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pratikarya
Nov 09, 2022
In Business Analysis
We all have heard “glass half full, half empty” mindset stories. Recently, something similar happened with the Steel Authority of India (SAIL) valuations. Before that, let’s understand how the business cycle affects valuations. There are two ways to see the value of a company. The market cap of the company indicates the value of common shares, whereas enterprise value indicates the value of the entire company. Market cap = number of outstanding shares * current market price Enterprise value (EV) = market value of equity + market value or book value of debt – cash & investments + minority interest. Market cap vs enterprise value Asset-heavy companies are those where generally turnover is close to 1. Also, their general feature is single-digit Return on Equity (ROE) and high debt-to-equity ratios. Such companies are generally affected by industry cycles (demand and supply); hence their operating margins are quite volatile. Technically what happens is when the demand is growing, in order to fulfil them, the companies keep on increasing their plant size, and as a business is not cash-rich, they borrow a lot to expand plants. Now when demand reduces (industry slowdown), fixed cost like depreciation & interest reduces profits to a great extent. This leads to a fall in market cap that makes the company look extraordinarily cheap. But when we see enterprise value, the reduction in EV is not as drastic as the market cap due to the debt pile-up on the balance sheet. For example, if you look at the bad period of SAIL from 2011-2016 you will notice the same phenomena happening. Asset expanded by approximately 3x, sales reduced, margins went into negative, and debt-to-equity increased. Due to this, the market cap was reduced by ~75% from Rs. 69,804 cr. to Rs. 17,761 cr., whereas enterprise value declined by ~31% from Rs. 72,469 cr. to Rs. 50,276 cr. When the cycle turns for good, companies end up repaying a lot of debt due to the burden of debt and interest payments felt in the bad cycle (called de-leveraging). Again, the impact of this is as the balance sheet becomes stronger and profitability improves, the rise in market cap is much faster, while EV is much slower. As enterprise value reduces due to heavy repayment of debt. In fact, the enterprise value might also fall, making the company cheaper, whereas, on a market cap basis, you would see no correction. A similar thing happened in SAIL at the close of FY 2021 and the close of FY 2022. At the end of FY 2021, if two people would see the valuations ratios of SAIL, they would come up with different conclusions. The person looking at enterprise value and EV/EBITDA would say the company has got cheaper as EV/EBITDA reduced & enterprise value hardly changed. In contrast, the person looking at the P/E ratio and market cap would see the market cap getting almost 4x and the P/E ratio getting doubled. Even more interesting phenomena happened at the end of FY 2022. When the market cap increased more than 2021, the enterprise value was further reduced due to heavy debt repayment. The market cap would hide a reduction in the value of the business as; technically, you could buy the whole company for Rs. 49,614 cr., at the end of FY 2022, whereas at the end of FY 2021, it was Rs. 66,070 cr. Hence keep your eye on enterprise value and market cap in case of asset-heavy companies to gauge the valuations of the business with a better perspective.
Business Analysis 116- Does Business Cycle Affect Valuations? content media
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pratikarya
Oct 29, 2022
In Valuation Series
There has been a ton of bullishness about the Price/Earnings-to-Growth (PEG) ratio being a great indicator to buy stocks. Motilal Oswal’s wealth creation studies did a great job explaining that buying stocks below a PEG of 1 and especially 0.5 lead to good wealth generation. Hence it has become a habit for investors to compute PEG to compare the valuations of two companies. For example, let’s say the P/E (Price-to-Earnings) of ABC Ltd is 30 and its growing Earnings Per Share (EPS) by 25% and the P/E of XYZ Ltd is 20 and is growing its EPS by 10%. On the face of it, company XYZ looks cheap but adjusting for growth, i.e., the P/E ratio divided by growth PEG is 1.2 for ABC and 2 for XYZ, which means A is cheaper relative to B. Contrary to what people believe, the PEG ratio of two businesses are comparable if they are from the same business segment, same industry and comparable capital structure (D/E), but in the real sense, the PEG of two business are comparable if the following is comparable: Length of sustainable growth, predictability of growth, return on equity above discount rate, Competitive advantage (for how long can ROE be maintained above discount rate) and quality of earnings irrespective of what business segment and industry they belong to. Let’s take a look at Divi’s Laboratories vs Alembic Pharma. Suppose we are standing at the beginning of FY 2017, and these are the numbers from the past few years: So, Alembic Pharma grew at a much higher rate than Divi’s Laboratories and still was available at a much lower PEG ratio than Divi’s Laboratories making a compelling undervaluation case for Alembic. Can you guess the returns of Alembic Pharma and Divis from FY 2017- FY 2022? Alembic Pharma has broadly remained at the same level with an all-time high of ~1100, whereas DIVI’s has become a 3.5 bagger from April 2016 with an all-time high of 5300. On the valuation and historical growth front, it seemed that Alembic Pharma by far would outperform Divi’s Laboratories, but the real scenarios turned out completely inverse. (PS: the main reason is Alembic’s growth/margins are not linear as there are one-time gains/losses due to stiff industry competitiveness at the generic level. Whereas Divi’s growth & margin profile is more linear giving market confidence about future growth. However, this is not a comment on the quality of businesses; we are trying to explain how the market reacts in terms of valuations) This is the point we wanted to highlight, blind comparison of any valuation ratio, even if it’s a sophisticated one like PEG, does not make sense. There are fundamental drivers of every valuation ratio. In an article shortly, we will also teach you how to calculate a company’s intrinsic PEG ratio, i.e., the PEG ratio a company should deserve depending on its fundamentals.
Valuation Post 19 -  Is PEG Ratio Used Correctly in Markets? content media
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pratikarya
Oct 29, 2022
In Valuation Series
Everyone knows they should buy stocks at low P/E and the real way to make money is by buying stocks at a valuation where you are not paying too much for future growth but there is not much literature published on this topic. The right definition of minimum valuation (P/E ratio) is the value a business should get if starting today it is only able to grow its profits at a perpetual rate of 3% (leaving aside highly cyclical businesses like commodity companies). This is also called Steady State Value. The simple formula to calculate the steady state is: Steady State Value = Operating profits after taxes *(1+perpetual growth rate) / (Discount Rate – perpetual growth rate) Steady State P/E = (1+perpetual growth rate) / (Discount Rate – perpetual growth rate) As perpetual growth rate (3%) and discount rates (12%) remain broadly the same for all businesses, the steady state P/E for Indian companies comes out to be ~ 11-12%. Low P/E value If any stock is available for a P/E less than 12% that basically means either: The market is not paying anything for growth which means growth is available for FREE & business is extremely undervalued or The business is going bankrupt in a few years or The business is in a decline stage or The past earnings include some cyclically high earnings (we will explain why the steady state P/E concept does not work in cyclical companies in a separate article). High P/E value Any P/E market that pays above 12% is basically termed as growth P/E (also called Future Value Contribution). A simple framework to calculate growth P/E is: Future value contribution = current market cap – Steady State Value Growth P/E = Future value contribution / Operating profits after taxes To confirm our hypothesis, we applied this framework to some multibaggers of the past namely Maruti, Divi’s Lab, Astral, Relaxo, Britannia, Symphony, Hero MotoCorp and Asian Paints. Some interesting insights that came out are as follows: In the past 12 yrs, 2012-2013 were the years in which the majority of stocks had the least contribution from future value embedded in their market cap. This basically means that you were paying the least for expected growth in 2012-2013. In fact, some businesses like Astral, Relaxo & Symphony were available well below their steady state value signifying NEGATIVE contribution of future value creation and this in spite of having symphony growing its PAT at an average of 10% between 2011-2013, Astral at 49% and Relaxo at 30%. Whenever the contribution of Future Value goes less than 30% in market cap & you are confident the company can grow at least 10% for foreseeable future it becomes an excellent entry point to get aggressive with buying. As the chances of P/E de-rating are significantly low and any earnings surprise will lead to excellent results. When the contribution of future value reaches 85-90% of the market cap you are playing with fire and any disappointment in earnings growth will lead to sharp corrections. Case in Point: Symphony This does not mean that buying stock near a market cap where the contribution from future value is higher or higher than its historical average does not make money. Case in Point: Divi’s lab If someone had entered Divi’s Lab at the end of FY 2018, they were buying it at a market cap which had a future value contribution of 65% i.e., the highest in the past 8 yrs. How did it turn out? The coming three years provided some of the best yearly returns in the past 12 yrs. The reason being the trajectory of growth rates became significantly better for DIVI’s Lab since FY 2019 and the market being a future discounting machine obviously would have analysed that a year in advance in FY 2018 that’s why in spite of profits being down by -12% in FY 2018 stock provided a return of 75% in FY 2018 itself. Hence when the future prospects are clear and there is a significant ramp-up in expected growth you might find today’s future value contribution to be high but that does not mean a stock is overvalued. In such scenarios, we need to apply reverse Discounted Cash Flow (DCF) to understand how many years of growth are priced in at the current market cap. We will explain reverse DCF in a separate article. There is still one enigma we are trying to understand – Asian Paints. In the past 12 yrs, the minimum contribution of future value has been 63% and the maximum (in FY 2022) has been 88% of market cap whereas profits growth rates have slowed down tremendously but still stock keeps on providing reasonable returns. Now with the current competitive intensity heating up with the entry of Astral, JSW Paints & GRASIM this space will be interesting to watch.
