Valuation template by PAk31v6

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									Factor                                                               screen
                             2000      2001 2002 2003 2004           2005   2006      2007 2008      2009     2010 H1 2011
RONW                        10.5%     10.5% 30.8% 27.0% 31.8%       18.3% 27.8%      23.3% 23.4%    21.8%    23.1% 29.9%

debt/equity                    0.6      1.4    1.2    1.6    1.6      1.65    1.65     1.5    1.5     1.44     1.11    1.09

Fixed assest T.O               0.4      2.5    2.0    1.4    1.8       2.0     2.4     3.1    3.0      3.3      2.2     2.4

W cap T.O                      1.1      3.8    4.1    3.2    3.4       3.3     3.3     3.0    2.7      3.3      3.0     3.2
Inv T.O                        1.5      7.5   10.0    9.2    7.8       5.9     5.8     5.8    6.3     7.73     8.34    8.32
Recievables TO                 2.8      6.5    4.6    4.7    4.4       4.1     4.5     4.6    3.5     4.36     3.99    4.24
current ratio                 1.39     5.04    2.6    3.8   2.93       2.6     3.0     3.5    3.1      3.6      3.2     3.1
Total asset T.O               0.31     1.49   1.34   1.00   1.19      1.23    1.38    1.52   1.42     1.66     1.27    1.38
Investment + cash
Sales                        2100        406  360   453   747          920    1303    1850 2093      2550     2660     1701
Salesgr                              -80.7% #### 25.8% 64.9%        23.2%    41.6%   42.0% 13.1%    21.8%     4.3%


NPM                         16.3%      2.5% 10.3% 9.1% 9.0%    5.0%           6.9%    5.6% 6.3%      6.0%     7.7%    12.8%
OPM ( EBIT/Sales)             30%       10% 21% 17% 15%          9%            13%     12%   13%      14%      16%
NP gr                                -97.1% #### 10.8% 81.1% -31.3%          95.7%   14.4% 28.2%    15.9%    34.6%
RM Cost %of sales            65%        34% 46% 49% 57% 61.6%                59.3%   61.6% 60.0%      61%    55.0%    56.4%
Overhead %                            20.2% 27.8% 29.8% 23% 24.3%            22.9%   21.1% 22.3%    20.7%    24.7%    22.3%

Power and fuel %                                  10.4%               7.4%    6.9%    6.2% 7.2%       9.0% 10.7%
Manpower cost                          2.2% 2.8% 3.5%       2.8%      3.5%    3.5%    2.9% 2.9%         3%    3.8%    3.4%
Depriciation (% of sales)       8%       3% 3.3% 3.3%       2.9%      2.9%    2.4%    2.0% 2.1%       1.9%    2.6%    2.2%
Interest cost                13.3%     5.4% 5.6% 3.5%       3.1%      2.9%    3.4%    3.3% 3.8%       4.0%    3.6%    3.2%
Interest % of debt                      14% 14.5% 6.5%      6.7%      6.5%    8.2%    9.2% 9.5%       9.9%    9.7%
Tax % of PBT                   11%       7% 33% 35%          20%     20.9% 25.0% 36.0% 29.0%           40%      35%    26%
Dividend ratio (DPS/EPS)       21%      21% 16% 18%          15%       15%     17%      9%     7%       8%       8%
Net cash from ops/ net                      2.92  0.68             0.85    0.48    0.20    1.00   2.03     1.45
FA Capex ( % of sales)               -1169%     4% 29%       13%        6%      6%      2%     5%       3%      16%
Wcap capex (% sales)                  -427%    -6% 12%       10%        7%      9%     12%     7%       0%       5%
Total Capex % of sales               -1596%    -1% 41%       23%       13%     15%     15%   13%        2%      21%
Depreciation %/ Capex %                  0% -300%   0.08     13%       23%     16%     14%   17%       86%      12%
FCF (% of sales)                      1601% 15% -29%        -11%       -5%     -6%     -7%    -4%       6%    -11%
Interest income as % of cash
Questions
why has the margins remained the same inspite of high R&D and new products ?
New products adding to 30% revenue now. These products don’t seem to be very unique, though may have a good margin
New products may have helped to raise the margins by 1-2% and help reduce the impact of margin pressure in amines


Why the asset turns stagnated inspite of increase in scale ?
Chemicals is a bit asset heavy and capacity based. FA turns unlikely to exceed 2.7
Total asset turns unlikely to exceed 1.5
ROE can be in 15% (pre-leverage) if the new products do well

improvements possible in margins or scale ?
margin improvements possible due to new products such as NMP and PVP. These products still have competition and hence difficult to assess the possible upside (ask ayush)
scale advantages possible due to increase in amines production (chk)




EBIT                             625         40      76      79    112       87      164    222     265       354      413
                              comments

ROE has been above average to due to high leverage
ratio to remain at same level atleast as company plans to invest upto
100 Crs in expansion (possible 50-60Crs of debt)
around 3-4% improvement per annum in scale. Current max turns
possible is around 2.7
steady, not much improvement from scale. Mainly related to fixed
recievables of almost 90 days



likely to be at best 1.5

30% export earnings. R&D is 3.5% of sales

Company has focussed on amines which are common commodity.
Improvement possible via new chemicals such as NMP and PVP.
Cannot estimate the probable increase


possible to reduce only if the high margin products are sold
possible to reduce only if fuel cost come down (wages unlikely to be
energy productivity down from 2008. coal usage doubled from 2008 to
2010 and costly disel power (twice) being used in 2010 over 2008
includes director and management salary/ commission


cost of debt looks reasonable (though high)




