Talwalkarsbettervaluefitness : Analyis of the company based on 25 Fundamental Parameters
The below analysis cloud can rate the company on 25 fundamental parameters , select the rating of each parameter on previous 2 sheets.It is suggested that investor should rate each of the 25 parameters to cover each aspect of company's business.
Analysis cloud give weightage to each fundamental parameter.Weightage can vary from 3 to 5.Parameter with higher weightage will have bigger circle in the cloud.For e.g cash flow has weightage of 5 so it will have cirlce with maximum size.
Now rating of each parameter can vary from 1 to 5.Poor rating i.e 1 is shown in red and best rating is shown in dark green color.
Analysis cloud for Great Companies will be Green and that of average/poor companies will be red.So Your Company should have Green cloud , darker the green ,better is the company
|Click here to see all graphs|
Gross Profit(GP) Margin = GP/Sales For colgate india FY11 = GP/Sales = 1109/2381 = 45%
GP Margin varies from industry to infustry.Companies in Service industry may have high GP Margin like
infosys has GP margin of 45 , TCS has around 40.
Automobiles companies like Maruti has GP margin of 16-17%.
For Titan it is 20% , as cost of raw material (gold) is very high in this case.
Companies with GP Margin of 40% or better tend to be companies with some sort of durable competitve advantage. GP margin below 20% is a indicator of very competitive industry, where no one company can create a sustainable competitive advantage over others.
Great companies generally show consistent GP margin years over years.You should avoid companies which shows lot of variations on GP margins unless you understand the company business very well and if you have got an edge in the industry.
|1||Gross Profit Margin||2008--73%
|4||Company has healthy Gross profit margin , well above 40%.Main cost for gross margin consideration is employee cost.
Total income is increasing at a better rate than employee cost so GP margins are increasing
Operating profit or operating income is a measure of a firm's profit that excludes interest and income tax expenses.It represent the money which firm makes from operations.
Operating Profit (OP) = Revenue – Operating expenses.
Operating expenses = SGA + Depreciation + R&D Cost.
For e.g Suppose Company A has sale of 100 Cr, Cost of Goods - 60Cr , SGA - 10Cr, Depreciation - 5Cr , R&D expense - 5Cr
Then OP Profit = Sale - Cost of Goods - SGA - Depreciation - R&D expense
= (100 - 60 - 10 - 5 - 5 )/100 = 20Cr
OP Margin = OP / sales *100 = (20/100)*100 = 20%
In a given industry , Company With greater OP Margin is supposed to be better as the company is generating greater amount of income from Operations.
For e.g in IT industry Infosys has OP margin of 32-37% , TCS 27-34% , HCL 20% , Mindtree 13%.
In 2 wheeler industry , Hero MotroCorp has OP Margin 11-16 in lasy 3 years whereas Bajaj Auto shows 19-24 in last 3 years.
Great companies show steady Operating Profit Margins years after years and their OP Margin are generally best in the industry
|2||Operating Profit Margin||2008--40%
|4||Opearing margin are consistent and are more than 30% in last 5 years.OP margin have increased in last 2 years.Company is taking measures to control costs and it is evident from the results For last 2 years , income has grown at a avg rate of 33% whereas cost has increased at rate of 25%|
Net Profit or Net Income is a measure of the profitability of a venture after accounting for all costs.
Net Profit = Sales - Cost of Goods - SGA - Depreciation - Interest - Tax.
NP Margin = Net Profit/Sales * 100
For e.g is a Company is doing sales of 100Cr and Net profit is 22Cr then it NP Margin is 22%.
Infosys NP Margin is 27% , Colgate 15%, Maruti Suzuki 5-7% , Eclerx Services 34% in Fy11.
If a Company is Showing NP Margin greater than 15% consistently for last 5 years then it is very much likely that this company has some competitive advantage.
If NP Margin is less than 10% then company is either in very competitive industry or it is in industry which requires lot of cost on raw material , property, plant and machinary or it may be spending lot of money on R&D.