Valuation Post 18 -  The Magic Number 11 and How To Judge Undervaluation of a Stock? content media
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pratikarya
Oct 29, 2022
In Valuation Series
Markets talk in the language of expectations and not Hindi/English etc. At any point of time in the market cap of a company, there is an inherent expectation embedded about future cash flows and discount rates. For discount rates, also called the opportunity cost of capital, it’s reasonable to take a common number i.e., the average of past after-tax 10-yr NIFTY rolling returns. This is 12%. See the below image for calculations: The discount rate is not static. It changes as businesses mature or there are changes in institutional holdings (FII/DII/Weightage in index) or capital structure or rolling betas. (We will discuss this in a separate blog). Now, some important connections between the financials of a company: Operating Profits = Revenue – all expenses excluding interest and taxes Expected Net Operating Profits After taxes (NOPAT) [EBIT*(1-tax rate)] = Current NOPAT * (1+NOPAT growth) NOPAT growth = ROCE (Return on capital employed) * Reinvestment rate Reinvestment Rate = NOPAT growth / ROCE Expected Reinvestments = Expected NOPAT * Reinvestment Rate Future Free Cash flows (FCFF) = Expected NOPAT – Expected Reinvestments (WC + Capex) ROCE = NOPAT / Capital Employed Capital Employed = Shareholders Equity (share capital + reserves) + Debt Debt = Long term borrowings + short term borrowing + current portion of long-term borrowing + leases Through the above equations, we can see that NOPAT Growth and ROCE are two inputs that drive FCFF. Also, remember that the current market cap is the present value of future cash flows. In other words, at any point of time when you see the market cap of a company, it is speaking something about: Expected NOPAT growth Expected ROCEs For how long Growth above GDP can continue For how long ROCEs of business can be maintained above discount rates Hero MotoCorp valuation Let’s dive deep into a detailed case study of Hero MotoCorp and what the market is conveying at the valuations as of 27th June 2022. Historical numbers Even if we don’t take into account the past two very poor years (2021 and 2022), the average operating profits (EBIT) growth rate is 7.06% and the average ROCE is 34% leading to a reinvestment rate of 21%. Low reinvestment rates mean a lot of money would be invested into non-core assets, which seems to be the case as investments and cash account for 50% of the consolidated balance sheet. The majority of this is into mutual funds (as per footnote 9B of FY 2021 consolidated balance sheet). Assuming Hero MotoCorp is a great company with long-term competitive advantages due to which it will be able to grow at its historical rate of 7% for more coming 20 yrs and then at a perpetual rate of 3% while maintaining a ROCE at 34% FOREVER (yes, till infinity), the fair value of Hero MotoCorp today comes out to be an approximate Rs. 4,500 cr. with an intrinsic P/E ratio of 20. (Please note to calculate the historical growth rate and ROCE, we excluded the last two poor years else growth rate was JUST 2% and ROCE at 31%. So, we are trying to be bullish with the above assumptions.) The current market cap is approximately Rs. 55,250 cr. with a P/E ratio of 23.85. (Refer to Annexure 1 to understand calculations in the above table and Annexure 2 to understand the effect of Ather Energy and Hero FinCorp on the financials of Hero MotoCorp) In order to justify the current market cap of roughly Rs. 55,000 cr., the expected NOPAT growth needs to be 10% and Hero needs to maintain 34% ROCE perpetually (current ROCEs are 19% FY 2021 and 14% FY 2022). At 10% NOPAT growth even with a 30% ROCE forever the intrinsic value and P/E move fairly close to the current market cap. Also, if you observe if we keep the growth at 10% if ROCE shoots up to 45% the valuations hardly move. This signifies an important and unique thing regarding Hero – the market can digest volatility in ROCE and improving ROCE won’t create much effect on Hero’s Valuation but the company needs to deliver on the growth of approximately 10% in operating profits to justify its current valuations. Some might argue that a discount rate of 12% seems high for a mature business-like Hero MotoCorp. We have tried to address this also below: If we drop the discount rate to 10% (for both the growth period and perpetual period), then the intrinsic value will come almost equal to its market value. So, at the current market cap of approximately. Rs. 55,000 cr. the market may be communicating either of the following for Hero MotoCorp: Operating profits will grow at 10% for 20 yrs and the company will be able to maintain a ROCE of 34% forever with a discount rate of 12% Operating profits will grow at a historical average of 7% for 20 yrs maintaining its ROCE of 34% forever BUT with a discount rate of 10% A discount rate means the minimum return you expect from a stock. Now being a retail Indian investor with portfolios ranging from a few lakhs to a few crores we would like to compound our wealth at 12% at least (the long-term average of NIFTY after-tax returns). So, reducing discount rates gets out of the picture for Hero MotoCorp. That leaves us with the first scenario. The most realistic expectations implied at the current market cap seem that Hero MotoCorp will be able to post a 10% growth rate in operating profits for the coming 20 yrs and improve current ROCEs of 18-20% to 34% and maintain them forever. Even if you agree with this, the market has already priced it to perfection and the only returns you will make is due to earnings growth but that will reduce due to slight P/E de-rating. Let’s assume you have a decent holding horizon and you may want to exit the business either 5 yrs or 10 yrs from now. What possible returns can you make by holding Hero MotoCorp? (Assuming you agree with 10% growth 20 yrs with 34% ROCE perpetually) Expected Returns = (Expected Market Cap/ Current Market Cap) ^ (1/number of periods) Expected Market Cap = Expected PAT * Exit P/E Again, the expected return comes out to approx. 8% even withholding period of 5-10 yrs To calculate exit P/E at the end of 5 yrs, we need to discount the remaining 15 yrs (FY 2028 – FY 2042) of cash flow and terminal value. In this case, the cash flows will be different as profit growth is 10% with 34% ROCE unlike the original scenario presented where growth was 7% and ROCE 34%. (Please note: Expected cash as of FY 2027 = FY 2022 cash and investments + Free cash flows of FY 2023 till FY 2027 – Dividends of FY 2023 till FY 2027. Dividend payout taken on an average of the last 10 years i.e., approx. 50% and current debt has also been paid off from accumulated cash.) To calculate exit P/E at the end of 10 years we need to discount the remaining 10 yrs (FY 2033 – FY 2042) of cash flow and terminal value. (Please note: Expected cash as of FY 2032 = FY 2022 cash & investments + Free cash flows of FY 2023 till FY 2032 – Dividends of FY 2023 till FY 2032. Dividend payout taken on an average of the last 10 yrs i.e., approx. 50% and current debt has also been paid off from accumulated cash.) In a nutshell, the only way we can expect decent double-digit returns (15-18% CAGR) from Hero MotoCorp is if your expected growth rates are way higher than 10% OR there is a short-term cyclical demand boost like the periods of FY 2018, FY 2016 and FY 2017 where growth rates were 15%, 33% & 12% respectively, (in this scenario you will have to enter and exit at the right time). For the above consistent higher double-digit growth rate (18-20% in revenue & PBT) to happen their scale up in the global market should continue at the current speed, their strategy of premiumization through Xtec, Xtreme and XPulse models needs to succeed even further, LEAP programs for cost saving should continue, market share in scooter needs to improve and Hero Fincorp should be able to double its Assets Under Management (AUM) as claimed by management and also Ather needs to reduce losses. Also, progress towards evolving the EV ecosystem through Ather, its own product launches and Gogoro (battery sharing Systems), exclusive dealers and ICE cum EV dealers should continue. Annexure 1: WACC = weighted average cost of capital = Discount rate = opportunity cost of capital EBIT FY 2023 = EBIT FY 22 * (1+EBIT growth rate) and so on for FY 2024, 2025 etc NOPAT FY 2023 = EBIT of FY 2023 * (1-Tax rate) and so on for FY 2024, 2025 etc RR FY 2023 = Reinvestment rate = NOPAT growth FY 2023 /ROCE FY 23 and so on for FY 2024, 2025 etc FCFF (Free cash flow to the firm) FY 2023 = NOPAT FY 2023 (1 – Reinvestment Rate FY 2023) and so on for FY 2024, 2025 etc Terminal Value = Terminal FCFF / (WACC – perpetual growth) Terminal value means at the end of the growth period i.e. FY 42 in our example what will be the present value of all the cash flows left till infinity. Total FCFF = FCFF + terminal Value (now as the terminal value will only come at end of the growth period i.e., FY 2042 in our example for initial yrs from FY 2023 – FY 2041 total FCFF is the same as FCFF) Discount Factor = 1/(1+WACC) ^ number of period of discounting – as FCFF of FY 2023 needs to be discounted back for 1 year the formula becomes 1/ ((1+0.12) ^ 1) similarly for FY 2042 FCFF needs to be discounted back by 20 years so formula becomes 1/ ((1+0.12) ^ 20) Present Value = FCFF/Discount factor Enterprise Value = sum of all present values Equity Value = Enterprise Value – Debt + Cash, bank & Financial Assets Implied P/E means what P/E should be today as per your assumptions of future Current P/E means P/E calculated as per the current market cap of the company. Annexure 2: For people who might think that the current PAT de-growth and ROCE dip effect may be because of Hero FinCorp (an NBFC) and investments into Ather as one being a Non-Banking Financial Company (NBFC) inherently has much lower ROCEs and another being will be burning capital is not correct. As both of them are associates and not subsidiaries hence effect on accounting is only limited to their contribution in Investments on the balance sheet and share of associates’ profits and loss on the P&L account. Now if we analyse this the combined loss due to Ather and Hero FinCorp on P&L of Hero MotoCorp (as per FY 2021) is – 1.2% (associates loss is Rs. 46.56 cr. and PBT from 2 wheelers business is Rs. 2,895 cr.). Also, total investments done by Hero in Ather & Hero MotoCorp combined (till FY 2021) is approx. Rs. 2,407 cr. representing approx. 10% of the balance sheet. As per FY 2022 stats, the losses for the full year are Rs. 200 cr. from associates that make up approx. 8.5-9% of PAT.