FCF net of maintenance capex (around 3%), will at best be 9%
difficult to assess the possible upside (ask ayush)
Factors to track to know if company doing well - add factors crucial to the industry
                                                     Company specific Key variables (Important and knowable/pred
Factor                                    2002      2003       2004       2005       2006    2007
Morphline Crs
NMP Crs
PVP (yet to commercialize)
Amine products and others




Products                                        2005       2006       2007       2008         2009         2010
GBL                                       Pilot                                                      scale up
Solanesol                                 Comm
Morphline                                              Comm       Comm stable                        scale up
NMP                                       Comm                                                       scale up
PVP                                                                                     R&D
Amine products                                                                                       scale up

Comm - commercialise

Key factors of failure (what factors will cause the company to fail or lose money)
1. Pricing pressure on existing amine based products (due to demand slow down)
2. Pricing pressure on new products (due to excess capacity in china and other such countries)
3. Investment in Hotel (40 Crs) - almost 40% of networth : remains to be seen

Key no brainer questions - what will drive the performance of the company
1. Long term the success in R&D will drive the performance



Key variables (3-4) which control performance of the compay (subjective)
1. Pricing of amines and other volume products
2. Pricing and success of new products such as NMP and PVP
ortant and knowable/predictable)
              2008     2009      2010 2011 (E)
                                   15        15
                         60        80       200
                                                      30-40 Crs expected, but approvals awaited
                                                200




          remarks
          captive
          very small in qty
          around 5%
          around 30% (has chinese suppliers too)
          has high potential, approvals awaited. However several chinese mfg too
          account for 70-80% topline. Scaling up now
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 bseindia.com
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 ?
Has the management used aggressive accounting in the past to manage results
Check the board composition - how many as % is promoter or family ?



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 ?
Does the company have a weak business unit which will destroy the value of the rest of company in due time



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
Does the website provide details of the company- its past, milestones etc
cannot be certain as it depends on success of new products
yes
moderate to low. Moderate entry barriers to new R&D based products


Yes
yes
recourse

Yes, growth will require funding



no
market assume no growth
competition and poor economics is the most likely cause

yes



re-investing
yes, but the management has invested 40 Crs in a hotel which is absurd
yes, the management has invested 40 Crs in a hotel which is absurd
no
could not find any

no
yes, compensation on higher side (almost 10% of net profit)
TBD
NA

TBD
TBD
70% is family controlled. Board not independent




Existing competitors. Industry is fairly commodity in nature
yes ..margins have been low
yes, from china
yes, possible from china.




Commodity biz. Maybe low cost supplier, but poor economics
no, possible upside from new products
Moderate competitive advantage from new products. Still sufficient competition
No
Yes, slighlty better
unleverage ROE has been low
no




Yes, matches with vinati organics




no

yes, partly
Sales revenue accounting (topline)                                                Track for
                                                                                  company
Is sales booked agressively ?                                                     Y
- recording revenue before completing obligation
- Recording revenue in excess of work completed
- recording revenue when payment is still uncertain
Is sales got through liberal financing - AR is increasing as % of sales           Y
Has the company changed revenue recognition policy which has increased
revenue and growth in the recent past
Does company use percentage of completion accounting although its industry        N
Does the company consider a high residual value in a lease arrangement (check     N
with average of others in the industry)
Is the cash flow lagging net income more than 10% for last 5 years ?              Y
Does the company record revenue for shipments to distributors ?                   Y
Does the company have a high returns % of sales ?
Does the company record too much upfront revenue on long term contracts ?         NA
Does the CFFO lag net income ?
Has the revenue recognition policy been changed and revenue growth changed        NA
as a result ?
Does the company record revenue with parties where there isnt an arm's length     N
distance ? Is it to a related party, JV or affiliated party ?
Recording cash from a lender, partner or vendor as revenue ?                      no
Use of an appropriate or unusual revenue recognition policy ?
Does the company consider grossed up revenue instead of net revenue (like the
priceline case)
Unusual increase or decrease in liability reserve account ?
Are the payment terms more generous than competition ?
Does the management use a revenue recognition approach which is different
from others in industry ?
Does the management show one time event as revenue ?
Has the management held back revenue before accquisition? See proforma
growth for before period and after period - has it increased a lot?
Sudden increase or decline in deffered revenue ? Why?
Has management shown income increases due to lease assumption changes in
the last few quarters ?



Expense accounting                                                                Track for
                                                                                  company
Does the company lease product on financial / operating leases on market terms
Has the company start capitalizing new expenses in the last 2-3 years. Chk if
there is an increase as % of sales in AR, inventory or some other non PPA asset
For tech companies - check the software capitalization policy. Is the asset for
the software capitalization increasing as % of sales in the last 5 years ?
Does management record restructuring charges regularly - every year for last 5-
Does the management shift losses to discountinued operations ?
Has management improperly classified normal operating expenses ?
Has the capitalization policy changes or accelerated ?
Sudden increase in capex ?
Decrease in obsolesence or bad debt expense (critical for banks) ?
Unusual decrease in reserve for warranty or warranty expenses ?
Has management created large reserves (write offs, bad debt, accquisition
related etc) to release later into revenue ?
Has the management aggresively written off expenses, created reserves well in
excess of required and then released them in future ?
Large write off on arrival of a new CEO ?
Large writeoffs before accquisitions ?
Gross margin increase after inventory write offs ?
Big write off of any kind of deferred expense ?
Large write off of intangible assets to boost future income ?




