Basic Company Details (July (Enter values only in red cells) | Data Source: A Note: Hero Motocorp's analysis in this excel is for represe Parameters Company Industry Business (As you understand it, in simple words) Current Stock Price (Rs) Face Value (Rs) No. of Shares (Crore) Market Capitalization (Rs Crore) Key Financials (Last 10-Ye Parameters Sales Growth (10-Year CAGR) Gross Profit Growth (10-Year CAGR) Net Profit Growth (10-Year CAGR) Average Debt/Equity (x) Average Return on Equity Safal Niveshak Value Investing Made Simpl www.safalniveshak.com
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Basic Company Details (July 2015)(Enter values only in red cells) | Data Source: Ace Equity
Note: Hero Motocorp's analysis in this excel is for representation purpose only.Parameters DetailsCompany Hero MotocorpIndustry AutomobilesBusiness (As you understand it, in simple words) XYZCurrent Stock Price (Rs) 2,650 Face Value (Rs) 2 No. of Shares (Crore) 20 Market Capitalization (Rs Crore) 52,921
Safal Niveshak: Don't go beyond this sheet if you don't understand the business.
Warning! Excel can be a wonderful tool to analyze the past. But it can be a weapon of mass destruction to predict the future! So be very careful of what you are
getting into. Here, garbage in will always equal garbage out.
Remember! Focus on decisions, not outcomes. Look for
disconfirming evidence. Calculate. Pray!
Please! It's your money. Please don't blame me if results of this excel cause you to lose it all!
I've designed this excel to aid your own thinking, but you alone are responsible for your actions. I want to live peacefully ever after! :-) I am not a sadist who wants you to do the hard work by analyzing companies on your own. But I'd rather give you a compass instead of a map, for you can
confuse map with territory and lose it all! All the best!
Excel can be a wonderful tool to analyze the past. But it can be a weapon of mass destruction to predict the future! So be very careful of what you are
getting into. Here, garbage in will always equal garbage out.
Remember! Focus on decisions, not outcomes. Look for
disconfirming evidence. Calculate. Pray!
Please! It's your money. Please don't blame me if results of this excel cause you to lose it all!
I've designed this excel to aid your own thinking, but you alone are responsible for your actions. I want to live peacefully ever after! :-) I am not a sadist who wants you to do the hard work by analyzing companies on your own. But I'd rather give you a compass instead of a map, for you can
confuse map with territory and lose it all! All the best!
Buffett Checklist - Read, Remember, Follow!Source - Buffettology by Mary Buffett & David Clark
Parameter
Consumer monopoly or commodity?
Understand how business works
Is the company conservatively financed?
Are earnings strong and do they show an upward trend?
Does the company stick with what it knows?
Has the company been buying back its shares?
Have retained earnings been invested well?
Is the company’s return on equity above average?
Is the company free to adjust prices to inflation?
Does the company need to constantly reinvest in capital?
Conclusion
Never Forget
Buffett Checklist - Read, Remember, Follow!Source - Buffettology by Mary Buffett & David Clark
Explanation
Seek out companies that have no or less competition, either due to a patent or brand name or similar intangible that makes the product unique. Such companies will typically have high gross and operating profit margins because of their unique niche. However, don't just go on margins as high margins may simply highlight companies within industries with traditionally high margins. Thus, look for companies with gross, operating and net profit margins above industry norms. Also look for strong growth in earnings and high return on equity in the past.
Try to invest in industries where you possess some specialized knowledge (where you work) or can more effectively judge a company, its industry, and its competitive environment (simple products you consume). While it is difficult to construct a quantitative filter, you should be able to identify areas of interest. You should "only" consider analyzing those companies that operate in areas that you can clearly grasp - your circle of competence. Of course you can increase the size of the circle, but only over time by learning about new industries. More important than the size of the circle is to know its boundaries.
Seeks out companies with conservative financing, which equates to a simple, safe balance sheet. Such companies tend to have strong cash flows, with little need for long-term debt. Look for low debt to equity or low debt-burden ratios. Also seek companies that have history of consistently generating positive free cash flows.
Rising earnings serve as a good catalyst for stock prices. So seek companies with strong, consistent, and expanding earnings (profits). Seek companies with 5/10 year earnings per share growth greater than 25% (alongwith safe balance sheets). To help indicate that earnings growth is still strong, look for companies where the last 3-years earnings growth rate is higher than the last 10-years growth rate. More important than the rate of growth is the consistency in such growth. So exclude companies with volatile earnings growth in the past, even if the "average" growth has been high.
