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					Factor                                                           screen
                                2000     2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H1
RONW                           10.5%     0.0% 15.6% 29.8% 42.5% ### ### ### ### ### ### ### 34.5%
debt/equity                       0.6      1.7   1.6   1.4   0.7 0.66 0.59  0.8  0.8 0.42 0.46 0.60    0.60
Fixed assest T.O                  0.0      1.0   1.2   1.5   1.9    2.0 2.2 1.9  2.0   2.3   1.9   2.4  2.6
W cap T.O                         0.1      3.1   4.5   4.1   6.3    4.9 7.1 5.4  4.5   5.3   4.8   5.2  4.8
Inv T.O                           0.1     10.5  12.3   7.8  17.0 17.5 18.9 15.4 14.2 15.57 11.72 12.65 11.9
Recievables TO                    0.1      3.7   5.4   6.6   7.2    5.6 6.6 6.2  4.9 5.70 5.20 6.18     5.6
current ratio                    1.39     2.89  2.47  2.31  1.91    2.1 1.6 2.0  2.1   3.2   3.1   3.2
Total asset T.O                  0.01     0.76  0.98  1.13  1.44 1.45 1.69 1.39 1.38 1.58 1.38 1.63    1.70
Investment / share
OPM ( EBIT/Sales)

NPM                           342.0%     0.0% 3.5% 6.4% 10.3% 8.8% 9.6% ### 8.3% ### 9.6% 9.2%                    11.9%
Salesgr                                 47.0% 33.3% 35.2% 35.1% ### ### ### ### ### 7.6% ###                      32.0%
OP gr                                                                                    ### ###
NP gr                                   #### #### #### #### 8.1% ### ### ### ### 2.2% ###                         47.0%
Interest cost                 279.0%     6.1% 5.1% 3.0% 2.0% 1.5% 1.5% 1.1% 1.4% 1.3% 1.3% 1.2%                    1.5%
Overhead %                    ####      40.8% 33.7% 32.8% 29% ### ### ### ### ### ### ###                         27.7%
Depriciation (% of sales)       175%       5%    5%    4%    3% 2.9% 2.6% 2.8% 3.1% 3.0% 3.1% 2.7%                 2.7%
Manpower cost                 351.0%    17.0% 15.8% 13.6% 11.7% ### ### 9.4% ###      9% 9.7% 9.0%                 7.8%
RM Cost %of sales              1364%      29%   33% 35% 35% ### ### ### ### 44% ### ###                           42.5%
Tax % of PBT                     11%       0%   30% 29% 30% ### ### ### ### 34% 35% 32%                             30%
Dividend ratio (DPS/EPS)         21%     100%   29% 19% 18% 22% 23% 18% 19% 17% 19% 17%
Net cash from ops/ net
                                                                                                      1.04 1.24
profit
Sales                             100      147     196     265     358    454    604    880 1091 1339 1441 1910    1200
Avg Capex ( % of sales)
FCF (% of sales)


Key factors of failure (what factors will cause the company to fail or lose money)
rupee appreciation resulting loss of cost advantage
Price differential narrowing between natural and reclaimed rubber - check pattern of differential

Key no brainer questions
Key variables (3-4) which control performance of the compay
Rubber pricing differential




Factors to track to know if company doing well
                               Company specific Key variables (Important and
                                         knowable/predictable)
Factor                                2005 2006 2007 2008 2009 2010                2011
Reclaimed rubber price (Rs/Kg)         24.4     26.4    30.1    30.5 35.2 34.4      40.2
Natural rubber price(Rs/Kg)              74       77 109.0      55.0 122.9 208.8     195
Differential                            3.0      2.9     3.6     1.8   3.5   6.1     4.9
Capacity                                                                   ###     ###
Production                                                                 ###     ###
Capacity util %                                                            101%    75%
                             comments

quite good, 2011 has seen capacity addition
ok, added for FA adittion
2-2.2 looks fine
dropped to average levels due to lower debtors turn
good. 2011 is back to earlier levels
down again
ok
improvement inspite of asset addition


at a cyclical high due to lower RM cost, lower overheads and lower
manpower costs
ok, dependent on automotive growth and move to reclaimed product
drop due to increase in transport and other overheads
looks fine
cause of margin improvement
has dropped from 2011 levels
3% looks fine
come down due to economies of scale
on a downward path ?
ok
ok


can be taken as 1% more than depreciation
1% less than NPM
Checklist - to be developed based on my and other's mistakes


Scalability
Can the company grow @ 15%+ and maintain ROE in excess of 20% for next 10 yrs ?
Is the current market/ future market for the company growing at 10%+ ?
Does the company enjoy entry barriers to maintain high growth and high ROE ?

Debt
Does the company have > 0.7 times debt (unless it is a bank / finance institution)
Will the company be able to finance/ renew the debt without equity dilution or bankruptcy
Is the debt non-recourse or recourse ?
Does the company have contigent / off balance sheet liabilities ?
Does the company need borrowed money for funding a critical aspect of the business ?