Cash flow accounting (update from cash flow accounting book)                      Track for
                                                                                  company
Does the management missclassify investing or financing cash flow into the
operating sectio to boost operating cash flows ?
Has the management recorded bank borrowing as cash inflow ?
Has the management boosted cash flow by selling recievables, with recourse or
by financial recievables (bank notes?)
Has management classified operating cash flow as investments - and shifted to
investing section ?
unusual increase in capex as % of sales with no corresponding logical reasoning
has management recorded inventory purchase as investing outflow?
Does management do a lot of accqusition ? Operating inflow are inflated as they
consist of the accquired company’s cash flow too, but outflow moves to
investing section (accounting quirk)
Declining FCF when cash flow is increasing ?
New categories of cash flow, not followed by others in industry ?
Has management boosted cash flows temporarily by
- collecting AR rapidly or prepayments ?
- increase in AP cycle days - paying vendors slowly?
- one time reduction in inventory ?




Options accounting                                                                Track for
                                                                                  company
Options grant as a % of O/s shares - is it greater than 1% p.a ?
Future dilutions due to ESOP (evaluate adjust - important for Tech companies)
Calculate annual dilution % for impact on fair value (see MSFT example)
Has the management repriced options in the past ?



Pension accounting                                                                Track for
                                                                                  company
Does the management have aggressive pension accounting ? (% of income, per
employee)
do the provident fund charges look correct (PF amount / employee - compare
with other companies
Does management has aggressive pension asset assumptions (expected return
> 7-8%?)
Has the management taken down the pension return rates based on low market
returns in the past 2-3 yrs?
Does the company has a large pension income (@ > 5% of the reported net


Tax accounting                                                                    Track for
                                                                                  company
Derivative accounting                                                               Track for
                                                                                    company
Check in detail MTM and derivative accounting (especially for companies with
large export sales)
Has management used AS11 in the past and hidden derivative losses in the
balance sheet instead of a pass through P&L
Does management use too much derivatives to smooth results ? More in
proportion of sales or more compared to others in industry ?
Does the company have large gains from ineffective hedging ?

Consolidation accounting
Has the accquired company created reserves before accquisition and released
later after the merger ?




Asset / Liability accounts
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 ?
chk for losses in the loan portfolio (banks)
Are they new asset account, sudden increase in soft assets relative to sales ?
Amortizting or depreciating costs (related assets) too slowly ?
Failure to record expense of imparied assets - such as AR, loan accounts etc ?
Jump in inventory as % of sales (chk inventory turns)
Decrease in loan loss reserves for credit loss (% of loans and as % of bad loans)
Decrease accuruals, reserves, or soft liability accounts ?
Failing to highlight off balancesheet obligations ?
Has management failed to write off impaired investments ? Impaired
investments exist but are still carried on books at cost value



Key metrics
Has the definition of a key metric of the industry been changed by the
management (such as same store sales in retail, bookings or backlog etc)
Does management highlight a misleading metric as surrogate for revenue or
other performance factor ?
Unusual definition for organic growth sales ?
Difference in earnings between 10-Q and release ?
Does management pretend that recurring charges are non recurring in nature ?
Does management pretend that one time gains are recurring and includes in
Has management distorted AR turns, suddenly reduced AR to present a better
Has management moved inventory to other parts of balance sheet, use a
distorted metric to hide inventory turns deteoration ?
Does management distort debt metric to hide liquidity issues ?


Others
Any critical qualifications by the auditors ?
Have the auditors been changed in the last 5 years. If yes, why ?
Are the auditors a reputed firm, or is it a small unknown company. Chk on their
background
Check if the accounting has changed during topline and bottom line slowdowns
in the past ?
FCCB borrowing resulting in dilution (Indian companies)
Interest income as % of cash (looks correct ?)
Are earning managed by modifying reservers/ special charges ? - Retained
earnings > increase in book value
Has the income been boosted by a one time event ?
Does the company take too many restructuring changes frequently and report it
below the line ?
Does the company record proceeds from selling a biz into revenue ?
Analyse the JV accounting closely ?
Has the disclosure details been changed or reduced from last quarter as the
performance has slowed (especially if industry is in a down cycle)
Comments

no, standard sales practise



AR is steady
no

NA
no lease arrangement

no, cash flows tracks net income
inventory has been steady
does not appear so




none


no
no

no
no , does not look like
no

no
no

no
no




Comments

no
no

no

no
no
no
no ..at around 4-5% of FA
Yes, due to new R&D plant and capacity expansion
NA
NA
No

R&D expenses have been capitalized. This may have excess capitalization

no
no
no
no
no




Comments

no

no
no

no, although some R&D expenses, could have been overcapitalized

no
no
no


yes, due to heavy investments in new products and plan expansion
NA
no




Comments

none
none

none



Comments

Pension account not disclosed in notes

Pension account not disclosed in notes

Pension account not disclosed in notes

Pension account not disclosed in notes

Pension account not disclosed in notes


Comments
Comments

no hedges

no hedges

no hedges

no hedges

Comments
NA




Comments
none

seems ok
none
none
4-5% of assets. Look ok
2.1 Crs of 6 month+ debts on books.
no, fairly steady
NA
NA
NA
none, but AR may have a writeoff




Comments
none

none

none
NA
none
none
none
none

none


Comments
none
none
small auditors
cannot be sure
none
yes

none
no

no
no
NA

NA
Checklist

Economics models - general
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 competitive advantage
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
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 capex ?

Economics models - demand/ supply and cost curves
Does the Industry have high fixed cost
Does the Industry has a low marginal cost ?
How does the company's marginal cost compare with the best in industry?
How does the Average total cost of the company compare with the best in the industry?
How much will the current price have to drop for the company to lose money at operating
level (related to variable cost)
Does the industry have an inelastic supply curve
Does the industry have an inelastic demand curve
Has the company made above cost of capital ROE over a complete business cycle ?