Like you should stock to your circle of competence, a company should invest its capital only in those businesses within its circle of competence. This is a difficult factor to screen for on a quantitative level. Before investing in a company, look at the company’s past pattern of acquisitions and new directions. They should fit within the primary range of operations for the firm. Be cautious of companies that have been very aggressive in acquisitions in the past.
Buffett prefers that firms reinvest their earnings within the company, provided that profitable opportunities exist. When companies have excess cash flow, Buffett favours shareholder-enhancing maneuvers such as share buybacks. While we do not screen for this factor, a follow-up examination of a company would reveal if it has a share buyback plan in place.
Seek companies where earnings have risen as retained earnings (earnings after paying dividends) have been employed profitably. A great way to screen for such companies is by looking at those that have had consistent earnings and strong return on equity in the past.
Consider it a positive sign when a company is able to earn above-average (better than competitors) returns on equity without employing much debt. Average return on equity for Indian companies over the last 10 years is approximately 16%. Thus, seek companies that earn atleast this much (16%) or more than this. Again, consistency is the key here.
Focus on decisions, not outcomes. Look for disconfirming evidence.
That's what is called "pricing power". Companies with moat (as seen from other screening metrics as suggested above (like high ROE, high grow margins, low debt etc.) are able to adjust prices to inflation without the risk of losing significant volume sales.
Companies that consistently need capital to grow their sales and profits are like bank savings account, and thus bad for an investor's long term portfolio. Seek companies that don't need high capital investments consistently. Retained earnings must first go toward maintaining current operations at competitive levels, so the lower the amount needed to maintain current operations, the better. Here, more than just an absolute assessment, a comparison against competitors will help a lot. Seek companies that consistently generate positive and rising free cash flows.
Sensible investing is always about using “folly and discipline” - the discipline to identify excellent businesses, and wait for the folly of the market to drive down the value of these businesses to attractive levels. You will have little trouble understanding this philosophy. However, its successful implementation is dependent upon your dedication to learn and follow the principles, and apply them to pick stocks successfully.
Hero Motocorp - Balance Sheet(Enter values only in red cells) | Data Source: Ace Equity
Safal Niveshak: "Diluted" means using the latest number of shares that reflects all bonus, stock splits, and new stock issuances of the past.
A9
Safal Niveshak: Gross profit margin represents the percent of total sales that the company retains after incurring the direct costs associated with producing the goods and services sold. The higher the percentage, the more the company retains on each rupee of sales to service its other costs and obligations. Gross Margin = (Total Sales - Cost of Goods Sold) / Total Sales For a company, the purpose of gross margins is to determine the value of incremental sales, and to guide pricing and promotion decision. For investors, higher gross margins vis-a-vis competitors means the company has pricing power, which indicates moat.
A10
Safal Niveshak: EBITDA stands for "Earnings Before Interest, Tax, Depreciation & Amortization. EBITDA margins is also known as "Operating Margin" and measures a company's operating profitability - how must profits a company earns after paying off its operational costs and before providing for depreciation and paying interest and tax. It's good to compare this number within the industry.
A12
Safal Niveshak: Net Profit Margin = Net profit / Sales It measures how much out of every dollar of sales a company actually keeps in earnings. NPM is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors.
A16
Safal Niveshak: ROCE =NOPAT / Capital Employed NOPAT = EBIT * (1-Tax) Capital Employed = Fixed Assets + Working Capital
A17
Safal Niveshak: ROIC is used to assess a company's efficiency at allocating the capital under its control to profitable investments. It gives a sense of how well a company is using its money to generate returns.
A18
Safal Niveshak: Also known as "Working Capital Turnover Ratio", it measures how much of sales is generated for every rupee of working capital employed. This provides some useful information as to how effectively a company is using its working capital to generate sales. Working Cap. Turnover = Working Capital / Sales Working Capital = Current Assets / Current Liabilities In general, the higher the working capital turnover, the better because it means that the company is generating a lot of sales compared to the money it uses to fund the sales.
A21
Safal Niveshak: It is also known as DSO or Days Sales Outstanding, and measures the average number of days a company takes to collect money after a sale has been made. Here's a simple formula... DSO = (Trade Receivables / Sales) x 365 A low DSO number means that it takes a company fewer days to collect its trade receivable. A high DSO number shows that a company is selling its product to customers on credit and taking longer to collect money. Due to the high importance of cash in running a business, it is in a company's best interest to collect outstanding receivables as quickly as possible. By quickly turning sales into cash, a company has the chance to put the cash to use again - ideally, to reinvest and make more sales. The DSO can be used to determine whether a company is trying to disguise weak sales, or is generally being ineffective at bringing money in.
