January 2019 Newsletter

<This is an extract from our January 2019 newsletter to clients>

Investor Behavior – We won’t sell at a loss

In the current market conditions, there are times when we must exit positions at a loss. There are periods when we book profits consistently and then there are periods, when we exit many positions at a loss.

When we give exit calls, a few investors do not exit the positions. They exit some, they hold the balance for the cost price to come. This is not the best habit to have as an investor. There are reasons why we exit a position, if we knew that the cost price would eventually come back, we would not exit! We would instead add more and hold.

The problem is that investors do not take a bird eye view when it comes to looking at the portfolio returns. They look at the returns of each stock in the portfolio. We will use the example of Cricket to explain this behavior.

India has posted a strong score of 296 and the run-rate is > 6. It is like a portfolio that has delivered a 15% CAGR over a 5-year period. As a viewer, you will be satisfied with the result. However, if this was your portfolio’s performance then you would not be impressed.

Out of 10 players, just 3 players scored most of the runs. A century, two half centuries and the rest of the players did not even cross 15 runs! Imagine if your portfolio delivered a 15% CAGR and just 3 stocks of out 10 were the reason for the return. Instead of being happy with the returns, you would question why 7 stocks failed to deliver returns.

With any portfolio, like a cricket team’s score card, you will have most of the returns coming from a few stocks. The other stocks would end up in a loss or deliver sub-par returns. You cannot expect most of the stocks to deliver a strong performance. That is why we have different allocations to each stock.

When it comes to stocks, never get emotional.

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Cheviot Company – Stock Analysis

We recently came across Cheviot Company in our smallcap radar. The company’s promoters are the Kolkata based Kanoria family who hold a 74.99% stake in the company. The family has varied business interests in the tea, jute and leather sectors.

Cheviot Company Business

Cheviot Company is primarily in the business of Jute. The company has 2 plants which are located in the 24 Parganas (South) district of West Bengal. Under Jute Packaging Materials Act of 1987, it is compulsory to use 100% jute bags (before November 2018, this was 90%) for packing food grains of consignment size of 10-100 KGs and 20% of jute bags for packing sugar consignments of 25-100 KGs.

Exports contribute ~ 35.5% of the revenues as per FY18 numbers. The export revenues are stagnant since FY12, thus the % share of revenue from exports is going down. Jute sacks have low margins while hessian fabrics and jute shopping bags have higher margins.


The raw prices of jute affect the prices of finished jute products and thus affects the top-line of the company.

Cheviot Company Financials

5 Year Financial Snapshot

The company’s EBITDA margins are stable and at par with other well run jute companies. Also, the company derives significant other income from it’s investments. In small companies with high promoter holding, we need to look at the remuneration of the directors with respect to the profits and the employee expenses of the company.

Cheviot Company Remuneration

Director’s Remuneration Table

The remuneration spike in FY18 is because of the remuneration being paid to Utkarsh Kanoria. He is the promoter’s son and was appointed as a director in the company in FY18.

Statistical Bargain?

Rs 290 Crores worth of investments

For a company with a market capitalization of Rs 455 Crores, you get net investments worth Rs 290 Crores. That means, you are paying Rs 164 Crores for the core jute business. This business generated a Profit before tax of Rs 50 Crores in FY18. This basically means that the core business is available at a PE of ~ 5. However, considering the slow growth rate and cyclicality of the jute business the PE would be in single digits.

Also, the current Price-to-Book ratio of the company is 0.87. Our view is that the stock trades at a fair value. Moreover, considering the slow growth rates, the stock would not command premium valuations. If we could get the stock for 20% to 25% lower than the current price, we could call it a statistical bargain. Investors can have the stock on their watchlist.


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How to invest Rs 5000 per month

Invest Every Month The benefits of investing every month in a systematic way are many. It makes you more disciplined, it helps you take advantage of market volatility, it is a lesser burden on the pocket, etc. The most common amount that a middle class person wants to invest now days is Rs 5000 per […]

PVR Ltd Stock Analysis

In this blog we analyse the PVR Ltd stock. PVR (Priya Village Roadshow) operates India’s largest multiplex chain. It has ~ 625 screens in 134 theatres across 51 cities. The company has a 40% share of the Hollywood screening and 25% share of the Bollywood screening in India.


India is the 5th largest box office market in the world, just behind UK.

PVR Ltd Stock Analysis

India is set to overtake UK and Japan soon

Hindi movies alone contribute ~ 40% to India’s box office collection. The exhibition space is still dominated by single screens although their share is reducing sharply. Single screens and Multiplexes generate 50% each of the total sales. However as ~ 400/500 single screens are shutting down every year, multiplex chains would become the major contributors.