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

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 ?
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 continue is
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
Is the management having integrity
Does the management discuss both negative and positives of the company performance
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
Is the cash held in foreign banks ?
Has the management done accquisitions in the past ? What is the track record of these
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
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
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 information
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
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
Are there one or two key variables, which if focussed by management will account for a major
success of the business ?

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 ?
Will the company succeed by out competing others in a narrow or broad segment ?
Will the company succeed by co-operating with others in the same or complementry




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
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
List 3 factors which can cause the business to fail

Execution filters
What is the price and volume action of the stock ?
Are there any short term : 3-6 month events which will drive the price up or down ?
Remarks
Read AR/ Google to answer questions on various models


Industry economics poor for pure commodity products. However specialised R&D based products have higher
margins and returns

A large number of competitors and low competitive advantage for the amines products
intense competition - even from china

RM costs are high - around 55%. Fuel and other costs account for the rest.
yes

not for the existing high volume products
Earning power is between 9-10%. High ROE has come due to leverage
Yes, constant pressure on commodity products

none
around 80% usage. Capex and expansions being done now


Yes
no - high marginal cost
Yes, looks like
seems to be lesser than competition

10-12%
yes in short term the curve is fairly inelastic
no , less elastic demand as not too many substitute
demand changes should not cause dramatic changes in price (demand changes are not too drastic anyway)



Yes seems to be
Yes seems to be
Not much in existing product
Yes, and adding new streams too
Possible by capacity addition
No
CHK
No


a. due to existing product/ market
b. existing products / new markets via new downstream products
c. New products and new / existing markets

no - no improvements in efficiency

yes - effectiveness of R&D will depend on success of products such as NMP and PVP
Custome relationship and technical skills to develop and commercialize new products



no

no

yes

no

no
none
no - enough alternatives for amines available
no
no




Yes, management seems to have done that. However the plan to invest upto 40 Crs in a hotel is not good
seems so
CHK

yes much higher than average. Around 10% of net profits (<= 5% is conservative)
yes
                                                                                                         10%

not much
no tax paid seems to be ok
currently investing in biz - 40 Crs hotel investment is an issue

none
none
none
none

Execution track record has been good



yes
Yes, management is constantly looking at new products and derivatives




yes, as the current data has more impact on impact on future results

no

yes
no

no
No
yes possible, may be overstating the impact of the current commodity biz
no
no
1. company faces competitive pressure on amine products which negates the improvements in margin
2. company funds the hotel project which is disliked by the market and hence the company recieves low
valuations
not yet, have been reducing this tendency now
NA

NA

NA

Possible as others seem to like the idea
yes
yes doing it by analysing negative these - need to evaluate the validity of these negative points
yes
yes
none
none

none
none
none
yes - possible due to new products. Expectation is that the company should be able to do 40+ crs of profit in 2
yrs. At 10 time earnins, the company should be double of current valuation

none



1. What is the probability of success of the new products and the net margins which would be obtained
2. Will the company see margin drops in the amine products ?
Positive - success of NMP and PVP products with increasing volume for amine products - result in multibagger
negative - margin pressure and delay or lack of success of new products - stagnation or 20-30% drop in stock
1. Margins of amines - this depends on RM/ fuel costs - this is driven by petroleum prices
2. Scaling of NMP and approval for PVP


As a niche player
Yes, the company has constantly introduced new products and commercialised them

Small niche firm of a large ecosystem - dominant in its niche
Out compete others in a narrow segment
NA




No
Yes, seems to be the case. Company developing the land into a hotel
No


none
none
pension calculations are not shown
none
less than 10%, not an issue


1. Success in scaling the new products - current and future (depends on R&D)
2. Maintenance of margins in amine products
For - Current margins at around 7-8%. New products as approvals and capacity come, will add to margins and
topline. All these together can cause profits to improve and re-rating to happen
Negative - High debt, unre-lated diversification and delay in capex can depress profits. current price has some
expectations built into it and hence price could drop in the scenario
Pro and cons have been added in the previous point
Multiple factors may help the company
Eco model model - niche product company with focus on R&D leading to higher margins products
Demand/ supply - less elastic demand and supply should keep margins intact
Biz model - focus on new products in current and new industris with wide range application should support
growth and long term profitability
Management - focus on R&D and new product led growth. management is aggressive, but has not overreached
in pay and other aspects. so likely that the benefits will come to shareholder
Catalyst - continued growth in economy, forward and backward integration with economies of scale and work
in a wide range of industry should drive good performance
All factors in 4 can add to a lollapalooza. However over aggressive behavior and excess diversification can
damage long term prospects




1. Excess debt and failure to get NMP on line and delay in PVP (short term price drops could happen)
2. Overrun in hotel costs and poor profitability. 40 Crs (35% of current capital), would be wasted
3. Capacity expansion in china and further competition in amines and new products




Yes
Yes
No
Yes
Multiple factors can cause the failure of the idea - has decent levels of risk
                                                                       Test of competitive advantage
                                         Company seems to have decent competitive advantage

One of Dominant firm in product or geo Yes, dominant firm in its segment
segment ?
High ROE for last 10 years and the same Above average ROE in general. However ROE has also been driven by debt
is being maintained ? If yes, displays
persistence of returns and hence CA

Does the company have customer or        Mainly production side advantage - partly scale and R&D base
production advantage                     Customer side advantage not much, though could improve with new products
- 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 ?                      No

Market share stability                   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              Y



Operating margins                          Operating cost             Y
                                           Operating leverage         Y
                                           Economies of scale         No


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



been driven by debt



D base
ove with new products




dvantage / customer advantage factors
on and enables incumbents to earn high returns
             1. Process economies enjoyed by the company due to multiple reasons
             a. indivisible lead economies
             b. complex linked activities (pilot plants and commercialization of the
             product)
             c. learning curve benefits
             d. R&D advantage



