Wit. Wisdom. Value Investing.
If you have read management books in the past, you would have realized that most of them exhort companies to go from good to great.
Regrettably most companies, in reality, move in the opposite direction – from good to great to good…and then they slip into mediocrity, and limp as pale shadows of their former glory.
These companies, despite being market leaders in their respective industries, see their performance take a turn for the worse.
Let’s Start with Safal Niveshak
Just in case you missed any of this on Safal Niveshak over the last few days…
Denial, as the old joke goes, is not just a river in Egypt. It’s proof of modern society’s deepest sins like irrationality and cynicism.
Eric Beinhocker in ‘The Origin of Wealth’ writes – “People have a general bias toward spinning their reality in positive ways and ignoring uncomfortable facts. It takes a real jolt to make them see that everything is not OK.
Jack Welch was infamous for popping the unduly optimistic bubbles of his people, and one of his dicta was that managers must ‘face reality [and] see things as they are…not the way they wished it would be.”
But most of us live a life of constant denial, which is a failure on our part to be able to tell fact from fiction, and, worse, the devastating failure to know ourselves.
Austrian philosopher Ludwig Wittgenstein said in ‘Culture and Value’: “Nothing is so difficult as not deceiving oneself.”
You see, we have to see the world as it is. Not for what it was or for what we want it to be. Refusing to look at unpleasant facts doesn’t make them disappear.
Often, bad news that is true (like you have lost money on a bad business) is better than good news that is wrong (like you have made money on a bad business that you think is a good business).
So please get over your denial…and stop deceiving yourself!
Book Worm
I am currently reading Daniel Kahneman’s amazing book Thinking, Fast and Slow, and came across his thoughts on Availability Bias…
People tend to assess the relative importance of issues by the ease with which they are retrieved from memory – and this is largely determined by the extent of coverage in the media. Frequently mentioned topics populate the mind even as others slip away from awareness.
In turn, what the media choose to report corresponds to their view of what is currently on the public’s mind. It is no accident that authoritarian regimes exert substantial pressure on independent media. Because public interest is most easily aroused by dramatic events and by celebrities, media feeding frenzies are common.
For several weeks after Michael Jackson’s death, for example, it was virtually impossible to find a television channel reporting on another topic. In contrast, there is little coverage of critical but unexciting issues that provide less drama, such as declining educational standards or overinvestment of medical resources in the last year of life. (As I write this, I notice that my choice of “little-covered” examples was guided by availability. The topics I chose as examples are mentioned often; equally important issues that are less available did not come to my mind.)
Stimulate Your Mind
Here’s some amazing content I read during the week gone by…
“The Mind is its own place, and in itself can make a heaven of hell, a hell of heaven.” ~ John Milton
I’m a pretty positive person — I consider it one of the keys to the modest success I’ve had in creating new habits and achieving things in the last few years.
Without seeing the positives in my actions, I couldn’t have begun on my journey of living my passion. I couldn’t have eliminated my debt, or quit my job.
So, I don’t feel that I’m particularly “incredible” – just lucky that I live with a positive attitude towards my life and actions.
Here is what Roger von Oech writes in one of his creative whack pack cards…
Most people have a warning device in their minds to alert them to new ideas. Unless the idea cleanly dovetails into what they’re doing, they’ll react by saying:
“It won’t work.”
“It’s dumb.”
“I don’t get it.”
When you evaluate new ideas, however, remember that your purpose is to help get good ideas produced — not to revel in the beauty of your criticism.
Thus, when you judge new ideas, focus initially on their positive and interesting features. This will counteract a natural negative bias, and help you to develop more ideas.
When you start feeling like the idea of being a positive person is hard to achieve, remind yourself that all it takes is one small step in the right direction to move yourself toward a more positive attitude.
Believe in yourself and remember the most important lesson of all: A positive outlook is a choice that you can always make.