Valuation and growth
Does the company sell @ PE >20
Does the current valuation assume growth in excess of the past or the same as past above average growth ?
Is the company not growing or likely to underdegrow due to competiton, poor economics or management
incompetence ?
Is there only 5 years of history of good performance, i.e is there insufficient past history of performance


Corporate governance
Is the management hoarding cash with raising dividend or reinvesting it ?
Has the management allocated cash rationally and returned excess cash to shareholders ?
Is the management putting cash in other non core areas which has no relevance to the core biz ?
What is the % of non core income (other than operations). Is it more than 10%, does it look fishy ?
Has the management been reprimanded by SEBI or other bodies. Does the management has bad governance
history with other firms ? (check watchoutinvestors.com)
Is the management lending excess cash to sister firms via loans and advance, sometime even below market
Does the management make more than 3% of net profit as salary
Is the management buying or selling shares of the company? - chk bse india website
Has the management does accquisitions in the past at high valuations and did they work out successfully ?
Has the record been good ?
Does the company have an management which has worked against shareholder interests in the past ?

Competition
Does the company face intense competition in its segment from some new competitor?
Does the industry have a history of intense competition in the past ?
Does the company operate in a segment which could see severe competition from a large competitor ?
Is the company getting impacted or will get impacted by low cost imports ?

Business economics
Is the company in commodity type biz with poor pricing poor and is not lowest cost mfg
Has the recent FCF or performance been due to bubble/ Cyclical high or am I looking at cylical earnings ?
Does the company operate in a business with poor ROE, high competiton, low barriers to entry and typical
commodity economics - i.e does it have sustainable competitive advantage
Does the company have product obsolesence ?
Are the NPM and Return on capital numbers comparable with other companies in the sector, if not why ?
Does the company have average ROE above WACC for last 10 yrs ?


Portfolio setup
Will the company being analysed be impacted in terms of fundamentals and price by fairly same factors as
other ideas in the portfolio



General
Do all the stakeholders of the company benefit or is the company predatory with some stakeholder, for ex:
selling credit to poor customers
10% growth and ROE of 15% is doable. Difficult to see 15%+ growth for the company
yes
ROE has been high. Entry barriers is through sourcing RM and customer relationships


no
yes
recourse
around 15% of annual profit. Not much




no
No
competition and poor economics may be the likely cause

yes, 6-7 yrs of good performance



reinvesting it
has been rational about it
no
none
no

associate company given 51 lacs, which may have been written off
yes, around 8% of net profits. Higher than normal
none
no accquisitions in the past

does not seem so


no new competitor
intense competition from smaller competitors, the company has 44% mkt share
no
yes, tyre imports can cause impact


Biz is commodity. Company is one of the largest MFG and has lower cost
no, but 2011 may see a cylical high
ROE is high, competition is high too with low entry barriers.

no
NA
yes
no




no
                                                                          Test of competitive advantage


One of Dominant firm in product or geo Dominant firm with 45%+ share of the market. Share may be growing further
segment ?
High ROE for last 10 years and the same Yes
is being maintained ? If yes, displays
persistence of returns and hence CA

Does the company have customer or        Mainly production advantage with smaller customer advantages
production advantage
- analyse ROC and check if Margins >
10% of Asset turns in excess of 1.
- If high margins, in excess of 10-12%
then customer advantage, if high asset
turns then production advantage. If both
are high then both advantage.
Low entry / exits ?                      Yes

Market share stability                   Seems to be high




                                                Source of competivite advantage - production advantage / customer advanta

Strong competitive advantages create entry barriers for incumbents, preventing entry of competition and enables incumbents t
Production advantage factors             1. Process economies (resulting in lower cost of production for
- resulting in moat (cost based          incumbent)
advantages). Weaker than customer        a. Indivisibility lead economies
based advantages expect in case of       b.complex , linked activities
patents or government regulation (like   c. learning curve process cost
licenses ).                              d. patent/ copyright/ R&D advantage
- indicator is high asset turns          e. resource uniqueness

                                         1. Scale economies
                                         a. In demand
                                         b. Distribution
                                         c. purchasing
                                         d.production
                                         e. R&D
                                         f. Informational economies of scale such as in advertising would
                                         give prevent new competitor
Customer advantage - creates more        1. Habit forming and High Differentiation - No. 1
durable competitive advantage            2. Experience goods (brand effect, trademarks) - No. 2
- more common, indicator is high margins 3. High switching cost (Lock-in) - No. 3 (for ex : change of
                                         business software by a co. such as SAP ERP etc)
                                         4. High search cost ( where it is diffcult, expensive and risk for
                                         custom to look for alternative ) like case of doctor or lawyer
                                         4. Network effect (related to switching cost - network effect
                                         increases switching cost)




                                       1. License
Government/ Regulation based advantage 2. Tariff / quota/ regulation
Moat analysis - does company has deep 1. Does co have multiple demand side advantages ?
competitive advantage or weak one ?    2. Does company has scale advantages - absolute advantage is
Customer advantages are more           not necessary. Local or product specific advantages are enough
sustainable !                          3. Does the company has cost advantages with or without scale
                                       Answer to these 3 questions decides whether competitive
                                       advantage is strong or not




                               Franchise Analysis - Competitive advantage analysis ( part repeat of the previous ta
Key factors of competitive advantage     Drivers
Barriers to entry                        1. Patent
                                         2. Governmental License
                                         3. Consumer demand Preference (Brands / Trade marks)


Enduring Low cost position                 1. Due to technology / Processes - not so enduring
                                           2. Due to management skill - good but may not endure the current
                                           management




Econmies of scale barriers                 1.Economies of scale in demand
                                           2. Scale advantages in advertising, Procurement, Distribution
                                           3. Informational economies of scale such as in advertising would
                                           give prevent new competitor