              1. Scale economies
              a. production
              b. R&D - upstream and downstream amines related product
           Some level of advantage due to switching cost (finding new import supplier
           with higher lead times) and search cost associated with it




           none

           1. Company has some demand side advantages
           2. Company also has some scale and production side advantages
           3. Company has competitive advantage due to demand and production
           aspects. Production aspects are stronger, but a wide base of customer also
           helps




repeat of the previous table ) only to be read again
                                   Analysis for the company
           Mainly R&D know how




           Technology and management skill




           Economies of scale in the niche, and informational economies in R&D




           Some level of switching cost of supplier
er based or production based advantages
ability for the firm
                                          Details for the firm
             Relationship with customer, process and knowledge base for amines based
             upstream and downstream products
             Assets via customer relationship which can be used to sell new products,
             R&D knowledge
             R&D
             Yes, possible
             no
             no




e capabilites are and strenght of the fit

             Outbound logisitic      Marketing




or Economic returns ( ROE > 15 % )
                            Influenced by




             How much
Competitor analysis - update data from financial websites
                                                                                                        Avg 5-10 yrs num
competitior names     ROE         NPM        OPM        D/E FA turns Wcap turns FCF/ sales Sales - CY
                                                                                (%)
Alkyl amines          8%          3%                    1.3 1.1      2.2        2%         2195
chemicals

RCF




Customer analysis - no specific customer has high volume

Key customer name     Volume      % of       Customer's
                      purchase    turnover   share of its
                                             industry
Multiple pharma, o&g customer etc
 Avg 5-10 yrs numbers
NP - CY Sales Gr Profit Gr   Sales    % share of   Analysis of performance
                             (volume) industry
100     14%       24%        21000 MT              Company has improved on
                                                   performance in the last few
                                                   years. Net margins still around
                                                                  Remarks (go beyond low moderate and high and give explaination for
                                                              Y/N each point)                                                        Points Key CA factor
     ENTRY BARRIER - No. 1 Factor for Competitive advantage        Entry barriers are mainly to economies of scale in niche product, R&D assets and
     analysis                                                      new products
 1   Asset specificity                                        M    High                                                                                      Y
 2   Economies of Scale                                       M    High                                                                                      Y
 3   Proprietary Product difference                           M    High                                                                                      Y
 4   Brand Identity                                           H    Low                                                                                       Y
 5   Switching cost                                           L    Moderate
 6   Capital Requirement                                      H    Moderate                                                                                  Y
 7   Distribution strength                                    L    Low
 8   Cost Advantage                                           NA   Moderate
 9   Government Policy                                             None
10   Expected Retaliation                                          High
11   Production scale                                              High
12   Anticipated payoff for new entrant                            Moderate
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 )                            Multiple competitors
     Total (average)                                                                                                                                  ####
     SUPPLIER POWER                                                Pricing is based on market condition
17   Differentiation of input                                 N    low
18   Switching cost of supplier                               N    Low
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 - for alcohol and gases
     Total (average)                                                                                                                                  ####
     BUYER POWER                                                   Low to moderate
18   Buyer conc. v/s firm concentration                       L    Low
19   Buyer volume                                             L    Moderate
20 Buyer switching cost                                       L    Moderate
21 Buyer information                                          H    High
22 Ability to integrate backward                              N    Low
   Total (average)
   Substitute product                                              Substitution effect is low, though may exist
23 Price sensitivity                                          H
24 Price / Total Purchase
25 Product difference                                         M
26 Switching cost                                             H
27 Buyer propensity to Subsititute                            L
   Total (average)
     RIVALRY DETERMINANT                                                 Moderate to high rivalry, result in moderate margins.
28   Industry growth                                               L     Moderate
29   Fixed cost / value added                                      M     High
30   Intermittent overcapacity                                     H     High                                                                  Y
31   Product difference                                            M     Low                                                                   Y
32   Informational complexity                                      M     Moderate
33   Exit Barrier                                                  L     high
34   Industry concentration                                              High
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



     Industry mapping
     Key segments                                                  Size Key companies in each segment
     Aliphatic amines                                                   Alkyl amines, RCF
Key Demand Drivers                                        Impact
Demand in end user companies - depends on economic growth High




Operational Risk factors                                       Impact
High debt levels
Additional capacities in china and price drops due to slowdown
in export market
Delay in capacity coming online and in approvals for PVP




Positive factors                                                  Impact
Strong R&D organization
Strong position in speciality chemicals
Forward and backward integration in amine products
Low valuations


Sell criteria : Imp ( define clear quantitative and qualitative
Net margins drop below 5% for 2 yrs
Sell at PE of more than 12


Questions to be explored
What are topline expectations from PVP ?
What are the topline expectation from NMP and margins?
Chk how the management has worked in meeting target in the
Analyse valuation impact for the hotel investment
Remarks