Valuation Post 17 - Market Talks We Need To Listen: A Detailed Valuation Report on Hero MotoCorp
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pratikarya
Oct 29, 2022
In Valuation Series
What’s common between shows on Indian television, Equity Markets and a prominent investor Chamath Palihapitiya who for the very good part of the year in 2020 and 2021 claimed that he is better than Warren Buffet! The common element is the surprising and unexpected turn of events twisting the complete plot of the story. Remember the three-time dialogues in Ekta Kapoor serials “Kya, Kya, Kya?” Just when you are extremely sure, even more than god, about the future, the reverse happens. From one of the best years for equity markets in 2020 and the first half of 2021 markets, the last eight months have crushed liquidity in markets and have led to severe correction, especially in small caps and mid-caps in India. Tsunami under the sea Well, every good thing comes to an end. Whether it’s a can of chilled beer or the career of great sports stars like Sachin Tendulkar. 2022 is turning out to be one such gut-wrenching period. All the hyped stocks of media, which were supposed to be high-growth stories, to name a few, even the likes of HDFC Bank, Asian Paints, Divis Labs, cement stocks, and metal stocks are taking a beating in current markets. The sea (Nifty/Sensex index) may look a bit calm but there’s a tsunami under the sea in both global markets and Indian mid-caps and small-cap stocks. Approximately 50% of the stocks are down by roughly 50% from their 52-week highs and the average drawdown in NSE stocks is 38%. On the global front, the S&P 500 has one of the worst starts of the year, and NASDAQ (majorly comprising tech stocks) has crashed by more than 20% (officially marked as the start of a bear market). Tech IPOs, SPACs, and Bitcoins, which were investors’ favourites during COVID-19, are down by broadly 30-70%. So, what went wrong? What always goes wrong – Recency Bias – they extrapolate based on recent events. All the businesses that were growing at a good speed for the past decade or in recent periods were assumed by the markets to keep on growing at this speed forever. This leads to market participants giving astronomical valuations to such businesses. The most important thing for investors in the equity market is to understand that NOT ALL GROWTH is good. Sometimes growing beyond a certain speed actually kills a business and its valuation. Ironical right? No and Yes. If you look at Avenue Supermarts, HDFC Bank, and Asian Paints, you will come to the conclusion that all it takes to generate great returns in equity markets is growth. All the stocks mentioned above have one factor in common – consistent growth in revenues, operating profits and cash flows for a very long period of time. But as the legendary investor Charlie Munger (Chairman of Berkshire Hathaway and partner of Warren Buffett) always says “Invert, always Invert”. Does this mean that every business that has grown revenues and profits has rewarded shareholders handsomely? Let’s take an example and I want you to guess the return of this stock in the last 1 yr. This company has grown revenue at a rate of 174%, 123% and 106% in 2020, 2021, and 2022, respectively. Yes, you read it right, revenues, not profits The correct answer is it is down 75% from an all-time high of 400 and down -44% in the last 1 yr (June 2021- June 2022). The name of the stock is Snowflake – which was hyped to the next level as Berkshire Hathaway invested some portion of their portfolio into it. This company was once quoting a Price to Sales multiple of 65 (again you read it right not P/E but P/S ratio of 65x and even after correcting -75% from top, it is quoting a price to sales multiple of 17x.) Similarly, see the fate of some IPOs in India itself like Paytm, Zomato, Car Trade, and so on. Zomato has crashed by 58%, Paytm by 66% and Car Trade by 65%. Again any guesses on the growth rates of the above businesses? Car Trade’s revenue grew at a 5-yr CAGR of 32%, Zomato’s at a 5-yr CAGR of 71%, and Paytm’s at a 5-yr CAGR of 44%. The analyst in the market should know that a company’s valuation multiple is an outcome of the following: The growth rates in profits and revenues The duration for which this above-average growth rate (greater than the economy) can sustain (called as Growth Advantage Period) The level of Return on Invested Capital (ROIC)/Return on Equity (ROE) it can earn The duration for which such high returns can be maintained (called as Competitive advantage period or MOAT) The Discount Rates/Cost of Capital (also called the opportunity cost of capital) If a business is growing at a fast rate with ROIC/ROE much lower than its Cost of Capital that actually reduces the valuation of the company rather than increasing it. Look at it this way – the purpose of a business is to earn more than it is letting go by investing capital in a business. Now, suppose you have broken your FD (fixed deposit), which was earning you 8%, to start a business. Now, that business has earned on average 6% in the past 5 years, would you put more money into the business to grow it or shut down the shop? A sane mind should shut down the shop because practically you have lost money at the rate of 2% per annum by starting the business. Now, let’s say, you initially invested Rs 1 cr. into this opportunity. Practically, you lost Rs 1 cr x 2% p.a. That’s a total of 10 lakh in 5 yrs. Now if you put another Rs 1 cr. in this opportunity, will your losses increase or decrease? (assuming the health of the business remains the same). Obviously, losses will widen. Now, you will lose 2% on Rs 2 cr. A loss of Rs 4 lakh p.a. instead of a loss of Rs 2 lakh p.a. See here what did growth do? It increased your losses. In other words, it reduced your valuation, not increased it. We know a lot of start-ups operate this way. Well, that’s a topic for a separate blog post. When the party stops (bull run), market participants suddenly realise that a lot of businesses were like a pig with lipstick. They were growing but with ROEs much below their opportunity cost/cost of capital actually destroying the value of businesses rather than creating it. Hence, not all businesses that are growing deserve high valuations. There are a lot of other factors like competitive intensity changing (Asian Paints with the entry of Grasim and JSW in Paints), industry getting saturated (Colgate Palmolive in Toothpaste) etc. that also support our thesis that just because a business has grown at a high rate in the past does not make it deserving of a high P/E today. How long will this correction last? There have been multiple instances of sharp reversals in history when even after correcting by 20%, the markets have recovered within 7 days (for example: in 2006, 1997, 1999, and 2012). Sometimes, there are long periods of drawdowns where the market remained below the 20% correction level for more than a year (For example: 1992-1993, 1995, 2008, and 2000-2003). Let us end this on a positive note. To quote Dumbledore of Harry Potter – “it’s always darkest just before the dawn”. For investors willing to work hard, there are always investable ideas available in every kind of market. It’s not all gloomy for Indian investors as there are some sweet spots, which are promising out to be excellent zones of investing (growth + reasonable valuations) like, businesses related to data centres, capital goods segment, agro-chemicals space, defence, etc. Hope next time when you see a growing business, you will be well equipped to analyse it.
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pratikarya
Oct 29, 2022
In Valuation Series
NEVER sell your house to buy equities. It’s just a metaphor to explain when you should get aggressive with putting more money into equities. Rakesh Jhunjhunwala has often been sighted saying 2003-2007 was one of the most golden and ferocious bull markets in India. This led us to think about what was so unique at the start of 2002-2003 that such a crazy bull run happened. Before we go deep, let’s understand two concepts: steady-state price and growth price. The above two words are very important as they hold a very strong connection between the start of every Major bull market in India, be it 1997-2000, 2002-2007, 2009-2011 and 2014 – March 2018. In the context of NIFTY steady state price, the value nifty should get if current EPS (Earnings Per Share) is only able to grow at 3% – that’s the world’s GDP growth rate (also called as perpetual growth rate). In simple words, this is one of the worst expectations, in terms of growth, to have from a developing country like India. Steady State Price = TTM NIFTY EPS * (1+perpetual growth rate) / (Discount rate – perpetual growth rate) Growth price is the additional value NIFTY should get due to future growth in EPS being more than the perpetual rate. As EPS of NIFTY has reported a 25-yr median growth in EPS of 7%- and a 25-yr CAGR/Average growth of 10% at every point of time, there is some contribution of growth price in the current price. Current Price = Steady State Price + Growth Price; if we adjust the equation. Growth Price = Current Price – Steady State Price Steady Price Contribution = Steady State Price / Current Price Growth Price Contribution = Growth Price / Current Price The most important rule now: The higher the contribution of growth price in the current price, the more bullish the market is about future prospects, which means you should be more cautious. In other words, as the contribution of growth price increases, the market goes from the undervaluation zone to the overvaluation zone. Now let’s see the data points for the past 25 yrs to understand the pattern: In the image above (see green marked rows), observe the contribution of growth price in 2003 a -8%, which means at that point of time rather than paying something for the future market was not even trading NIFTY at its steady state price. A rarity which has not occurred since 1997 even once (cyclical recovery was the cause behind this number). That means if in 2003 you were sure that NIFTY EPS would at least grow by more than 3%, you were getting entire growth for FREE! A pure Value Investors paradise!!! Not as extreme as 2003, but if you closely observe the levels where markets bottom before the start of a new rally (all the green marked years) is when the contribution of growth price goes below or reaches approx 30-35%. This is when you can be aggressive with your buying into equities. We also have this data crunched on a monthly number for finer analysis. The file is too large; hence we decided to present it on a yearly basis.