PVR Ltd Stock Analysis

Single screens are decreasing in numbers

The number of screens per million population in India is 8. Brazil has 10 and China has 26. PVR, Inox, Carnival and Cinepolis are the dominant multiplex operators. The multiplex chains are rapidly adding more screens and the count is changing every week.

PVR Ltd Stock Analysis

*As per latest data

Food & Beverage segment is an important contributor to the revenue of multiplexes. Some of the large multiplex chains make 30% to 35% of their revenues from food & beverage. However, Indian multiplexes are below this range. Indian movie watchers are consuming more than just the regular popcorn and coca cola now days. Many multiplex chains are coming up with gourmet cuisines to cater to the taste buds of movie watchers.

F&B – Long way to go

Financial Performance

While the PVR Ltd stock is close to all time highs, are the revenues and profits moving in line?

PVR Ltd Stock Analysis

In Rs Crores

  • PVR has posted impressive growth numbers over the last 5 years
  • The EBITDA margins have improved and the company is paying tax at full rate
  • The company is on an expansion spree and thus has accumulated negative free cash flows
  • Box office collection makes up ~ 55% of the revenues


PVR Ltd. has used debt to purchase other multiplex players in the past. The company acquired SPI Cinemas in August 2018 to strengthen it’s position in the Southern India market. The cost of acquisition varies greatly from region to region. For example, screens in NCR region have a higher average spend than those in southern region. Moreover, many regions have caps on ticket prices too!

Cost of acquisition varies significantly

While doing the PVR Ltd stock analysis, we need to be careful in the analysis of investments and capital expenditure. This avenue is a grey area and can be mis-used to siphon away funds from the company. The company is investing more cash than it is generating, thus there is a high reliance on debt.

PVR Ltd Stock Investment

The revenue of PVR depends on the box office collection of films in India. For footfalls to increase, the content being offered has to lucrative. PVR has demonstrated it’s ability to increase the average ticket price and average spend per head over a 3 year period. Also, the opportunity to grow at double digits is huge because of the tailwinds. Higher disposable income, more spend on food and beverage, ever growing box office collections are strong tailwinds for the multiplex industry.

Return Ratios

PVR Ltd’s return ratios are bad from an investor’s perspective. Since 2005, the company has made an ROE of more than 15% just once! Ideally, a company with a strong franchise and a strong business would make more than it’s cost of capital. PVR Ltd. becomes a very risky investment for the long term portfolio.

PVR Ltd. has been going through a rapid expansion phase. Inline with the industry, PVR has been acquiring companies and adding screens which requires heavy investments. In this growth phase, the industry itself is witness low return ratios.


PVR Ltd is richly valued at a consolidated PE of 53. The EV/EBITDA is ~ 18x and the investors are assuming a very strong growth in earnings over the next few years. However, the peer company Inox Leisure trades at much cheaper valuations.

However, the valuation gap has historically existed due to multiple factors. Higher average ticket price, better presence in regions of higher spending and more number of screens give PVR the muscle to command a higher premium.

We have PVR on our watchlist. It is a proper long term structural growth company but the valuations are expensive for a stock that generates no free cash flow and has very low return ratios. Moreover, the talks of allowing outside food in multiplexes could hit the stock price.

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Whirlpool of India Stock Analysis

Whirlpool of India stock is one of the finest quality stocks on our watchlist. The stock ticks of on most of the fundamental parameters. It has also posted decent growth numbers over the last 3 and 5 years. But the stock is expensive. The industry in which it operates will benefit tremendously with the rise in per-capita GDP and higher consumer spending. The current GDP per capita is $ 1,963. Different studies peg the 2023 GDP per capita to be between $ 2,800 and $ 3,300.

Industry Details

The Indian appliance and consumer electronics market (ACE) was worth $31.48 Billion in 2017. Smartphones made up $17.66 Billion of this market. The growth rate for the ACE industry is pegged at 9% p.a. till FY23. The volume growth in the manufacturing of the white goods is as given below.

LG has a ~ 35% market share in refrigerators and washing machines. Samsung is the second biggest brand in the refrigerator and washing machine market. Whirlpool’s market share is estimated to be at ~ 18%. However, many brands in the past have fallen from their peaks in the electronics and consumer appliances market. Whirlpool’s strength lies in the economic segment where the refrigerator prices are below Rs 25,000. Since FY14, their push into the rural markets has helped grow revenues and profits.


