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Business Analyst Vantage Point # 1

Balance Sheet - Breakup of Capital Employed, Capital StructureIncome Statement - Margins, Turnover,Cash Flow - reconciliation with income, maintenance capex.Interpretation - Capital requirements, Return on Capital, Business Volumes

Balance Sheet

Average net fixed assets over 6 years = 109 cr.

Surplus cash of Rs 173 cr or Rs 114 per share

working capital for each of the last six years = -30 cr, -68 cr, -87 cr, -124 cr, -94 cr, -96 cr. Average = -83 cr.

Income Statement

Cash Flow Statement

Total cash flow generated from operations for 6 years = Rs 567 cr.Annual Average = 94 cr. Since last two years were less than average, we assume March 10 as sustainable i.e Rs 81 cr.

Average Cash Flow from Operations = Rs 83 cr. p.a.

Average Capital Employed in the Business = Rs 26 cr.

Average return on capital = 319%

What’s causing this business to be insanely profitable?

Indirect Taxes

Out of Rs 1158 cr of gross revenues the govt takes away 663 cr.

Why does capital employed not go up?

Business is not capital intensivecompany pays most of its earnings out as dividends

Direct Taxes

Out of a PBT of Rs 85 cr, the govt takes away 27 cr.

Prudent Banker Vantage

Point # 2

How much money would you lend to this business?What are the key factors?Size, Interest Cover, CyclicalityWhat is the company’s debt capacity on a per share basis?Rs 81 cr cash flow/ Interest cover 3 times. Rs 27 cr of interest. Assume interest rate of 9% p.a.. Debt capacity = Rs 300 cr.No of shares = 1.54 cr. So debt capacity of the BUSINESS per share = Rs 195. Cash is Rs 114 per share. So value per share can’t be less than 309. Why? Why can the business NOT be worth less than Rs 300 cr or Rs 195 per share? Has it sold below debt capacity?

debt can be paid off in 7 years

Shrewd Value Investor

Vantage Point # 3

“An equity share representing the entire business cannot be less safe [and less

valuable] than a bond having a claim to only a part thereof.”

“There are instances where an equity share may be

considered sound because it enjoys a margin of safety as large as that of a

good bond.

“This will occur, for example, when a company

has outstanding only equity shares that under depression conditions are selling for less than the amount of the bonds that could safely be issued against its

property and earning power.

“In such instances the investor can obtain the

margin of safety associated with a bond, plus all the chances of

larger income and principal appreciation inherent in an equity

share.”

“Our research seeks to appraise the intrinsic value of a share of stock by estimating its acquisition value, or by estimating the collateral value of its

assets and/or cash flow.

Bond Fund Manager Vantage

Point # 4

How can a bond market value a PART of the business for less than what the equity is valuing the WHOLE DEBT FREE COMPANY for?

Henry Kravis

LBO Artist Vantage

Point # 5

In 6 years Kravis can pay off all the debt.What will he now own?

MM’sVantage

Point # 6

MM on Capital Structure

MM on Capital Structure

Value Oriented Manager

Vantage Point # 7

Special Dividend.Buyback:

MM on Capital StructureMM on Dividend

My Own Vantage

Point # 8

How to get closer to the truth….. - look at multiple points of view.look at broad picture - zoom out - look from civilization point of view… Why is this company prospering?What can go wrong? Increased Regulation - increased taxes, ban on advertising Ban on smoking? Can it happen? Dependence on tax revenues. Why does it exist in the first place? If it did not exist, would it be allowed today? Why is it allowed? Drop in smoking itself…Medical costs not borne by tobacco. What if they were?Virtue and Vice Effects

Virtue and Vice Effects

Vice Effects

My Own Vantage

Point # 8

The truth is that VST is prosperous because its involved in a vice where it the benefits are enjoyed by its stockholders while the costs are borne by society. How long can this last? I don’t have good answer to that question. Life is cheap. Money is expensive. Will you buy the stock, and overlook the vice effects? Maybe not. But, at a price, maybe you would. You see man is not rational animal. Rather he is a rationalizing one. You do know now however, that you get closer to the truth by seeing different points of view, some of which are wrong. And that by itself is quite something. Isn’t it?

Thank You