For e.g Titan has NP Margin of 6%.It is because that main source of Income for Titan is its jewellery business in which the cost of raw material , which is gold or diamond, is very high.So Despite being a Great Company , it has NP Margin of 6%.
NP Margin can very from industry to industry, for e.g Pharma and IT companies has high NP Margin but Automobiles and Heavy Machine industry has low NP Margin. The key is to look for the company with one of the best NP margin in the industry and moreover consistency in NP Margins for 5-10 years.
|3||Net Profit Margin||2008--11%
|4||Net Profit margin is respectable and has increased in last 2 years due to stringent internal
controls, effective cost cutting strategies
SGA means Selling , General and Admin Expenses
Under which company reports its cost for direct and indirect selling expenses and all general and administrative expenses.These includes management salaries , advertising travel costs . legal fees, commissions, all payroll cost.
SGA% = SGA cost /Gross Profit
Infosys SGA% cost is 16%, Titan 37%, Colgate 42%.Maruti Suzuki 14-23%.
Great companies do not show much variance in SGA cost , you can refer last 5 year data for these companies.
Ideally SGA cost should be less than 30% of Gross profit.
|4||Selling , General and Admin expenses||2008--6%
|3||SGA cost are under control|
All machinery and builings eventually wear out over time.This wearing out is recognized on the income statement as depreciation. For e.g a manufacutring company buys building, plant and machinery for 100Cr, assume that life expectancy is 10 years for property , plant and machines. Now (100/10) 10 Cr will be deducted as deprecation amount from income statement.After 10 years company has to buy new building plant and machinery with additional cost.Deprecaition cost vary from industry and tends to be high for manufacturing industry and low for service industry.
Depreciation % = Depreciation/Gross profit.
Cipla has Dep% of 8 , Titan 2-4%, Infosys 5-8%, Maruti Suzuki 14-20%.
Great companies generally have less depreciation and is less than 7-8%.
|2||Depreciation cost is slightly on a higher side ,equipments , furniture and fittings are the main depreciating items|
Interest expense is due the the interest that company has to pay on the debt present on balance sheet.Company may need debt for working capital or may need additional money for increasing capacity.For this debt , company has to pay interest.This interest expense is deducted from Profit of the company. Interest expense can depend on industry type.Automobilies companies like Tata Motors , Maruti need large plants and machinery and hence debt needs to be taken.
Good companies generally have Interest expense less than 15% of Operating Profit.This is not applicable for Banks and Financial institutions as their business in taking debt at low cost and giving loan at higher interest rate.
Interest % = Interest Cost / Operating Profit
Colgate has interest expense 0-2%, Tata Motors 37% for Fy11 , Titan used to pay 20% of its operating income in debt but now this cost has reduced to 8%. In any given industry the company with the lowest ratio of interest payment to operating income is usually the company with competitive advantage.
|3||Interest cost is becoming less as compared to Operating profit year by year which is a positive sign|
Net Profit or Net Income is a measure of the profitability of a venture after accounting for all costs.
Net Profit = Sales - Cost of Goods - SGA - Depreciation - Interest - Tax.
Good companies show consistent Net Profit which increases year after year.
Titan's Net Profit is increasing at a average rate of 34% for last 5 years.For Infosys it is 14% .For Jubiliant foodworks it increased at rate of 100% between 2007 and 2011.
For considering Investment in any given company , please check last 5 years net profit of the company.
Note that if company buy back its shares than its Net Profit may appear less compared to last years but it is very good condition which reflect that company is doing good and it has enough cash to buy back its shares.
You can check if company has bought it shares back by checking number of shares in Balance sheet for previous years.
|7||Net Profit growth rate for past years||2008--4.52 Growth 48%
2009--6.73 Growth 17%
2010--7.94 Growth 91%
2011--15.23 Growth 26%
|4||Net profit have been growing at average rate of 45%.Growth in 2011 was more as company got listed and additional funds were used to add more stores.In Fy11 31 stores were added as compared to 9 stores in fy10.So the growth was much sharp.Seeing the current trend of Fy12 and Q1 and Q2 of Fy13 , net profit should continue to increase at 20%|
Earning per Share is equal to Net Profit divided by number of outstanding shares.