Switching costs                            1. Switching cost to other supplier
                                           2. Network effect - benefits are high in the current network ( like
                                           telecom , e-mails, e-bay etc)
Distinctive capability analysis applied to specific market (product or geographic create the customer based or production based
                                                                      Analysis of Distinctive capability for the firm
Type                                                                    Description
                                           Relationships with all stakeholder / systems / process / Knowledge
Architecture                               base
                                           Distribution network / Customer relationships / plant / license
Strategic assets                           monopoly / natural reserve /Patents / Media Properties/ Network
Innovation                                 R&D / Innovation history /NPD
Cost                                       Enduring Low Cost position
                                           Strong Balance sheet
Finanical strength
                                           Brands / trademarks
Reputation




The value chain analysis can be used to identify the key distinctive capabilities and how unique the capabilites are and strengh

Value chain analysis                       Procurement                Operations
DESCRIPTION
Key Strenghts
Key Weakness
Cost analysis
Differentiation
Value adds


                          List of the drivers/ factors (internal / external ) for the Superior Economic returns ( ROE
                                                  Driver




Value driver                               Value factors              Trigger
Sales                                      Sales volume               Y
                                           Price and mix              N



Operating margins                          Operating cost             Y
                                           Operating leverage         Y
                                           Economies of scale         Y


Re-investment rate                         Investment efficiency      N
                                           Asset intensity            N
e advantage


may be growing further




vantages




dvantage / customer advantage factors

on and enables incumbents to earn high returns
            1. Process economies from
            a. Complex linked activity
            b. learning curve costs




              1. Scale economies
              a. Demand
              b. distribution
              c. purchasing and production
           3. Moderate switching cost
           4. Moderate search cost of finding a good supplier of equal scale




           none

           1. A few demand side advantages
           2. Mainly production advantages due to learning curve and scale




repeat of the previous table ) only to be read again
                                   Analysis for the company
           None




           Mainly due to scale and management skills




           1. Economies of scale in demand
           2. Moderate scale in purchasing and disribution




           Low to moderate switching cost
er based or production based advantages
ability for the firm
                                         Details for the firm
             Relationship with stakeholders such as OEM customer, suppliers and
             knowledge base to run the biz
             Distribution network, customer relationship, well placed plants and sourcing
             network for raw material
             Small amounts of innovation
             Yes
             Yes
             None, but reputation




e capabilites are and strenght of the fit

             Outbound logisitic      Marketing




or Economic returns ( ROE > 15 % )
                            Influenced by




             How much
Checklist

Economics models
Does the industry have good economics - a) High return on capital , Less price wars,
barriers to entry. Chk industry returns for last 10 years and see if the indsutry returns
have been high or characterised by high competition
Does the industry have scale - characterised by large competitors or a large no. of
small firm and intense competition - indicator of low Fixed cost and hence lower
Does the company operate as monopoly / duopoly / intense competition
Is the industry RM intensive / sensitive ( 40-50 % ) total cost and hence has low
Variable costs - hence high operating leverage ?
Does the industry have high Capital intensity ( sales / FA+NWCA <1.5 )
Can the company increase prices freely ahead of inflation/ Does it have untapped
pricing power ( VV IMP )
What is the earning power of the company through the complete business cycle (level
of cyclicality )
Does the industry have a high degree of change and obsolesence ?
Are they regulatory or technology shifts happening in the industry which will migrate
value to a different set of industry participants ? Does it impact the company ?
What is the % of installed capacity being used ? Will the company require substantial


Business model checklist
Is the Company a Low cost producer or among low cost producers (especially
commodity ), if yes why ?
Are the net margins higher than competition ? Why ?
Is the company strengthening its CA, if yes - how ?
Does the company have a recurring revenue stream
Is company gaining share in the industry profitably
Does the company have high concentration of sales with few customers
Does the company have a strong MKt/Sales organisation
Is the business model becoming less asset intensive and increasing the ROC
Does the company have high demand growth due to
a) growth in exisitng product/ market
b) growth in exisiting product / new market
c) growth in new product / existing market
d) growth in new product / new market
Is the company reducing the amount of capital invested ? i.e is the company freeing
up capital or increasing FCF
Does the company have investment which are expensed such as Advtg, R&D. how
effective have been these 'investments'
Does the business have intangible assets - brands, trademarks, patents, customer
relationship etc ?

Company classification
Is the company a slow growing company with high competitive advantage - returns to
come from valuation gap closing ?
Is the company a cyclical stock currently cheap due to down turn - returns to come
from cycle upturn in the commodity ?
Is the company a moderately priced mid/small cap with decent biz model and
competitive advantage - returns to come from growth and high ROE?
Is the company a sector/ market leader suffering from temporary biz or sector specific
distress - returns to come from market recognizing true value of company and sector
Is the company a cheap, graham like stock (extremely cheap by PE, asset based
valuation) - returns to come from valuation gap closure ?

