Safal Niveshaks Stock Analysis Excel

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

Key Financials (Last 10-Years)Parameters DetailsSales Growth (10-Year CAGR) 14.6%Gross Profit Growth (10-Year CAGR) 14.5%Net Profit Growth (10-Year CAGR) 11.2%Average Debt/Equity (x) 0.1 Average Return on Equity 46.9%

Safal Niveshak Value Investing Made Simple

www.safalniveshak.com

http://www.safalniveshak.com/

A13

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

Year / Rs Crore L-9 L-8 L-7 L-6SOURCES OF FUNDS / EQUITY & LIABILITIESShare Capital 40 40 40 40 Reserves & Surplus 1,453 1,969 2,430 2,946 Shareholder's Funds / Equity 1,493 2,009 2,470 2,986

Non-Current LiabilitiesLong-Term Borrowings 202 186 165 132

Current Liabilities 1,500 1,563 1,479 1,825 Short-Term Borrowings - - - - Trade Payables 662 646 555 756 Other Current Liabilities 354 427 487 569 Short-Term Provisions 485 490 437 500

APPLICATION OF FUNDS / ASSETSNon-Current Assets 881 1,157 1,519 1,751 Tangible Assets 674 949 1,166 1,156 Intangible Assets - - - - Capital Work-in-Progress 41 44 190 392 Non-Current Investments 165 163 164 202

Current Assets 2,416 2,720 2,723 3,301 Current Investments 1,861 1,899 1,810 2,365 Inventories 204 227 276 317 Trade Receivables 90 159 335 297 Cash and Bank Balance 18 159 36 131 Short-Term Loans and Advances 240 274 263 185 Other Current Assets 4 4 4 6

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Safal Niveshak: L = Latest Year L-1 = Previous year …and so on

Hero Motocorp - Balance Sheet(Enter values only in red cells) | Data Source: Ace Equity

L-5 L-4 L-3 L-2 L-1 L (FY14)

40 40 40 40 40 40 3,761 3,425 2,916 4,250 4,966 5,560 3,801 3,465 2,956 4,290 5,006 5,600

78 66 1,471 1,011 302 24

2,053 4,831 6,017 4,341 4,171 5,527 - - - - - - 703 1,111 2,073 2,293 1,873 2,291 823 2,694 2,898 996 888 588 527 1,026 1,045 1,052 1,410 2,648

1,832 2,054 4,596 4,498 3,748 3,910 1,574 1,659 4,080 3,786 3,071 2,243 - - - - - - 121 48 50 39 62 854 138 347 465 674 614 813

4,244 6,461 5,772 4,831 5,078 6,660 3,231 3,578 4,663 3,290 3,009 3,276 327 436 525 676 637 670 150 108 131 272 665 921 220 1,907 72 77 181 118 311 247 123 242 407 1,509 6 183 258 274 178 168

Hero Motocorp - P&L Account(Enter values only in red cells) | Data Source: Ace Equity

Year / Rs Crore L-9 L-8 L-7 L-6 L-5Net Sales 7,422 8,714 9,900 10,332 12,319

ExpenditureIncrease/Decrease in Stock (12) (12) 2 11 (18)Raw Material Consumed 5,227 6,098 7,216 7,441 8,816 Employee Cost 215 259 299 321 371 Other Manufacturing Expenses 295 380 435 459 545 General and Administration Expenses 374 443 539 550 672 Selling and Distribution Expenses 160 206 257 237 266 Miscellaneous Expenses 6 7 18 12 38 Total Expenditure 6,266 7,380 8,767 9,032 10,691 Gross Profit 1,911 2,249 2,247 2,421 2,976 Operating Profit / EBITDA 1,156 1,334 1,133 1,300 1,628 Other Income 153 196 254 272 337 Depreciation 89 115 140 160 181 Profit Before Interest & Tax (PBIT) 1,219 1,415 1,248 1,412 1,784 Interest 2 3 2 2 3 Exceptional Income / ExpensesProfit Before Tax 1,217 1,412 1,246 1,410 1,781 Provision for Tax 407 441 388 442 500 Profit After Tax 810 971 858 968 1,282 Minority Interest - - - - - Share of Associate - - - - - Profit After Tax (PAT) 810 971 858 968 1,282 Diluted EPS (Rs) 40.6 48.6 43.0 48.5 64.2