EPS = Net Profit / Number of outstanding shares For e.g Titan has profit of 600 Cr in Fy12 , it has 88.77 Cr outstanding shares ,so EPS
= 600/88.77 = 6.75 Rs
We should look for atleast last 5 years of EPS figure to check if the company has competitive advantage. EPS is impacted by bonus shares , splits , issuance of more numbers of shares.
Bonus and Split do not have negative impact on shareholders but if Company keeps on issuing more and more shares to meet its capital needs then the company may be in the business which is capital intensive , requires lot of money for meeting working capital needs and for plants and equipments.The Company is generating less cash than what is needed.We should be very cautious in investing these companies.
|8||EPS growth rate for past years||2008--22.96 Growth 49%
2009--34.22 Growth -87%
2010--4.39 Growth 43%
2011--6.31 Growth 26%
|3||EPS growth has been fine|
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders.When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be distributed to shareholders. There are two ways to distribute cash to shareholders: share repurchases or dividends. Many corporations retain a portion of their earnings and pay the remainder as a dividend.
We shoud check the dividend history to see if company has been regularly paying dividends to its shareholders. Many companies prefer not to give dividends rather they spend the excess money on future expansions which should be fine till the time the company is able to generate good return on incremental capital invested in the business.
But when we are investing in company for its dividends then we should also check dividend yield.
If face value of Company's share is 10 Rs and stock market price is 800 Rs.
So if a company is paying 100% dividend which is 10 Rs then the yield on dividend will be 10/800 = 1.25% as this is the value which we are getting on our investment of 800 Rs per share.
|3||consistent dividend paying company , dividend yield is .63 in december 2012|
Inventory is the company's product that it has warehoused to sell to its vendors.Since a balance sheet is always for a specific day,
the amount found on the balance sheet for inventory is the value of the company's inventory on that date.
Cost of inventory mentioned on balance sheet may not be correct as the product might have become obsolete/outdated.
For e.g if the Garment company shows inventory of 400Cr then we may not be rely on this number as some of the Garments may have become obsolete and have no significance value but on balance sheet it is shown of full value.On the other hand if we take company in Jewellery business than inventory should be of reasonable value as more than 90% cost of the product is either gold or diamond.
Second important point about inventory that if inventory is increasing year by year then its sales and net profit should have the same or better growth rate than that of inventory.
If inventory is increasing at much higher rate than that of earnings and sales then it may be due to insufficient demand for Company's products and company may be finding it difficult to sell it products on desired prices.
|10||Inventory||2008--0.00 Growth 0%
2009--0.00 Growth 0%
2010--0.00 Growth 0%
2011--0.00 Growth 0%
How stable is the business of the company?
Does the company have any sort of competitive advantage?
Quality of Managment team and is the background clean?
|11||Business , Advantage and Quality of Management||Company is into organized gym , fitness center industry.It has 8-10% share of organised fitness market.Its first gym was set up in 1932.
Management has rich experience in this industry.
Madhukar Talwalkar , Executive chairman has 50 years of experience has 50 years of experience in health and fitness industry. He has been the Founder President of Greater Bombay Body Builders.
Prashant Talwalkar, Managing Director and CEO , has 25 years experience in marketing of health clubs.
Each of the director is taking 42 lakhs as salary as per fy12 data , which seems reasonable
|3||Talwalkers has first movers advantage.It is the biggest player in this industry and has 130 gyms as of q2Fy13.
Magagement is taking new measures to remain competive for e.g company has launched Hifi franchised model , it has launched ZUMBA fitness program.
Company has partnered with Miha bodytec, german company, to launch Nuform in India.Nuform uses electric simulation to strengthen and tone muscles.It trains all muscles in 20 minutes , once a week.