Accounting checklist
Options grant as a % of O/s shares
Future dilutions due to ESOP
FCCB borrowing resulting in dilution (Indian companies)
Is sales booked agressively ?
Is sales got through liberal financing - AR is increasing as % of sales
Are earning managed by modifying reservers/ special charges ? - Retained earnings >
increase in book value
Does the management have aggressive pension accounting ? (% of income, per
Interest income as % of cash (looks correct ?)
do the provident fund charges look correct (PF amount / employee - compare with
other companies
Any MTM losses on the balance sheet or 'Shareholder' equity statements ? Due to
derivative instruments
Is the loan and advances too high and growing year on year ?
Does the company lease product on financial / operating leases on market terms ?
chk for losses in the loan portfolio (banks)

Knowledge economy models (creating consumer advantage)
Does the Business have network effects
Does the business have a lock in - once the product is bought the tendency to
Are switching cost high
Is company increasing the service component


Management factors
Is the management rational in capital allocation . Does management allocate capital
well and above current rate of return. If the management has excess capital, is it
giving it back to shareholders ?
Is the management having integrity
Does the management discuss both negative and positives of the company
performance candidly .
What is the compensation levels in the co. Is the CEO/owner being compensated
heavily (cash or options?)
Does the management / CEO have substantial ownership in the company ?
salary as % of sales
related party transaction - are they harmful to the co ( rights offer, sale of promoter
owned ventures to the company at high price)
Tax as a % of PBT ( is it too low , < 15%, why ?)
Plans for cash ?
Has the management been reprimanded by SEBI or other such govt bodies ? Does
they have any past cases or issues in other companies ? - check google and stock
boards such as moneycontrol , TED etc
Is the cash held in foreign banks ?
Has the management done accquisitions in the past ? What is the track record of
these accquisitions ?
Has the management done restructuring and taken such charges on a regular basis ?
What is the management track record in the last 10 yrs ? Have they followed through
on their statements in the past ? How is their execution track record


Probability / options models
Does the industry have high level of change - results in a larger no of real options
Does management has capability of identifying and utilising the real options


Physcological models
Am I working with recency bais - giving more wieght to recent data ( check if the
projections based on recent data or averages / look at 10-12 yrs data)
Am I working with Hindsight bais - thinking that fact was obvious beforehand ( check
if the -ve factor was noted before hand )
Am I framing issues correctly and in different manners - trying to look at situation
using varying models
Is there a data framing bais - influenced by the way data has been presented.
Am I too overconfident on the situation - assuming over familiarity , associating
positive unrelated feeling, too high wieght to optimistic scenario ( familiarity due to
work / association with the industry )
Have I done probability analysis for all negative factors
Am I having too much loss aversion - overwieghing negative factor
Am I working with sunk cost mentality - trying to average down the cost
Am I slow in changing opinion - not responding to negative news
Describe negative thesis for the company


Bais from commitment and consistency tendency - Make this spreadsheet hence
committed to buy ?
Pavlovian association - correlation being considered as cause effect relationship
social proof bais - stock being recommended by various analyst
Incorrect / low weightage of existing/ new negative information or even positive
Status quo bais - unwilling to sell existing holding ( review discount to intrinsic value
and sell based on that )
False consensus bais : confirmation bais ,selective recall, baised evalution ( check all
information against you investment thesis and evalute objectively )
Have you questioned the consensus
Has the analysis been done with reverse thinking (working the problem forward and
backward)
Catalyst
Shift of demand/supply to favor company ( relevant more for commodity company )

Change in the business cycle / economic cycle- imp for commodity business
Regulatory changes
Management action - Buy back, Bonus etc
Asset conversion - buyback / LBO/De-merger/Accquisitions - critical if the business is
a holding company or reason for buying is discount to asset
Value creation through access to capital market on very favorable terms
Sale / buying of any asset
Unexpected earnings increase
Time - Catalyst if self assesment of CAP is higher than market. With time market
realises the higher CAP and will give higher valuation
(value - Poor management not interested in enhancing value)

Other models

What are the key no-brainer questions ?



Any combination of factor effects


Biomodels
Will the business survive/adapt into a niche or is it a dominant player
Does the business have practise evolution
Describe how the company operates as part of the ecosystem - dominant firm or
small firm in a niche ?

Hidden assets
Does the company have subsidiary which are carried at cost and is worth more
Does the company has real estate which is at cost and worth more
Does the company have investments which are worth more than the cost

Hidden liability
Forex/ derivative liability
ESOP liability
Pension liability
Equity dilution via FCCB
Contigent liability as % of Net worth and annual profit (concern ?)

Munger Model
1. Solve the big no brainer points in the thesis - find the key points of the idea which
define success/ failure for the idea
2. Use math to support the reasoning the supporting/ opposing points for the idea



3. Think the problem forwards and backwards - find causes which will cause the
company to fail
4. Use multidisciplinary approach - analyse the idea based on models on this page.
Any specific models point to a hidden factor not being considered and can cause it to
fail ?

5.Properly consider results from a combination of factors or lollapalooza effects




Other questions

Based on DCF what factors would improve the CAP and growth further
Based on DCF what factors will cause a deterioration in performance
List 3-4 reasons why the idea will fail ?


Failure analysis (list factors which will cause the company/idea to fail) - describe
High debt level
Cyclical high in terms of margin
Management competency
Competition
Remarks
Read AR/ Google to answer questions on various models


Industry has poor economics with a lot of competition. Company has been able to scale and get good
ROE and growth