A22
Safal Niveshak: Also known as "Days Sales of Inventory" or DSI, it measures how long it takes a company to turn its inventory (including goods that are work in progress, if applicable) into sales. Generally, the lower the DSI the better, but it is important to note that the average DSI varies from one industry to another. DSI = (Inventories / Sales) x 365 DSI basically represents the process of turning raw materials or finished goods into cash.
A23
Safal Niveshak: It is also known as "Days Payable Outstanding" or DPO, and is an indicator of how long a company is taking to pay its trade creditors. The formula is… DPO = (Trade Payables / Sales) x 365
A34
Safal Niveshak: Current Ratio measures the liquidity of a company, or its ability to pay short-term obligations. Current Ratio = Current Assets / Current Liabilities The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign. The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash. Companies that have trouble getting paid on their receivables or have long inventory turnover can run into liquidity problems because they are unable to alleviate their obligations.
A35
Safal Niveshak: Also known as "Acid Test Ratio", it is an indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company. Quick Ratio = (Current Assets - Inventories) / Current Liabilities The quick ratio is a more conservative metric than current ratio because it excludes inventory from current assets. Inventory is excluded because some companies have difficulty turning their inventory into cash. In the event that short-term obligations need to be paid off immediately, there are situations in which the current ratio would overestimate a company's short-term financial strength.
A36
Safal Niveshak: This ratio determines how easily a company can pay interest on its outstanding debt. Interest Coverage Ratio = Earnings before interest and taxes or EBIT / Interest expenses The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses.
Hero Motocorp - Key Ratios(Don't touch any cell on this sheet, as all are calculated figures)
Final CalculationsTerminal Year 4,926 PV of Year 1-10 Cash Flows 18,291 Terminal Value 23,738 Total PV of Cash Flows 42,029 Number of Shares 20 DCF Value / Share (Rs) 2,273
Safal Niveshak: Normalize! It's better to take a 3-5 years average FCF as this starting number instead of the latest year's FCF. This is for the simple reason that the latest year can be a best/worst number. FCF can be calculated from the Cash Flow Statement in the annual report. FCF formula = Net Cash from/(used in) Operating Activities minus Purchase of Fixed Assets
A7
Safal Niveshak: In a 2-stage DCF, we break the next 10 years into two phases of five years each, and then calculate the FCF growth based on growth rates assumed in Cells B9 and B10 below.
A8
Safal Niveshak: Be conservative! Prefer to value stocks based on the present data rather than what will happen in the future. Anything could happen even in 1 year, and if the growth rate is too high and the company cannot meet those expectations, there is no where to go but down. The best practice is to keep growth rates as low as possible. If the company looks to be undervalued with 0% growth rate, you have more upside than downside. The higher you set the growth rate, the higher you set up the downside potential. Just be reasonable and use common sense. On most of the stocks I value, I rarely go above 15% (for the first 5-year period), and that’s only for the safest, cash-generating businesses like Colgate, HUL, Infosys etc. This is approx. 2x India's expected long-term GDP growth rate. The goal of choosing a growth rate is to find a number which is conservative yet not very low or pessimistic, and close to reality in order to capture potential future gains without eliminating too many investment candidates.
A9
Safal Niveshak: This is the rate at which you discount the future cash flows to the present value. So what would be a good rate? Considering that the “average” market return is about 10-15%, a minimum discount rate should be set to 10%. I use 10% as a minimum for stable and predictable companies such as Colgate, Infosys, HUL while 15% is a good return for less predictable companies such as, say Opto Circuits. Also, do not adjust the entire risk of a investment in its discount rate. In other words, if Opto Circuits is a "riskier" investment that say Titan, adjust for some risk in the cash flow growth estimates and some in the discount rate. Ignore simple yet junk models like CAPM to get the discount rate. People in the finance world pour out their hearts to obtain the most accurate discount rate by analyzing risk free rates, beta, risk premium and WACC. It's just short of rubbish! What’s the point in learning every method of hammering a nail when all you have to do is hit it on the head. So do not over-complicate this aspect. The beauty of old school Graham and Buffett is that their investments are based on common sense, not volatility and other mumbo jumbo. There is no hard and fast rule for choosing a discount rate. Using a high discount rate to discount the future cash just means you are willing to pay less today for the future cash and vice versa. Do understand that - “You can’t compensate for risk by using a high discount rate.” The important aspect is not deciding upon a discount rate, but in being logical and reasonable about cash projections. Another way you can look at discount rate is to not using different discount rates for different businesses. It won't really matter what rate you use as long as you are being intellectually honest and conservative about future cash flows.
