrangement
D-Mart also operates under long-term lease arrangement model, with lease periods of more than
30 years, rather than on a rental model.
3) Sourcing efficiency
D-Mart purchases directly from manufacturers and primary vendors, thus saving on
intermediaries margins. Upfront payment to suppliers helps in availing cash discounts.
4) Centralized sourcing
More than a third of D-Mart’s total sourcing is centralized, giving it greater bargaining power. It
stocks faster moving products like food and grocery in warehouses closer to its stores and slower
moving products like apparel further away, thus optimizing storage costs.
5) Cluster Model
D’Mart opens new malls in a cluster model near to existing malls and distribution centers, which
helps to save cost on the entire supply chain.
6) No stores in the malls

They also avoid opening stores inside malls unlike other hypermarkets to avoid high CAM
(Common Area Maintenance) charges and highly inflated rents, which is almost 6-10% of the
operation cost.

Philip Fisher
Revenue and EBITDA Trend

Because of these strategies, we 25000 1800
notice that not only the revenues 1600
Revenue-LHS
tripled in the last 5 years, but the 20000 EBITDA-RHS 1400
EBITDA margins of the company
1200
increased by over 100 bps YoY 15000
1000
which is very difficult to achieve in
a sector like retail. The company’s 800
10000
revenue grew at a CAGR of 33% 600
between 2015 and 2019, while its 5000 400
EBITDA grew at an impressive 38% 200
during the same period. 0 0
2015 2016 2017 2018 2019
D-Mart Vs Future Retail

Also, if we compare the numbers
with its closest peer, we can notice D-Mart
that though the Gross Margins
were higher for Future Retail in 4 Particulars 2014 2015 2016 2017 2018
out of 5 years, D-Mart still Gross Margin 14.5% 14.5% 20.9% 20.8% 23.3%
reported way better EBITDA
EBITDA Margin 7.2% 7.1% 7.7% 8.1% 8.9%
Margins. These impressive
numbers reflect the management’s PAT Margin 3.4% 3.3% 3.7% 4.1% 5.2%
determination of introducing and
implementing various strategies
relating to cost controls.
Future Retail
Therefore, out of the box
approaches like owning stores Particulars 2014 2015 2016 2017 2018
rather than renting and opening it
Gross Margin 5.2% 16.9% 30.3% 28.6% 31.7%
close to existing malls to gain
consumers’ traction have helped EBITDA Margin -24.2% -16.7% 1.4% 3.8% 4.6%
the company in not only increasing PAT Margin -13.4% -20.1% 0.2% 2.1% 0.1%
revenues but also margins.
Price Performance
392%
(Total Return: Issue Price to Mar’ 19 / Mar’17 to Mar’19 – 392% / 140%)

(Source –ACE Equity,Annual Report)

Philip Fisher
11. ARE THERE OTHER ASPECTS OF THE BUSINESS, SOMEWHAT PECULIAR TO THE INDUSTRY
INVOLVED, WHICH WILL GIVE THE INVESTOR IMPORTANT CLUES AS TO HOW OUTSTANDING
THE COMPANY MAY BE IN RELATION TO ITS COMPETITION?
Focus Area
Fisher described this point as a catch-all because the "important clues" will vary widely
among industries. It is critical for an investor to understand which industry factors
determine the success of a company and how that company stacks up in relation to its
rivals.
Fisher here is basically emphasizing on Industry specific ratios that are useful only in specific industry
and hence calculated for analyzing companies in that industry only. These ratios if applied to
companies in other industries would be meaningless.
Following are some Industry specific ratios
Industry Key Financial Ratio
Banking CASA
Gross NPA Ratio
ROA
Credit-Deposit Ratio
IT Digital Revenue % of Total Revenue

Revenue Per Employee
Revenue % from Fixed Price contract
Utilization Rate
Retail Sales per Square foot
Revenue per Employee
Same Store Growth
Automobiles Recall Rates

