26 Sep 2015

Rakesh Jhunjhunwala Interview Summary

Rakesh Jhunjhunwala is one of India’s renowned investor who has built a fortune from scratch over last three decades. He was interviewed on his life, his investing style, his views on market etc by Ramesh Damani in a show hosted on CNBC TV18 called ‘Wizards of Dalal Street’.
Following is a summary of the interview:

Early years in the stock market:
Born in 1960, and he first dabbled in the markets when he was aged 15 years. He was interested in markets due to daily fluctuations in stock prices and due to investments in markets by his father. When Rakesh decided to make a career in investing by being a broker, he was instructed by his father that he can go ahead, provided he fulfilled a few conditions – a) don’t go to any of his father’s friends for money, b) don’t ask him (Rakesh’ss father) for any money and c) that Rakesh should always keep his promises

He started investing in 1985 by borrowing Rs.750,000 @18% to 24% interest from two people. He subsequently earned Rs.8-10 lakhs on this capital over next three years. He then brought shares in a utility company, where the dividend yield was closer to the interest he paid on borrowed capital. The reason was that there was an expectation of an increase in its guaranteed RoE, which could be linked to its power generation efficiency. He always invested based on company fundamentals and did not speculate in his early years in the stock market.

25 Sep 2015

Summary of Sanjay Bakshi Interview With Farnam Street

Recently Farnam Street blog interviewed Professor Sanjay Bakshi in New York.
The entire interview can be downloaded by clicking here
Equity School has summarized the entire interview for the benefit of students of value investing.
Please visit the Farnam Street blog for a wealth of knowledge on investing.

Summary of the Interview:

Learning, Synthesizing and Collating Knowledge
Prof Bakshi discusses that he now mainly uses Amazon Kindle to read books instead of paper books because:  
a) It allows him to search through all the books for any particular phrase or thought, which is impossible with a physical paper book and
b) It allows him to underline important portions of text from the book. These underlined paragraphs (which at times can run into pages) can be synced on the cloud, from where it can be copied and pasted to any other document for further future reference.

How to read books:
Prof Bakshi usually reads 3-4 books at a time as it helps multi disciplinary thinking. One can associate thoughts from one book with other. He takes notes by underlining on the fly on Kindle.  After finishing the book, he syncs the kindle and then copies the notes from the cloud to a separate file for future reference. He maintains a master document of all the notes from different books which have been read. Software used for note taking – Evernote and Thebrain.

According to Prof. Bakshi best way to think is by using multi-disciplinary thinking. We need to ask the question that ‘Why did this happen’ for various events to get the answer using multi-disciplinary thinking. Always try to answer any question with multiple different reasons.

Investing – Early Years:
Started investing in 1994. He was mainly concentrating on Financial Statement Analysis and was influenced largely by teachings of Benjamin Graham. His focus was on bankruptcy investing, risk arbitrage, cash bargains and statistically cheap stocks using Graham’s Screens. Then he discovered in June 2004 Charlie Munger’s teachings on multi disciplinary thinking, mental models and how to distinguish between different types of businesses. This changed his style of investing completely.

13 Sep 2015

Tracking Indian Value Investors – Ajay Piramal

Billionaire Ajay Piramal runs a successful listed company in India. He has generated massive 26% returns for his shareholders over the long term – 28 years to be precise. In the latest annual report of his operating company, he talks about his thoughts of generating long term value for shareholders in the future.
Following are the key takeaways for investors from his latest annual report:
1.      Virtual Companies: Mr.Piramal’s operating company is currently in three businesses – pharmaceuticals, information management and financial services. According to him, they have now grouped these three businesses as three virtual companies. This mindset has helped in a) execution discipline in the form of focus on achieving near term goals, milestones and budgets in each of these virtual companies, and b) Prioritization in use of available capital.

