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.

The other side of risk

Risk is often assumed to be “volatility” (measure of variation of price over a period of time), which is quite bizarre, ask any trader, for him / her it is bread and butter. 

Volatility in stock prices creates opportunity, your actions create risk.

So what is risk

One aspect of risk is loss of capital, so when we buy into something which has a high probability of faltering and going down we tend to take more risk ( think : buying IT stocks ’99, real estate and infra ’07 )

There is another aspect to risk which tends to get sidelined.

Picture this, there are ~5000 securities to choose from (India alone), As long term investors, we will typically hold ~20-25 ideas in the portfolio (beyond which diversification loses its significance).

We are betting on the fact that this small portfolio at any given point of time, comprising just 0.5% of the overall universe of stocks available will beat the market consistently over the long run (Only referring to long term, not the short term variations)

  While buying into an idea we are faced with two kinds of risks:

  1.     Loss of capital: Risk of downside from purchase price
  2.     Opportunity risk: Risk of under performance relative to better ideas

So let’s say, I bought Reliance Industries in the 1st week of January, 2009 at ~Rs.700, 1st week of January, 2015, price is ~Rs.930, so 6 year CAGR works out to be ~5%, my fixed deposit did better.

There is no loss of capital and I even got dividends, however it turned to be a poor investment decision, opportunity risk was very high (think: returns in Pharma, IT in the same periods)

Historical market returns have been ~16%, our portfolio has to beat this to justify the extra effort and risk.

We have to find ideas where the risk to capital and opportunity are low and consequently the probability of market beating returns higher.

 

Investing Resources & Books – 2

This is the 2nd part of the series, you can read the first part Here

Books:

1. The little book that ( still ) beats the market ~ Joel Greenblatt

If you are just starting out, this is should probably be one of the first books that you read, it’s like a foundation course on investing and business. The central theme of the book revolves around the fact that one should buy high quality companies at discounted valuations, as the author says frequently throughout the book ” Find out what the company is worth and pay a lot less for it ”

The Dhandho Investor ~ Mohnish Pabrai

This book is another gem, the main idea the author tries to convey is how to differentiate between risk and uncertainty. I remember one of its quotes very clearly ” Heads I win, Tails I don’t lose much “. It also talks about the power and magic of compounding.

3. The little book that builds wealth ~ Pat Dorsey

This book is all about the various forms of competitive advantages a firm can enjoy which enables it to achieve super-normal profitability for an extended period of time. It provides a good insight into how to identify a business with superior fundamentals

4. The 5 rules of successful stock investing ~ Pat Dorsey

This is slightly more detailed and elaborate and covers a more broader scope of topics, it takes the reader right from the fundamentals of investing to the valuation of companies, all in 1 book. It’s a great book for people to get their basics right and develop a sound investment process

5. One up on Wall Street ~ Peter Lynch

It’s one of my favorite books, I have read this one multiple times, it often reminds me to keep things simple. It emphasizes on investing in companies you know and can understand. There are no complex jargon here. Highly recommended for everybody, no matter what stage of your investing career you are in, this is one book you simply cannot miss

6. The black swan ~ Nasim Taleb

I must confess that I haven’t read the whole book, It proved too heavy and complex for my understanding, however there was one key insight I was able to pick up from the book which also happens to be its main theme ~ The role and impact of highly improbable and unlikely events on our lives. As far as investing is concerned, it has helped me remain skeptical and alert for any potential black swans lurking around

By no means is this list complete and as they say learning never ends, reading is to an investor what water is to life.
Keep reading
Cheers

Investing Resources & Books -1

As the title suggests this post discusses briefly the various books and resources which have helped me in my investing journey

Disclaimer: I am not paid to write this and it’s not promotional material

Blogs & websites :

1. Rohit Chauhan’s blog( blog.rcfunds.com)
What I really like about this blog is its originality and the logic in the ideas it tries to convey, material is very engaging and forces you to think. Posts are tagged into variety of categories and it’s a treasure for anyone who’s seriously wanting to learn.

Must Read: Rohit used to share his investing template, you can still check if it’s there on the blog it’s the best thing you can lay your hands on. It just shows how hard a person is willing to work to generate market beating returns, there is no complex financial modelling here, it’s simple enough for anybody to understand and follow.

2. Prof. Sanjay Bakshi ( fundooprofessor.wordpress.com ) 

If you don’t already know, he is the father of value investing in India, inspired by Warren buffet and Charlie Munger, some of his lectures which he graciously shares through his blog are for a lack of a better word mind-blowing.

Must Read: Relaxo lecture series is the most profound material I have read on investing yet. It should form as compulsory reading material at every Post graduate course in management.