Average Production Downtime
Inventory Turnover Ratio
Aviation Revenue per Available Seat Kilometer (RASK)

Cost per Available Seat Kilometer (CASK)
Fuel Costs
Pharmaceutical R&D Expenditure to Sales
No of Patents
Patents Expired
Telecom Average Revenue Per User (ARPU)
Subscriber Base
Media & Entertainment Ad Revenue Growth
Average Subscription Fees per User
Monthly Active Users
Metal Revenue per Tonne/MT
EBITDA/MT
Refineries Gross Refining Margin
Gross Marketing Margin

Philip Fisher
EXAMPLE: HDFC BANK

Below is the comparison of 3 Indian banks (2 Private and 1 PSU) based on the key industry metrics.
One has to not only look at the Total income, Net interest margin and PAT numbers but must also
give utmost attention to bank specific metrics such as CASA, NPA, Credit-Deposit, ROA, etc.
CASA ratio of a bank is the ratio of deposits in current and saving accounts to total deposits. As a
higher CASA ratio indicates a lower cost of funds and therefore ICICI Bank is better in this regard
than compared to Bank of India and HDFC Bank. However, the Credit to Deposit ratio is also highest
in the case of ICICI Bank. This ratio basically gives an indication of how much a bank lends out of its
total deposits. A very high ratio is considered alarming because, in addition to indicating pressure on
resources, it may also hint at capital adequacy issues, forcing banks to raise more capital.
One has to also look at the NPA numbers to understand the quality of bank’s loans. HDFC Bank’s
Gross NPA (to advances) has been the lowest in the past few years thereby helping the Bank to gain
goodwill in the market. It is also important to look at ROA other than ROE to understand banks’
profitability as ROE could be a relatively inflated number in the case of banks.
Bank of India ICICI Bank HDFC Bank
Particulars (in %)/FYE 2016 2017 2018 2016 2017 2018 2016 2017 2018
CASA 25.79 31.83 34 45.4 49.9 51.32 43.25 48.03 43.5
NPA Ratio (Gross) 13.07 13.22 16.58 5.21 7.89 8.84 0.94 1.05 1.3
ROA -1.02 -0.26 -0.97 1.25 1.19 0.86 1.85 1.81 1.81
Credit-Deposit Ratio 70.06 67.91 65.64 109.46 100.53 96.77 85.02 86.16 83.46
Price Performance
Share Price Comparison

350
HDFC Bank ICICI Bank Bank of India
300
250
Share Price
200
150
100
50
0
FY14 FY15 FY16 FY17 FY18 FY19
*Prices rebased to 100 (FY14 taken as base of 100)
HDFC BANK – UP 214%

ICICI BANK – UP 79%
BANK OF INDIA – DOWN 53%
(Source – ACE Equity, Annual Reports)

Philip Fisher
12. DOES THE COMPANY HAVE A SHORT-RANGE OR LONG -RANGE OUTLOOK ON PROFITS?
Focus Area
Investors should take a long-range view, and thus should favor companies that take a long-
range forecast on profits. In addition, companies focused on meeting quarterly earnings
estimates may forgo beneficial long-term actions if they cause a short-term hit to earnings.
Hence, investors should prefer businesses that are willing to pamper their suppliers, give
customers a discount etc. in order to establish goodwill that can be capitalized on in the
long run.
EXAMPLE: RELIANCE JIO