Finally, Herm Albright said – “A positive attitude may not solve all your problems, but it will annoy enough people to make it worth the effort.” 🙂
Well, if you haven’t done it already, sign up here to receive Poke the Box in your email…and get ready for stimulating Saturday mornings.
Keep poking.
Stop denying the obvious.
Stop deceiving yourself.
See the positive.
Be kind to your heart.
Till next weekend…
Vishal Khandelwal
Chief Poker – Poke the Box
“It’s a funny thing about life; if you refuse to accept anything but the best, you very often get it.” ~ -W. Somerset Maugham – English dramatist & novelist (1874-1965)
Maugham’s thought holds a great relevance when it comes to picking up businesses for investment. So, the results of your investing efforts are decided not after you make or lose money in 5-10 years, but at the very moment you decide to own a specific business.
[Read more…] about Wit, Wisdom, Warren (Issue #9): The Great Business
This isn’t going to be a long post, for I am sad.
I am sad to share with you the news of untimely death of a young Safal Niveshak tribesman, Sameer.
I had never met Sameer but we had interacted a lot through email over the past few months…and had thus become ’email friends’.
The last time he wrote to me was on 25th August, the day he subscribed to my Mastermind course and was very excited to walk together with me on a one-year journey of learning.
Very sadly, his friend – another tribesman – broke the news to me that Sameer passed away on the 27th.
It’s not news anymore, but Microsoft is acquiring Nokia for a pocket change of US$ 7.2 billion.
This is for a company that, just six years back had a market capitalization of US$ 145 billion, and US$ 20 billion a year ago.
“It’s a bold step in the future,” says the Microsoft chief Steve Ballmer. Time would tell that…and time, as Mr. Ballmer must know is very important when decisions are irreversible.
By the way, Microsoft lost US$ 15 billion from its market cap after announcing this US$ 7.2 billion acquisition! 😮
Statutory Warning: This report may cause a reaction, and acting on it can be injurious to your wealth.
Note: This StockTalk analysis has been written by Manish Sharma.
“Putting ideas on paper forces you to think things through.” – Shelby Davis Sr.
There has been a lot of interest among investors about Bata India stock (Bata henceforth). This analysis is a basic attempt to understand the key dynamics of the business and the possible weaknesses or competitive threats that might affect the performance of the company. Normal disclaimer that goes along with all the reports of StockTalk apply here as well; please do your own due diligence.
Macro Overview of Footwear Industry
Before looking into the performance of the company, let’s take a brief look at the overall industry framework in which the company operates.
The Indian footwear market is currently growing at a rate of 12% per year. Of the total market size, 40% is in the organized segment also known as branded segment, and rural market accounts for 75% of the overall consumption.
Thus, the industry is dominated by unorganized players and rural market is holding fort. Nevertheless, with 40% of the market being controlled by organized players, footwear is the second most organized retail category in India, after watches.
Here are some other key stats…
About Bata India
Bata is a name that needs no introduction to Indians. The company has established itself as India’s largest footwear retailer. Bata India Limited (Bata) is a 52% subsidiary of the Netherlands-based Bata BV.
It is one of the largest footwear manufacturers in India and sells a wide range of canvas, rubber, leather, and plastic footwear. The company has a licensed capacity of 628 lakh pairs per annum spread across its five manufacturing units at Batanagar (Kolkata), Faridabad (Haryana), Bataganj (Bihar), Peenya (near Bangalore), and Hosur (Tamil Nadu). The company has one tannery at Mokameghat (Bihar).
As per its latest annual report, the company is relying mostly on domestic leather for production and imports constitute a very small part of raw materials.
Bata sells over 50 million pairs of shoes every year. South India is a major market for Bata, from where it earns around 40% of its revenue. The company is the market leader in South, with 16% share of the organized footwear market. Of the overall revenue, it derives nearly 85% through retail networks, 14% from non-retail channels (dealers/institutional/industrial sales) and remaining 1% through exports. Thus, the domestic market is the mainstay as far as revenues are concerned.