A10
Safal Niveshak: Since it isn’t practical to forecast cash flows for an infinite number of years, it’s usual to end the DCF with a terminal value. The best terminal growth rate is 0%, and the highest you should go (for safest businesses) is 2%.
A13
Safal Niveshak: If this figure is negative, i.e., in brackets, it means that the company has more Cash than Debt. This is automatically added to the PV of cash flows below to give a complete picture of the company's valuation.
Why DCF? The value of a business is
simply the present value of cash that investors can take out of the business
over its lifetime.
Hero Motocorp - Fair Value Calculation(Enter values only in red cells)
Valuation - Different Methods (Rs)Avg P/E Ratio Valuation 1,830 DCF 2,273
Fair Value Range (Rs/Share)High End 2,051 Low End 1,895 Margin of Safety (MoS) 20%Fair Value after MoS 1,578 Current Mkt. Price (CMP, Rs) 2,650 Premium / (Discount) 67.9%
Remember! Give importance to a stock's fair value only "after" you have
answered in "Yes" to these two questions - (1) Is this business simple to be understood? and (2) Can I understand this business?
Don't try to quantify everything. In stock research, the less non-mathematical you are, the more simple, sensible, and useful will be your analysis and results. Great analysis is generally "back-of-the-envelope".
Also, your calculated "fair value" will be proven wrong in the future, so don't invest your savings just because you fall in love with it. Don't look for perfection. It is overrated. Focus on decisions, not outcomes. Look
for disconfirming evidence. Pray!
A3
Safal Niveshak: L = Latest Year L-1 = Previous year …and so on
A16
Safal Niveshak: Valuation is an imprecise art (yes, however smart you may think you are!). Also, the future is inherently unpredictable. Thus, it’s important to bring in the most-important investing concept of “margin of safety” into the picture. This is what Graham wrote about margin of safety in The Intelligent Investor… "Confronted with the challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY." Margin of safety is simply the discount factor that you use with your intrinsic value calculation. So if you arrive at an intrinsic value of Rs 100 for a stock that trades at Rs 80, you might think that you have found a bargain. But what if your intrinsic value calculation is wrong? Yes, it will be wrong, at least 100% of the times! Thus, you will do yourself a world of good by buying the stock only at say 50% discount to your intrinsic value calculation, or around Rs 50. Now when you bring your intrinsic value assumption down to Rs 50 – by giving a 50% discount to the original calculated value of Rs 100, don’t think that you are trying to be ultra-conservative. What you are doing is providing yourself protection against: 1. Bad luck 2. Bad timing, and 3. Bad judgment. Margin of safety was, and will always be, the bedrock of value investing. You can’t ignore this at any cost…or it will turn out to be a costly affair!
A17
Safal Niveshak: This is the fair value or comfortable buying price of the stock after adjusting for Margin of Safety.
A19
Safal Niveshak: Here are the definitions... Premium = Stock Price is more than the Fair Value, which means the stock is expensive. Discount = Stock Price is less than the Fair Value, which means the stock is cheap. Warning: Valuation must only be looked after assessing the quality of a business. Otherwise, if the business is bad, or getting bad, a cheap stock can be a "value trap".
Hero Motocorp - Fair Value Calculation(Enter values only in red cells)
Remember! Give importance to a stock's fair value only "after" you have
answered in "Yes" to these two questions - (1) Is this business simple to be understood? and (2) Can I understand this business?
Don't try to quantify everything. In stock research, the less non-mathematical you are, the more simple, sensible, and useful will be your analysis and results. Great analysis is generally "back-of-the-envelope".
Also, your calculated "fair value" will be proven wrong in the future, so don't invest your savings just because you fall in love with it. Don't look for perfection. It is overrated. Focus on decisions, not outcomes. Look
CalculationsEsti. CAGR in EPS over next 10 years 10%Esti. EPS after 10 years 274 Current P/E 22.2 Esti. Stock Price @ 20x P/E 5,479 CMP (Rs) 2,650 Esti. CAGR Return in 10 Years 7.5%