Remarks




Remarks




How and when ?
Around 30-40 Crs. High, but not that much. NMP will have bigger impact
NMP could add 100+ crs, margins are better
Yes, management has increased revenue, introduced new products
cant be sure as of now. Assume value neutral for the time being
Valuation ( neutral )                                        actual                                                                                plan
detail                               2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011                        2012   2013    2014    2015 2016 2017
PBDIT                                 800   51   88   94 134 114 195 259 309 402 481 496                                 560    640     712     800    896 976
excpl item & non operating inc.
Less :TAX                               4     8     19    22     22    14     30     58      54   100     110    103 114.5       130 145.4      165 186.8 206.3
Less : Wcap change                  #REF! -1734    -20    54     77    62    115    226     150     -8    122     14   50         50  100       100  200   200
Less : Capex                        #REF! -6480     -4   187    173   118    198    271     263    56     555    311  350        350  300       300  400   300
Less : Capex ( maint) **            #REF! -1723   -7.4   75.9   106   94.6   153    268     199   45.9    206    119  176        197  261       275  389   396
Less : Options cost (post tax)
FCFF- normal $$                     #REF! 8257      93 -169 -138     -80 -148 -296 -158           254 -306         68    45   110   167   235   109   270
FCFF(Mn) 5                          #REF! 1766    76.4 -3.91 6.37 5.45 11.6 -66.5 55.6            256 165        274 269.5    313 305.6   360 320.2 373.8
shares ( mn)                          6.48 6.48   6.48 6.48 6.48 6.48 6.48 6.48 6.48              6.48 6.48      32.4 32.4 32.4 32.4 32.4 32.4 32.4
fcff/ share                         #REF! 1274    14.4 -26.1 -21.3 -12.3 -22.8 -45.7 -24.4        39.2 -47.2     2.09 1.404 3.394 5.143 7.253 3.371 8.326
fcff / share ( maint)               #REF!  272    11.8 -0.6 0.98 0.84      1.8 -10.3 8.58         39.5 25.4      8.45 8.318 9.66 9.433 11.11 9.883 11.54
discount ( 1.15 or 1+ WACC )                                                                                        1    1.1   1.2   1.3   1.5   1.6   1.8
NPV ( maint)                                                                                                     8.45    7.6   8.0   7.1   7.6   6.1   6.5

terminal value : note 1                78
Intrinsic value estimate              144
Less : Pension liability/ share         0                                                 Chklist : Check for underfunded pension plans
Less : Debt/ share
Less : Contingent liability/share        1                                                Chklist : Check what % of annual profit (> 50% is a risk)
Less : MTM losses not
recognized/ share                        0                                                Chklist : Check for comprehensive income losses which may come up later
Add :Net cash/ share (excluding
debt)                                   0                                                 Chklist : Chk if the net profit excludes income from excess cash
Equity value / share : note 2         143                                                 Chklist : Terminal value should be less 14 times FCF + excess capital


MICAP calculation
Terminal value 3                                                                                                                 140    161   178   200   223
total = terminal value+ cum of value 4                                                                                                 176.1 201.0 230.1 259.6
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
                                                                         12.2   1.44   12.3   8.15

                                                                                              11.1
an
               2018   2019   2020
               1088   1200   1296

              234.3 262.35 286.11
               200    200    200
               300    300    300
               403    410    417

               354     438    510
              450.7 527.65 592.89
               32.4   32.4   32.4
              10.92 13.508 15.737
              13.91 16.285 18.299
                1.9     2.1    2.4
                7.1     7.6    7.8