Here is the category revenue break-up:
Bata is earning a major chunk of its revenue from leather products that is a high margin business as compared to rubber sandals and hawai chappals. This augurs well for the company. Accessories and garments have been recent additions, but it is unlikely that this category will grow considering the huge competition already present in the market.
Of the total revenue earned from leather footwear:
The executive shoes range for men’s segment has helped Bata in taking the pole position in organised shoes category. But the company lags its competitors in the kids’ and sportswear segments. It is trying to increase its market share in the women’s segment, but it will not be a cakewalk given the competition in this category as well.
According to market studies, nearly 75% of the market for women and kids’ footwear is unorganized. In its 2011 annual report, Bata India’s Chairman also stated that the organised footwear brands have less penetration in the ladies footwear segment mainly due to the complex buying behaviour of Indian women. As such the business model is unlikely to change easily.
Marketing Analysis
Bata being a retail company, it is better to make an attempt to assess the company’s strength on Kotler’s 4Ps of marketing – Product, Price, Place and Promotion.
Product: Bata has positioned itself as a one-stop family store for all footwear and related products. It provides to vast consumers various footwear lines under both international and national brands such as Hush Puppies, Marie Claire, Mocassino, Ambassador, Comfit, School, Quovadis, North Star, Scholl’s, Weinbrenner, Bubble Gummers, Baby Bubble, and Power.
Since shoe is a need-based product, there will always be a demand. But of late there is more effort on the part of company to focus on the premium range considering the growing consumerism. Although Bata does not enjoy the kind of monopoly it had during the late 1980s, considering its long history, high brand recall and extensive product portfolio, it is one of the formidable players.
Price: Bata has adopted a multi-pricing strategy by providing to its customers a value proposition strategy. It has moved away from the classic ‘Bata Pricing’ approach because it is now targeting the high-end customers along with the middle-class segment that is its main target audience. The present pricing approach where Bata is promoting various sub-brands under its umbrella brand has helped in projecting it as a family brand as well as a fashion brand.
Place: Bata has a strong distribution network, which is one of the strengths of the company. It has a retail network of over 1,200 stores and around 30,000 dealers. The company is on an expansion spree. In the last five years, it has opened 350 stores and renovated 200 existing stores. The company has also decided to be more visible in shopping malls, open up to the franchisee model and also create the shop-in-shop experience in multi-brand stores.
Promotion: Bata does not promote much by advertising. The selling & distribution expenses don’t account for a major cost. Unlike its competitor brand Liberty that has enrolled Hrithik Roshan for brand endorsement, Bata is not following that approach for promotion as of now. Thus, it is saving on exorbitant TV advertising cost.
Bata is mainly promoting through point-of-purchase material. It has revamped its stores to look more contemporary, shedding its age old image. It is also re-positioning itself as a market-driven, fashion-conscious lifestyle brand with an emphasis on service and production.
Financial Analysis
As seen from the table below, there is constant improvement in financial profile of the company driven by steady increase in Sales at an average annual rate of 16%. There is also a sustained improvement in net profit margins, which increased from around 5% in 2007 to over 9% in 2012. This has led to sharp increase in profits that jumped up nearly 4 times in these last 5 years (2007-12).
Between 2007 and 2012, Bata employed an average capital of Rs 4,327 million in the business and earned revenue of Rs 10,047 million.
The net profit growth dropped to just 10% in 2009, and then it shot up over the next two years, to finally see a fall in 2012. It will be interesting to see how the company fares in the current slowdown (2013).
Nevertheless, as mentioned in the annual report, Bata has taken the following actions to improve its margins:
1. Cost rationalisation: Bata’s margins have improved because of rationalisation of employee cost, closing down of non-performing stores, and through outsourcing of several functions.
2. Outsourcing: Over the last 5-6 years, Bata has increased the outsourcing of labour-intensive work while retaining machine related operations. Increasing focus on outsourcing of labour-intensive operations has led to rationalization of employee cost and continuous improvement in profitability.