Reliance Jio Infocomm Ltd – Entry of Reliance Jio has not only disrupted the telecom industry but has
also changed the phase of this market. As we all know that India’s telecom firms have been bleeding
since the last 2 years, this company on the other has managed to gain goodwill of the masses by
providing unlimited free calls and steep discounts. Since commencement of its services on 5 th
September 2016, Jio has become the fastest growing technology company in the world.
It crossed 50 million subscribers in just 83 days and 100 million in 170 days, adding at an average
rate of 6 lakh subscribers per day. Reliance Jio made its entry with free offers for more than six
months; it did not even care for the losses booked in its financial report, because it focused on the
bigger picture and vision of the company to be the leading telecom player in India by providing
affordable services to the wider Indian consumers.
After successfully gaining a decent market share, the company has been making strategic
acquisitions and investments to create a comprehensive ecosystem of digital products and services
around its telecom service.
Following are the developments and acquistions the company has made so far:
 Acquired a mojority stake in Embibe (online education portal) to add more education
content to its platform
 Strategic merger with Saavn (now JioSaavn) to offer exhaustive content library, customer
experience functionalities and to develop a media platform of the future with global reach,
cross border original content and an independent artist marketplace.
 Acquisition of Radisys Corp .(Nasdaq listed telecom solution provider) to accelerate
company’s global innovation and technology leadership in the areas of 5G, IOT and open
source architecture adoption
 Majority stakes in Hathway cable and Datacom Ltd to explore and diversify into cable,
digital content and broadcasting market.
 Launch of fiber-based broadband connectivity service called JioGigaFibre
 Launch of JioPhone 2, priced at Rs 2,999 for the lower segment people
Company is also working with corner stores (or kiranas) that will enable shoppers to buy at
neighbourhood shops using digital coupons via its Jio Money platform
The company which incurred losses for the initial few quarters turned profitable in less than 18
months. Jio swung to a profit of Rs 504crore in Q3 of FY18 from a loss of Rs 271crore in Q2.
Particulars (in Rs Cr) Q2'18 Q3'18 Q4'18 Q1'19 Q2'19 Q3'19
Subscriber Market share 11.7% 13.7% 15.8% 18.8% 21.6% 23.9%
ARPU (Rs -per month) 156 154 137 134.5 131.7 130
Revenue 7,197 8,114 8,404 9,567 10,901 12,252
EBITDA 1,443 2,628 2,694 3,147 3,573 4,053
PAT -271 504 510 612 681 831

Philip Fisher
Mukesh Ambani led Reliance Infocomm adopted somewhat similar strategy as mentioned by Fisher,
of focusing on the long term benefits by giving away short term gains.
No of Subscribers (In Mn)

300
250
200
150
100
50
0
Q2'17 Q3'17 Q4'17 Q1'18 Q2'18 Q3'18 Q4'18 Q1'19 Q2'19 Q3'19
Price Performance
Reliance Industries Ltd.
43%
(Total Return: Sep’17 to Dec’18 – 43%)
(Source – Investor Presentations, Business Standards,Economic Times )

Philip Fisher
13. IN THE FORESEEABLE FUTURE WILL THE GROWTH OF THE COMPANY REQUIRE SUFFICIENT
EQUITY FINANCING SO THAT THE LARGER NUMBER OF SHARES THEN OUTSTANDING WILL
LARGELY CANCEL THE EXISTING STOCKHOLDERS ’ BENEFIT FROM THIS ANTICIPATED
GROWTH?
Focus Area
As an investor, one should opt for companies with sufficient cash or borrowing capacity to
fund growth without diluting the interests of its current owners with follow-on equity
offerings. Phil highlights the importance of acquiring stakes in companies with a strong
financial foundation that warrants additional borrowing for expansion rather than
issuing/selling shares. These methods are imprudent ways to raise capital, as it cuts directly
into the EPS of the outstanding shares.
One can simply track basic EPS & diluted EPS over the years to see trend of dilution and
Management psychology for raising capital. One must also look at debt-equity, interest coverage
and other debt coverage ratios to see if the company is in a position to raise further debt capital if
needed. One must get a grip over the cash flows of the business along with the capital expenditure
model to see if the internal accruals are able to fund future growth and investments required by the
company. Some important ratios to track here are: Cash from Operations/ Capital Expenditure Ratio
for a period of 5 years, a higher ratio is preferred.
EXAMPLE: TATA CONSULTANCY SERVICES