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Hero Motocorp - P&L Account(Enter values only in red cells) | Data Source: Ace Equity

L-4 L-3 L-2 L-1 L (FY14) CAGR 15,758 19,398 23,579 23,768 25,275 14.6%

6 (24) (84) 33 8 10,781 14,190 17,449 17,458 18,314 438 619 736 821 930 677 674 363 412 508 842 605 774 855 960 388 383 366 469 493 15 393 440 530 614 13,146 16,840 20,044 20,577 21,828 14.9% 4,295 4,558 5,851 5,865 6,444 14.5% 2,612 2,558 3,535 3,191 3,447 12.9% 414 344 448 492 539 191 402 1,097 1,142 1,107 2,834 2,500 2,886 2,541 2,879 10.0% 2 15 21 12 12

(80) 2,832 2,405 2,865 2,529 2,867 10.0% 600 477 487 411 758 2,232 1,928 2,378 2,118 2,109 11.2% - - - - - - - - - - 2,232 1,928 2,378 2,118 2,109 11.2% 111.8 96.5 119.1 106.1 105.6

Hero Motocorp - Cash Flow Statement(Enter values only in red cells) | Data Source: Ace Equity

Year / Rs Crore L-9 L-8 L-7 L-6Net cash (used in) / generated from operating activities 747 936 625 1,212 Payment for purchase of fixed assets (219) (399) (519) (375)Free Cash Flow 528 537 106 837 Net cash (used in) / generated from investing activities (563) (323) (273) (781)Net cash (used in) / generated from financing activities (204) (471) (493) (432)Net increase in cash and cash equivalents (20) 141 (142) (2)

MINUS

Sample Cash Flow Statement (from Annual Report)

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Hero Motocorp - Cash Flow Statement(Enter values only in red cells) | Data Source: Ace Equity

L-5 L-4 L-3 L-2 L-1 L (FY14) 1,359 2,687 2,254 2,360 1,890 2,963 (315) (212) (364) (565) (608) (937) 1,044 2,475 1,890 1,795 1,283 2,027 (861) (528) (1,322) 93 (733) (1,619) (500) (2,109) (955) (2,458) (1,056) (1,415) (2) 50 (23) (6) 101 (71)

Remember! Cash flow, not reported earnings, is

what determines a company's long-term value.

Sample Cash Flow Statement (from Annual Report)

Remember! Cash flow, not reported earnings, is

what determines a company's long-term value.

Hero Motocorp - Key Ratios(Don't touch any cell on this sheet, as all are calculated figures)

Operational & Financial Ratios L-9 L-8 L-7 L-6 L-5Diluted Earnings Per Share (Rs) 40.6 48.6 43.0 48.5 64.2 Diluted Book Value Per Share (Rs) 74.8 100.6 123.7 149.5 190.3 Tax Rate (%) 33% 31% 31% 31% 28%

Profitability Ratios L-9 L-8 L-7 L-6 L-5Gross Margin (%) 26% 26% 23% 23% 24%EBITDA Margin (%) 16% 15% 11% 13% 13%EBIT Margin (%) 16% 16% 13% 14% 14%Net Profit Margin (%) 11% 11% 9% 9% 10%

Performance Ratios L-9 L-8 L-7 L-6 L-5Return on Equity (%) 54% 48% 35% 32% 34%

Return on Capital Employed (%) 51% 46% 36% 37% 34%Return on Invested Capital (%) -442% 708% 109% 156% 299%Sales/Working Capital (x) 8.1 7.5 8.0 7.0 5.6

Efficiency Ratios L-9 L-8 L-7 L-6 L-5Receivable Days 4 7 12 11 4 Inventory Days 10 9 10 11 10 Payable Days 33 27 20 27 21

Growth Ratios L-9 L-8 L-7 L-6 L-5Net Sales Growth (%) 17% 14% 4% 19%EBITDA Growth (%) 15% -15% 15% 25%PBIT Growth (%) 16% -12% 13% 26%PAT Growth (%) 20% -12% 13% 32%

Financial Stability Ratios L-9 L-8 L-7 L-6 L-5Total Debt/Equity (x) 0.1 0.1 0.1 0.0 0.0 Debt Burden (x) 0.4 0.3 1.6 0.2 0.1 Current Ratio (x) 1.6 1.7 1.8 1.8 2.1 Quick Ratio (x) 1.5 1.6 1.7 1.6 1.9 Interest Cover (x) 631.7 484.6 775.0 706.1 705.1

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Safal Niveshak: "Diluted" means using the latest number of shares that reflects all bonus, stock splits, and new stock issuances of the past.