Gujarat reclaim is one of largest companies and has scale (accounts for almost 50% of industry)
50% mkt share with threat of imports

yes
No

No

around 20% ROE
no

No
Yes, capex completed in 2010




Yes
Yes
Yes, but increasing scale, opening plants in different regions and tapping export markets
yes
yes seems so
Yes, but increasing scale, opening plants in different regions and tapping export markets
yes appears so
no



a. existing product/ market
b. growth in existing product / new market

No, capital invested is same, but asset turns have improved by 10%+

not much

main intangibles are trademarks and customer relationship



no

no

yes, most likely

no

no


none
none
none
no, does not seem to be
none
none

no, does not seem to be
yes
yes

no

reduced due to lesser advance taxes
no
NA


no
no
Moderate for large manufacturers as it would require finding a producer of equal scale
no




yes, management seems rational about it
yes, seems so

not too much discussion

cash, higher than average. No options
yes
< 2%

does not seem so
35%, looks ok
buyback, re-invest back


no
no

no accquisitions
no

yes, seems to be good



yes - product is substitute for rubber and provides a low cost substitute
partly




Partly true, as the last 6-7 years data is more relevant

no

yes
no, doing my own analysis


no
yes
no
not yet
no
1. Overhead and Manpower costs could counteract RM reduction (resulting in stagnant margins)
2. RM sourcing (tyres etc) could get more expensive due to alternative uses
3. RM price drop could reduce difference between new and used rubber causing a drop of profitability

no
no
no, not much coverage of the stock as it is a small cap
cannot be sure

no

confirmation bais and baised evaluation possible
yes

Yes


possible - move to cheaper and environment friendly material. Also reclaimed rubber is now 20-50% of
virgin rubber
yes, increase in tyre volumes and other uses for rubber
none
not likely

no
no
no
possible if exports pickup. Also increase in rubber price is likely to trigger higher demand

yes - most likely cause
have not worked this way till date


1.   Will the price differential between new and re-cycled rubber remain ?
2.   Will the management be able to expand sales to foreign OEMs ?
1.   Move to cheaper environment friendly materials
2.   growth in indian auto industry
3.   Large share of the industry with further consolidation
4.   Further increase in price of virgin rubber to reclaimed rubber



niche player in the overall ecosystem. Less competition likely
yes

Large firm in a niche


no, most are carried at cost or written off value
cannot say
no


low level of liability
none
low, less than 2% of net profit
none
less than 10% of net profit


1. Price differential between re-cycled and virgin rubber
2. ability to expand in export market / source RM
1. Overhead and manpower costs have come down due to scale. Rise in price of virgin rubber v/s
reclaimed rubber will benefit topline
2. growth in exports should increase value
3. RM sourcing issue, reductions in price differentials will cause drop in profitability and reduce possible
1. RM sourcing issues, reduction in price differentials and reduction in export sales

1. Business related factors as discussed earlier
2. Social proof issues may be cause of making more optimistic than should be
3. Auto market slowdowns (across industries)

1. Cost savings, extra capacity and improving tech with demand growth may improve the value of the
company
2. Increase in rubber price will increase substitution by reclaimed rubber. This would improve growth of



Current margin and topline growth if continued will improve value. CAP may be maintained due to
dominant position in the industry
Drop in margin and topline growth (competition) and reduction in CAP due to high competition
as earlier



no
Yes, possible
should not be an issue
Low impact
     INDUSTRY ANALYSIS - The shaded factor
     contribute maximum to the competitive
     advantage of the firm                                    Y/N Remarks                                                              Points Key CA factor
     ENTRY BARRIER - No. 1 Factor for Competitive advantage        Entry barriers are moderate to high, with scale driven advantages
 1   Asset specificity                                        M    High                                                                       Y
 2   Economies of Scale                                       M    High                                                                       Y
 3   Proprietary Product difference                           M    Low                                                                        Y
 4   Brand Identity                                           H    Moderate                                                                   Y
 5   Switching cost                                           L    Moderate
 6   Capital Requirement                                      H    High                                                                       Y
 7   Distribution strength                                    L    High
 8   Cost Advantage                                           NA   High
 9   Government Policy                                             None
10   Expected Retaliation                                          Low
11   Production scale                                              High
12   Anticipated payoff for new entrant                            Low
13   Precommitment contracts                                       High
14   Learning curve barriers                                       High
15   Network effect advantages of incumbents                       None
     No. of competitors - Monopoly / ologopoly or intense
16   competition (concentration ratio )                            A lot of competition. However gujarat reclaim is a major player
     Total (average)                                                                                                                   ####
     SUPPLIER POWER                                                Supplier power is absent. However sourcing network is crucial
17   Differentiation of input                                 N    None
18   Switching cost of supplier                               N    None
19   Presence of substitute                                   Y    None
20   Supplier Concentration                                   N    Low
21   Imp of volume to supplier                                N    Low
22   Cost relative to total purchase                               High
17   Threat of forward v/s Backward integration               L    None
     Total (average)                                                                                                                   ####
     BUYER POWER                                                   Buyer power is high. Buyers are mostly OEM and mfg
18   Buyer conc. v/s firm concentration                       L    High
19   Buyer volume                                             L    High
20 Buyer switching cost                                       L    Moderate
21 Buyer information                                          H    High
22 Ability to integrate backward                              N    None
   Total (average)
   Substitute product                                              The product is a substitute for virgin rubber
23 Price sensitivity                                          H    High
24 Price / Total Purchase                                          High
25 Product difference                                         M    Moderate
26 Switching cost                                             H    Low
27 Buyer propensity to Subsititute                            L    Low as yet
   Total (average)
     RIVALRY DETERMINANT
28   Industry growth                                               L     Moderate
29   Fixed cost / value added                                      M     High
30   Intermittent overcapacity                                     H     Moderate                                                              Y
31   Product difference                                            M     Low                                                                   Y
32   Informational complexity                                      M     Moderate
33   Exit Barrier                                                  L     Low
34   Industry concentration                                              moderate with further consolidation
35   Demand variability                                                  Moderate
     Total (average)                                                                                                                    ####
     Total                                                                                                                              ####
     Grand Total average                                                                                                                ####