Valuation Post 15 - When Exactly To Sell Your House To Buy Stocks and NIFTY Valuation Analysis
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pratikarya
Oct 29, 2022
In Valuation Series
India being a country of trust deficit, it has become a policy to micro analyse promoters' every move all in the name of looking out for the little guy, the shareholders. There certainly isn’t any debate on shareholder interest against promoter interest but where do we draw the line? It is important to step into the shoes of the promoter to understand his afflictions. Let us explain how things could perhaps look on the other side of the fence. Skin in the Game A very common doubt amongst the investing community is if the company’s future growth is certain, then why wouldn’t the promoter increase their own stake? But there’s little empirical evidence of any correlation between the two. We can have ample example where the stock has performed extremely well inspite of promoters having reduced their stakes at regular interval. For example, Aarti Industries and in fact promoters of one of India’s biggest wealth creation stocks, Page Industries, have sold 1-2 percent of their stake in the company almost every year in the past 10 years! Also Read | View: How not to make a bad situation worse in a falling market Reading promoter stake sale directly as a 'red flag' is a market cliché! The High Price of High Compensation All hell breaks loose when an analyst in the market sees promoter group/directors remuneration hitting the ceiling of 11 percent as permitted by Companies Act (although that even can be increased by passing a resolution). We should consider the base effects. Imagine a small-cap company with 50 crores of sales (at 2 times multiple a market cap of 100 crore) operating at 5 percent PAT margins leading to a PAT of 2.5 crore. Do you really expect the promoter to withdraw a salary of 5 percent of PAT i.e. 12.5 lakhs after creating a 100 crore company? Naïve right? Although this topic is debatable and we will go deeper into the issue some other time. The Family Tree People hate paying taxes and also there is “Lala” nature in terms of controlling the decision making. Hence to reduce tax paid on income they diversify the earnings among family members and include them into the board to control decision making. The Cash Trap vs Dividend Dilemma Sometimes business booms due to industry tailwind and the promoter decides to declare good dividends (which benefits even minority shareholders) to cash-in some money from his booming business. The analyst community would rip them apart stating it is a “no-growth” story. Funnily enough, if the promoters decide to do the exact opposite and start accumulating cash on the balance sheet, even then the promoter would be tagged as a `fool’ as it will reduce Return On Invested Capital and Return on Equity numbers! Also Read | Coach-Soch: Startup at the cost of family? The Related Party Loan Conundrum In small companies, this is a regular event by promoters to fund their liquidity positions. What’s the issue if business had surplus cash even after achieving sustainable growth rates and he is paying market level interest on the same? but sadly, the analyst community would still penalise them citing corporate governance issues! Till the time a promoter is not taking undue advantage a) by increasing his stake through amalgamations of private promoter owned entities at absurd valuations or b) by giving himself ridiculously cheap Employee Stock Ownership Plans to increase the stake, or c) by diverting funds out of the company for private purposes without interest payment and history of such loan write-offs, or d) by holding obscene amount of private assets on company balance sheet, or e) by owning private entities in similar lines of business that are actually performing better than the listed ones. Let other small things go. Else it becomes a perfect case of analysis-paralysis. Further, there can be multiple reasons for which a promoter might have to dilute his stake - Qualified Institutional Placements, SEBI regulation to bring shareholding to 75 percent, bringing a strategic buyer on the table which may provide key technology/asset, to release his pledged holdings, classification of shares in the non-promoter category due to family issues leading to reduction in promoter holding or transferring it to some Trust due to taxation purpose or, infact, his business in the lumpy in nature where he cannot predict cash flows so it's better to dilute equity than taking debt etc. Also Read | View | How Women are becoming the new growth drivers of India’s evolving gaming industry The main things to note that is forgotten by market participants is A) look at the track record of the promoter has he ever defaulted on payments B) how has the business performed during bad phases of business/industry C) did the promoter reduce his salary in bad phases of business and D) how much money has he raised by diluting equity and for what purpose. I will tell you from personal experience a bad promoter will latch on to the first opportunity he gets for raising money from the public without even having a clue where he will use that. I still remember a statement by Madhusudhan Kela in an interview when the insider trading case of one of the employees of Divi's Laboratories came into limelight - That boss look at the total equity of Divi's today. The promoter of Divi's has raised money from the public only once during IPO which today in front of total equity he has created is a drop in the ocean and he pays tax fully and such guys cannot be frauds.
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29
pratikarya
Oct 29, 2022
In Valuation Series
The period between June 2020 and September 2021 was one of the best for the Indian equity market but 2022 is turning out to be a gut-wrenching time. The liquidity/volumes in the market have fallen by half and correction in small- and midcaps in India is severe. All the hyped growth stocks—even the likes of HDFC Bank, Asian Paints and Divis Labs—apart from cement and metal stocks are taking a beating. The sea (broad market indices like the Nifty and Sensex) appears calm but there’s an undertow lurking in both global markets and Indian mid- and small-cap stocks. Nearly 50 percent of the stocks are down by roughly half from their 52-week highs. The average fall is around 38 percent from their all-time highs. In the US, the S&P 500 has seen one of the worst starts of the year and the NASDAQ is down by more than 20 percent (officially, this is said to be the start of a bear market) and the darlings of the COVID period like technology initial public offerings or IPOs, SPACs or special-purpose acquisition companies, cryptocurrency, etc. are down by 30-70 percent. So what went wrong? Answer: Recency bias, or extrapolation based on recent events. It was assumed that all the businesses that were growing at a good rate for the past decade or in the recent period would grow at this speed forever, and that led market participants to provide astronomical valuations to them. The most important thing for investors is to understand that not all growth is good. Sometimes growing beyond a certain rate actually kills a business. If you look at Avenue Supermarts, HDFC Bank, Asian Paints and so on, you would conclude that all it takes to generate great returns in the equity market is consistent growth in revenues/operating profits and cash flows. As the legendary investor Charlie Munger says, “Invert, always invert.” In this case, does this mean that every business that has grown revenues and profits has rewarded shareholders handsomely? Let’s take an example of a company where revenue grew 174 percent, 123 percent and 106 percent in 2020, 2021 and 2022, respectively. Now, I want you to guess the return of this stock in the last one year. This stock is down 75 percent from its all-time high and down 44 percent in last one year alone. The name of the stock is Snowflake (Berkshire Hathaway also invested some portion of its portfolio into it). Also see the fate of some IPOs in India like those of Paytm, Zomato, CarTrade, etc. Zomato is down 58 percent, Paytm 66 percent and CarTrade 65 percent. Again, any guesses on the growth rates of the above businesses? Revenue at CarTrade grew at a five-year compound annual growth rate (CAGR) of 32 percent, Zomato at 71 percent and Paytm at 44 percent. Valuing the company right A company’s valuation multiple is an outcome of the following: 1. Growth rates in profits and revenues2. Duration for which growth rate is greater than the economy can sustain (growth advantage period)3. Level of return on invested capital (ROIC)/return on equity (ROE)4. Duration for which such high returns can be maintained (competitive advantage period) 5. Discount rates/opportunity cost of capital If a business is growing at a fast rate with ROIC/ROE much lower than its discount rates, it actually reduces the valuation of the company. Let’s take an example. Imagine you broke your fixed deposit, which was earning you 8 percent, to start a business. Now that business has earned on average 6 percent in the past five years. Would you put more money in this business to grow it or shut shop? Practically, you have lost money at the rate of 2 percent per annum by starting this business. If you initially invested Rs 1 crore into this you lost Rs 1 crore x 2 percent per annum, or a total of Rs 10 lakh in five years. Now if you put another Rs 1 crore in this, will your losses increase or decrease? Assuming here that the health of the business remains the same, you will lose 2 percent on Rs 2 crore. A loss of Rs 4 lakh per annum, instead of Rs 2 lakh per annum. The increased losses will reduce your valuation. We know a lot of startups that operate this way. Well, that’s a topic for a different day. When the bull run ends, analysts suddenly realise that a lot of businesses were like a pig with lipstick. They were growing with ROEs much below their opportunity cost, actually destroying the value of business rather than creating it. Hence, not all growth businesses deserve high valuations. There are lot of other factors like competitive intensity changing (Asian Paints with the entry of Grasim and JSW in the segment), industry getting saturated (Colgate Palmolive in toothpastes) and so on that also support our thesis that just because a business has grown at a high rate in the past, it does not automatically deserve a high price-earnings multiple today. How long might this correction last? That is anybody’s guess. There have been multiple instances of sharp reversals when even after correcting by 20 percent the markets recovered within seven days (for example, in 1997, 1999, 2006 and 2012) and sometimes there are long periods of drawdowns where the market remained below the 20 percent correction level for more than a year (1992-1993, 1995, 2000-2003, 2008). For investors willing to work hard, there are always investable ideas available in every kind of market. There are some sweet spots (growth plus reasonable valuations) like businesses related to data centres, capital goods segment, agro-chemicals space, defence, and so on.
