CategoryUncategorized

Business model of Ratings agency – Crisil

By Rohit Chauhan
In Industry analysis, Uncategorized
September 11, 2005
2 Min read
1 comment
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I am looking at the financial numbers of crisil. My thinking was that CRISIL and any other rating agency would have a good business model. On looking at the numbers i have been completely blown away.

– Return on networth – 20 % +
– Return on capital employed in business – 80 % (approximate ). The company has about Rs100/share of investment
– Net profit is almost equal to cash flow as a rating agency would not have too much fixed expenses (other than offices which can be bought or leased)
– Not much of working capital requirement (close to zero)
– Net margins of 20% +
– Strong competitive advantage in the form of a strong brand name ( CRISIL or ICRA etc ). Any company wanting to get rated will have to go to these companies …sometimes to all of them ( and i cant think of new companies being able to get into this business easily)
– additional lines of business through these relationships with companies like advisory services, research services etc which provides additional revenue streams.

So if everything is so good , why not buy the stock …?? looked at the price and ofcourse the market is smart enough to recognise a good business. The stock sells at a PE of around 35. So it seems to be a great business available at not a great price. I will give it a pass ..but will continue studying the business model

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Impact of High petrol prices

By Rohit Chauhan
In General thoughts, Uncategorized
September 10, 2005
1 Min read
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I

Have been thinking of how higher petrol prices would affect indian industry. My opinion is that companies like FMCG / IT services / Telecom should not effected much , either due to their inherent pricing ability or because fuel costs are low for them and affect them only indirectly.

The above event should impact oil companies postively ( hopefully they will not go bankrupt). Commodity businesses may get impacted badly if the demand falters and the costs go up. Metals/ Cement / Steel etc could get impacted negatively.

Cant think of the impact on retail / Media and other such industries. They would have some second or third order impact ( less disposable income leading to lower demand ? ) …

I think the bigger impact could be on inflation and interest rates. I would stay away from fixed income funds for some time atleast. Also individuals with variable rate loans could be impacted. Will it impact the housing market …not really sure about it

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Pricing strenght – A key indicator of competitive advantage

By Rohit Chauhan
In Competitive advantage, Uncategorized
September 10, 2005
2 Min read
2 comments
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I was reading an interview of warren buffett a few days back. He was asked on what kind of businesses he prefers. His replied the ones where he can increase the price of the product ahead of inflation (he gave the example of see’s candies ). He also noted that one should avoid businesses where one has to pray before increasing the price by one cent (he gave the example of berskhire hathway – the textile company where they found it diffcult to increase prices )

The above comment got me thinking. Pricing strength of a business is a very powerful indicator of competitive advantage enjoyed by the business. Think of FMCG companies like HLL, P&G, marico . These companies have been able to increase their prices (although that ability has come down in recent past due to higher competition ). On the other end companies like steel , cement typically can increase prices only when there is supply shortage (which is only for a limited period of time)

I have found the above way of looking at a business a very powerful tool of checking if a business has enduring competitive advantage.

How about telecom companies or IT services companies …their pricing ability does throws up interesting insights ..although i have not been able to come to a conclusion

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How VOIP would impact the Telecom industry

By Rohit Chauhan
In Industry analysis, Uncategorized
September 7, 2005
1 Min read
6 comments
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Read this article on how VOIP is impacting the telecom companies (or could impact). The article focuses on the number of users switching to VOIP and that the traditional companies could see a fall of upto 25 % revenue in the next few years.


I think VOIP could be the disruptive technology often referred to by Clayton M. Christensen in his book ‘the innovator’s dilemma’ . This technology although just below the required performance levels of the regular telecom market is fast improving and moving into the rapid adoption phase. Now with microsoft, skype and google behind it , it should not be long before more rapid adoption happens.

all of the above should be great for the consumer, but what will happen to the telecom industry …i would guess that their entire business model could get disrupted in the next few years …what does this mean for companies like VSNL, bharti or reliance infocomm ?

some of them could face pain but would evolve with the new technology like reliance or bharti ..but i would not be too optimisitic for VSNL, MTNL and some others

i would be wary of investing in the telecom sector for a long term basis

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Kothari products ltd – A Net cash graham situation

By Rohit Chauhan
In Company analysis, Investment ideas, Uncategorized
September 6, 2005
2 Min read
3 comments
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I was running my screen in the year 2003 and came across kothari products. This was a company with 240 crs cash and equivalent (net of debt) on the balance sheet with a market cap of 80 crs ( i think they had 40 mn outstanding shares @ 170 rs / share). They currently have almost 300 crs (around 600 rs per share )

They were fairly profitable (although the profits were down). The market had beaten down the price due to legislation issues (The maharashtra government had banned Pan masala / gutka – their main products). The company was still profitable, although the profits had come down due to drop in sales. Its free cash flow is same as its net profit because Gutka and other tobacco products require little capex for plant and machinery or working capital. The main asset is the brand (in this case pan parag ). So their profits were pure cash for the owners


I bought the share at an price of Rs 160 – 170 a share and sold around 260 per share. The reason I sold was lack of information from the company ( their website is poorly updated in terms of financial results). In addition, I was not sure what the promoters were planning to do with the cash ( the promoters hold almost 70 % of the company).