Tata Consultancy Services is India’s largest IT Company operating in more than 46 countries around
the globe. In the first half of 2018, the company crossed the $ 100 billion market capitalization
milestone thereby entering the world’s 100 most valued organizations’ group.
TCS seems to be a suitable example as the company has been following the pecking order theory.
Pecking order is a corporate finance theory that suggests that the cost of financing increases with
asymmetric information. According to this theory any company should first use their internal
resources followed by external debt and avoid the issue of equity.
In the last 8-10 years, TCS has grown primarily because of two reasons; firstly because of their
inherent capability and secondly because of their acquisitions of start-ups and other companies
purely by using cash. The company has avoided issuing equity thereby not letting the earnings of the
existing shareholders dilute. Also TCS is a zero debt company with ample amount of cash sitting in its
Balance sheet that is utilized for expansions and acquisitions.
All Cash Transactions

Philip Fisher
Company Financials
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Net Sales 22,619 27,813 30,029 37,325 48,894 62,989 81,809 94,648 1,08,646 1,17,966 1,23,104
Profit 5,060 5,311 7,093 9,190 10,523 14,076 19,332 20,060 24,338 26,357 25,880
After Tax
Cash 3,895 5,409 7,406 6,614 6,977 11,615 14,751 19,369 19,109 25,223 25,067
From
Operating
Activities
Cash and 1,223 2,698 4,719 4,701 5,813 6,769 14,442 18,556 6,788 4,149 7,161
Bank
Ratios/Year End 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Total debt to equity 0.04 0.04 0.01 0 0 0.01 0.01 0.01 0 0 0
Interest Cover(x) 195.8 215.6 515.9 417.19 627.3 374.1 660.5 253.4 965.9 1,079.5 656.6
CFO/Capex 3.09 4.87 7.17 3.83 3.68 4.69 5.18 7.35 10.53 13.88 15.13
EPS/Year End 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Basic 51.4 53.7 35.8 46.3 53.1 70.9 97.7 101.4 123.2 133.4 134.2
Diluted 51.4 53.7 35.8 46.3 53.1 70.9 97.7 101.4 123.2 133.4 134.2
Given the fact that TCS is a zero debt company with a very high interest coverage ratio, there is
technically nothing that can act as a hurdle for the company to raise money from the debt market
considering the size and growing profit numbers. According to Fisher what really matters is whether
the company’s cash plus further borrowing ability is sufficient to take care of the capital needed to
exploit the prospects in coming years. However in this case the company’s retained earnings and use
of cash have been enough to prove its growth. Therefore raising money via equity seems very
unlikely and hence possibility of dilution risk for shareholders is very low.
Price Performance
Tata Consultancy Services Ltd
902%

(Source – ACE Equity, ET Article, Bloomberg)

Philip Fisher
14. DOES MANAGEMENT TALK FREELY TO INVESTORS ABOUT ITS AFFAIRS WHEN THINGS ARE
GOING WELL BUT “CLAMS UP” WHEN TROUBLES AND DISAPPOINTMENTS OCCUR ?
Focus Area
Investors should seek companies whose management speaks openly about their issues and
do not gloss it up and try to make it sound rosy. Profit disappointments, shifts in demand for
one’s products, failed product launches etc. are the unavoidable reality for even the most
successful companies. The key is transparency; the management team has to be open about
such matters.
EXAMPLE: KWALITY
Kwality Limited is engaged in processing, manufacturing and trading of milk, milk products and dairy
products. The Company primarily markets and sells its products under the brand, Dairy Best.
After Kwality Ltd’s share price plunged from Rs 142 to Rs 30 a piece between September 2017 and
June 2018, management of the company was asked to give concrete reasons behind the turmoil that
the company has been facing. With one of the interviews with CNBC-TV18 early this year in June, the
company’s President, Nawal Sharma claimed there was nothing fundamentally wrong with the
company and that none of the pledged shares were being sold in the market. He further stated that
the company’s performance is on track with internal estimates and denied to give more information
on the same.
However, few of the questions concerning the shareholders that remained unanswered by him
were:
1) Will the promoters be participating in the buy back?
2) Out of Rs 96Cr that is shown as Cash & Equivalents as per FY18 Balance Sheet, how much of it
is actually cash in hand excluding “Cheques recognized as cash”? As last year (FY17) Cash &
Equivalents was reported as Rs 84Cr and Rs 82Cr was later found to be Cheques recognized as
cash.
3) Why is the company considering a buyback or interim dividend when the debt on the book is
as high as around Rs 1600 crore levels? Can’t this money be utilized to pay off the debt holders
instead?
4) Why are the receivables increasing at such a pace and are now amounting to Rs 1900 crore?
5) Why has the promoters’ stake come down between September 2017 and March 2018?
Followed with the decreasing value of the company in last several months, the company reported a
steep fall in its quarterly net profit on account of poor sales. Net profit stood during Q1FY19 was Rs
1.04crore down from Rs 27.87crore during Q1FY18. The company then disclosed that it’s facing a
major issue of receivables management.