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30
pratikarya
Oct 29, 2022
In Business Analysis
The only rule in investing is there's no permanent rule. Reading this you will truly understand why investing is simple but not easy. 1) Crunching basic number like revenue CAGR and ROCEs is just the start not the END of business analysis. (a) Pick up any decade all businesses that generated strong returns ratios a decade ago (2002-2012) did NOT result in superior stock returns a decade later (2012-2022). (b) There will be businesses that delivered superior investment returns this decade (2012-2022) but were NOT generating high return ratios in the past decade (2002-2012). Cases in Point: a) FMCG was a bull market leader in the 2010 – mid-2012 Bull market. b) Metal was a leader in the COVID rally &, c) Capital goods was a leader in the 2000-2003 bull market. 2) Don’t believe in any particular investment thesis. Nothing outperforms forever. For example, the concept of only buying the market leader is wrong. Take an example in FY11/FY12 TCS was a leader in IT in terms of revenue but the highest return generating stock for the next decade became HCL Tech. A similar story has also played out in a) paints (Berger providing more returns than Asian Paints). b) Banking (ICICI providing more return now/growing faster than HDFC bank). Sometimes even the 2nd/3rd/4th players provide much higher returns than the leader itself. Remember market pays for two things: not just stability but also for CHANGE. It’s a combination of improving fundamentals with leadership that sometimes matters more. 3) Rather than classifying a business as good or bad we should classify a business into whether the upcoming 2-3 years will be good or bad for any business. FMCG was a bull market leader in the 2010 – mid 2012 Bull market, Metal was a leader in COVID rally, Capital goods was a leader in 2000-2003 bull market. Even business has a day. Stop classifying in your brain that commodity companies are bad, PSU’s are bad etc., Rather than focus on where earnings trajectory seems most powerful in the coming 2-3 years available a decent valuation that allows you to make a reasonable 20% CAGR in a 3-4 years holding time frame. 4) Time is the most powerful asset of a business that keeps on executing. Compounding works its magic with Time. We all must have read the statistics of the approx. USD 90 bn in wealth generated by Warren Buffett approx. 96% ($86 Billions) have come after the age of 60. The interesting part is this his CAGR has actually declined over a period time between age 30 to 60 his CAGR was 32% whereas b/w age 60-90 his CAGR is only 11%. That’s the magic of compounding. credits for this data: Jigar Mistry sir 5) History does not repeat but it rhymes Studying the history of nature, businesses anything gives you a guideline of what has worked in the past and what has not but every few years some things happen which has not ever happened in history. That’s how actually history is created right? That’s why we need to control for tail risk events in the portfolio. There are a lot of mechanisms that people deploy to safeguard themselves against unknown unknown like having a maximum weightage cap to a single holding or to a sector. Or using stop losses even in fundamental bets to exit first as first signs of drawdowns, trying to buy stocks at valuations where one is not paying more than 1-1.5 yrs of future growth, making themselves an expert of few sectors to differentiate between: a)News & real drivers of the business b)Asset allocation b/w debt, equity, cash, gold & real estate etc., 6)Incumbents are generally slow to react to disruption due to dilemmas. To go all in into a new category will burn their existing cash and might also make them lose focus in their existing segment and also going into a new segment will cannibalize their revenues from the existing segment. And last thing is the new segment size initially is very small so that leads to the thinking that even if we succedd here what’s to gain? So, they keep on building war chest to fight at the right time i.e. till the time new disruption is clearly taking way market share from them. Generally by that time it's too late. There are tremendous examples here both of international market and domestic market like Kodak Vs Sony in camera, Nokia Vs Apple in cellphone, SONY Vs Apple in music, NSE Vs BSE, currently EV vs ICE engine in India. The right way for any such business is to proceed quickly where scale up is visible in a new disruption through quicj Joint Ventures with players bringing that disruption apart from consistently focusing on creating new market through own in-house R&D Teams. A company remains great for a long period of time NOT because it has moats but because it is able to develop new sources of Moat. The reason for dominance changes every few decades. Some years back the CEO of NESTLE India explained that: In earlier periods distribution used to be strength now due to evolution of digital tools and Direct B2C start ups that is no longer the edge anyone can create distribution easily but it’s the product innovation that matters much more. Creating more quality products in existing segments and creating new segments by developing new products 8)People who say don’t read economics;politics focus on business models are utterly wrong. We think have completely misinterpreted Warren Buffet or Peter Lynch's statements. Its very important to understand global demand & supply in lot of sectors to really make money its equally important to understand how strongly a particular government is backing a particular sector to understand tailwinds For e.g, See the recent government stance on Ethanol or FTA in textile helping Bangladesh & Vietnam, Rise of Indian chemical industry in past decade due to China’s environmental policies or effect supply bottlenecks on shipping companies margins due to COVID.
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120
pratikarya
Oct 29, 2022
In Business Analysis
While watching the great COSMOS series brilliantly narrated by @neiltyson this clicked us somewhere around the 12th episode of season 1. This set of observations might help you understand what great investors and thinkers like sir charlie munger globally and Prof Sanjay Bakshi in India have been explaining for decades – the importance of multi-disciplinary thinking. Observation 1: It takes much longer than you think Earth is approximately 5 billion years old & the universe is approx. 15 billion years old if we compress these 15 billion years (scale) into a single calendar year i.e., from 1st Jan to 31st December. We, humans, arrived on earth approximately in the evening of 31st December and entire species of mammals came around 25th December. As per the timeline of the universe, we are just 4 days old. Crazy right? That’s how young our species is. In business models like evolution,it takes much longer for business decisions to reflect in numbers. Hence qualitative analysis matters more than just number crunching. That’s why maybe great investors ask us to see business as an evolving movie rather than a static picture. May be boiling frog syndrome also explains the same thing (hypothetically if you keep a frog in a pan of water & slowly increase the temperature the frog won’t be able to feel the heat & will die boiling in the water) Observation 2: Common element between earth,moon, our solar system,our galaxy,our universe: GRAVITY. Our entire ecosystem is governed by gravity. We are controlled by earth through gravity, earth control moon through gravity, moon control winds & waves on earth through gravity. Earth is controlled by sun through gravity, Sun is governed by gravity of milky way galaxy. Similarly in business world there are few variables (respective to various industries) that govern the entire cycle. For e.g, 1) Take AMC business -> It’s all about scale & Trust. 2) Cement -> it’s also about cost 3) CRAMS/CSM -> it’s about scale and R&D 4) FMCG it’s all about product SKUs, category innovation & distribution 5) Banking -> it’s all about low cost of liabilities & quality of Asset book. (These are just some basic examples) Observation 3 Facts vs narratives: It will be fascinating for you to know that in earlier times if someone disproved beliefs of the Church (no targeting of religion, we are just quoting what was presented in the COSMOS series) you were burnt alive or banished from society. When one of the greatest astrologers of that era Galileo developed a telescope to see the farthest distance in the skies people controlling the church did everything in their hands to destroy his findings. Even when Issac newton was selected as a fellow for Trinity college there was a note mentioned in his so-called offer letter that he can’t commit a few CRIMES – one of them being Heresy (i.e., going against accepted faiths & beliefs). They were hiring a scientist and wanted to be a “Yes” man in the beliefs of the church. Similarly in investing when a narrative is believed by the markets to be true the stock just keeps on going in one direction. It does not matter how loud you shout with a contra opinion people just disregard it and label you as a fool who does not UNDERSTAND what is going on. In the end, fact & logic win but again it takes much longer than we expect. Observation 4: What makes you sometimes kills you: It is due to carbon elements that we humans exist. In creation of Stars, humans, universes carbon plays one of the most crucial roles and it is the same carbon element which is causing global warming/greenhouse effect. which might lead to the death of the earth. Similarly, there are some things in business that you might do at a smaller scale that actually makes you dominate a field but doing the same things at a larger scale kills you. For e.g,imagine a B2C business initially focusing on product development as you need that 1-2 great products to start attracting customers. This brings initial traction but what if you just keep focusing on product innovation without thinking of expanding the distribution scale? You will end up burning money in R&D with good products to sell but not having enough scale and ROEs to further continue product development which in the end will kill you. Observation 5: Weather vs climate: A brilliant insight that we learned in COSMOS was weather & climate are different things. Weather is a short-term/daily/seasonal phenomena which get affected by even smallest of the factor hence it is so difficult to predict whereas climate is long-term phenomena. For e.g, greenhouse heating the earth is a climatic issue if we look at the global temperatures, not Y-o-Y but over decades, we will clearly see that the earth is heating up & ice on glaciers is melting but it may be possible that: The recent winters were even colder than earlier. years confusing you whether global warming is really true? Similar events happen in the business world where investors confuse short-term effects with the long-term performance of the business. Rather than focusing on long-term business drivers like Market Share, product innovations, Gross margins, ROICs, management execution etc., we get affected by the noise of short-term events. Observation 5: If you don’t know that does not mean it’s not important . It was really intriguing to understand why melting of ice is such a huge problem.Water absorbs heat & ice reflects it. So,it’s imp for ice glaciers to be intact else earth will absorb all the heat being poured by sun (infrared lights) on our planet & it will heat it up even more. Similarly in investing its imp for an investor to talk to people involved in the value chain of the business (suppliers, buyers etc) a lot of time,you may be missing some crucial activities happening in the business as not every minute detail gets reflected in the numbers quickly.
