BEYOND NUMBERS
Webinar- September 19, 2020
R Balakrishnan September 2020 1
BEYOND THE BALANCE SHEET
• So you have cracked the numbers, read the annual reports for the
past few years, studied the industry and like the company.
• In a manner of speaking you have ‘kicked the tyres’ before starting
your journey of investing;
• I assume that you have personally done the homework and not taken
the closest available ‘research’ report. Not disparaging them, but they
can at best be a starting point.
R Balakrishnan September 2020 2
Memo to myself
• Take a piece of paper. Write down as to why you want to buy this
stock.
• How much money are you willing to put in to it?
• How long do you intend to hold?
• Do you have a selling price target?
• Do you have a stop loss method of investing?
• What if the stock goes to zero?
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Quality of Accounting
• Cash flow
• Importance of ROCE/ROE
• Taxation
• Leverage
• Reclassification
• Accounting policy changes
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Cash Flow Check
• Bottom up approach
• Test it over time
• This statement is the greatest story teller
• The true nature of the business is exposed
• Nature of industry cannot be an excuse
• Over time, a company must throw out cash
• Dividends paid
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Cash Flow Quality
• Cash conversion cycle
• Borrowing habits
• Working capital cycle
• Propensity for capital expenditure
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Related Party Transactions
• What is disclosed may not be all
• Salaries to promoter family
• Too many subsidiaries and associates
• Sales and purchases
• Receivables
• Loans
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Reading the Fixed Assets Schedule
• Understanding the nature of the business
• A peer comparison of asset composition
• Time out to think about the balance of assets
• Disposal of assets
• Intangible assets
• Brand ownership
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BFSI
• Using different measuring tools
• Sell side hides the truth
• Why invest in this?
• POOR ROE
• Dilution
• Numbers are estimates
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BFSI
• Regulatory supervision is absent
• Laws and rules keep changing
• Trust is everything
• Chasing growth vs chasing quality
• Automation is everything
• Technology with banking and finance attached
• Owning the customer
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BFSI
• Book value build up
• Dividend payout
• Valuation
• Growth
• Asset Liability Mismatch
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Logic Check
• A sense of ‘where you are’
• Bartronics
• Opto Circuits
• Bombay Dyeing
• Interest rates, suppression of borrowings
• Window dressing
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Stock Technicals
• Liquidity and impact cost
• Number of shareholders
• Dispersion of shareholding
• Volatility in price and volume
• Delivery volume numbers
• Promoter dealings
• PE / VC FUNDING
• INSTITUTIONAL OWNERSHIP
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Ownership
• Extent of promoter holding over the years;
• Dilution of equity;
• Preferential allotments;
• Warrants;
• Buy back and new issuances;
• Which generation ownership?
• Complexity of structure
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Ownership
• PSU
• Indian business family
• Indian first generation ‘professional’
• MNC
• State Government owned
• Orphans
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Corporate habits
• Acquisitions
• Restructuring of subsidiaries
• Family shareholding in subsidiaries
• Investments in unrelated things
• Partnership investments
• Loans and Advances
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Management Quality
• Trust
• Capability
• Reputation
• Depth
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New Company or Established Company?
• New involves the approach of a venture capital investment
• Established company is a play on price and value
• Big winners and losers are plenty in the venture capital space
• Established companies are used more to preserve capital
• Value or growth? Value and growth? Choices
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Credit Rating
• Rating Rationale
• Rating Changes
• Which agency?
• Short term Ratings v Long term Ratings
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Longevity of Joint Ventures
• Over time, familiarity breeds contempt
• One partner will try and dominate
• A fair buyout is important
• Non compete fees
• Board composition
• Can the survivor be in business without the ex?
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Market Leader or “Me Too”?
• All industries tend to be concentrated in three or four players
• A start up will either die or get bought over
• Money and brands are major entry barriers
• Is there a SUSTAINABLE USP?
• Early stage buying is Venture Capital
• ”Me Toos” are avoidable.
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Regulatory Risks
• Licensing
• Price Control
• Quotas
• Government as Major customer
• Financial Sector is at highest risk
• Tariffs
• Protectionism
• Nationalism
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Which space are you investing?
• B to B
• B to C
• OEM
• Replacement market
• Distribution channels
• Disruption through technology
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Nothing is Fail Proof
• Accounting is number balancing
• Promoter integrity is everything
• Accounting policies
• Forgetting purchases
• Not paying taxes or duties
• Audit is faith. No guarantee of accuracy
• Fictitious sales
• Top line definitions
• Every expenditure or buy can be a question mark
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A rough and ready approach
• Buy/Sell the balance sheet
• Buy/Sell the P&L
• Buy/Sell in to turnaround
• Buy/Sell in to ”Greater Fool” theory
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The Internet
• Google
• [Link]
• Credit rating agencies
• SEBI
• Peridot App- GST
• Industry websites
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Sizing of a bet
• Diversification or Concentration
• Having too many scrips
• Venture Capital
• Wealth Preservation
• Appetite for Risk
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A four letter word- LUCK
• Early stage investing
• Need to spread bets
• Patience is a virtue
• Stories of investing heros
• No stories of investing ‘zeros’
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