3. Business restructuring: Bata launched a massive restructuring exercise in the year 2006. It closed down 363 cash-drain stores and remodelled about 300 stores in the last 5 years. As a result, revenue per store increased from Rs 50 lakh in 2006 to more than Rs 100 lakh in 2011.
In addition to these factors, significant value was unlocked from the exit from the real estate project at Batanagar, Kolkata.
Capital Management
Return on Equity
Charlie Munger, Vice Chairman of Berkshire Hathaway has said the following on the importance of return on equity on shareholder return…
If the business earns six percent on capital over forty years and you hold it for that forty years, you are not going to make much different than a six percent return.
Further, the Du-Pont analysis shows that Bata has not relied on financial leverage to increase its ROE.
Since margin has gone up, the asset turnover remains stable. The asset turnover ratio tends to be inversely related to the net profit margin; i.e., the higher the net profit margin, the lower the asset turnover (for most businesses; either it’s a high margin business or a high volume business).
Nevertheless, an asset turnover of around 3x augurs well for the company.
So Far So Good
While, all the financials and business performance discussed so far indicate a positive story for Bata, it’s important to note that things were not so hunky dory always.
Bata has had a history of losses and the company came out of woods not once but twice.
First time in 1996, Bata achieved a turnaround by posting a positive bottomline of Rs 4 crore. Earlier, the company had decided to wean away from traditional strongholds in the middle and lower footwear segment to woo the premium segment…a strategy that backfired resulting in the huge losses.
In order to cut its losses, the company even sold off its corporate headquarters for Rs 19.5 crore.
Then, the company again suffered a series of losses. For three successive years (2002-2004) it posted net loss of Rs 74 crore, Rs 26 crore and Rs 63 crore respectively. Sales suffered due to workers’ agitation at its factory in Batanagar over the issue of wages.
The company had to weather serious labour issues. In the three rounds of VRS offered around 2004, Bata reduced its employee count by 1,600. Apart from VRS, a turnaround strategy was undertaken which included focus on mass consumption products, flexible marketing, tighter cost controls, and better asset management.
Key Challenges
Here are the key challenges worth noting in case of Bata’s business…
Valuations
100% of the information you have about a company represents the past, and 100% of a stock’s valuation depends on the future.
Ideally, I would have liked to end my analysis over here. I am with Asif here who while reviewing Gruh Finance did not elaborate much on valuation part.
After all, we are putting a statutory warning at the start and not giving a valuation target can be the ideal way to prevent any biases creeping into the mind of investors regarding evaluation of the stock.
But still, I have tried to value Bata’s business, and you may consider this the trickiest part of my analysis.
But first I would digress a bit.
Warren Buffett wrote the following in his 1993 letters to Berkshire shareholders – “There’s no business like shoe business.”
This was in the context of the purchase of Dexter shoes that Buffett made this statement. He further wrote to the shareholders that I can assure you that it is a business that needs no fixing; it is one of the best-managed companies that Charlie and he have had seen in their business lifetimes. Berkshire paid US$ 433 million for Dexter Shoes. Rather than use cash, Buffett used Berkshire Class A stock to fund the purchase.
But, 15-years later (2008), this is what Buffett said about Dexter…
To date, Dexter is the worst deal that I’ve made. What I had assessed as durable competitive advantage vanished within a few years.
Now I am not comparing Dexter Shoes with Bata. The point I am trying to make is that everybody, even the investing greats, can be wrong in their judgement of business. And it is sometime difficult to assess the future performance of even a simple business.
Anyways, Bata is currently trading at Rs 815 (as on Sept. 2), and with shares outstanding of 6.4 crore, it has a market capitalization of around Rs 5,200 crore.
After deducting cash value of Rs 154 crore, we get an Enterprise Value of around Rs 5,050 crore. With profit before tax (PBT) of Rs 250 crore, we get a pre-tax yield of 5% (250 divided by 5050).
This is half of the yield available on the benchmark Govt. bond at present. Also, at current price level, the P/E ratio comes to around 30x, which is again on a higher side. Price-to-Free Cash Flow is also around 40x.