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83
pratikarya
Oct 29, 2022
In Business Analysis
1. Area of operation: commercial vs residential vs lease model-Affects Revenue cyclicality & margins 2. Reputation in local brokers-Affects Project Booking Advances & Cash flows 3. Target market: Tier 1 city vs tier 2/3 cities, premium projects vs middle/low income vs retirement projects vs clubs/resorts. Impacts: Revenue cyclicality & Unit economics of the business 4. Check RERA for timely project completion: Affects pricing & Bookings Advances 5. Low ready to move (RTM) inventory (i.e. already completed projects on sale/finished inventory). Impacts: Leverage Position & cash flows. If RTM is high you should see quick liquidation. 6. Geographical presence - Key micro markets of a state in which company operates. Geographical diversification is preferred. Impact: Difficult to create brand across the country and hence the co which is able to scale up in 2-4 states commands valuation premium. 7. debt service coverage ratio (co. Should be able to service interest and principal comfortably). Check interest payments + principal repayments against investments and CFO (after tax but before interest) generated. 8. Land bank inventory - old cheap available land leads to higher profits per unit/realization per unit. Land acquisition strategy i.e. in bad times/recession was management able to acquire land cheaply. 9. The construction cost per sq.ft. (materials and labor) generally remains stagnant for a very long period/ increases with inflation. So the real decrease in overall cost per sq.ft. comes by buying land cheap. 10 Difference b/w project launch, construction starting date & completion date. Lower difference means better execution. Check historical Execution & call few brokers to verify the same 11. IND AS 115 Vs old accounting standard. Impacts: Revenue CAGR & balance sheet ratios 12. Advances from customers on balance sheet (float being generated). Good builders who have timely execution reputation get good advances on project launch leading to reduction is working capital for the business. 13. Sources of borrowing, borrowing structure (IRR promised, moratorium period, repayment schedule) 14. Quality of bankers (get hold of any interview of banker on the management). 15. Be vigilant in analyzing land bank. THIS IS a TRICKY AREA. Land bank should be in the vicinity of 5-7 years of land development requirement. A higher land bank acquisition leads to low asset turnover->decline in ROE->low valuations and cash getting stuck in inventory. In downturn this hurts badly as CFO takes a hit while interest burdens remains the same. 16. Net Debt levels (Debt - excess cash - investments). Lower the better. 17. Some companies do project in partnerships/joint development agreements with other developers. If the stake is less than 50% they apply equity method of accounting hence only reporting profits of JV in P&L and not balance sheet items. Look closely on off balance sheet items. 18. Mode of selling - directly to customers or through brokers. 19 Credit Rating/fundamental grade for projects-Credit rating is also awarded to separate projects in real estate business 20 Legal issues mentioned in contingent liabilities section. It can be a major issue for real estate players due to land clearance,govt intervention etc. 21. After sales maintenance. A very very important point. even if a mishap happens after 8 years of completed construction it's the builder who is held responsible that destroys credibility and future project launches. 22. Very difficult to achieve economies of scale as profitability is dependent mostly on individual projects which are mostly local. A bigger scale does not equate to bigger margins like in manufacturing business. 23. IMPORTANCE OF TIMELY EXECUTION - Quick execution by builders leads to banks releasing full home loan upfront rather construction linked loan (In a construction linked loan only interest is repaid till complete disbursement). It is beneficial to both the builder and buyer. As builder gets higher float due to complete loan credited upfront and buyer is happy as he will be able to acquire property quickly and his EMI payments would also lead to principal deduction. 24. Forecasting revenue and Profits: There are two terms estimated land area and estimated sale-able area. Estimated land area is in acres whereas sale-able area is in lakhs sq. feet. Convert estimated land area to sale-able area (1 acre=43560 sq.ft.) Multiply land area x 43560 sq. ft x FSI (floor square index)=saleable area Est. revenue = Sale-able area x realization per sq. ft. Est. Profits: Est. Revenue x historical PAT margins. While calculating PAT margin please check MAT credit & any tax loss reversal/holiday Some co.'s have tax holiday near expiry and hence PAT margins take a huge dip Some of this sale-able area will be under JV & as per JV accounting only profit of JV will be recorded directly in consolidated profit. Hence diff b/w estimated revenue & revenue reported by co. 25. Calculating future cash flows to be received Total sale-able area - area booked=area on which cash still to be received Expected Cash flow=Area to be sold x realization per sq.ft (check project completion guideline through Investor presentation/mgmt interview or AR) 26. Calculate area booked but cancelled as a % of area booked-"lower the better" How to calculate Total area booked of last 5 years (in Rs.) - Revenue recognized in last 5 years - area booked but yet to be delivered (in Rs.) - Revenue under JV = Booked but cancelled. Check if a co is moving up value chain in terms of geography spread (from tier 3 city to tier 1) or from affordable housing to premium projects or from ground+3 to ground+15/20 etc Other income in terms of hospitality. Fees income in managing outsourcing contracts property maint.
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82
pratikarya
May 17, 2022
In Investing Webinars & Sessions
Concentration over Diversification: They believe taking concentrated bets on your highest conviction ideas will help you to generate more returns compared to a diversified approach. If you are diversified (too much) then your performance will resemble the market performance. Challenges in concentration when you have large portfolio size: With size there are challenges in terms of deploying capital in small & Mid-sized firms. If your portfolio size is too big then you will have to build positions slowly over a period of time in small and Mid-sized companies to have a concentrated bet. Churning portfolio in volatile market: If markets are volatile you’ll find new opportunities to invest your money but it’s upon the fund manager/ investor to analyse “where is the best prospect of returns- not in near term but from a 3-5 year perspective”. Challenge as an investor is not to differentiate between good ideas and bad ideas. That’s easy. The main challenge is to differentiate between good ideas and great ideas. An investor needs to take too many subjective calls while differentiating good ideas v/s great ideas. Allocation (cap-wise): We are always focused on small and mid-caps. Smaller companies have the ability to grow faster (%wise) than larger companies (Base effect). If we look at past performance we would notice: If we take most 5 yr or 10 yr periods you will find that small and mid-caps would have outperformed the large caps. Volatility in small and mid caps: Small and mid-caps are more volatile compared to large cap. Investing in small & mid-caps works when your horizon is for the long term. Investors need to be sensitive about investing in small and mid-caps if their horizon is for a short term. These are the the questions they need to ask before investing: At what stage of the cycle you are currently? At what valuations you are taking entry? If your horizon is for the long term then entry and exit valuation become less important comparatively. Reasons Sumeet sir prefers investing in small & mid-caps Small and mid caps have the ability to grow (%wise) more than large caps. There is a lot of inefficiency in the small and mid-caps compared to large caps and it is possible to find some great companies at reasonable valuation. Scuttlebutt: On Ground v/s through technology: Both of them have their advantages and disadvantages: If we use technology to connect a company's supplier/ distributor or dealer then we can connect with more people and can get broad and diversified opinions whereas if we go on ground and talk with them one on one then we can connect with the company's ecosystem. Views on IT Industry: Economies of scale can be hugely beneficial but in IT services you don’t get that. If you look at IT services in the very long term in India then you’ll observe they have followed cyclical patterns. While there should not be much of cyclicality to the business but if you look at valuation they have followed that cyclical pattern & that’s because the growth beyond a certain level becomes difficult in IT services. Questions one needs to ask if he is holding a highly valued stock or trying to build a position in that: Can the current growth rate be sustainable? Are you seeing the traction on the ground by customers? Or growing the company's order book? What is your visibility for the near term? If you can justify these things then either investing or holding onto those positions will help you. Stories/ themes you come across and your views on them: Never rely on the stories going on in the market. Do your research and if you believe that this story or a theme can work out then only put your capital into it. Let me give you one example of a theme/ story I heard in the market: China is manufacturing 25 million cars and we are only at 2 million. We are going to go to that. But I think we can’t achieve that because look at china’s land mass, size, density and road system and compare it with India so before believing anything always do your own research and ground checks.
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120
pratikarya
May 10, 2022
In Investing Webinars & Sessions
About Mr. Naren: Mr. Naren is the chief investment officer and executive director of ICICI Prudential Asset Management. Investment Philosophy: Mr. Naren is best known for his contrarian and deep-value picks; he avoids chasing hot stocks. As a contrarian over the years, he developed a knack for spotting neglected sectors and stocks before they become vogue. He believes that to pick out-of-favour stocks a fund manager should approach stock-picking with a mixture of top-down and bottom-up thinking. - From Mechanical Engineering to Investing in stocks Father of Mr. Naren was investing their money in public issues back in the 70s & 80s by watching his father investing Mr. Naren also got fascinated towards equity market. Unique aspects of Mr. S Naren: More than 30 years of experience in the Indian Equity market. Deep Knowledge of Credit markets and how credit cycle interplays with the equity markets. Enormous depth of reading material across the globe. - “Checklist” Theory: In this they have explained the backstory of how they started using checklists in their research process. While they were reading a book called “The checklist Manifesto” by Dr. Atul Gawande they got fascinated by this idea. - Emotional side of Investing: Markets are nebulous in the short run and there are emotions which play a role. There have been crises, Euphoria, Bubbles in the market and to identify at what stage of cycle you are in you need a checklist. - Investing Mantra for Mr. Naren: Whether there is Fear in the market? How’s the Valuation? What are the Flows? For example: Whenever FIIs sell then you have to put money in equities because fear is rising. In the last 20 years, whenever FIIs have sold aggressively like in 1998, 2002, 2008, 2011 or in september 2016 there have been opportunities but if you don’t have a checklist then you might have missed those opportunities. - Going Beyond “Checklist” Using Checklists doesn’t ensure complete elimination of mistakes.You do make mistakes because markets behave differently, people in the markets behave differently. Using a checklist only helps to reduce the number of mistakes. - Investing through Checklist Story of how it started: Dr gawande is a doctor and they were explaining the uses of checklists by telling their story “how checklists made them make less mistakes”. Then some of the stalwarts of investing community started applying this checklist in investing and by seeing that Mr. Gawande wrote the book “The checklist Manifesto”.