  • 70% of the refrigerator market is “Direct Cool” while the remaining 30% is “Frost Free”
  • The estimated market size of the refrigerator industry is $3.02 Billion and it is expected to reach $5 Billion by FY23. The penetration in India is ~ 9%
  • The refrigerator market has grown faster than the consumer durables industry
  • Estimates say that 75% of the refrigerator demand comes from urban areas

Washing Machines

  • Washing Machines are perceived as a luxury
  • Urban areas make up the major chunk of the demand

The top 5 players enjoy more a combined market share of more than 75%. In air conditioners, the competition is intense and the market is fragmented.

Industry Trend

Till FY13, the white goods and home appliance companies were facing a tough economic environment due to high inflation, lower consumer spending and a lower margins. However post FY14, the growth figures, margins and ROCE improved for the entire industry.

Despite the hiccups of Demonetization and GST implementation, the consumer spending in India picked up. Moreover with better pricing power and lower raw material costs, the EBITDA margins of these companies has expanded.

Industry trend analysis

Whirlpool of India Stock Analysis

Whirlpool of India Stock Analysis

  • Whirlpool’s revenues have grown in the 10% to 12% p.a. CAGR range over the last 5 years. The growth rate has picked up in the recent years
  • The raw material and input costs have reduced and thus the EBITDA margins have improved from 2.6% in FY14 to 12.7% in FY18
  • The company has demonstrated it’s ability to convert profits into cash and has been able to meet it’s capital expenditure from internal accruals

As per the latest results, the company’s revenues grew by ~ 8% in the 6 month period ended 30th September 2018. The EBITDA margin expanded due to lower raw material costs while higher other income pushed up the PAT margin.

Whirlpool of India derives it’s revenues from 4 segments. The share of refrigerators has come down. Meanwhile “other home appliances” has become 13% of the revenues.

Operating Efficiency

Whirlpool has maintained it’s operating efficiency by reducing it’s receivable days and maintaining it’s inventory turnover ratio. The company has a healthy current ratio of 1.75. It has cash reserves of Rs 983 Crores as on 30th September, 2018. However, one should note that Whirlpool of India stock doesn’t have a high dividend yield.

The company imports a major part of it’s raw materials. In FY18, the company imported Rs 1,157 Crore worth of raw materials and stock in trade. However, the exports amounted to just Rs 288.48 Crores. The company’s margin could be affected by any sharp depreciation in the value of Rupee. But till now, the company has demonstrated pricing power.

Whirlpool of India Stock Analysis

If we look at the valuations, Whirlpool of India stock is not cheap. It commands a premium valuation, just like other consumption theme companies.

PE Ratio: 45.19 (20th November, 2019). The expected growth rate of the earnings is 18% to 22% over the next four years. However, there is an underlying risk that a new entrant in the industry can reduce volumes of existing players. In our VIP Industries stock analysis we saw how Xiaomi’s effect on the luggage sector. Xiaomi, flushed with funds, is looking to enter into the home appliance space. Competitors like this are a big threat to incumbents.

The very news of new entrants in the industry could result in de-rating of the Whirlpool of India stock. However, there have been examples like Maruti too which have gained market share despite competition. On the upside, Whirlpool of India can benefit from a rising per-capita-GDP and higher GDP growth numbers. Also, when the GDP growth averaged > 8% between 2007-12, Whirlpool’s topline grew by 15% p.a. in that period.

Will you invest in Whirlpool of India stock? If yes, then how much portion of your portfolio will you allocate to Whirpool?

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Lessons of Investing

Investing can be a rewarding journey if done the right way! Here we present 5 important lessons of investing which every investor should learn / be aware of.

i) Start Early

The best time to start investing was yesterday. The next best time is today! The earlier you start, the better – Thanks to the power of compounding.
Rs 1 Lakh invested for 10 years @ 15% per annum gives Rs 4.04 Lakhs
Rs 1 Lakh invested for 15 years ~ 15% per annum gives Rs 8.13 Lakhs

ii) Be Patient

While tracking your investments is necessary, letting daily news and doomsday predictions will only make you uncomfortable and impatient. The more you listen to BUY/SELL recommendations on TV; the more you will feel tempted to churn your portfolio.

iii) Short Term vs Long Term

Do not invest your short term funds into your long term investments. Long term investments can be volatile in the short term and you will not be able to meet your financial goals if you keep breaking your investments to meet short term expenses.