So management is taking measures to remain ahead in this industry
Current ratio tells about the liquidity of the company and also tells if it can meet the short term debt obligations.
Current Ratio = Current Assets / Current Liabilities
The higher the ratio , the more liquid the company.
A current ratio of over one is considered good and anything below one bad.
If it is below one , it is believed that the company may have a hard time meeting its short term obligations to it creditors.
Infosys current ratio is above 4, Colgate 1.09 , Cipla 2.26, Titan 1.32
Please note that lot of good companies often have their current ratio less than one. Bajaj Auto has current ratio is .88 , Hero Motorcorp .24 .Some may think that these companies might have difficulties paying current liablities.What is really happening that their earning power is so strong that they can easily cover their current liabilities.
There are many companies which have current ratio less than one but still they may be great companies which have tremendous earning power and they are using their earnings for long investments , good acquisitions instead of using their earnings in meeting working capital needs.So current ratio alone cannot tell much about the company we need to look at consistent earning power of the company also.
|Current ratio is fine.|
Debt to Equity
Debt to Equity ratio can tell us the relative proportion of shareholders' equity and debt that company is using to finance its assets.
D/E = Debt/Shareholders Equity.
Debt used above is generally the long term debt and does not include current liablities and provisions.
Great companies generally use their earnings to finance its operations and therefore should have less debt in comparison to equity. For non finance institutions D/E should be preferably less than .8.
Banks and finance institutions borrow large sum of money and then loan it back out, making money on the spread between what they paid for the money and what they can loan it our for.D/E equity ratio is of less relevance for financial institutions.
Infosys has D/E of 0 means no debt, Titan 0 , Maruti Suzuki 0.02 , Kingfisher Airlines(KFA) -2.39 , minus as it has negative shareholder equity. KFA is making losses from last 8 years and all these losses are subtracted from shareholders equity. Vadilal Industries 3.29.
We should note one more point here that some comapnies can show less D/E due to buybacks.
There may be a very good company which is having very low debt but still D/E can be high.This can happen when company has tremendous earnings and company is using its earnings to buy back shares.This buyback decreases its retained earning/equity base leading to superficial high D/E. So we shoud check if company has bought back large amount of shares in past if D/E appears unusual.
|13||Debt to Equity||2008--5.64
|2||Company is in expansion mode , it needs money to add stores.Average expenditure required to set up 1 gym is 2 crore.Company is adding more than 30 stores for past 2 years and it is adding more stores now.
Company issues debentures worth 25 crores in fy12.
Company has 129 Cr debt as of september 2012
Besides knowing debt/equity ratio , it is also important to know how much debt company needs to pay and whether it has capability to repay its debt.
Consider an example in which a manufacturing company has 5000Cr in Debt.This money was used for building new plant and machinary.Now if this company has shown average net earning of 250Cr earnings in last 2-3 years then it should ideally take around 5000/250 = 20 years to pay its debt.Here we have assumed that earnings are not going to rise exceptionally.
Even if we consider than earnings will increase at a rate of 20% even then it will take 9 years to just pay of its debt assuming that entire earnings is used to just pay the debt.
As a general rule if debt/earnings ratio is greater than 6 then we are dealing with business that require lot of money for operations and moreover the business is not generating enough money
|2||As mentioned above , company is in expansion mode so it needs to add debt every year to add more stores.Company is not able to fund expansion from earnings.|
A company can have a lot of sales and Net Profit on income statements but still may be deprived of cash so it becomes important to check cash flow of the income along with income statements.
Cash flow from Operations and Free Cash flow are 2 important parameters which are calculated as
Cash flow from Operations = Net income + depreciation+ amortization+ other non-cash charges(income) - increase in working capital
Net working capital = Net current assets - current liabilities
A company may be showing lot of profit on income statements but it may be having problem in getting money from the sales of goods in this case net recievables will increase drastically so cash from operations can tell us the true picture. We should check how Cash flow from operations is doing against net profit.