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102
pratikarya
May 03, 2022
In Investing Webinars & Sessions
About Govind Parekh sir: Govind Parekh sir began his career as a chemical engineer. Govind sir was advised to invest their money into stock market by his uncle and Mr. Kishan chokshi (Broker at BSE) while they were in 3rd year of graduation, Mr. Kishan Chokshi teached Govind parekh sir to analyse a business fundamentally. After Govind sir completed their studies, they went for an interview but unfortunately, they weren’t selected by that firm so Govind sir decided to join Madras stock exchange as a broker. About Investing: 1) During their early days as a broker, Govind sir was very keen on seeing how the stock prices fluctuated. Govind sir started investing their own money along with their clients’ money. 2) Their MNC Ideas: International company AR weren’t easily available at that time but somehow Govind sir managed to get 6 International companies AR whose subsidiary were listed in India name: a) Birla 3M b) Bosch c) SKF bearing d) Nestle & e) Colgate. Reading AR helped them to build a conviction and some of these companies became their stock ideas. Their ideology for betting on 3M India: - They had around 60,000 Products - 1/3rd of the products was invented in last couple of yrs - It was darling of US stock market - Birla 3M didn't have the same product portfolio as 3M so Govind sir decided to accumulate the shares of Birla 3M at around 200 rs. Key Investment Bets: - Madras cements & - Laxmi Machine works (LMW): This was the first investment of Govind sir. Investment thesis: o Reading AR and scuttlebutt (visiting their factory) built their conviction. o Company was having 10% holding with Writer machine works (World’s number 1 company) o Good Management o Available at cheap valuation o They entered the stock at 180 and that stock went 7500 after 1:1 bonus. They didn’t hold the stock for this long but have generated a very good amount of return from Laxmi machine works. - Laxmi machine works was the company which kickstarted/ helped Govind sir to go deep into the markets. Becoming an Independent Investor: Investing in Dr.Reddy Lab: There was a conference of Dr. Reddy's first public issue in Chennai. Govind sir attended that conference and one of their friends (who was a merchant banker) insisted they stay and attend dinner they planned with the management. Govind sir was very excited as Dr. Reddy in his speech has talked about many things which no one could imagine at that point of time. Qualities of Dr. Reddy: 1) Making products which no one was making. 2) Make profits and the time competitors use to enter the market they would switch/ create a new product (Superb R&D). After getting: a) Management Right b) Company right, they made a very good amount of money from Dr.Reddy and decided to become Independent Investor.
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pratikarya
Apr 20, 2022
In Investing Webinars & Sessions
One stock love: There are many people who are largely concentrated in a stock they love and defend their positions by saying: 1) I am willing to wait. I don’t mind not making money for long time. 2) The stock gives me dividend 3) I don’t mind stock going down These are the reasons they justify for their obsessiveness for the stock. There is also another side which hates a single stock or a theme like for example there are people who hates a theme like PSU’s or energy. They hate because they think price won’t go up for these stocks. As an investor what are the things which one needs to understand about this one stock love or one stock hate? In one stock love huge amount of wealth is created. For example: Azim Premji, Bill gates etc. Because they had one stock they invested their money, time into it and made it huge but remember they also during their journey diversified by thinking I something goes wrong I should have something to fall back on. We do not know the company as much as the owner does so could you and azim Premji had made similar amount of money (in %ate terms) even after starting at same time? The answer is no. Another thing “Will you be able to sleep with this kind of portfolio?” Again the answer is “No” because going from low base to high is fine but after you reach a certain level you will have to diversify otherwise if some unforeseen event happens and your wealth which you created is down by 40-50% then what will you do? While concentrating your position in a stock you need to understand the company so well just like a promoter. Understanding portfolio construction and portfolio sizing is very important for creating wealth in equity market unless you are a promoter. Historical returns: Look at the Y-o-Y return along with the CAGR because it might happen that a company in the initial phase has given handsome returns but in recent period the returns are not that good. If you see CAGR as a single factor than you would love the company as returns would be averaged so to avoid this, always see Y-o-Y returns too. Equity market is a test of your temperament during bad times of being able to sit tight and this is not easy. My price syndrome: Let’s take an example to understand this, If person A has bought a share of XYZ ltd at 100 rs and in a year that share price has increased from 100 to 167 i.e. 67% return in single year so people will set their expectations high and think this stock won’t go wrong and they have tendency this stock corrects also then it will not go below 100 (their purchasing price). There is no reason behind this but still people thinks if this stock corrects also then it will be above my buying price. This is called my price syndrome. The ability to sit on cash will make you rich. When the promoters of the company are selling their stake in their company like for example: ITC promoter sold it’s full stake after building the company too big, Aditya puri sold his stake before exiting the company then why is investor obsessed with that company? As an investor you need to take tough calls based on you rational thinking. Things to do before buying a company: 1) Why are you buying? 2) At what price you will sell? 3) what are the trigger points when you will start thinking of selling this stock? Always have opinion from a guy who’s thinking is different from you like for example: If your portfolio is 70-80% in equity then take opinion from a guy who hates equity what will happen is he will counter back on your every investment and ask you questions regarding that and if you can’t explain him the reason or logic then maybe that’s the time again read/ revisit the company. Summarizing: Whether it is index or individual stock one needs to turn down his obsessive love for it and even in the parts of the market which are disliked intensely one needs to turn down hate for it and strike a balance between excessive love and excessive hate by reducing both and forming a more balance approach towards investing.
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pratikarya
Apr 07, 2022
In Investing Webinars & Sessions
Every time you own a stock it’s a part ownership in business and that part ownership of business is reflected in market capitalizations, always remember market capitalizations grows in line with profitability and profitability is never secular there is volatility that is associated with it. If you are investing in fixed deposits and bonds, your GDP growth or the growth in the economy and your bond returns would have been the same. Equity v/s other asset class returns past 3 decades Power of compounding with strike rate: If you would have invested 85 thousand in 1991 in 2 companies: Orkay silk (blue-chip company at that time) Hindustan Unilever Then that 85 thousand would have turned today into 1 crore (17% CAGR) rupees despite one company has shut (orkay silk). Although your strike rate would have been 50% but your wealth would have compounded well above index (has given CAGR of 12%). Inflation is a transfer of capital from the savers to the government, inflation is taxation the government taxes higher prices and don’t need legislation around it so they can take prices up but, on a percentagewise you pay a higher tax back to the company. Example for why we are entering a decade where the optics for every government in the world is going to be great: Tata Steel Steel prices have moved from 51 thousand rupees per ton to 78 thousand rupees per ton from 2019 to 2022. Tata steel profitability has moved from 30 thousand crore to 60 thousand crores (this is purely commodity price movement). When prices go up companies makes money and from that money, they repay all their debt. Now what is in the optics of the government? Government is not collecting taxes on volume sold they are collecting taxes based on price it has gone up by. We tend to believe that if we buy stock today then we have to keep it in perpetuity but things change very dramatically and it is relevant that you continue to move your portfolios or track your portfolios on a regular basis. Cycles and preferences change (explained through this 2 slide) What was not popular in 2008 is the major preference in 2020 Try to find companies who can increase their top line as well as bottom line with same amount if invested capital or % wise the revenue and profits should be increasing at higher pace than invested capital. Example: Redington, this company grew its profit 4x (400%) by just increasing their invested capital by 21% from 2010 to 2021. Avoid incumbents: example: Paint Industry- Major players- Asian Paints, Berger paints, Akzo Nobel, Kansai Nerolac, Indigo paints. Industry Revenue- 36500 crore (INR) Invested capital- 16000 crore (INR) Industry profit pool- 6000 crore ROCE (Return on capital employed) – 37% Market value- 450000 crore This numbers have attracted the attention of very large business which have deep pockets like Grasim industries, who are willing to commit 30% of industry’s capital i.e. 5000 crores into paint business which will bring competition. Grasim has 55k dealers who sells birla white putty so now they are going to sell paints too of Grasim. This was just one new entrant we also have JSW paints which is also a very strong group. Due to new entrants it might happen that same profit will be spread out on wider base or the next question would be can industry sustain its superlative/ supernormal ROCE? Kenneth sir’s opinion on startups which are still loss making? It hasn’t happened for the first time there was a company named Shobha developers IPO’d in 2007 it crosses its IPO price in 2021. I think it’s our savings and our investments that drives that value of that firm so you got to figure out when to step back. Specially for the current companies that are coming out, we are putting our savings behind someone else’s losses, if you got an appetite to take losses then start your own business. Do not venture into unknown territory because you have no control of it. Identifying top of the cycle: Identifying the top of cycle is easy, go back to 2007 to 2008 it was very simple every construction company was raising money for the same order book. Every NBFC or every micro-finance business was raising equity to fund the same customer. Valuations are stretched, everyone’s raising money so more capital is not creating profitability that’s where you catch the top of the cycle.