ay come up later




               242    269    295
              277.6 303.22 330.16
                                                                           Current                                                                     Pro
                             2000         2001    2002     2003   2004       2005      2006   2007 2008     2009   2010   2011      2012      2013
sales                        2100           406    360       453    747        920     1303   1850 2093     2550   2660   3100      3500      4000
Sales Gr                                -80.7% -11.3%     25.8% 64.9%       23.2%     41.6% 42.0% 13.1% 21.8%      4.3% 16.5%      12.9%     14.3%
Operating cost               1300           355    272       359    613        806     1108   1591 1784     2148   2179   2573      2905      3320
% of sales                  61.9%        87.4% 75.6%      79.2% 82.1%       87.6%     85.0% 86.0% 85.2% 84.2%       82%    83%       83%       83%
PBDIT                         800            51      88       94    134        114       195    259    309    402    481    496       560       640
% Gr                                      -94%    73%        7%    43%       -15%       71%    33%    19%    30%    20%     3%       13%       14%
% of sales                  38.1%        12.6% 24.4%      20.8% 17.9%       12.4%     15.0% 14.0% 14.8% 15.8% 18.1%        16%       16%       16%
depriciation                  175            11      12       15     22         27        31     37     44     48     68     90       108       126
dep %sales                   8.3%         2.7%    3.3%     3.3%   2.9%       2.9%      2.4%   2.0% 2.1%     1.9%   2.6%   2.9%      3.1%      3.2%
dep % FA                     3.6%         6.7%    6.7%     4.8%   5.4%       5.8%      5.7%   6.2% 6.2%     6.2%   5.7%   6.0%      6.0%      6.0%
Interest                      279            22      20       16     23         27        44     61     79    101     97     93       105       120
% of sales                  13.3%         5.4%    5.6%     3.5%   3.1%       2.9%      3.4%   3.3% 3.8%     4.0%   3.6%   3.0%      3.0%      3.0%
Tax                             4              8     19        22     22         14        30     58     54   100    110 103.29    114.51    130.02
% of PBT                     1.2%        44.4% 33.9%      34.9% 24.7%       23.3%     25.0% 36.0% 29.0% 39.5% 34.8%        33%       33%       33%
% of sales                   0.2%         2.0%    5.3%     4.9%   2.9%       1.5%      2.3%   3.1% 2.6%     3.9%   4.1%   5.2%      5.2%      5.2%
Net Profit                    342            10      37       41     67         46        90    103    132    153    206    210       232       264
% Gr                                      -97% 270%         11%    63%       -31%       96%    14%    28%    16%    35%     2%       11%       14%
% of sales                  16.3%         2.5% 10.3%       9.1%   9.0%       5.0%      6.9%   5.6% 6.3%     6.0%   7.7%   6.8%      6.6%      6.6%
wcap                         1842           108      88      142    219        281       396    622    772    764    886    900       950     1000
Inc Wcap                    #REF!        -1734      -20       54     77         62       115    226    150      -8   122     14        50        50
wcap % of sales             87.7%        26.6% 24.4%      31.3% 29.3%       30.5%     30.4% 33.6% 36.9% 30.0% 33.3% 29.0%          27.1%     25.0%
Inc Wcap % of inc sales     #REF!      102.4% 43.5%       58.1% 26.2%       35.8%     30.0% 41.3% 61.7% -1.8% 110.9%      3.2%     12.5%     10.0%
capex                       #REF!        -6480       -4      187    173        118       198    271    263     56    555    311       350       350
Capex as% of sales                   #######     -1.1%    41.3% 23.2%       12.8%     15.2% 14.6% 12.6%     2.2% 20.9% 10.0%       10.0%      8.8%
Capex ( Maint )             #REF!      -1722.5     -7.4    75.91 105.63      94.55    153.36 267.51 199.42   45.9 206.21    119       176       197
Capex ( Maint ) %           #REF!     -424.3% -2.1%       16.8% 14.1%       10.3%     11.8% 14.5% 9.5%      1.8%   7.8%   3.8%      5.0%      4.9%
fixed asset                  4910           164    180       313    409        465       548    593    706    770  1203   1500      1800      2100
Sales /FA                      0.4           2.5    2.0       1.4    1.8        2.0       2.4    3.1    3.0    3.3    2.2    2.1       1.9       1.9
EPS                           52.8           1.5    5.7       6.3  10.3         7.1     13.9   15.9   20.4   23.6   31.8     6.5       7.2       8.1
TA                          #####         272.0  268.0     455.0  628.0      746.0     944.0 1215.0 1478.0 1534.0 2089.0 2400.0    2750.0    3100.0
Sales/ TA                      0.3           1.5    1.3       1.0    1.2        1.2       1.4    1.5    1.4    1.7    1.3    1.3       1.3       1.3
ROC                            5%           4%    14%        9%    11%         6%       10%     8%     9%    10%    10%     9%        8%        9%
No. of shares (adjust for
options dilution)            6.48        6.48     6.48     6.48     6.48      6.48      6.48   6.48   6.48   6.48    6.48   32.4     32.4      32.4
             Projections
  2014      2015       2016      2017      2018      2019      2020
  4450      5000       5600      6100      6800      7500      8100 2.612903   2.59374   10%
 11.3%     12.4%      12.0%      8.9%     11.5%     10.3%      8.0%    54150
  3694      4150       4648      5063      5644      6225      6723
   83%       83%        83%       83%       83%       83%       83%
    712       800        896       976     1088      1200      1296
   11%       12%        12%        9%       11%       10%        8%
   16%       16%        16%       16%       16%       16%       16%
    138       150        162       168       174       180       186
  3.1%      3.0%       2.9%      2.8%      2.6%      2.4%      2.3%
  6.0%      6.0%       6.0%      6.0%      6.0%      6.0%      6.0%
  133.5       150        168       183       204       225       243
  3.0%      3.0%       3.0%      3.0%      3.0%      3.0%      3.0%
145.365       165     186.78    206.25     234.3    262.35    286.11
   33%       33%        33%       33%       33%       33%       33%
  5.2%      5.2%       5.2%      5.2%      5.2%      5.2%      5.2%
    295       335        379       419       476       533       581    3724     6.9%
   12%       14%        13%       10%       14%       12%        9%
  6.6%      6.7%       6.8%      6.9%      7.0%      7.1%      7.2%
  1100      1200       1400      1600      1800      2000      2200
    100       100        200       200       200       200       200
 24.7%     24.0%      25.0%     26.2%     26.5%     26.7%     27.2%
 22.2%     18.2%      33.3%     40.0%     28.6%     28.6%     33.3%
    300       300        400       300       300       300       300
  6.7%      6.0%       7.1%      4.9%      4.4%      4.0%      3.7%
    261       275        389       396       403       410       417
  5.9%      5.5%       6.9%      6.5%      5.9%      5.5%      5.1%
  2300      2500       2700      2800      2900      3000      3100
     1.9       2.0        2.1       2.2       2.3       2.5       2.6
     9.1     10.3       11.7      12.9      14.7      16.4      17.9
 3400.0    3700.0     4100.0    4400.0    4700.0    5000.0    5300.0
     1.3       1.4        1.4       1.4       1.4       1.5       1.5
    9%        9%         9%       10%       10%       11%       11%

   32.4      32.4       32.4      32.4      32.4      32.4     32.4
Sensitivity analysis
Intrinsic value estimate                            Eliminate cells which are low probability ones

CAP = 8 years                                       Answer the following questions
                                                    1. Is the company sensitive to changes in growth or m
          Topline growth                            2. What drive the growth or margin/ are current numb
NPM             5%       8%   10%     12%           3. Provide details on the most probable scenario (mark
     8%
    10%
    12%

scenario analysis not done as - company is selling at 4 times earnings. DCF is not very meaningful he
 probability ones


to changes in growth or margins ? - margins is a higher impact
 margin/ are current numbers sustainable ? - new products will drive margins. Growth in amine products
st probable scenario (mark it yellow)




not very meaningful here
                                                                         Normalised earnings calculation
                                                                        year
                             2001      2002    2003   2004   2005   2006         2007      2008            2009   2010   2011
sales                        406       360     453    747    920    1303         1850      2093            2550   2660   3400
np                           10        37      41     67     46     90           103       132             153    206    320
eps                          1.5       5.7     6.3    10.3   7.1    13.9         15.9      20.4            23.6   31.8   9.9
price - low                  29        9       16     41     70     98           110       72              60     136    27.2
Price - high                           18      69     87     245    201          204       220             161    220    41.5
no. of shares Mn             6.48      6.48    6.48   6.48   6.48   6.48         6.48      6.48            6.48   6.48   32.4
mcap                         188       58      104    266    454    635          713       467             389    881    881
mcap/sales                   0.5       0.2     0.2    0.4    0.5    0.5          0.4       0.2             0.2    0.3    0.3
p/e - low                    18.8      1.6     2.5    4.0    9.9    7.1          6.9       3.5             2.5    4.3    2.8
p/e - high                   0.0       3.2     10.9   8.4    34.5   14.5         12.8      10.8            6.8    6.9    4.2
Competitors PE - high
Competitors PE - low


