Scribd
Upload
34 views2 pages

master05

The document discusses the investment strategy of identifying companies like Polyplex Corporation that have shown significant growth without diluting equity or accumulating debt. It emphasizes the importance of evaluating a company's sales growth, profit margins, and capital requirements to determine its value. The author uses Avenue Supermart as an example to illustrate how to assess a company's future cash generation potential and market valuation.

Uploaded by

vishalg_4
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
34 views2 pages

master05

The document discusses the investment strategy of identifying companies like Polyplex Corporation that have shown significant growth without diluting equity or accumulating debt. It emphasizes the importance of evaluating a company's sales growth, profit margins, and capital requirements to determine its value. The author uses Avenue Supermart as an example to illustrate how to assess a company's future cash generation potential and market valuation.

Uploaded by

vishalg_4
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

MASTERCLASS WITH SUPER-INVESTORS

business was doing well. So I looked at the other companies making polyester
film. Of the others, Polyplex Corporation was outstanding. Polyplex had
started at a 1,500 tons capacity, and went to 18,000 tons capacity without
diluting equity! That’s a quick filter - companies which have grown well
over a 10-year period without diluting equity and without getting seriously
in debt are always interesting. With the tailwinds of a good polyester film
market, the company and the stock did really well.
All Numbers in INR Crores

POLYPLEX CORP Mar/1997 Mar/2002 Mar/2007 Mar/2012 Mar/2017


Net Sales 108 126 768 2,426 3,208
5 year CAGR % 3% 44% 26% 6%
PAT 9 -1 45 208 351
PAT % 9% -1% 6% 9% 11%
5 year CAGR % NA NA 36% 11%
RoE 11 -1 12 12 15
Debt/ Equity 1.0 0.5 0.8 0.4 0.3
Dividend Payout 16 - 18 14 10
Market Cap 23 25 151 591 1,340
5 year CAGR % 2% 43% 31% 18%
P/E 2 NA 3 3 4
Gross Block 145 184 827 2,173 3,818
5 year CAGR % 5% 35% 21% 12%
Equity Capital 15 15 15 32 32
5 year CAGR % 0% 0% 0% 0%
*Bonus shares in 2010

POLYPLEX CORPORATION
605
550
495
440
385
330
275
220
165
110
55
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

To find one good investment like that, there could be twenty other
companies that you see and reject. There might even be some good
companies that you end up rejecting, but it doesn’t matter. The ones you
find and invest in are what matters.
How do you value a company?
There are only three variables to determine the value of a business –
how much they grow their sales, how much profits they can make, and what

9
MASTERCLASS WITH SUPER-INVESTORS

kind of capital they need to generate that sales. Of course, the additional
variable is how they treat the minority shareholders.
Let me take an example. Somebody recently asked me about Avenue
Supermart (D’mart). I said it was a valuation challenge. Amazon was a
valuation challenge earlier, as it had strong growth but was not generating
cash. But the difference with D’mart is that it is generating cash. Last quarter,
they had sales of Rs.4000 crore, so let’s say the annual sales are Rs.16000
crore. Their net margins is about 6-7%, so they can make profit of Rs.1000
crore. To generate Rs.16000 crore of sales, they only require Rs.2000 crore
of capital. Let’s assume that they can grow at 25% for the next 10 years
and maintain these margins and capital turnover. So the sales will reach
Rs.160,000 crore and they will generate Rs.10,000 crore cash in 10 years.
They will also have some cash on the books, as they will not invest all the
cash flows. A company like this, which generates Rs.10,000 crore of cash,
can easily be valued at Rs.250,000, plus they will have cash. The current
market is Rs.80,000 crore. So it can be 3-4x in 10 years – which is better than
keeping money in the bank – but I think there could be better opportunities
over time. But you have to keep thinking and valuing businesses. If you
think 10 times, you will know what to do when opportunities come.
So if you break up the value of the business – the first is how much
sustainable money they are making. Like D’mart is making Rs.1000 crore
profit now, and you think that is sustainable. Now if you put money in a
bank today – you get 6% interest rate, so the value of that Rs.1000 crore
is at least 16x (~100/6%), so Rs.16,000 crore. The second is, what is the
minimum growth that you can project over the next many years? I take
that at a nominal GDP growth of 12-15%. That will give another Rs.15,000-
20,000 crore of value. So you can attribute Rs.30,000-35,000 of value to
these. Then there will be other opportunities that the company can exploit –
that the market is valuing at Rs.45,000 crore today. The composition of these
three changes over time. At some time, the first component accounts for
70% of the market cap and the second component accounts for 35% of the
market cap of the company. Which means the third component is negative
5%, which the market is not willing to value. In bear markets, the market
cap might even be lower than the first component of the value, and you find
that the second component definitely has some value. So one can wait for

10

You might also like