The Interview

The market is similar to an ocean, there is just too much information to assimilate, process and analyze, an investor needs to make sure he/she is on the right kind of a boat while traversing the rough ocean waters.

Recently, I was re-reading some of the very insightful interviews of reputed investors which Vishal (Safal Niveshak ) has been gracious enough to share with. This gave me an idea to conduct a small experiment

So my friend and I decided to conduct mock interviews of each other, to better understand our thought process, I have listed some of the questions we covered:

  • Why do you invest in the stock markets? Isn’t it too risky?
  • What stocks do you usually invest in?
  • Where do you find good investment ideas?
  • How do you decide which ideas to buy and which ones to let go?
  • What are your return expectations from the markets?
  • What???? Just 20% P.A, don’t you think you should be making more, at least wanting more?
  • What percentage of capital is allocated to each idea of your portfolio?
  • Do you buy into the full position at one go or in stages?
  • How do you decide when to add more to your existing holdings vs adding new positions?
  • When do you sell? What factors do you consider before selling?
  • Do you sell the entire holding together or in stages?
  • How do you handle your emotions when stocks you own are losing or appreciating in value ?
  • How do you develop conviction to hold on to stocks in spite of a huge up/down move?
  • What is your typical holding period?
  • Do you meet management of your portfolio companies?
  • What has been the worst performing stock idea for you?
  • How do you ensure downside protection, prevention of capital loss?
  • How do u handle and process the constant stream of information? How do you cut down the noise and clutter?

And so on…

To my utter disbelief I flunked this interview big time, I realized, I had no objective and concrete answers to most of the questions above.

This was a great learning experience, it forced me to think these questions through, I sat over the following weekend and wrote down the answers to each and every question, not only did I feel more confident but it made me more aware of my temperament and inherent personality as an investor.

The future is unknown and unpredictable, however managing risk is something we can control and influence, writing and documenting in detail, your entire investment philosophy and process can take you one step closer to that, it forces you to acknowledge the chinks in your armor and rectify the errors in your decision making process.

Go ahead, see if you can pass this interview, if not introspect. Repeat.

Keeping it simple!

 

Investing can be as simple or complicated as you make it to be. I’ ll share a personal example:

I used to be in awe and often get overwhelmed on reading these brilliant analyses of companies and concepts on various blogs across the internet, ” Wow how am I ever going to get so good” or ” I am going to start reading 6 hours a day, everyday (orders top 10 recommended books from Amazon)”.

After passing through a period of mindless reading and running about to various seminars ( which promised the fruit of identifying the next multi-baggers ) in the pursuit of gaining nirvana, I ended up with a 10 page framework and check list to analyse companies. I thought to myself ” Now, finally I am going to crank up those returns and become the best money manager ever”

This feeling did not last long, for 2 reasons:

  1. As I progressed, I realised that most of it was repetitive and as a result I had to think and write the same points over and over again and it took a really long time to finish researching a company
  2.  The framework itself was so vast, it was intimidating, most times as I sat down for research, to my surprise, I was bored rather quickly

On some introspection, I understood the following:

  1. Your only competition is yourself, focus on absolute returns
  2. Understand that knowledge grows gradually with time and experience
  3. Reading the wrong kind of stuff is very dangerous
  4. Reading too many books too soon will not add optimum value, it takes considerable time to absorb concepts and ideas of each book, relax there’s a lot of time, one book at a time, slowly
  5. If the idea is not appealing within the first 30 minutes of the time you spend understanding it, it probably never will be
  6. Luck plays a huge part in determining returns, it is often futile to know everything out there
  7. You are not really investing in the business itself but on the probability of the business doing well in future
  8. Your investing strategy must suit your temperament, different things work for different people, find what works for you
  9. There is no superior or inferior analysis, only returns

So what do I do?:

  1. I read about 1 book every other month(related to investing) and I am really choosy about what I read
  2. My investing framework is only 2 pages
  3. I usually complete my homework on the company within a couple of days max
  4. I try and know enough to understand if the business is going to do well 3-5 years out, My focus is generally on the larger picture
  5. I avoid crunching too many numbers, future is unknown, I’m good if I like the business model of the company and the people running it
  6. I allocate minimum capital at the start and keep adding and averaging up as and when I get more comfortable with the business and the management
  7. I follow very selected blogs of people I admire and which I believe can add good value to my investing life
  8. I don’t watch stock prices very often specially of companies I am invested in
  9. I often write down stuff rather than typing

The investing process has to be fun, engaging and most importantly simple!