3. Ayush Mittal & Family ( www.dalal-street.in & www.screener.in ) 

Screener.in is probably the most useful tool for any investor focused on Indian markets, I can’t even imagine the kind of effort which has gone into creating something like that. Yes and it’s available for free ( well at least for now 😉 )
Dalal-street.in is my go to destination when I am looking for new ideas. These guys have a great knack for identifying beautifully simple businesses which have indeed proven to be very successful.

Must Read: There is a small tab called “talks” on screener.in, it’s a hidden gem, they compile articles and interesting posts from around the web.

4. Safal Niveshak ( www.safalniveshak.com )

Having personally attended his investing workshop, I have greatly benefited from Vishal’s ideas and his investment process.
It is a treasure trove of information and insights into the world of Warren Buffet and many other value investors. What really appeals to me is that it can be followed and understood by everybody.

Must Read: There are interviews which he has conducted of many brilliant investors out there. It will require some patience in finding them, however one should read all of them, in addition to that you can subscribe to the value investing course, it is money well spent.

5. Basant Maheshwari ( www.theequitydesk.com ) 

Although I don’t subscribe to his paid service yet, the website is by itself a brilliant learning experience, it has one of the largest and the most communicative forum, lots of new ideas to pick up.

Must Read: Basant Maheshwari has written a book called “The Thoughtful Investor” , it’s a good read.

6. Base hit investing ( www.basehitinvesting.com )

Although this blog doesn’t discuss stocks of the Indian markets, it has one of the most insightful material on investing.

Must read : Read the articles tagged “Investment process “.

What I really like about all of them is that they don’t advocate short cuts, they have been in this business long enough to understand that it requires just as much effort, patience and perseverance as any other line of work.
Every time I read through these blogs I come out wiser and inch towards being a better investor.

Stock Idea – South Indian Bank

About:

  • Incorporated in 1929, South Indian Bank (SIB) is a mid-sized bank in the private sector space
  • It operates a network of ~800 branches and ~1000 ATMs
  • Predominantly present in Southern India ( Kerala )
  • It has scaled to a business of 83,894 cr in FY 2014 at a CAGR of 25% over a 5 years period

Loan Portfolio:

  • 22% of the loans are RETAIL LOANS out of which majority are against gold
  • Around 50% of loans are in the CORPORATE segment
  • 28% of the loans are in the SME & AGRICULTURE space
  • It has quite a conservative approach, if you observe they have negligible exposure directly to sensitive sectors like real estate and almost all of them are in the housing mortgage space

Key Financials: 

Untitled

Reasons to buy:

  1. Management is managing risk quite well, Net NPAs<1% are really good, especially considering the recent slowdown and a very difficult macroeconomic scenario, bank is not sacrificing quality for growth
  2. In spite of that the bank seems to be growing and expanding quite well at a healthy CAGR of ~20% and expanding rapidly by adding new branches to have a pan India presence
  3. Profitability of the bank is very good, ROE is averaging at 18% over a 5 year period and NIM average is healthy too at ~2.5%
  4. It is well capitalized and its CAR stands at a comfortable 12.5%
  5. Another thing I like about SIB is that it hasn’t diluted too much equity in the past, this is one very critical element which we often overlook
  6. Management is quite transparent and clean, in addition to that the remuneration for the top brass is reasonable
  7. Its a professionally run bank, with no promoter holding
  8. It has decided to focus more towards the Retail, SME and Agriculture segments which has a high growth potential
  9. Other Income growing at ~18% CAGR will add a healthy fee based stable income to the bank’s bottom line and reduce earnings volatility
  10. Valuations are very attractive, for a bank growing @20% CAGR and having ROE @18% is quoting at a P/BV of 1.19
  11. Dividend yield of around 2.5% is quite good
  12. Mohnish Pabrai who is an investor I really admire for his style and Investment philosophy has recently invested in this idea

Risks and Concerns:

  1. The nature of the banking business is by itself quite risky, SIB however through its conservative approach is managing that risk quite well
  2. CASA ratio of the bank is quite low in comparison to some of its peers, this is very crucial to reduce its cost of funding, the bank is aware of this and taking adequate steps to increase the same
  3. Its Cost/Income is also on the higher side which the company should take steps to reduce
  4. If the macroeconomic scenario should not improve and remain sluggish it could impact its growth and profitability
  5. SIB has a high exposure to gold loans, which the company is taking steps to reduce

Conclusion:

  • Overall I think this idea should do pretty well over 3-5 years and compound at a decent 15% CAGR
  • True there are some risks and concerns, which is why we always look for margin of safety which is adequate in this case

DISCLAIMER: I am not in any way making any recommendation to buy/sell through this post, please do your own analysis and homework

 

Sources: Company AR, presentations, ACE EQUITY, third party reports