     Low, Bad - 1
     Med - 2
     High, Good -3

     Low CA = < 30
     Med 30< , <50
     High CA > 50

     The Industry structure helps in identifying the critical competitive factors which have to be managed to create a sustainable CA
     entry barriers are moderate to high in the industry
     Supplier power is absent, but sourcing network is crucial
     Buyer power is crucial and important to manage
     Rivalry is high, but gujarat reclaim due to size and scale should benefit

     Industry mapping
     Key segments                                                  Size Key companies in each segment
Key Demand Drivers                                                Impact
Auto industry growth                                              High
Switch from virgin rubber to reclaim rubber (% wise)              High




Operational Risk factors
Virgin rubber prices
Auto demand slowdown
Price to source RM due to presence of alternative use of used rubber tyres




Positive factors
Big scale and high mkt share
Growth of auto and switch to reclaim rubber
Strong balance sheet and decent performance record
Exports


Sell criteria : Imp ( define clear quantitative and qualitative
Margins drops below 7% for 3 years
valuation exceeds 16 times earnings
Growth slows to 5% and margins drops with it for 2-3 years

Questions to be explored
Remarks

Tailwind on this as virgin rubber prices are improving
Valuation ( neutral )                                                      actual                                                                                                   p
detail                               1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010                               2011    2012   2013   2014
PBDIT                                   0    0 456    19 30.8   42   72 81.8 113 191 190 265 275.4                                   363     483    520    580
excpl item & non operating inc.
Less :TAX                               0    0         2    2         5     7      16   22        30     59   50       72      75      89  122   128   141
Less : Wcap change                      0    0       40     8        -4    20      -7   35        -7     77   83        8      49      68   30    50    50
Less : Capex                            0    0      180    13         8    34      14   65        43    274 161        56    196     131   225   250   250
Less : Capex ( maint) **                0    0      49.8 18.2      6.99    32    6.44 50.5        12    110 121      49.7   100.9    132   110   146   162
FCFF- normal $$                         0    0      234    -4      21.8   -19      49 -40.2       47   -219 -104     129    -44.6    143   136   142   189
FCFF(Mn) 5                              0    0      404 -1.15      18.8 3.03     49.6 9.26        71   22.4 18.7     143    99.46    141   251   246   277
shares ( mn)                            0    0       1.3 1.33      1.33 1.33     1.33 1.33      1.33   1.33 1.33     1.33    1.33    1.33 1.33 1.33 1.33
fcff/ share                       #DIV/0! ####      180 -3.01      16.4 -14.3    36.8 -30.2     35.3   -165 -78.2    96.8   -33.5   107.4 102.0 106.8 142.1
fcff / share ( maint)             #DIV/0! ####      311 -0.86      14.1 2.28     37.3 6.96      53.4   16.8 14.1     108    74.78   106.4 188.4 185.0 208.2
discount ( 1.15 or 1+ WACC )                                                                              1     1       1       1     1.0   1.1   1.2   1.3
NPV ( maint)                                                                                           16.8 14.1     108    74.78   106.4 171.3 152.9 156.5

terminal value : note 1              2078                                                     Above FCFF should exclude income from cash if cash is being added back to valuation
Intrinsic value estimate             3371
Equity value / share : note 2        3181

Terminal value should be less
14 times FCF + excess capital

MICAP calculation
Terminal value 3                                                                                                                    2100    2766 3007 3366
total = terminal value+ cum of value 4                                                                                                     ##### ##### #####
MICAP years
current price

Notes :
1. FCF ( n+1 th year )/ Wacc - g                      Wacc : weighted cost of capital , g - long term growth / economy growth
2. Equity value = IV - ( LTD+STD-cash - cash equivalent ) + Non operating asset- ESOP value - contingent liability
3. Terminal value = current year NOPAT / WACC /(1.15 ^ no. of year)
4 cum of value = total of discounted fcff till year in question
5. FCFF adjusted for maintenance capex
$$ - adj for normal capex
** - capex for maintenance
cash/share   15.8   28.6   29.1   40.5   46.9
                    12.8   0.46   11.4   6.35
                    26.9   2.74   48.7   13.3

                                         11.1
                                  plan
               2015   2016     2017    2018    2019    2020
                660    740      882     940    1060    1200

               163   182        221     233     262     300
               100   100        100     100     100     100
               200   300        300     300     400     300
               220   236        252     268     292     308
               297   258        361     407     398     600
               277   322        409     439     506     592
               1.33 1.33        1.33    1.33    1.33    1.33
              223.3 193.8      271.1   306.0   299.3   451.4
              208.3 241.9      307.1   330.0   380.5   445.4
                1.5   1.6        1.8     1.9     2.1     2.4
              142.3 150.2      173.4   169.4   177.5   188.9