Masterclass on Equity investing by Mr.Kenneth Andrade content media
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pratikarya
Mar 29, 2022
In Investing Webinars & Sessions
- D2C a.k.a. Direct-to-consumer brands. Majority of their revenue or customer acquisition comes from direct-to-consumer online channels or started with an online first distribution channel before going omni-channel. For example, Lens kart. - Brand awareness is at an all time high and brand loyalty is at an all-time low. - Building a retail store requires huge investment and it is capitalized in the balance sheet (expensed gradually over its useful life) whereas in Online space the cost of developing an app is relatively less expensive but incentivizing users to download the app is very high. Incentivizing cost is expensed on P&L. That is why most of the internet-based companies suffer huge losses in Initial years. - Journey of D2C brand: Early stage: Focuses on digital distribution, mix of omni channel, Creating customer database from their own platform. Mid/ Growth stage: Scaling offline for gaining more traction, Enables touch-feel factor. Expansion stage: Increase basket size and target audience, Omni channel expansion and international expansion. - Key metrics to measure D2C success as a brand: Average order value. Customer Repeat ratio. Gross margins. Brand resonance. - Value chain difference: Normal retailers: Manufacturing brand > Wholesaler > Retailer > Customer D2C brand: Manufacturing brand > Online platform > Customer - Difference in marketing strategies: Traditional business: Spend a lot in terms of promotions and offers to general trade and to wholesale channels. D2C brands: Tend to spend a major portion on digital marketing (Instagram/ Influencers / Bloggers, Facebook, Google AdWords’). - Selling (Marketplace V/s Website) When you sell your product on a website the major cost for that company is IT cost (In house IT team or through 3rd party) and logistics costs takes around 15% of the order value whereas when you sell your product in market it takes around 40% for logistics cost, inventory management and payment gateways. - Major sub-segments in D2C space: Beauty & personal care F&B Fashion Electronics and Home & Furnishing. Below is the chart used in the presentation giving key details about these sub-segments. Credits: PPFAS - Success stories: Nykaa, Firstcry.com, boat, mamaearth. Some failure stories: D:FY (Sports brand). There has been one fantastic book written by the founder of D:FY addressing what went wrong in their business named “The Biography of a failed venture”.
Primer on D2C brands by Mr. Raj mehta content media
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pratikarya
Mar 22, 2022
In Investing Webinars & Sessions
Please find below our key excerpts from ithoughtwealth YouTube video. In this video, 2 of the stalwarts of finance industry are discussing about the common mistakes which an investor make in his/ her starting phase. (Emphasis ours). In every market cycle new entrants come into the market they experience investing in the stocks and different derivatives of stocks and this is probably the cycle (Post Covid) in which the maximum number of new entrants have entered the Indian stock market. There is a trend: After every market cycle a number of these entrants don’t stay in the market. Longevity of investors is the most important thing for the health of the market. Longevity mantra for millennials to stay in the market: Investing has to be built in your lifestyle. It has to start small. You can’t risk everything and lose it in the market and then wait for it to recover. For example: If you earn 20k a month you should not be staking 2k rupees a month. That is the way to start small. Lose small and learn in the starting. Jot down your mistakes and experiences from your mistakes. Always keep in mind Experience can’t be taught, you have to go through the cycles and experience it that’s why start small otherwise you won’t be able to handle volatility of the market. In equity markets everybody thinks they can give their view. There is something called beginner’s luck so people who haven’t seen drawdowns and made money in bull runs need to keep their feet grounded and realize the difference between skills and luck. You have to constantly use this “was it skill or was it luck?” “N” is important in investing (Number of years). Can you make 12-15% for 30 or 40 years? That is important, not the 50-60% which you made in 1 or 2 year. Things to avoid in starting phase of your investing: Don’t leverage & Don’t do options & futures- Invest what you have. Market is a very very tempting place when you do a small leverage and you make money you think you are very smart you do more and more leverage till one day you get wiped off. Your EMI should not come from the appreciation of your portfolio. Don’t try to copy anyone else's portfolio: If you don’t know why an ace investor has bought a stock/ his thesis on that stock then don’t buy that stock. Risk reduction is a very important thing in wealth preservation. Some bull markets create a cult following for equity as an asset class. More people across different sections of society aspire to get into equity so they all start, try their hands and some get success within a short period of time. In 1992 investors were going into market ecosystems but now the market has gone into investors' ecosystems. Doing transactions in 1992 was a very time consuming and hard job. It is very important to be very disciplined as an investor. In euphoric markets you need to reduce your risk & book profits before the party ends. Watch full video here: https://youtu.be/MUMFC0AGhSQ & https://youtu.be/wk5jNydp_h8
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pratikarya
Mar 17, 2022
In Business Leader Stories
Dabur ltd is an Indian multinational consumer goods company founded by Dr. S. K Burman in 1884. Dabur India Ltd is the fourth largest FMCG company in India. Today dabur is India’s most trusted name and the world’s largest ayurvedic and natural health care company with a portfolio of more than 250 herbal/ ayurvedic products. Below attached image shows us some of their great products. Dabur got its name from its founder Dr. S. K Burman itself. Da (from Daktaar (Bengali pronunciation of Doctor)) and Bur from his last name Burman. In late 1880s diseases like cholera, malaria and plague were life-threatening diseases so Dr.burman in 1884 started to prepare natural cures (ayurvedic medicines) with a mission of reaching a wide mass of people who don’t have proper access to medical facilities at affordable price. As soon as the medicines (natural cures/ ayurvedic medicines) cured people this news traveled quickly and Mr. Burman came to be known as the trusted “Daktar”. With growing popularity of Dabur products in 1896 Dr. Burman expanded his operation by setting up a manufacturing plant. In 1986, Dabur became a public limited company. Dabur in 1992 expanded its business into the international market by doing strategic partnership (Joint Venture) with Agrolimen of spain. During 1996 Dabur had a lot of product mix in their portfolio so for operational efficiency they decided to have 3 separate divisions according to their product mix - Health care product, Family product division & Dabur ayurvedic specialties limited. Dabur over the time has successfully transformed itself from being a family run business to professionally managed enterprise in 1998.In 2013 Dabur’s market capitalization crossed 5 billion $. Dabur’s today product portfolio - Health Care, Hair care, Oral care, Skin care, Home care & foods (Packaged juices).
Story of a company which is known as “Distribution king” and is worth 1 lakh crore (Mkt Cap). content media
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pratikarya
Mar 10, 2022
In Business Leader Stories
The Bajaj Group is amongst the top 10 business houses in India. The group's flagship company, Bajaj Auto, is ranked as the world's fourth largest three and two-wheeler manufacturer and the Bajaj brand is well-known across several countries in Latin America, Africa, Middle East, South and SouthEast Asia. Jamnalal Bajaj is the founder father of Bajaj group. Born in Rajasthan in 1889. He was a great follower of Mahatma Gandhi. He was also known as “5th Son of Gandhiji”. After Jamnalal Bajaj his son Kamalnayan Bajaj took over the business in 1942. As Kamalnayan Bajaj was also a great follower of Mahatma Gandhi he could devote all his attention to business after Independence in 1947. Kamalnayan Bajaj handled this business for 27 years and after that Rahul Bajaj became the chairman of Bajaj Group and Managing director of Bajaj Auto. Under Rahul Bajaj leadership, turnover of this group went from 7.2 crores to 12,000 crores. Rahul bajaj was one of India's most distinguished business leaders but unfortunately, he passed away recently on 12th February 2022. In 2005, Rahul Bajaj's son Rajiv stepped into the shoes of Managing Director of Bajaj Auto. After becoming M.D of the company Rajiv introduced a revolutionary range of bikes known as “Pulsar” which altogether changed Industry’s dynamics and consumer preference towards sports bikes. Remember those ads where 2-3 bikers were doing wheelies & stoppies on Pulsar bikes. https://youtu.be/E466ti4okTA In 2007, Bajaj Auto acquired a 14.5% stake in KTM (2 wheeler premium segment bikes) that has since grown to 48%. Bajaj Auto today exclusively manufactures Duke range of KTM bikes and exports them worldwide. In FY2018, KTM was the fastest growing motorcycle brand in India. Bajaj Auto today exports to 65+ countries with a significant share of revenue coming from the International market. Bajaj Auto today has a very wide product portfolio under its umbrella which includes: 2 Wheelers: Premium segment (Pulsar, Duke, KTM, Dominar etc) Mass segment (CT 110, Platina etc) Electric scooter (Chetak) 3 Wheelers/ Passenger carrier: Rikshaw (RE, Maxima Z, Maxima X wide,) Goods Carrier: Maxima C Qute (Four wheel) This was the journey of a company which revolutionized the 2-3 wheeler Industry. Hope you liked it.
Business Leader Stories Post 2: A legacy which revolutionized the 2 wheeler Industry in India. content media
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