Philip Fisher
In Q2 and Q3 FY19, the company posted net

sales of Rs 351 cr and Rs 362 cr respectively.
Surprisingly, the net losses that showed up on
its statements were as high as Rs 951 cr and
Rs 1500 cr. This was mainly due to the
increase in doubtful debts and advances in
the form of “other expenses”. This concludes
that high sales numbers that were being
reported since last few quarters were in fact
misleading and were not generating any cash
for the company. One could have looked at
the change in operating cashflows from 2017
to 2018 to verify the increase in sales figures.
From the table below, we can see that over
the last 2-3 years all the numbers were
comparable between Kwality Ltd and its
peers, except for the receivables days, this is
likely because the sales numbers seem
incorrect.
Although Kwality reported a comparable ROCE and EBITDA margin in 2018, absence of transparency
in its functioning and reporting dragged the share price down to Rs 6.5 from Rs 116 (Jan’18)
Kwality Ltd Parag Milk Foods Ltd HatsunAgro Hertiage Foods

Particulars/FYE 2017 2018 2017 2018 2017 2018 2017 2018
Receivable Days 85.9 86.69 43.34 39.85 2.42 2.04 4.26 2.18
Inventory Days 13.86 14.65 73.91 80.9 27.92 28.94 25.77 21.33
ROE (%) 20.05 7.87 0.96 13.04 46.81 25.44 67.39 9.23
ROCE (%) 17.34 14.06 3.93 16.37 22.3 14.07 57.46 12.16
EBITDA (%) 6.82 7.35 5.81 10.5 9.15 8.86 18.21 6.22
PAT (%) 2.83 1.26 0.27 4.45 3.22 2.12 14.66 2.65
Price Performance*
Kwality Parag Milk Foods Hatsun Agro Products Hertiage Foods

Rs
160
120
80
-96%
40
0
Mar'17 Jun'17 Sep'17 Dec'17 Mar'18 Jun'18 Sep'18 Dec'18 Mar'19
*Prices rebased to 100
(Total Return: Mar’17 to Feb’19 - -96%)
(Source – ACE Equity, CNBC Article, CNBC TV 18 Interview)