Cash from Operations should ideally be greater than net profit so check the track record of net profit vs operating cash flow for past years.
Free Cash Flow = Operating cash flow - capital expenditure
Capital expenditure are outlays of cash in assets that are more permanent in nature - held longer than a year-such as property, plant and equipment.They can also include intangibles like patents , rights.Capital expenditures are recorded on the cash flow statement under investment operations. Great companies use a smaller portion of its net earnings for capital expenditures for continuing operations. If a company is historically using 50% or less of its annual earnings for capital expenditures then it is likely that company has some sort of advantage in its favour.If it is consistently using less than 25% of its net earnings for capital expenditures than even better.
|15||Is the Company generating free cash flow? Capital Expenditure?||Capex
|2||Operating cash flow is positive and is inline with net profit but free cash flow has been negative for last 4 years.
It is due to adding of more gyms as well as investment in subsidiaries.Moreover all this expansion is done using lot of debt which is not so positive.
ROE & ROA
Return on equity (ROE) refer to net profit generated on each unit of shareholder equity. ROE = Net Profit / Shareholders equity
It measures management effecieny in allocating resouces to generate more and more profit. Great companies show higher than average ROE such as 20-25%. Titan has ROE of 41% , TCS 38-44%, Maruti 16%, Cipla 14%, Gitanjali Gems 9%.
Some companies use lot of debt to support its operations and this can result in high return on equity. But we should avoid companies which are using lot of debt to increase its earnings.
For e.g Suppose a company A has equity of 100 Cr and Net earnings of 20Cr so ROE is 20%. Company B has 100 Cr equity and 200 Cr of Debt and net earning of 25 Cr , now ROE is 25%. Company B shows vurtually high ROE as it is using lot of much higher debt compared to equity.
Return on assets (ROA) indicates how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets
ROA = Net Profit / Total Assets
ROA is an indicator of how profitable a company is before leverage, and is compared with companies in the same industry. Titan has ROA of 41% , Infosys 28%, Gitanjali Gems 6%.
|16||Return on Equity & Return on assets||Return on Equity
Return on Assets
|1||For the last 3 years ROE is around 13-18% which is low.
Company is using lot of leverage to fund its expansion.
Return on assets is very low at 7% which is very low for company in service industry
Long term graph of a stock can tell a lot about company.
Great companies do not generally show lot of spikes in the long term chart and their chart follows the earnings of the companies.
If there are unusual spikes we should check if the whole market is following same or it is just the concerned company. If there are unusual spikes during a particular then we should check the news and earnings of that company in that period. It may happened that company was suffering from a temporary problem due to which stock price was hammered but it got rebounded when the problem got resolved. What we should check if that problem should be a temporary one , if a company was facing a long term problem like losing its ground due to large number of competitors , or slowdown in the industry then stock price may have not rebounded.
Companies in cyclical industry shows lot of up and down in the stock price. Prices fell sharply when economy is declining and they rebound when economy is on the rise.
Sun Pharma has a shown a very good chart for last 10 years , same for ITC and Colgate. These companies has shown that they were not very much impacted by various sow downs that we have seen in last 10 years.
|17||graph of stock price||the graph is not much consistent.The stock got listed at around 140 Rs.It has all time high of 223 and low at 108 Rs.||2|
Company's Net Profit can either be paid out as dividends or can be used to keep the business growing. It can also be used for buy back the shares.When it is retained in the business, it is added to balance sheet under shareholder's equity, called Retained Earnings or Reserves.
Reserves (current year) = Reserves (previous year) + Net profit - Dividend
If company is making profit after paying dividends then reserves will keep on increasing year after year.
If the company makes loss in a year and this loss is subtracted from reserves causing depletion of reserves.
Analyzing the growth of retained earing is a important factor while analyzing the company.
Titan's Reserves have been increasing at average rate of 36% for last 5 years , for Colgate it is 30% , Maruti - 20%.
Reserves can also be increased when one company acquires another company , in this case retained earnings of both the companies are added to the balance sheet. Company can use it retained earnings/ reserves for capacity expansion Or it can use access cash to invest.