h is being added back to valuation




               3812   4278  5066   5422   6120   6905
              #####   5051 5840.8 6213.4 6933.1 7764.4
HIGH PROBABILITY - NEUTRAL

                          1998   1999    2000       2001   2002      2003      2004     2005      2006   2007 2008        2009   2010      2011
sales                                     100         147    196       265      358       454       604    880 1091       1339   1441      1910
Sales Gr                                           47.0% 33.3%      35.2%     35.1%    26.8%     33.0% 45.7% 24.0%       22.7%   7.6%     32.5%
Operating cost                           -356         128    165       223      286       372       491    689   901      1074   1166      1528
% of sales                              #####      87.1% 84.3%      84.2%     79.9%    82.0%     81.3% 78.3% 82.6%       80.2%    81%       80%
PBDIT                                     456          19     31        42        72       82       113    191   190        265    275       363
% Gr                                                -96%    62%       36%      71%       14%       38%    69%    -1%       39%     4%       32%
% of sales                              #####      12.9% 15.7%      15.8%     20.1%    18.0%     18.7% 21.7% 17.4%       19.8% 19.1%        19%
depriciation                              175            8      9       10        12       13        16   24.2     34        40     44      64.4
dep %sales                              #####       5.4%   4.6%      3.8%      3.4%     2.9%      2.6%   2.8% 3.1%        3.0%   3.1%      3.4%
dep % FA                                #####       5.5%   5.7%      5.8%      6.3%     5.9%      5.9%   5.2% 6.2%        6.7%   5.9%      8.0%
Interest                                  279            9    10          8        7       6.8         9    10     15      17.8   18.4     28.65
% of sales                              #####       6.1%   5.1%      3.0%      2.0%     1.5%      1.5%   1.1% 1.4%        1.3%   1.3%      1.5%
Tax                                         2            2      5         7       16        22        30     59    50         72     75       89
% of PBT                                #####     100.0% 42.4%      29.2%     30.2%    35.5%     34.1% 37.6% 35.5%       34.8% 35.2%        33%
% of sales                               2.0%       1.4%   2.6%      2.6%      4.5%     4.8%      5.0%   6.7% 4.6%        5.4%   5.2%      5.2%
Net Profit                                  0            0      7       17        37       40        58     98     91       135    138       181
% Gr                                             #DIV/0! #DIV/0!    150%      118%        8%       45%    69%    -7%       48%     2%       31%
% of sales                               0.0%       0.0%   3.5%      6.4%     10.3%     8.8%      9.6% 11.1% 8.3%        10.1%   9.6%      9.5%
wcap                                0       40         48     44        64        57       92        85    162   245        253    302       370
Inc Wcap                                    40           8     -4       20        -7       35         -7    77     83          8    49        68
wcap % of sales                         40.0%      32.7% 22.4%      24.2%     15.9%    20.3%     14.1% 18.4% 22.5%       18.9% 21.0%      19.4%
Inc Wcap % of inc sales                 40.0%      17.0% -8.2%      29.0%     -7.5%    36.5%     -4.7% 27.9% 39.3%        3.2% 48.0%      14.5%
capex                                     180          13       8       34        14       65        43    274   161         56    196       131
Capex as% of sales                                  8.8%   4.1%     12.8%      3.9%    14.3%      7.1% 31.1% 14.8%        4.2% 13.6%       6.9%
Capex ( Maint )                           49.8      18.15   6.99     31.97      6.44    50.54     12.04 109.83 121.29     49.65 100.94     132.4
Capex ( Maint ) %                       49.8%      12.3%   3.6%     12.1%      1.8%    11.1%      2.0% 12.5% 11.1%        3.7%   7.0%      6.9%
fixed asset                               140         145    157       171      192       222       272    469   547        595    742       805
Sales /FA                                  0.7         1.0    1.2       1.5      1.9       2.0       2.2    1.9   2.0        2.3    1.9       2.4
Debt
EPS                                        0.0       0.0      5.1     12.8     27.8      30.1     43.6    73.7    68.4   101.5   103.8    135.9
Cash
TA                                      180.0      193.0   201.0    235.0     249.0    314.0     357.0   631.0   792.0   848.0 1044.0 1175.0
Sales/ TA                                 0.6        0.8     1.0      1.1       1.4      1.4       1.7     1.4     1.4     1.6    1.4    1.6
ROC                                       0%         0%      3%       7%       15%      13%       16%     16%     11%     16%    13%    15%
cash / share
No. of shares   1.3   1.33   1.33   1.33   1.33   1.33   1.33   1.33   1.33   1.33   1.33   1.33
                                     Projections
  2012       2013       2014       2015        2016       2017       2018       2019      2020
  2300       2600       2900       3300        3700       4200       4700       5300      6000 3.141361 3.394567   0.13
 20.4%      13.0%      11.5%      13.8%       12.1%      13.5%      11.9%      12.8%     13.2%    36910
  1840       2080       2320       2640        2960       3360       3760       4240      4800
   80%        80%        80%        80%         80%        80%        80%        80%       80%
    483        520        580        660         740        882        940      1060      1200
   33%         8%        12%        14%         12%        19%         7%        13%       13%
   21%        20%        20%        20%         20%        21%        20%        20%       20%
     80         96        112        120         136        152        168        192       208
  3.5%       3.7%       3.9%       3.6%        3.7%       3.6%       3.6%       3.6%      3.5%
  8.0%       8.0%       8.0%       8.0%        8.0%       8.0%       8.0%       8.0%      8.0%
   32.2       36.4       40.6       46.2        51.8       58.8       65.8       74.2        84
  1.4%       1.4%       1.4%       1.4%        1.4%       1.4%       1.4%       1.4%      1.4%
122.364    127.908    141.042    162.954 182.226        221.496    233.046    261.954    299.64
   33%        33%        33%        33%         33%        33%        33%        33%       33%
  5.2%       5.2%       5.2%       5.2%        5.2%       5.2%       5.2%       5.2%      5.2%
    248        260        286        331         370        450        473        532       608    3739    10.1%
   37%         5%        10%        16%         12%        22%         5%        12%       14%
 10.8%      10.0%       9.9%      10.0%       10.0%      10.7%      10.1%      10.0%     10.1%
    400        450        500        600         700        800        900      1000      1100
     30         50         50        100         100        100        100        100       100
 17.4%      17.3%      17.2%      18.2%       18.9%      19.0%      19.1%      18.9%     18.3%
  7.7%      16.7%      16.7%      25.0%       25.0%      20.0%      20.0%      16.7%     14.3%
    225        250        250        200         300        300        300        400       300
  9.8%       9.6%       8.6%       6.1%        8.1%       7.1%       6.4%       7.5%      5.0%
    110        146        162        220         236        252        268        292       308
  4.8%       5.6%       5.6%       6.7%        6.4%       6.0%       5.7%       5.5%      5.1%
  1000       1200       1400       1500        1700       1900       2100       2400      2600
     2.3        2.2        2.1        2.2         2.2        2.2        2.2        2.2       2.3