Philip Fisher
15. DOES THE COMPANY HAVE A MANAGEMENT OF UNQUESTIONABLE INTEGRITY ?
Focus Area
All other points are completely irrelevant if the answer to this question is anything but a
resounding “YES!” The company’s management team is closer to the business’ assets than
the shareholders. If one can’t trust that the executives manage these assets to the best of
their abilities on behalf of the shareholders, there can be no discussion and investors should
therefore completely ignore such companies for their portfolios.
EXAMPLE: VAKRANGEE
Vakrangee Limited could be the best example to explain the Fisher’s last point with respect to
management integrity. Vakrangee Limited, a technology company, provides banking, insurance,
ATM, e-commerce, e-governance, and logistics services in India.
The company has lost almost 90% of its market value in less than a year when its shares were trading
around 500 levels in January 2018. So what really led to this downfall?
Incident 1 – Buyback and Dividend Policy (February - 2018)
On 12th February, the company informed shareholders of a new capital allocation plan approved by
its board which intended to spend Rs 250 crore on dividend and Rs 1,000 crore towards a buyback.
Also in a detailed presentation filed with the stock exchanges, the company stated that its “long
term policy” would be to allocate two-thirds of capital towards dividend payout and share buyback.
Though it was “considered and approved” nothing was mentioned in this regard in the Board
Meeting which held on 31st March, 2018.
Incident 2 – Auditor’s Resignation (April - 2018)
On April 28, Vakrangee informed stock exchanges that its auditor, Price Waterhouse, had resigned.
Price Waterhouse was appointed by the company in September, 2017 and started reviewing the
company’s financials till December quarter. However, the problem cropped up only after the auditor
started working on the full year accounts and found problems with the company's "election books as
well as bullion and jewellery businesses". Later the management issued a clarification, saying-
These were false statements made by the company as PWC did carry out the fourth quarter audit
and only then they came out with some fraud in the books. The auditor did try to seek information
from the company’s management and audit committee about the discrepancies, however,it did not
receive satisfactory reply. The replies were found “inadequate and contradicting,” only after which
the audit firm decided to resign.

Philip Fisher
Incident 3 – Death of Legacy Business (June - 2018)
Interestingly, when the company announced its full year earnings on June 14, it also disclosed the
death of its legacy business segment, e-governance. This was the same segment PWC had raised
questions about and thus proved that there were some issues in the company’s books.
These incidents apparently proved that the management did not have a highly developed sense of
trusteeship and moral responsibility to their stockholders which ultimately led to the downfall of
company’s stock.
Price Performance
Vakrangee Ltd
-88%
(Total Return: Jan’18 to Jan’19 - -88%)
(Source – Press Release documents, Annual report, The Hindu article)

Philip Fisher
KEY TAKEAWAYS
The investing principles of Phil Fisher dates back more than half a century, but most of his
teachings are still relevant today. Even though today, high frequency trading systems
execute a thousand trades a second, investing still requires in-depth qualitative research, in
order to find businesses with the potential to generate long-term wealth.
Some of us may be born with a greater or lesser degree of each of the required traits than
others. However, Fisher believes all of us can “grow” our capabilities in each of these areas
if we discipline ourselves and make the effort.
While good fortune will always play some part in managing common stock portfolios, luck
tends to even out. Sustained success requires skill and consistent application of sound
principles. Within the framework of Fisher’s guidelines, we believe that the future will
largely belong to those who, through self-discipline, make the effort to achieve it.
Through Phil Fisher’s investment checklist, we aim to enhance your cognitive apparatus to
make more intelligent and strategic decisions.

Philip Fisher
CONTACT US
INVESTMENT STRATEGY RESEARCH DESK

Prabhudas Lilladher Advisory ServicesLtd.
3rd Floor, Sadhana House,
570. P.B. Marg, Behind Mahindra Tower,
Worli, Mumbai – 400 018. India.
T: +91 22 6632 2222 | F: +91 22 6632 2229

E: Acumen@plindia.com
www.plindia.com
www.plindia.com/blog
TEAM
Siddharth Vora, CA-CFA-MSc(Head - Investment Research & Products Strategy)
E: SiddharthVora@plindia.com T: +91-22-6632-2236
Jason Monteiro (AVP – Research Editor)

E: JasonMonteiro@plindia.com T: +91-22-6632-2469
Karan Fatnani (Executive- Investment Research)