It can invest it long term bonds, stocks , real estate ,fixed deposits or can acquire other companies.
Long term investment can also reflect investment in the company's affiliates and subsidiaries.
A company long term investments can tell us a lot about the investment mind-set of top management.
Do they invest in business that have durable competitive advantage or do they invest in business that are in highly competitive markets?
Beware of companies that use excess cash to make ambitious acquisitions as it can erode the entire reserves of the company.
We should also look at the revenue , profitablity , return on equity and competitive advantage of the acquired company.
You can get details of long term investment in the balance sheet of the company.
Check how company is using its retained earnings based on above points
|18||retained earning growth rate and its use||2008--9.68 Growth 92%
2009--18.59 Growth 29%
2010--23.99 Growth 319%
2011--100.66 Growth 15%
This ratio shows the relationship between the stock price and the earnings of the company. It is simply calculated as stock price divided by earning per share.
Trailing p/E - in this stock price is divided by last 12 months eps.
Forward P/E - in this stock price is divided by forecasted eps for the next 12 months. P/E ratio can be thought of as the number of years it will take the company to earn back the amount of your initial investment assuming that the company's earning remains constant.
P/E ratio is often useful to measure any stock is overpriced , fairly priced , or underpriced relative to company's money making potential.
p/E varies from industry to industry for e.g FMCG are currently priced in 35-40 PE , Software companies used to have PE of 25 before 2010 but now are running at PE 15-20 as the whole IT industry has slowed down a bit.Automobiles generally have PE 10-14 etc.
The P/E ratio of any company that's fairly priced should equal to its growth rate.If TCS is having a P/E ratio of 20 , we would expect it to grow at 20% per year.
Below is the useful table to describe various ranges of P/E
N/A - A company with no earnings has an undefined P/E ratio. By convention, companies with losses (negative earnings) are usually treated as having an undefined P/E ratio, even though a negative P/E ratio can be mathematically determined.
0–10 Either the stock is undervalued or the company's earnings are thought to be in decline. Alternatively, current earnings may be substantially above historic trends or the company may have profited from selling assets.
10–17 For many companies a P/E ratio in this range may be considered fair value.
17–25 Either the stock is overvalued or the company's earnings have increased since the last earnings figure was published. The stock may also be a growth stock with earnings expected to increase substantially in future.
25+ A company whose shares have a very high P/E may have high expected future growth in earnings, or this year's earnings may be considered to be exceptionally low, or the stock may be the subject of a speculative bubble.
Avoid companies with unrealistic P/E ratio , some companies may be operating at a P/E of 40-60 or even more.Market is assuming that these companies are going to grow at 40-60% per annum.In most cases , companies fail to deliver that much growth
|19||P/E ratio||As of december 2010 , stock has consolidated PE of 16.89 , which seems to be high of small cap company of market cap around 500 cr.||2||Company still needs to do lot of work to improve ROE and reduce debts.Once these 2 are improved then PE can be re-rated otherwise currently PE is not cheap.|
Intangible assets are assets we can't physically touch; these include patents , copyrights, trademark, brand etc.
Brand value is one of the most important parameter for the success of the company.
The important point about brand value is that it is not considered as a asset on balance sheet. Titan , Asian Paints , TCS also these companies have tremendous brand value due to which they can sell their product and services at a premium compared to their competitors and hence can enjoy better margins.So this piece is hidden which is not present in financial statement and can only be found out by doing research on the company and its industry. One can mention brand value as a asset on balance sheet if this brand value is acquired through acquisition.
For example , if a company A buys a Company B , which has book value of 100Cr. Company A pays 300Cr to acquire Company B.Now this extra 200cr has been paid for the brand value and it will mentioned as goodwill asset of 200Cr on the balance sheet of company A.