Hope this has added some value to your investing journey!

Happy investing!

 

 

Company Analysis – Talwalkars Better Value Fitness

 

BUSINESS MODEL & INDUSTRY ANALYSIS:

  1. General intro and background info:
  • Headquartered in Mumbai, founded in 1932
  • India’s largest and only listed fitness chain
  • 150 centers across 78 cities and towns
  • +1,50,000 members
  1. Business model:
  • It is the largest fitness chain in the country, with ~150 fitness centers
  • It has 2 formats 1) Talwalkars & 2) HI-FI ( low cost ) fitness centers
  • ~20% of centers are of the franchisee model
  • In addition to standard gym and fitness services, there are various value added services such as, zumba, reduce, transform, nu-form etc ( ~23% of revenues )
  • For franchisee business, upfront royalty – INR 2mn & ~6% of turnover for first 3 years and ~8% thereafter
  • 16 centers are subsidiaries which are co-owned by the company and a local partner
  • Average renewal rate of memberships has been ~75%
  1. Is the business scalable? Can the products / services find a large number of customers?
  • Yes the business is scalable and It can find a large number of customers
  1. Where do majority of the revenues come from?
  • All fitness centers are located in India across 78 cities and towns
  • Clientele is well diversified and company is trying to cater to all segments of the society through its premium and low cost fitness center formats
  • There is no risk of client concentration
  1. Market share?
  • It has a market share of ~45% in the organized fitness industry and 13% share in the total Indian fitness industry
  • Market share is increasing
  1. Is the business capital intensive?
  • Yes business is very capital intensive
  • Average size of a full fledged fitness centre is ~4000-5000 sqft, it takes around 16 weeks to set up and can cost between 1-2 cr
  1. Is the industry heavily regulated?
  • No
  1. Dynamics of industry?
  • The fitness industry is growing at a decent pace
  • Less than 1% of the urban population owns a gym membership
  • 40% of Indian population will be between age group 18-44 in 2016
  • Rising health concerns will ensure growth in this industry
  • In US there are 90,000 health clubs with 73 mn memberships, India has ~1300 clubs with only 440,000 members ( In no way can you extrapolate future growth using these numbers, but they can serve as tool to assess the opportunity size of the industry )
  • Industry is very competitive and the un-organized market in India is huge, however organized players are gradually taking away market share
  • The service offering is commoditized to an extent, people are price sensitive
  • Real estate is a major operational cost and is quite expensive, especially in urban areas

 

FINANCIAL ANALYSIS:

  1. Growth?
  • Sales, profits & centers have grown at a fast clip over the past 5 years ( all over ~20% CAGR )
  • Realizations have by and large been stagnant ( industry is very competitive ) ( ~10% CAGR, past 5 years )
  • Same store sales (SSS) growth has been modest ( again competitive intensity is pretty high ) ( ~7.5% CAGR 5 years )
  • Networth & Net block have grown in line with sales and profits and is impressive ( +35% CAGR )
  • The good thing is that Cash flows have grown consistently over the same period ( ~17% CAGR )
  1. Operating efficiency?
  • Margins have been good and increasing over the past 5 years (hence, same store profits have increased at a faster pace) ( net margin up from ~12% to ~21% in the past 5 years )
  • Company benefits from some economies of scale, purchasing furniture, equipments, hiring trainers for which they have developed a training center ( 25,000 sq ft)
  • Company has been maintaining decent working capital cycles, however can improve, competitive intensity can be seen here too as customers are spoilt for choice, various payment options need to be provided to attract clients, as a result of which receivable days have gone up significantly ( Receivable days up from 4 to 55 days )
  1. Investing efficiency?
  • Company has very poor fixed asset turnover ratio (built in operating leverage, competition is intense) ( Average ~0.5 )
  • ROE is decent but has reduced over a period of time, again due to poor turnover ratios ( average 5 years ~18% )
  • Company has focused on expanding the number of centres. SSS & realizations are stagnant . The entire revenue growth is largely coming from growth in no. of centres ( Centre growth ~19% )
  • Company is taking steps for the same and has added various VAS (value added services) which are margin accretive with low operating costs, this is responsible partly for margin expansion in the last few years
  1. Capital structure? Debt? Equity dilution?
  • Company came up with public issue in 2010, post that it has raised capital again in 2013 via QIP(40 cr) to set up a health club at Pune
  • Company is in an expansionary mode and focused on expanding number of centres which is very capital intensive, hence it will keep needing debt for growth (may change in future with renewed focus on setting up HI-FI centres which are franchisee based)
  • Over the past 6 years cumulative capex has been ~569 cr and cash flows ( post tax ) have been ~210 cr
  • Current debt/equity is greater than 1
  1. Cash flows?
  • Cash flows are good & have grown consistently
  • Cumulative PAT is ~177cr and the CFO post taxes is ~210 cr over the past 6 years
  • Interest cover is ~3 which should improve in future ( Interest expense/ CFO-pre tax)
  1. Funding for growth?
  • Internal accruals may not be sufficient for future plans
  • Company may continue raising debt and equity for expansion plans
  1. Other important observations:
  • Tax rate is along the lines of corporate tax rate which is a good thing
  • Expenditure on sales & promotion have been reducing over the past 5 years
  • Dividends wont possibly increase for some time to come
  • On average company spends ~80L on gym equipments / centre
  • Lease rentals on average ~8-10L / year
  • Institutions own ~30% of the total equity
  • Receivable days have consistently increased in the past 5 years

 

MANAGEMENT ANALYSIS :

  1. Key people in the management? Promoter holding?
  • The company is managed by the Talwalkar & Gawande families, CEO- Prashant Talwalkar & CFO – Anant Gawande, Harsha Bhatkal ( marketing ), Girish Talwalkar are other key promoters who hold significant equity and are whole time directors
  • Combined promoter holding is ~43%
  1. Project execution & expansion plans?
  • When the company listed on the bourses in 2010 it had a footprint of ~60 centers, today within 4 years it has expanded to ~150 centers across the country, this is quite impressive considering the competition and the overall global slowdown
  • The company plans to focus on multiple areas in the coming future, in the next 3-4 years it wants to add another 100 centers across platforms ( Talwalkars, HI-fi, Health clubs etc )
  1. Adverse action against shareholders? Related party transactions?
  • The promoters have various other companies in which they hold significant influence and there are few related party transactions there, not sure why?
  • No material deliberate action against shareholders
  1. Compensation?
  • Top management and directors receive a total compensation of ~2.5 cr p.a which is ~6.5% of net profits ( FY 2014 )
  1. Ambitious? Pursuing profitable growth? Any diworsefications in the past? Bad acquisitions?
  • Management is certainly quite ambitious, from 60 centers in 2010 it has grown to 150 centers in 2014 and has taken significant debt to fund this capex
  • It is quite aggressive in adding centers while SSS & realizations are not growing satisfactorily, entire growth in profits is through addition of centers which is not sustainable, to change this management has added variety of VAS and the contribution of the same has grown from ~18% of sales to ~22% of sales in 2-3 years
  • No bad acquisitions or expansion in unrelated areas till now
  1. Promoters buying / selling shares, buybacks, splits, bonus?
  • On an average promoters have been selling shares which is not really good, one hand they are expanding aggressively and on the other they are selling shares almost consistently, since IPO promoter holding has reduced from ~60% to ~43% in the latest quarter

 

EXPECTED RETURNS:

  1. What kind of upside is possible in future? Time frame?
  • Company is growing well, in 3-4 years company plans to add ~100 centers across platforms, we could look at revenues ~450 cr and PAT ~80 cr, at a multiple of 20x, value 3-4 years out could be between ~1600 cr, this is assuming SSS and realizations don’t increase and remain stagnant, value could be much larger considering the built in operating leverage and if you factor in this increase in SSS & realizations
  1. Things which have to go right in future?
  • Management has to keep up the momentum of expansion of fitness centers
  • Eventually debt has to reduce, SSS & realizations have to increase
  1. Major risks?
  • Frequent dilution of equity and increasing debt levels are not good signs, company constantly needs funds to expand and grow
  • SSS & realizations are very poor, however management plans to focus on increasing the same in future
  • Increasing competition
  • In the next 3-4 years company has to pay back NCD principal amount, not sure of how that will be arranged, additional debt? Dilution of equity?
  1. When would you sell?
  • Frankly I don’t know, I would consider selling if growth slows or SSS & realizations decrease and if debt balloons out of proportions

 

SUMMARY NOTE:

The good

  1. Business is growing at a fast clip
  2. Cash flows are consistent and growing, margins and returns are decent
  3. Opportunity size is huge
  4. Organized players are gradually taking market share from un-organized players
  5. Good brand recall
  6. Built in operating leverage
  7. Shivanand Mankekar & family own 6% of equity ( It is possibly a relatively small part of their portfolio )

The bad

  1. Growth is there but its not too efficient, management plans to focus on increasing SSS & realizations, this is the real test for the company, want some indication of them increasing in future
  2. Increasing debt
  3. Not comfortable with some aspects of corporate governance & promoters, will monitor periodically
  4. Receivable days have gone up significantly

With due respect to all the bad, I feel there is substantial scope for growth and value creation in this idea

I am still contemplating whether to buy or not, I may start with a 2-3% allocation and increase as my conviction in the business and promoters increase.

Feedback is most welcome!

 

 

P.S: Some data has been missing due to unavailability of AR 2015, some numbers have been calculated, may differ when actual AR is out

P.S: Data sources – Internet, wikipedia, Company reports, HDFC research report 2014

P.S: All figures are consolidated except 2009, 2010

 

 

DISCLAIMER:

The views and opinions expressed or implied herein are my own and this is not a buy / sell recommendation, it is for educational and discussion purposes only, my views could change depending on new information.

As of now I am not invested in this company.

Registration with SEBI:

I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”.

 

 

 

 

 

 

 

The reading dose – 2

Here’s another set of articles and material which I have found very insightful and interesting.

1. The 400% man: This one is a very inspiring read, it’s about this guy called Allen Mecham, who, without any college education, no wall street contacts, operating from a small town in Utah ( USA ) beat most of mutual funds on wall street over the past 12 years, it teaches the importance of hard work, discipline, patience and simplicity.

2. Investing framework: Having a good framework to scrutinize ideas and companies is a must for any investor, this article has provided me with great insights and guidelines in order to deepen my understanding of ideas I am working with, I have used many of aspects of this in my own framework of analyzing ideas.

3. Finding Value: Whenever I get tempted and need to find my shoes on the ground, I visit Base hit investing, it really helps me stay disciplined.

4. Rejecting a stock: This remains one of my most favorite blogs to visit for deep insights into investing, this article deals with developing a framework to reject ideas, it’s a brilliant read, don’t miss it

Reading such material provides the foundation to building a good investing career.

Investing Framework

The information overload we face can be quite overwhelming, I find it really important to have a framework in place to filter and crystallize ideas, it enforces discipline.