Overall, the stock seems fairly rich in valuation on traditional parameters. In fact valuing the stock on the basis of last 10 year average EPS, we get a figure of around Rs 330 per share. However, it must be noted that past figures would have been affected by macro environment like interest rates, low market base etc.
I have not used traditional DCF and Dividend Discount Model. The company has started giving dividend since 2007 and it is too short a period to assess the longevity of dividends.
Also, the company is in an expansion mode and so it is better to reinvest the capital into the business and earn superior returns for shareholders. Also the trouble with discounted cash flow or dividend discount is that most of the value is from year four or five into the future and not the next few years.
It is difficult enough to predict future especially for a growth business like Bata. Changes in the assumptions for the later years can substantially alter today’s value.
Disclaimer: I, Manish Sharma, am not invested in Bata shares, but I wear Bata shoes so I might be biased in my analysis. 🙂
Readers are advised to do their own independent assessment before taking any decision. You can expect some errors or forward looking statements, so do your own research as well.
Let’s Start with Safal Niveshak
Just in case you missed any of this on Safal Niveshak over the last few days…
Warren Buffett completes 83 years on this planet today. A good way to wish the legend is to get inspired by a few amazing words of wisdom he has said over these years. Here are 10 Buffett quotes – Part 1 and Part 2 – to inspire you.
To the delight of all, the message was typically transformed into something new and bizarre, no matter the sincerity and care given to each retelling.
You see, when information travels through multiple channels – like in the telephone game – it’s easy for some elements of the message to get distorted — by biases, or simple human error.
The effect of the spread of misinformation is called “cumulative error”, like you see in this stock market cartoon…
So, when a company’s management says something, the lead analyst hears something else, his report to the fund manager says something else, the fund manager understands something else, his broker understands something else, the broker’s analyst assumes something else, he blurts out something else to the TV anchor, the anchor – thinking how smart she is – shouts out something else, and you – enamoured with the anchor – understand something else.
If I were to condense the history of stock investing mistakes in a few words, those will be what you just read!
Somehow, we expect information to be faithful to its origin, no matter what history might have corrupted it. And that’s why it is so important to cut yourself from the noise – that create cumulative errors – and concentrate on independent thinking.
This is especially true while investing your hard-earned money, where you don’t just need to minimize mistakes, but minimize cumulative mistakes – those that add up to wreak havoc on your savings.
A joke isn’t funny anymore if it’s repeated too much. The same goes with information. The more you hear the same things, the more they get dangerous.
So please be careful!
Book Worm
I was re-reading Warren Buffett’s 1962 letter to shareholders and came across these words…
A lot of value can be obtained for the price paid. This substantial excess of value creates a comfortable margin of safety in each transaction. This individual margin of safety, coupled with a diversity of commitments creates a most attractive package of safety and appreciation potential.
Here is something from his 1992 letter that must be the cornerstone of every value investor’s philosophy…
We insist on a margin of safety in our purchase price. If we calculate the value of a common stock to be only slightly higher than its price, we’re not interested in buying. We believe this margin-of-safety principle, so strongly emphasized by Ben Graham, to be the cornerstone of investment success.
Stimulate Your Mind
Here’s some amazing content I read during the week gone by…
I have learned a lot of life lessons just seeing my daughter grow up. Like when she was just a year old and was trying to take her first steps and repeatedly fell down, she tried again…and again…and again.
Sometimes she laughed. Sometimes she cried. Sometimes she laughed and cried at the same time.
But she kept trying and trying…laughing and crying. She did not labelled her experience as a “failure”. She just enjoyed it.
Unlike us adults, our babies don’t know the possibility of a failure, so they happily keep falling down until one day they take a few steps, and then a few more. Before long, they’re jumping and running. All their trying pays off.
They fall but never fail.
As grown-ups, what if we also simply choose not to fail?
What if we treat our mistakes and failures as not things to be avoided but things to be cultivated?
