Author: Vivek Bothra

Understanding Pricing Power

What is pricing power ?

A simple question from Prof Sanjay Bakshi on Twitter got a gamut of responses from his legion of followers, Don’t miss the entire discussion here

I have tried to penned down my understanding in form of few questions hope they help you next time when you are evaluating a business

When you think of Pricing Power

What’s obvious ?

When a company has following attributes

  1. Easily pass on increases in costs to customers without having volume declines
  2. Strong brands and customer loyalty allowing company to charge premium price over competitors
    1. Pricing power is when you can sell $120 phones(manufacturing cost) to people at $650 just because you are Apple
    2. Making/marketing a product that is so loved by customers that they find ‘value’ even at increased prices
  3. The ability to increase the prices of your product without losing market share to competition
  4. Ability to price ahead of inflation
  5. When elasticity of demand of your product is not price sensitive

What’s not so obvious ?

  1. Pricing power isn’t just about increasing prices of your OUTPUT .It’s also about lowering prices of your INPUTS
  2. Pricing power is not just about RAISING prices. It includes power to CUT prices,

… Read the rest

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Annual Review – GRUH Finance

If you’re not getting better, you’re getting worse

With above motto today we are starting a new category of posts “Annual report Reviews”

An annual review is a perfect exercise as

  1. most companies produce a look back report (called annual report) with details once in a year
  2. it gives enough gap for business to progress on stated objective thus helping investor to observe business’s Moat (whether it is expanding or contracting)
  3. it helps us answer many of our question we get while are reviewing quarterly results – e.g. where is business putting capex, it the product portfolio or customer mix is changing
  4. Finally I bet if your write these reviews for 5 business for 5 continuous years than you will expand your understanding of business and the key metrics that drive the business

And what better company than GRUH finance limited to start this exercise

Some companies produce outstanding annual reports and GRUH is definitely part of that tribe.

To get a good grasp of GRUH’s business read this post and come back

Let’s start

First the core numbers,

Disbursements still remains a small percentage of total number of household in India and average ticket size has gone down

GRUH

… Read the rest

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Download an ebook on Warren buffett partnership letters

Jim Rohn famously said,

You are the average of the five people you spend the most time with

As a young investor starting out it would serve you well if you can spent time with Warren Buffet (vicariously) by reading his fantastic letters

At Tankrich – We have taken an initiative to share his learnings through our video channel

This week having finished the partnership letters I thought it would be good if I could document those learnings in a single place

After few weeks of editing here is the final copy for you on Learnings from Warren buffett partnership letters

Below is Table of content of this ebook

Download a copy by sharing any of the above social links (I do this so that this reaches maximum people through your social networks)

If you are reading this in your inbox go to this link to download a copy

Building blocks

  1. What should be focus of long term investor
  2. Surest means of profit is value investing
  3. Think long term to evaluate performance
  4. Beating index is very tough
  5. True conservatism
  6. Magic of Compounding
  7. Price is everything aka Margin of Safety
  8. Cigar butt as a group works out to be a good

… Read the rest

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Invest your house EMI in equity markets

Earlier I wrote a post to convince you that you should buy a house against renting, Today let’s build a case of buying house on EMIs vs investing equated monthly investment (EMI ) in capital markets

Base case

Cost of house – INR 60,00,000

Down payment – INR 12,00,000

Term – 15 years

Rate of interest – A quick search would tell you ~10% floating rate is the going rate , See below snapshot from www.bankbazaar.com

house-1

Typically as an economy scales up the interest rate goes down, See an example of South Korea , A nation which has moved from being a developing nation to a developed nation

house-2

Therefore for our base case example we can say that consumer is likely to pay a lower EMI in future however to be conservative I will assume EMI to be constant

EMI – INR 51,463 /month or INR 6,17,564 / Year

To complete my calculation I need to make few more assumptions , Rent yields let take a look at what are rent yields across the world now

house-3

In 15 years India as an economy should be closer to China / Singapore in real terms so I can only make an educated … Read the rest

How using earnings power box lets you ask right questions ?

Over my limited experience in equity markets, I have come to conclusion that earnings power box is a powerful tool to analyse authenticity of corporate earnings. While I am not going to repeat much of much I have written earlier, you can go through it here and here

One of first things I do after getting annual reports of the companies I hold is to update their earnings power box (EPB)

Updating it sets me in right frame of mind to query annual reports, let me run through an example to elucidate my point

In 2014 this is how Kitex ‘s  EPB looked like

kitex-14

A company in wealth maximizing quadrant 2, the more number of years it continues its advance in this quadrant the more it will continue to create value for owners

2015 EPB will blow your mind away

kitex-15

The company made a significant advance in quadrant 2, no wonder stock market rewarded the stock in the bull market

Kitex-3

This is where we start our investigation

First let’s look at raw data for per share earnings

Kitex-4

The accrual EPS (one which is reported as diluted EPS in Profit and loss account) had a significant jump from INR 12.08 /Share … Read the rest

Tax

Will government’s tax rate cut be game changer ?