Internaly developed brand value is not mentioned as assets on balance sheet. We should look for companies which have good brand value.Asian Paints , Titan etc have brand value of thousands of crores due to which they enjoy leadership in their respective industries. Check if company has good brand value and other intangible assets
|20||intangile assests , brand value and does a company have advantage over others||Company has first mover advantage and it has got good brand value.
It is now also issuing corporate membership.
|4||First mover and good brand value is the advantage over other known players.|
when insiders are buying then it is positive sign which indicates that company's management believe in the business of the company.When management owns stock , then rewarding the shareholders becomes the first priority , whereas when management simply collects a paycheck, then increasing salary becomes the first priority.
When you see that even the employees of the company are buying the shares of the company then it could be highly positive.Employees have edge than normal investors in terms of better knowledge about operations of the company and it is generally a positive sign when they buy.
Buying back Buying back shares is the simplest way a company can reward its investors.Due to buy back , outstanding number of shares get reduced which have positive impact on EPS. Buying back of shares also stabilizes the share price if it is on the fall for a while.
|21||are insiders buying the stocks , is company buying back shares , are mfs holding this company||Promoter holding is 59.47% as of Q2 fy13.
No insider buying.
No buy back of shares instead company is issuing more shares and more debentures to fund it s expansion.
Mutual funds holds around 9% shares as of FY12 data
We can divide company into various types like low Growth, Stalwarts, Fast Growers , Turn arounds , Cyclicals based on its growth rate.
Low Growth - Big Companies which are growing at a low rate , 3 to 5%
Stalwarts - Big companies which are growing at a rate of 12-20%.These are generaly powerful companies with stable business model.E.g Infosys , TCS, Cipla , Sun Pharma , Tata Motors , ICICI Bank etc.
Fast Growers - Companies which are growing at more than 20% annually.These companies are in their early stages , some of them will become Stalwarts , Some of them may not be able to sustain and may become a mediocare company.These companies are most risky to invest in but have the capability to offer maximum returns on investments.E.g Jubiliant foodworks, Thangamayil , Baja Finance, Manappuram Finance
Turn Arounds - Companies which which were doing good earlier but now struggling or Company which were in bad condition earlier but are now recovering can be put in this category.E.g Satyam is a example of company which was struggling in 2009 but it has start showing recovery from 2012.
Knowing the growth type of the company helps us to calculate the potential upside in the investment. For e,g stalwarts may give 20% returns annuals and investment is less risky , on the other hand Fast grower can become a multibagger in span of 3-4 years but he risk is higher.
Room for Expansion If we are buying company as it has shown good growth in the past then we should if the company can still grow further. For e.g a company may be into fast food business , it has added more than 1000 food chains in last 15 years and has been growing at a rate of 20%. In these 15 years , it has already opened food chains in almost all cities.Now we should see if the company can still grow further and till what extent? It cannot keep on adding more and more chains so it might have to change it business model like offering new dishes etc.Here growth may be compromised in future.
|22||Growth type of company and room for expansion
Impact of Industry parameters and Government policies
|Company is in expansion mode.Number of gyms have been increased from 30 in Fy07 to 130 in Q2 of Fy13.Its gym are present in 68 cities spread over 18 states.Company is still adding more company owned gyms as well as franchise based gyms||4||Company has introduced new strategy to expand in smaller cities.It has introduced new franchised based gyms under the brand HiFi.With no capex, only pure franchise income and a scope to open a large Talwalkar gym in future, HiFi business model shall enable the company to enter in smaller markets of India.Company has 8 Hifi gyms as of Q2 fy13.
We should appreciate the fact that there is a business behind every stock.If the underlying company does well the stock price will follow the positive momentum and vice versa.
So it is important to know about the basic business of the company , to know about its business cycle , dependency on raw materials , operating costs currency fluctuation etc.There are infinite number of parameters but we should be able to identify and understand the main parameters which are responsible for the business of the company.
Some people have edge in a particular industry and for them it is easy to invest in that industry.Do you have any edge in this industry?
For e.g if somebody is working in telecom industry then he would be knowing about other players in the industry and may also be knowing which company is performing best in the industry and why? This gives huge edge to the person over other investors who are just following the financial statements and have less practical knowledge about the industry.