PE based valuations (based on observed

Normalised earnings based valuation
                           PE          Price
Lower limit ( historical ) 4           29.2
Upper limit ( historical ) 13          94.9
Normalised PE              9           65.7

Normalised PE based valuation
                           Earnings    price
Earnings in depressed      5           45
scenario
Earnings in optimistic     10          90
Normalised Earnings        7.3         66

current odds based on past   price behavior
Upper band price              95
Lower band price              29
Current price (buy)           41.5
Upside ( upper - current )    53.4
Downside ( current - down     12.3
Risk / reward ratio *         4.3     Checklist - Is the Risk reward greater than > 3
Gain / loss value             34
* upside / downside


PE comparison based valution
Sector avg PE
times Mkt current PE       1.14286

Earning yield (latest)        14.5%
Earning gr                    5%
Expected return without PE    19%
expansion
Tot ret /PE ( between 1-2 )   2.8


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




Does current PE fall in the low range ? - no
does my valuation assume PE 10% in excess of past PE ?

does my valuation assume PE 10% in excess of past PE of
competitors ? No

Subjective Probablility based valuations

                                     Price        Probability   Expected
Optimistic scenario                  100.0        0.15          15.0
Neutral scenario                     70.0         0.65          45.5
Pesimisstic scenario                 30.0         0.2           6.0
Intrinsic value                      66.5
disocunt to int price                0.38




 Capital usage efficiency Computation for 5 yrs
Profit growth                       116
Capex added                         1343
Depreciation                        228
Net capex                           1115
ROI in capex                        9%
ROI on net capex                    10%

  Checklist - Is the ROI greater than WACC : No, ROE is high due to debt
Asset valuation
Net cash ( Debt - cash )
Any investment
Asset = NFA (reproduction cost) + WCAP
Total asset (Slice 1) = Asset + Investment
+ Net cash (or reduce debt ) - Any off
balance sheet liability                                34
No growth value (NOPAT/WACC)- Slice 2                76.8
DCF Value (Slice 3)                                   140
Current Mcap/ share                                    41 Checklist - Is current Mcap below or at growth value ? - current below

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

Average EBIT based
Ten year average sales                            1544.2
Ten year average EBIT                              243.7
Average margins                                     16%
Future margin                                       14% assume the future margin in the future
Sales (2 yrs from now)                              4000
Average low PE for last 10 years                     2.0
Average high PE for last 10 years                    5.0
Low price                                           1120
High price                                          2800
th value ? - current below no growth value, close to net assets
1 Problem re-statement
  1. Define investment problem in different
  words

  2. Invert the problem
  3. Define problem in a larger industry
  specific context


  4. Define key elements of the problem

  5. Ask why on the key elements

2 List all the merits of idea
  Management has scaled plants for
  amines and will go online by next year
  NMP and other products will go online
  next year

3 List all the cons of the idea


  Delay in scaling up
  Competitive pressure will result in
  margins being low and as a result the
  company's profits will not go up
  Investment in hotel


  Identify key factors which have driven
4 success till now
  R&D and introduction of new products
  focus on a single product segment and
  away from commodity product


  Weighted ranking of criteria driving
4 performance
  Growth in amines sales due to new
  Scaling of NMP
  Launch of PVP

5 Hypothesis testing




                   Evidence
  Past sales has grown
  New products are being launched
  Demand in india is growing
  Other companies are adding capacity
Response
Investing in balaji is a bet on the new products and upside from capacity expansion. So it is a
bet on the management
What has the management done in the past which shows that they have not scaled biz or
made bad decision
Are other players expanding in the same product space and hence the upside will be limited

1. Topline contribution from products such as NMP, PVP etc
2. Margin benefit from new products
3. Growth on existing products and margins on the same
1. Reason why the company can do the above is that there are entry barriers on these
products. Company has R&D advantage. In addition, these are niche products in the amines

Details




Fixes for the cons
build position further if there is delay and temporary drop in profit - from general analysis it
has usually taken longer than expected
- Chk how the management has worked in meeting target in the past
Do industry analysis to see the situation for next 2-3 yrs


analyse the valuation impact for this piece


Details




                                                                                                   1
                                                                                                   2
                                                                                                   3

C - consistent with evidence, I - Inconsistent, A - Ambigous
Eliminate hypothesis which is inconsistent with evidence
Search for hidden evidence which can disprove hypothesis

                                                                                           Hypothesis
A
Company will increase sales

C
C
C
A


Most likely to happen
      cancel all evidence which is consistent with each hypothesis
      select hypothesis (one or more) which has least inconsistent evidence


Hypothesis
      B                                        C
      Company will sustain margins             Company will sustain CA

      A                                        A
      C                                        C
      C                                        A
      A                                        A


      2nd most likely
                               Final review chklist
  Have you analysed the competition - read AR of competitors (2-3 ) atleast
1 [check foreign competition if necessary]
2 Have you analysed the main customers / suppliers and the markets
3 Have you checked how this idea correlates with other ideas in the portfolio ?
yes, done for alkyl amines.
yes
yes - chemical company

								
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