  186.8      195.3      215.3      248.8       278.2      338.1      355.8      399.9     457.4

 1400.0     1650.0     1900.0     2100.0     2400.0      2700.0     3000.0     3400.0    3700.0
    1.6        1.6        1.5        1.6        1.5         1.6        1.6        1.6       1.6
   18%        16%        15%        16%        15%         17%        16%        16%       16%
1.33   1.33   1.33   1.33   1.33   1.33   1.33   1.33   1.33
Sensitivity analysis
Intrinsic value estimate                                            Eliminate cells which are low probability ones

CAP = 10 years                                                      Answer the following questions
                                                                    1. Is the company sensitive to changes in gro
        Topline growth                                              2. What drive the growth or margin/ are curre
NPM           8%      11%        13%                                3. Provide details on the most probable scen
     8%     1500      2100       2300
    10%     1900      2500       2900
    12%     2500      3100       3500


current price of 950 assume 10 times earnings, with no competitive advantage and no additional value creation
ch are low probability ones

ng questions
 sensitive to changes in growth or margins ?
growth or margin/ are current numbers sustainable ?
on the most probable scenario (mark it yellow)




dditional value creation
                                                                            Normalised earnings calculation
                                                                             year
                             2001      2002     2003   2004        2005         2006          2007       2008      2009     2010    2011    2012
sales                        147       196      265    358         454          604           880        1091      1339     1441    1910    2300
np                           0         7        17     37          40           58            98         91        135      138     181     248
eps                          0.0       5.1      12.8   27.8        30.1         43.6          73.7       68.4      101.5    103.8   135.9   186.8
price - low                  29        31       40     100         155          202           313        290       288      610     915     1080
Price - high                                    60     200         295          290           790        790       750      1044    1265    1350
no. of shares Mn             1.33      1.33     1.33   1.33        1.33         1.33          1.33       1.33      1.33     1.33    1.33    1.33
mcap                         39        41       53     133         206          269           416        386       383      811     1217    1436
mcap/sales                   0.3       0.2      0.2    0.4         0.5          0.4           0.5        0.4       0.3      0.6     0.6     0.6
p/e - low                    #DIV/0!   6.1      3.1    3.6         5.2          4.6           4.2        4.2       2.8      5.9     6.7     5.8

p/e - high                                      4.7    7.2         9.8           6.7           10.7      11.5      7.4      10.1    9.3     7.2
Book value
Retained earning / share

PE based valuations (based on observed

Normalised earnings based valuation                    company seems to be cheap based on subjective criteria, but not so
                           PE          Price
Lower limit ( historical ) 5           950.0
Upper limit ( historical ) 9           1710.0
Normalised PE              7.5         1425.0

Normalised PE based valuation
                           Earnings    price
Earnings in depressed      160         1200
scenario
Earnings in optimistic     210         1575
Normalised Earnings        190         1425

current odds based on past   price behavior
Upper band price              1710
Lower band price              950
Current price (buy)           1270
Upside ( upper - current )    440.0
Downside ( current - down     320.0
Risk / reward ratio *         1.4                        Checklist - Is the Risk reward greater than > 3
Gain / loss value             212                        No
* upside / downside


PE comparison based valution
Sector avg PE
times Mkt current PE       0.55556

Earning yield (latest)        9.9%
Earning gr                    10%
Expected return without PE    20%
expansion
Tot ret /PE ( between 1-2 )   2.0


* compare the current PE with PE of other companies
in the same sector
** also do a rough comparison of PE with that of other
companies in the index
Comments




Does current PE fall    No
in the low range ?




Subjective Probablility based valuations

                        Price     Probability   Expected
Optimistic scenario     2900.0    0.15          435.0
Neutral scenario        2300.0    0.65          1495.0
Pesimisstic scenario    1500.0    0.15          225.0
Intrinsic value         2155.0
disocunt to int price   41%




      Computation for 5 yrs
Profit growth        83
Capex added          818
Depreciation         206.6
Net capex            611.4
ROI in capex         10%
ROI on net capex     14%                Checklist - Is the ROI greater than WACC
                                  Yes
Asset valuation
Net cash ( Debt - cash )                               0
Any investment                                         0
Asset = NFA (reproduction cost) + WCAP               850
Total asset (Slice 1) = Asset + Investment
+ Net cash (or reduce debt ) - Any off
balance sheet liability                              680
No growth value (NOPAT/WACC)- Slice 2               1182
DCF Value (Slice 3)                                 2300
Current Mcap                                        1044 Checklist - Is current Mcap below or at growth value ? - yes




If slice 1 >= Slice 2                          No competitive advantage
If slice 2 > Slice ( check the EVA / sales % ) competitive advantage
Slice 3 - slice 2 represents the value of growth of the excess return over cost of capital
th value ? - yes

				
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