iv) No Free Lunch

There is no free lunch. If you invest on the tips of your friends, family and others then you are definitely not being serious with your investments. Will they provide you with the quarterly updates, followup reports, etc? No matter how well your friend knows the promoter of the company ~ steer clear of investments which are not backed by any research.

v) Do it Yourself vs Advisor

You can either do all the research and stock selection yourself OR you can go for a fee-based advisor who can mitigate you through all the nuisances of investing. However, your advisor’s approach to investing should be in sync with your expectations. Someone who gives intraday trading advice will not be able to guide you with the right long term investments!
Like we will not be able to guide those looking for:
i) Futures and Options advice
ii) Short term trading advice
iii) 30-40 recommendations a year

Who should choose us?

i) Those looking to invest for 3 years or more
ii) Those looking for fee-based direct mutual fund and stock advice
iii) Those looking to buy and hold high quality stocks – Investors who see stocks as a part ownership in a business and not as random digits blinking on a screen
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The Next Generation of Wealth Creation

We have a better standard of living than our previous generations and the coming generations will have a much more better standard of living. This is a India centric statement and we shall demonstrate this statement with some facts and figures. So Ladies and Gentlemen, please get ready for reading an article which will leave you optimistic for the future.


To start of with, we have our Gross Domestic Product (GDP) which is a widely used measure for the economy. It is basically the value of everything (goods and also services) produced within the country. After the GDP we have something which every Indian is familiar with – Population. While GDP is a measure of a country’s economy, the GDP-per-Capita is an average number derived by dividing the GDP with the total population.

India’s Statistics

India’s Population

India’s GDP

India’s GDP Per Capita

Since 2002, India’s GDP per capital is growing exponentially. Going forward, this number will only increase and we believe – At a faster pace. Lets understand this using simple maths.

India’s Future


India’s Real GDP growth rate (Adjusted for inflation) is ~ 7% and it is estimated to grow at 7% to 8% for the foreseeable future. India is expected to be one of the fastest growing major economies of the world as per various papers, reports and publications. From a GDP of $2.2 Trillion, we will touch $18 Trillion over the next 3 decades (Growing ~ 7% p.a.)

The Population

India’s population is expected to grow at a net rate of 1.3% p.a. for the next decade and further slow down over the next few decades. Infact, some reports claim that India’s population would start shrinking after 2050-2060. The fertility rates are down from 5.9 in 1951 to 2.3 in 2011 and is expected to slip below 2 in the coming decade. From 1.35 Billion in 2017, our population will increase to 2 Billion over the next 3 decades.
The Wealth Creation

Now when we do the simple math of a $ 18 Trillion economy with a 2 Billion population, we get a GDP-per-Capita of $9,000. In 2016, this figure was ~ $1,750. Though it is better to compute all this is $ terms, for simple understanding let’s break it into Rupee terms. We expect India’s GDP per capita to increase from Rs 1,14,660 to Rs 5,85,000 over the next 3 decades (We have assumed a $ rate of Rs 65.
What we ignore

What we are ignoring in this computation is that innovation and technology have the power to propel the growth rate of our economy. India’s population is shifting from working in the fields to more skilful jobs and India’s biggest challenge is to create enough opportunities to absorb this demographic shift of workers. The largest threat here is innovation (Artifical Intelligence, other futuristic technologies) itself.
Having said that, even at $9,000 per head India will still lag most of the major economies of the world (even in today’s terms). The below chart shows India’s standing when compared to the global average.
The Potential

After India’s fabled 1991 tryst with opening up it’s economy, one would expect India to have propelled itself to the big league! But China has out-performed India on a massive scale. Just look at the historical GDP Per Capita for India vs China since 1991.
Post 1991 chart of GDP Per Capita growth
If India is able to ape China’s rate of growth (or even a bit slower than it) then there will be massive wealth creation for India. This will not be easy as it involves radical measures in terms of economic and political reforms. However, one must note that an increase in GDP most probably will not trickle down to the grassroots proportionately.

What it means for investors

A growing economy will create headroom for booming stock markets. We are just a ~ $2.2 Trillion economy and if we are to indeed grow to $18 Trillion, then over the next 30 years, we can expect $15.8 Trillion of wealth creation. Even if we assume a 100% Marketcap to GDP ratio then $15.8 Trillion of wealth is going to be created.

The wealth creation that you have witnessed in megabaggers like Infosys, Reliance, MRF, Eicher Motors, Maruti, Bajaj Finance, etc over the last 3 decades will be dwarfed by what is going to happen over the next 3 decades! As a long term investor you need to be optimistic and believe in the stock called India.

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