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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.

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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.

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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.

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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.

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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.

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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

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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.

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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.

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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)

L-4 L-3 L-2 L-1 L (FY14) 111.8 96.5 119.1 106.1 105.6 173.5 148.0 214.8 250.7 280.4

21% 20% 17% 16% 26%

L-4 L-3 L-2 L-1 L27% 23% 25% 25% 25%17% 13% 15% 13% 14%18% 13% 12% 11% 11%14% 10% 10% 9% 8%

L-4 L-3 L-2 L-1 L64% 65% 55% 42% 38%

68% 52% 56% 53% 50%-114% -651% 124% 100% 95%

9.7 (79.2) 48.2 26.2 22.3

L-4 L-3 L-2 L-1 L 3 2 4 10 13 10 10 10 10 10 26 39 35 29 33

L-4 L-3 L-2 L-1 L28% 23% 22% 1% 6%60% -2% 38% -10% 8%59% -12% 15% -12% 13%74% -14% 23% -11% 0%

L-4 L-3 L-2 L-1 L 0.0 0.5 0.2 0.1 0.0 0.0 0.8 0.6 0.2 0.0 1.3 1.0 1.1 1.2 1.2 1.2 0.9 1.0 1.1 1.1 1,349.4 164.8 135.5 213.4 243.6

Remember! What counts in the long run is the increase in "per share value", not overall growth or size of a

business.

Remember! Gross margins suggest pricing power.

Higher = Better, but also invites competition. So watch out for consistency.

Remember! ROE = Efficiency in allocating capital, which is a

CEO's #1 job. Higher = Better. Look for consistency.

Remember! What counts in the long run is the increase in "per share value", not overall growth or size of a

business.

Remember! Gross margins suggest pricing power.

Higher = Better, but also invites competition. So watch out for consistency.

Remember! ROE = Efficiency in allocating capital, which is a

CEO's #1 job. Higher = Better. Look for consistency.

Hero Motocorp: 2-Stage DCF

Figures in Rs Crore | Enter values only in red cells

Initial Cash Flow 1,701

Years 1-5 6-10FCF Growth Rate 12% 10%Discount Rate 10%Terminal Growth Rate 2%

Shares Outstanding (Crore) 20 Net Debt Level (3,369)

Year FCF Growth Present Value1 1,906 12% 1,732 2 2,134 12% 1,764 3 2,390 12% 1,796 4 2,677 12% 1,829 5 2,998 12% 1,862 6 3,298 10% 1,862 7 3,628 10% 1,862 8 3,991 10% 1,862 9 4,390 10% 1,862

10 4,829 10% 1,862

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

Note: See the explanation of DCF here

http://www.safalniveshak.com/value-stocks-using-dcf/

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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

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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.

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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)

Year L-9 L-8 L-7 L-6 L-5 L-4 L-3Diluted EPS (Rs) 40.6 48.6 43.0 48.5 64.2 111.8 96.5 High P/E (x) 15.0 20.2 18.5 19.1 18.4 23.2 19.6 Low P/E (x) 10.4 12.0 13.2 13.6 12.1 15.1 13.7 Average P/E (x) 12.7 16.1 15.9 16.4 15.2 19.2 16.7

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!

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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)

L-2 L-1 L (FY14) 119.1 106.1 105.6 22.9 18.9 21.5 16.6 14.3 13.6 19.8 16.6 17.5

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!

Expected Return ModelHero Motocorp L-9 L-8 L-7 L-6 L-5Profit After Tax (Rs Cr) 810 971 858 968 1,282 Earnings per Share (Rs ) 41 49 43 48 64 Net Profit Margin 11% 11% 9% 9% 10%Return on Equity 54% 48% 35% 32% 34%

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%

Note: See the explanation of this model here

http://goo.gl/F4PjL7

L-4 L-3 L-2 L-1 L (FY14) CAGR (10-Yr) CAGR (5-Yr) 2,232 1,928 2,378 2,118 2,109 11% 10% 112 97 119 106 106 11% 10%

14% 10% 10% 9% 8%64% 65% 55% 42% 38%

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Safal Niveshaks Stock Analysis Excel