So what’s the point of the whole thing …Its not that it was a profitable investment. Rather, although I made money on the whole thing, I did not have a very comfortable feeling with the investment. If I compare it with the other purchases I have done such as asian paints, or a concor which are good businesses with good management, this one made me uncomfortable as there was no transparency from the company. In the end I decided to get out rather than face an unpleasant surprise from the management.

My investment philosophy is closer to that of buffet where I end up buying good to great companies at fair prices and get a good night’s sleep. The above was an experiment in a graham style investment. It was profitable and based on a sound approach. But somehow requires more diversification and purchase in not so great enterprises.

Do you have a similar experience? please feel free to share with me

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Watchout investors !!

By Rohit Chauhan
In Uncategorized
September 5, 2005
1 Min read
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W

A new website from SEBI and ministry of company affairs which lists any non complaince or any voilation of guidelines or rules by people associated with any public listed companies. Great step towards transparency and investor eductation !!


watchoutinvestors.com is a national web-based registry covering entities including companies and intermediaries and, wherever available the persons associated with such entities, who have been indicted for an economic default and/or for non-compliance of laws/guidelines and/or who are no longer in the specified activity. This information which is presently disorganized, difficult-to-use and is spread across a large number of sources i.e. websites, databases, publications, notifications and orders of the government and of other organizations, agencies, courts of law, tribunals and commissions, has been aggregated, indexed, standardised ,reformatted and re-presented in a form and manner that can be accessed in a user friendly manner.

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Blogging for dollar – A new business model for individuals ?

By Rohit Chauhan
In General thoughts, Uncategorized
September 5, 2005
1 Min read
1 comment
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Came across this blog from darren. He seems to have made 100000 usd via blogging in the last 1 year. Seems to be an interesting business model. Can this become a full time source of income ? i dont think so ( and darren suggests the same).

But i think blogs can be become a powerful tool for small time entreprenuers and a creative outlet for a lot of people. In addition a lot of companies can use blogs for internal and external communication (with customers ). Microsoft seems to be doing so.

We may see some companies use blogs in addition to their website to get closer to their customer (experience marketing ?)

It would interesting to see how this medium develop. But it would be safe to say a handful will achieve prominence ( the ones which will pass the tipping point ??) , whereas the rest would remain a labor of love (or pain if you are in it for the money only )

there is an interesting post i read on mark cuban’s blog on a similar topic – podcasting

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Reading a book on Bill miller

By Rohit Chauhan
In Book review, Notable value investors, Uncategorized
August 23, 2005
2 Min read
2 comments
R

I have been reading a book on bill miller from janet lowe

A few things which I learnt

– It is critical to develop a multi-disciplinary model to evaluate companies. This is getting more important as new companies would have more intangible assets than tangible ones and would depend on network effects / customer lock-in etc to create value (like e-bay). even old economy companies will have some component of new economy companies (think about the website of most retailers )
– Importance of understanding business models of these new economy companies and avoiding slotting them into incorrect categories. Bill miller gives an example of amazon.com which is looked at as a retailer and as a result the market has got it wrong several times. According to miller, business model of amazon is closer to dell than walmart (although amazon is using the same wallmart strategy , but online – keep the gross margins constant and pass the benefits to the consumer to build scale )
– The market typically makes an error in evaluating a new business model and is slow to recognize it (but eventually it does). So an investor like miller who has the foresight , can beat the market on these companies (examples given were for dell and amazon )
– Concepts such as network effects, customer lock-in and increasing returns have been discussed briefly in the book with some example.
– Some example of companies which have both new and old economy models
– The book brings out bill miller’s capability to think independently and stand against the crowd ( there is an incident narrated in the book , where it seems in the baron’s panel , one of member asked if bill was drunk when he bought amazon in 2001 – eventually bill was vindicated on his decision

One the most important points which I learnt from the book was to develop an open mind on the new concepts which are coming up and the way they are being used by value investors like bill miller. The growth v/s value tag seems to be immaterial for any company as long as one can assess the intrinsic value of a company and buy it at a discount. Although I may find it difficult to apply these concepts directly, I think these new concepts would help me analyzing and appreciating the new business models which are developing

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