One more point that we should look is that what do we know that market has not already factored in the stock price. For example Jubiliant Foodworks was trading at a PE of 75 in oct 2012 month , market has already factored all future growth of the company.
In this particular case lot of growth has already been factored.So now why do we think that this stock can go further? We should list all reason as in why we think market has not got the stock price right and why do we think that future market price would be better than current price which market is offering.
|23||do you understand business , do you have edge in this industry,what do you know which market does not know||Business it to provide fitness services.
Company has 90 owned gyms, rest are owned by subsidiaries and franchises.
It is the biggest player in India.
No insider edge.
Before investing in a company, it makes sense to a take a look at competitors in the same industry.
We should compare the Gross Profit Margins , Operating Margins, Debt/Equity Ratio and Sales / Profit growth rate for past years.
This can tell how the company is performing compared to its competitors. We should also know the market share of each of the company.
In most cases , the company with largest market share is the industry leader with better margins. For e.g Asian paints is the leader in paint industry , with better growth rate and better margins than all of its competitors. But it can be other way round also for e.g In sanitary ware business , among the listed companies , hindware has the largest market share but its margin and growth rate is inferior to much smaller player Cera Sanitary ware , which is continuously increasing its market share.
We should analyze why a particular company is doing better than its competitors and why it will continue to do so.
|24||Competition||Talwalkars is the only listed comapany in this industry.
Other players are either non listed domestic players or international players.
Gold gym , international player, has 65 gyms in India as of 2012.
Talwalkars has 130 gyms.
|4||This industry is still unorganized , there are large number of small ,local players
but now the trend is shifting towards organized players due to brand awareness and rising disposable income
What the company does ? Why do you think that it will grow in future ? What are the factors by which company's business can be impacted. Is the industry stable , is the industry growing ?
For e.g Energy companies had their time in 90s .Telecom had their time from 2000- 2010 , now companies in telecom industry are in strong competition.Information Technology has almost seen its best part from 1995 to 2010 now the industry has become stable and is growing at 10-12% rate. We should have strong reasons to believe that the company will continue to grow in future and can mention all these factors in this section.
|25||what company does ,your story on company , why do you think that company will become better than what it is today, or any other point||Company is positioned well for the growth , it is growing at a fast rate adding more than 20 gyms per year.
It has advantage of first mover and it is the biggest player in organized market.
High capex needs
Low Net profit Margin
Low return on equity
High Depreciation cost
|2||We should wait before we invest in this company.Let it improve margins as well as ROA and ROE.
Earnings are not sufficient to fund expansion and lot of debt is being raised to add more gyms.We need to see if these new gyms can really turn into profitable entities which are able to pay off the accumulated debt.As per the current situation , more than 6 years will be needed to just pay off the debt assuming all earnings are used to pay off the debts
Other important point is that revenue is increasing mainly due to addition of new gyms.
If you see the attached table increase is revenue is just following increase in number of gyms.It reflects that revenue from existing gyms is not increasing which is not so positive.
So as time passes revenue from same gyms should increase as the business is still in early stages
This indicates the overall rating of the company after analyzing the business , financial strength , management quality , growth and other fundamental parameters of the compan y.
Give ratings from 1 to 5 where
1 means a very average company with low growth , low return on equity, needs lot of capital expenditure and have no competitive advantage.
5 means a company with good growth , good cash flows , good return on equity , exceptional brand value , needs very less capex and working capital and have bright future prospects.
|Overall Fundamental Rating|
This indicates the valuation rating of the company Give ratings from 1 to 5 where
1 means that stock price of the company is at very high valuation compared to business prospects of the company and there is either no upside in near future or stock price can go down in near future
5 means that stock price of the company is at very low valuation compared to business prospects of the company , hence lot of upside can happen.
|Abhishek says :|
|I have tried talwalkars gym in pune.It is a decent gym with good equipments and trainer.
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