Tag: Moat

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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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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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

Evaluating Moats through Floats

Firstly some disclosures the idea of evaluating moats through floats was inspired from this amazing post from Professor Sanjay Bakshi

Secondly the candidate chosen to be evaluated is borrowed from Amit Arora ‘s blog – Poddar Developers Ltd

Now lets begin, Poddar developers ltd is a small Mumbai based real estate developer interestingly the Group is focusing on the value housing segments in Mumbai, within the MMRDA region.
Value housing or Affordable housing as it commonly called has huge demand in India. Poddar developers have a significant presence in Mumbai suburban region through multiple projects, you can access details here

So much so for our candidate now lets quickly define FLOAT – It is other people’s money which company holds temporarily. Durable FLOAT is something which becomes a cost less revolving fund for the company. The common sources for FLOAT are

– Trade payables (Look for companies who buys at Credit but sell in Cash )

– Customer Advances

– Deferred taxes (Companies having advantageous tax situation – unlikely to be durable)

Durable FLOATS create higher ROE and ROCE for the companies,  reason – they are using other people’s temporary money to run their operations

How to calculate FLOAT for … Read the rest

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Symphony – Understanding Competitive advantages

Previously I have written about how to identify stock investments

Like Peter Lynch here

Using Pause and Play here

By following smart money here

One of the pointers in Ten point investment map is to identify whether company has sustainable competitive advantages. Many of the investors have this question on how to define/find competitive advantage of company. We will try to ascertain competitive strength of  Symphony Ltd one of our top picks in Model Portfolio.  I am borrowing heavily from Warren Buffet’s letters to his shareholders.

1.  Will Company be in business for next 10 years ? Is there a big market to address – Symphony limited makes air coolers, also known as evaporative cooler, swamp cooler, desert cooler and wet air cooler, works on the evaporation technique; it uses the hot air in the room and water to generate cool air.  This is what I picked from there 2012-13 Annual report

In India,about 132 million households live in hot dry climatic regions (about 54% of the total) and about 11 million households live in moderate climatic regions. This represents an aggregate 143 million households (58% of total) of potential customers.

So we can safely assume that there is a … Read the rest