Below, I have tried to consolidate my process to make an investing decision ( Seasoned and brilliant investors have helped me in this process through their selfless sharing of knowledge )

BUSINESS MODEL & INDUSTRY ANALYSIS:
  1. General intro about the company  ( Brief background, no. of production facilities, employees, etc )
  2. What is the business model? do you understand it? ( If you don’t understand it that well and if you still want to buy it, make sure the price you pay is really less compared to value )
  3. Is the business scalable? Can the products find a large number of customers? ( This is important, however again, if not scalable make sure you are buying with lots of operating leverage on the upside and current utilization is low )
  4. Where does majority of the business come from? ( Geography, clientèle ) ( It helps when client profile is well spread out and diversified in numbers as well as across geographies )
  5. Existing market share? expected 5 years out? ( Better if increasing, at least it must be stable, very difficult to make money of declining market share companies )
  6. Is the business capital intensive? ( Lesser the capital intensity the better it is, if you must buy a capital intensive company make sure, CFO, interest coverage is high and debt as low as possible and not to forget make sure you don’t pay a bomb to acquire it )
  7. Is the business heavily regulated? ( This is a good thing and a bad thing, good thing as it acts a entry barrier, bad thing because recurring interference is a pain, think airlines, alcohol, oil & gas etc)
  8. Name, Nature ( cyclical, secular ), size of industry? ( Own cyclicals when they are ugly and malnourished, not when they are fat and plump )
  9. Business ecosystem ( This is important, don’t be lazy, it’s going to throw useful insights into the business, preferable do this at the last just before the expected returns module )
FINANCIAL ANALYSIS:
  1. Growth in sales, profits, production capacity, realizations? ( Growth in all is very important, again if currently there is no growth make sure there is good build in operating leverage built in )
  2. Operating efficiency? ( check for margins, receivable, inventory, payable days, this is a good indicator to identify if the company has some edge over its competition  )
  3. Investing efficiency? ( check for ROE, fixed asset turnover , again its a good sign of competitive advantage )
  4. Capital structure? frequent debt & capital raising? ( raising too much debt is very risky and diluting equity too often is not a healthy sign, avoid both unless compelling reasons are there )
  5. Cash flow generation, free cash? ( very important, avoid companies that do not generate cash flows from its operations, free cash is a boon, market will always provide rich valuations for FCF + companies, also a sign of competitive advantage )
  6. Funding for growth? ( Substantial funding for growth should ideally happen through internal accruals, avoid companies which only rely on external sources )
  7. Red flags, concerns, contingent liabilities ( Read notes to account carefully )
  8. Other important observations from KPI ( Key performance indicators ) sheet
MANAGEMENT ANALYSIS:
  1. Key people in the management, promoter holding? ( Do some back ground check on key managerial personnel, promoter group ideally should have reasonable amount of their wealth tied to the company )
  2. Project execution & business expansion history? ( Timely execution of projects and expansion activities says a lot about the management, also check how management has tackled recession and problems in the past)
  3. Any deliberate adverse action against minority shareholders? Related party transactions? ( Watch out for amalgamation of subsidiaries, preferential share allotments to promoter group, too many related party transactions etc,)
  4. Compensation? ( 3-5 % is fine, don’t fuss too much about this unless there is something obviously alarming, think sun tv network )
  5. Ambitious? pursuing profitable growth? any diworseifications in the past? bad acquisitions? ( Beware of management getting carried away by growth, eventually many end up in a mess, think DLF, suzlon, ADAG companies, having said that also avoid companies with no ambition at all, think GM breweries,  )
  6. Management / promoters buying / selling shares? ( Naturally, you want them buying and not selling )
EXPECTED RETURNS:
  1. Brief note on why you want to buy / sell / hold ( If all / some of the above segments are in bad shape, there better be a really good reason for you to buy this company, for eg if a company is facing some temporary headwinds and has a strong probability of recovering think wockhardt, mcx, )
  2. What kind of upside is probable in future? Expectde returns? Approx time frame? ( if <100% in 3-4 years forget about it, look for something else, again there are always exceptions )
  3. Things which have to go right for you to make money on this idea ( fewer the better )
  4. Major risks?
  5. Under what circumstances would you sell? ( This is perhaps one of the most critical aspects of investing, risk is not only loss of capital but also loss of opportunity )

 

P.S : I am learning and evolving as an investor, constantly trying to improve, hence this framework is subject to changes.