E: KaranFatnani@plindia.com T: +91-22-6632-2399

Philip Fisher
DISCLAIMER
This document has been prepared by PL and is meant for sole use by the recipient and not for
circulation. The returns mentioned in this document are compiled based on simulation carried out
on historical price data and not based on actual data. The information and opinions contained herein
have been compiled or arrived at, based upon information obtained in good faith from sources
believed to be reliable. Such information has not been independently verified and no guaranty,
representation of warranty, express or implied, is made as to its accuracy, completeness or
correctness. All such information and opinions are subject to change without notice. This document
is for information purposes only. The document should not be construed as an offer or solicitation of
an offer, to buy or sell any securities or other financial instruments.
Neither PL nor any of its affiliates, its directors or its employees accepts any responsibility of
whatsoever nature for the information, statements and opinion given, made available or expressed
herein or for any omission therein. Recipients of this document should be aware that past
performance is not necessarily a guide to future performance and value of investments can go down
as well. The suitability or otherwise of any investments will depend upon the recipient’s particular
circumstances and, in case of doubt, advice should be sought from an independent expert/advisor.

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Series 1 - PHILIP FISHER

Researched and Authored by

INSIDE THIS ISSUE EDITOR’S NOTE

One of the major steps in prudent investment must

Fisher & Company.

American - Born on September 8, 1907 in California, United States

Tenure in Investment Management

His investment career spanned from 1928 to 1999

Stanford School of Business (dropout)

Investment Strategy Research Desk |2

What is the Scuttlebutt Technique?

Investment Strategy Research Desk |3

We list the key sources for the Scuttlebutt technique

Investment Strategy Research Desk |4

Highlights of Fisher’s 15-point Checklist

Investment Strategy Research Desk |5

FISHING IN THE RIGHT POND

Fisher’s Fishing Process

Consider around 250 companies from various

Narrow down the list to 50 companies from 250,

Apply the “Scuttlebutt” technique using the15-

Final Stage: visiting the management of the

Investment Strategy Research Desk |6

How to arrive at1 Stock out of 250 Stocks?

Favour them opportunistically, either when

Invest in companies fulfilling most of the above 15 points.

Investment Strategy Research Desk |7

Fisher’s Comprehensive Checklist based on 3 Broad Categories

6 Do employees feel invested in the company and its success? Yes □ No □

Investment Strategy Research Desk |8

FISHER’S TOP 3 DON’TS

1. Don’t overstress diversification

“I don’t want a lot of good investments; I want a few outstanding ones”

2. Don’t quibble over eighths and quarters

Investment Strategy Research Desk |9

3. Don’t follow the crowd

Bajaj Finance Ltd.

(Source: ACE Equity, Moneycontrol)

Investment Strategy Research Desk | 10

STOCK MONITORING & WHEN TO SELL?

Fisher advises selling "mistakes" quickly, once they are

One should sell the stock if a company has deteriorated in some

One should sell the stock of a company if there is a

Investment Strategy Research Desk | 11

FISHER’S VIEW ON DIVIDENDS

Invested CMP (Mar- No. of Capital Dividends Total

Investment Strategy Research Desk | 12

THE 15-POINT CHECKLIST IN THE

1. Expanding Market – Page Industries

2. Product Development/Product Innovation – Saregama India

3. Efficient Research and Development activities –Divi’s Lab

4. Above Average Sales organization – Britannia Industries

5. Handsome Profit Margin – Colgate-Palmolive (India)

6. Initiatives to Improve Margins – Eicher Motors

7. Relations with Employees – Godrej Consumer Products

8. Relations with Executives – HDFC

9. Depth in Management – Hindustan Unilever Ltd (HUL)

10. Cost Analysis and Accounting controls – Avenue Supermarts

11. Industry Specific factors – HDFC Bank

12. Long Range on Profits – Reliance Jio Infocomm

13. Financial Strength (Avoid Equity Financing) – Tata Consultancy

14. Good Investor Relations/Disclosures – Kwality (as a negative example)

15. Unquestionable integrity – Vakrangee (as a negative example)