2.      Efficient Capital Allocation: The cornerstone of value creation is efficient capital allocation . Piramal is committed to efficiently allocating capital while undertaking controlled risk, to consistently generate higher profitability and deliver superior shareholder returns. The company has undertaken various steps during the year towards this like a) bolt-on acquisitions in different businesses, b) enhanced minority stake in Shriram Group, c) Deleveraged balance sheet, d) Returned capital to shareholders and e) Significantly scaled down the high-risk high-reward New Chemical Entity Research Programme.

3.      Partnerships: Piramal highlights that he company is the first port of call for global majors for partnerships in various businesses and co-investments. He highlights that since its inception, they have practiced and maintained the highest standards of ethics, integrity and corporate governance in each of its business dealings. The result is that the company has forged relationships with global partners like CPPIB (for co-investment in real estate funding), APG Asset Management (co-investment in Infrastructure funding), Vodafone (historically invested in Vodafone India), Abbott (sold pharma business to Abbott) and Allergan (has a local JV for pharmaceutical business).

4.      Minority but ‘Strategic’ Investments: While Mr.Piramal’s about $700mn minority investments in the Shriram Group appear passive, they have been repeatedly been referred to as ‘Strategic’, along with the mention that Mr.Piramal is now the non-executive chairman of Shriram Capital, the financial services holding company of Shriram Group. Thus, there may be an intention to take active participation in these minority investments in future.

EV/EBITDA Ratio – The Good and The Bad

One of the problems of investing is the multitude of tools and techniques available to analyze companies and the resultant confusion in making decisions. No single ratio or method in isolation can be used to pick promising stocks for investment. However, some of these ratios – like the beloved EV/EBIDTA - are more popular and hence it is important to know what are their advantages and disadvantages.
So what EV/EBIDTA mean? Lets understand in plain English. EV/EBITDA stands for Enterprise Value divided by Earnings Before Interest, Taxes, Depreciation and Amortization.
Enterprise Value (EV): To calculate EV, you start with a company’s market capitalization (the number of shares outstanding multiplied by its current market price). You then add the amount of total debt they hold, both short-term and long-term and then subtract the amount of cash and cash equivalents (like investments in liquid mutual fund units, etc) they have.
EBITDA: This is simply as the name suggests the company’s profits before deducting items like interest, taxes, depreciation and amortization.
That is all about the math, which is straight forward and simple. The reason this ratio is so popular is because it can be applied to almost any company - except airlines and banks. Thus, a company making losses at the net profit level is far easier to value compared to its peers based on EV/EBIDTA. The reason why EBIDTA is crucial is because it helps explain a business’s operating profitability. It vaguely helps gauge the contribution margin. It removes the impact of financial leverage and hence lends itself to comparison across various companies within and outside the company’s sector. Also, businesses which are in the nascent stage of build-out incur huge costs related to depreciation and interest expenses, which results in losses at net profit level. However, EBIDTA might help gauge the true margin power of the business.
However, the good news ends here. The ratio has been a subject of abuse in many valuation reports and M&A explanations. Thus, while it is important to look at EBIDTA to judge the margin potential, we cannot exclude depreciation out of the picture, as it is an implicit cost to use the fixed assets. Just imagine, would the business be able to operate without the use of fixed assets? Thus, ‘sustainable’ margin potential can only be judged using EBIT (Earnings Before Interest and Taxes) margin.
The second most common mistake is to judge the valuation of a company using the absolute EV/EBIDTA number. Thus, while a 6x EV/EBIDTA might look cheap, it might that the company has low return on assets and uses a large asset base to generate the EBIDTA. Thus the ratio totally ignores the impact of return on assets and can give an incorrect picture of profitability.

According to us, EV/EBIT is a far superior ratio than EV/EBIDTA as it does away with most of the disadvantages of the latter. It gives due respect to cost of using assets, takes into account impact of return on asset and at the same time irons out the impact of financial leverage to lend itself to comparison

Introduction to Equity School

Hi! I am Guruji, a capital market professional with passion for investing. I intend to make this as my virtual education platform to share knowledge and build investing competency among readers. I intend to cover various issues related to value investing, asset allocation, theoretical aspects of investing, etc on this website. Comments from like-minded individuals are invited. You can reach me at mail@equityschool.in 
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