In last budget government announced a key intention to reduce corporate taxes to make India par with other emerging nations

Tax-1

Note this is only proposal and there is no guarantee that this will fructify in next 4 years. Now imagine in 2019 that this becomes a reality

How will it improve CAGR returns from companies ?

5% is big saving and can fill corporate coffers tremendously with direct impact to FCF available to owners

So I did a thought experiment on how this tax edge could impact investor returns

Read carefully – Few key assumptions that you are making when relying on this analysis

  • would stick to its promise of reducing corporate taxes by 5% in 4 years – To me this is biggest risk
  • Predicting profit growth for next few years, in most business this is difficult if not impossible
  • Assigning an PE exit multiple, this requires years of practice, we would be wise to be conservative on this
  • Margins would be remain as 2015, for cyclic business this would lead to faulty outputs again if business had an extremely good or poor 2015 then results would be skewed on either side
  • There would be no equity dilution, which

… Read the rest

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Create an Investing checklist

Invest in creating an Investing checklist as it can save you from making fatal investment mistakes in life

Charlie munger said,

“You need a different checklist and different mental models for different companies. I can never make
it easy by saying, ‘Here are three things.’ You have to derive it yourself to ingrain it in your head for the rest of your life

Checklists in aviation and medicine aim to eliminate errors completely. They are critical since they deal with life and death situations—a minor mistake in a flight may lead to a fatal crash, In investing checklist slows down investing process thus taking impulse out of decision making. See how Harvard have developed this checklist for CEOs for big corporate decisions

Daniel Kaheman wrote

Form a checklist of criteria to consider before making a strategic decision. This can help to protect against overconfidence. For example, you might want to know the quality of the information given, whether or not there is a strong possibility of “group think” influencing this information, have any influential team members had a chance to persuade other team members, and also whether the chief decision-maker already has a strong stance on this issue. These

… Read the rest

Why you should not mix emotions and investing

I love the below quote related to emotion and investing

Emotions can be a great asset in life, but when it comes to investing, they may be a liability

Very important line and one needs tremendous patience and practice to avoid mixing emotions with acumen when making an investing decision

Let me tell you story of Anil, a retail investor,and how his emotions cost him dearly

Few years ago his friend told him about an established NBFC Bajaj Finance as a stock tip, he looked at the company’s ticker it was INR 88, he added stock to his watch list and waited for price to drop so that he can buy

Bajaj-1

 

 

 

 

 

 

 

 

A year went by and one day while browsing prices of his watch list he was stuck, Why ?

Bajaj-2

 

 

 

 

 

 

 

 

The stock suggested by his friend has moved almost 50% up, there was huge guilt in him on having missed 50% returns but then he consoles himself by saying ‘We can’t make money on every stock in markets’

He thought this would be end of his story with Bajaj finance, but almost a … Read the rest

Scuttlebutt

Don’t apply scuttlebutt like this

My mistakes have been one of most important sources of my learning, See some stuff  here

Today let me give you another example from my personal experience for you

In year 2010, I learned about this technique and in a minute you will know where it came from

The scuttlebutt technique is inquiring and asking questions to various people with mutual interest or are involved with a certain company or industry. Asking suppliers, vendors, customers, competition, trade association executives, research scientist from universities or in government and previous employees may all be intangible sources of qualitative information.

Phillip Fisher had first coined the “scuttlebutt” technique when he wrote Common Stocks and Uncommon Profits

Now eager to use this technique, I went ahead and started applying this on HDFC bank,

Context

Our family business had recently started dealing with a new branch of the bank and our industry is famous for squeezing the last dime out of bank in terms of service. I thought it was a perfect opportunity for me to find about culture of the bank and how it operates through its employee and fellow customers. What unfolded over next few months really surprised me; I was a … Read the rest

Few takeaways from study of wide moat companies

Wide Moat companies(1)

I started with wide moat ratings of morningstar and selected 10 companies randomly as below

Asian Paints Bajaj Auto Colgate India Dabur Cummins HUL Infosys ITC Nestle Lupin

Then I collected 10 year data on above companies from 2005 to 2014, collecting 10 year data will ensure that you can avoid sampling errors although I want to clearly point that selecting 10 companies and trying to interpret patterns in itself will have sampling errors

If you have gone through our previous posts on competitive analysis , ROE dissection or Earnings framework you know I like to understand a concept through key metrics and examples , I have selected 3 important metrics and plotted on how have they performed for 10 companies in last 10 years

Lets take them one by one

Understand this first  you get rated as improved if a particular company is able to beat its own average over last 10 years in year 2014. So if year 2014 was extremely bad/good year for the company than data interpretation below could be erroneous

Gross Margin – My reason to select – this indicates pricing power

Wide-1

8 out 10 companies were able to improve their gross margins

Cash … Read the rest