Like Warren Buffett said…
“You’re going to make mistakes. You can’t play in the game without making any mistakes. I don’t think about it, I just move on. Most business mistakes are irreversible setbacks, but you get another chance. There are two things in life that you don’t get another chance at – marrying the wrong person and what you do with your children. Business, you just go on. It’s a mistake to dwell on mistakes, it’s unproductive. It’s like Mark Twain’s story about the cat that sat on a hot stove – he never sat on a hot stove again, but he never sat on a cold one again either.”
Life teaches us each day that stuff happens (and sometimes shit happens!), but we don’t need to give each of our experiences a label.
Good, bad, hard, easy, success, failure etc. do not exist but as labels in our minds.
All we need to do to hold our head high is to break through these labels.
Well, if you haven’t done it already, sign up here to receive Poke the Box in your email…and get ready for stimulating Friday mornings.
Keep poking.
Embrace your failures.
Be nice to your family.
Be kind to your heart.
Till next weekend…
Vishal Khandelwal
Chief Poker – Poke the Box
You may avoid reading this post if you have made up your mind that you don’t want to join my one-year course in Value Investing, The Safal Niveshak Mastermind…or if you have already subscribed to the Course.
But if you are confused whether to go for Mastermind or not, I would try to help you make the decision before I close the course to new admissions 2 days from now, i.e., on 25th August 2013.
So, to answer your question – “Should I subscribe to Mastermind?” – let me first invert and tell you five reasons you must NOT subscribe to Mastermind…and then five reasons you must subscribe.
5 Reasons to NOT Subscribe to Mastermind
5 Reasons to Subscribe to Mastermind
Now, if this clears your mind and you wish to subscribe to The Safal Niveshak Mastermind…
An education in investing requires only two courses – How to Value a Business, and How to Think About Markets.
You don’t have to know how to value all businesses. Start with a small circle of competence, things you can understand. Look for things that are selling for less than they’re worth. Forget about things you can’t understand.
You need to understand accounting, which has enormous limitations. You need to understand when a competitive advantage is durable or fleeting. Learn that the market is there to serve you, not instruct you.
In the investing business, if you have an IQ of 150, sell 30 points to someone else. You do not need to be a genius.
You need to have emotional stability, inner peace and be able to think for yourself, since you’re subjected to all sorts of stimuli.
It’s not a complicated game; you don’t need to understand math. It’s simple, but not easy.
Based on what Buffett suggests and based on my understating of how investing really works, the lessons you will receive through the Mastermind Course will revolve around answering these 15 questions …
I will cover all these lessons in a jargon-free, non-geeky way so that you find it simple to understand and implement them in your investing life.
Want to Subscribe to Mastermind?
Now, if you desire to subscribe to The Safal Niveshak Mastermind…
I wish you that pulsating desire to change your investing life through The Safal Niveshak Mastermind, and even after that.
Yes, I did that recently!
I sold off all my stocks without even looking at their prices.
I realized that I had started liking stocks in my portfolio. In fact, my likeness for them had gone to such an extent that whenever I heard negatives about them, I rationalized my decision to hold on to them.
So whenever I learned that, from among my stock holdings, a business was not going to do well in terms of growing its sales in the future, all I did was assume a higher profit growth so that my overall decision – of it being a growth business – remained intact!
“A human being is a dark and veiled thing; and whereas the hare has seven skins, the human being can shed seven times seventy skins and still not be able to say: This is really you, this is no longer outer shell.”
This is what the noted German philosopher and poet Nietzsche said, and this is what the Austrian neurologist Sigmund Freud agreed – we are ignorant of ourselves!
And the biggest problem with such ignorance is that it is just so expensive.
Now, even Darwin struggled to explain why we would evolve a response that lets others know that we have cheated or lied. Darwin would be trembling in his grave knowing how easily we have learned to cheat ourselves.
[Read more…] about Safal Niveshak’s Investor Psychology Survey: You Failed!