Week end 28 Jun 2015.

This weekend, tried hands on Packaging industries. On Friday, started writing the rationale for the
investments made in the Metals stocks such as NMDC, NALCO. From there happened to go across
to Packaging aluminiun industry. ESS DEE Aluminium and Gujarat Foils limited.
The aluminium Packaging industry has a huge potential Favourable Demographics, potential high
hygiene preferences, Generic Pharma, FMCG sector growth.
ESS DEE (321)double in one week on this month from 150 to 300. Its market cap is 1000 crores. The
stock was beaten down to 52 week s low to around 120s-something mainly from the news that the
promoter dutta sold 1.5% stake in the company. After sale he still holds 56% approx in the company.
The company turn over for the last 4 years has been hovering from 750 to 850 crores and profits in a
confused state from 70 crores to 35 crores. The decrease in the profits is attributed to decrease in the
EBIDTA profits margins from 25-27% to 20-21 %. Interest costs is bearing the profits down. PBDT has
gone down from 23 to 13%. Interest coverage ratio is around 2.3 not good enough. Debt equity ratio
is 0.7. Working capital management is also poor especially debtors management - around 60% of the
sale is unrealised. Cash profit margin is 12% and EBIDTA is 21%. Fixed assets turnover ratio is not
good Gross block is 1000 crores increased from 500 crores in 4 years and sales are constant with
declining ebidta margins. In 2011- 4 years back- fixed assets turnover ratio is 1.7 and now it is 0.9
almost half. Huge capacity utilization gap. It gives the business operating leverage. High margins and
lower fixed assets turnover ratio reflects high end value added products (comparison drawn from
Gujarat foils). ROCE is around 9% down from 14-15% 4 years back.
Company has entered into a technological tie-up with a German university. Its factories and
distribution channels are USFDA accredited or ISO accredited. FIIs hold around 20% in the company.
Company has in built training programmes to train the future managements levels.
Company has a huge potential for future- It needs to work on capacity utilization and debtors
management.

Gujarat Foils (47) is a small company Market cap 35 crores. The promoter is Abhay Lodha.
Company has been in operations from last 22 years. The sales have been growing for the last 4
years from 240 crores to 480 crores( but in last two years the sales increase has slowed down from
450 to 480 crore). Profits are not commensurate with the increase in the sale. Increased from 1.87
crores to 9 crores and then decline to 7 crores. Margins are range bound from 10 to 13% over the last
4 years. Interest is the risk area interest coverage ratio is 1.5 not good enough. And company has
a huge debt if preference share are considered debt then DE ratio is around 2.5- HIGH!. The fixed
assets turnover ratio is increasing along with increase in the gross block (almost double in 4 years)
around 3.3. It is a high volume and low margins business model. The Cash margin is 4%. But the
working capital management is very poor Inventories and debtors turnover ratio is bad takes
around 80 and 100 days respectively to realise the sales. More than 50% of total assets are locked in
the working capital. ROCE is increasing from 10% to 13%. Overall company is a risk even at this price
which translates to around 4-5 PE ratio. Its factories and distribution channels are USFDA accredited
or ISO accredited. The company has a thrust on purchasing the latest equipments but not much focus
on in-house innovation. This increases the cost and associated interest burden. From book value
perspective, it is not a very safe buy its book value is 50 crores (Preference shares are considered
debt). Company is focusing on the growth in sales and capturing clients, adding capacities. But lost
focus on capital management. Given the small company, high interest cost and poor working capital
management will bring the company down. Short term upside is there but not worth the risk.

15 Jul 2015:
For the last 3 days, I have been active on twitter, solely because of my desire to know more about
value investing. Really dont know how the idea of investing in Small cap and mid cap got me, but
this took my exploration to twitter in finding answer to many a questions on investing in small cap. I
came across a professor, named Sanjay Bakshi. I read few of his tweets and that got my attention to
his simplicity of ideas and their application in the life. He seemed to me an avid follower of Charlie
Munger he mentioned that, silly! I love this Charlie guy, his book (an awesome one) and, particularly
his philosophy- he says it is must to keep reading, reading and reading. Dont know if it is his words,
but it was mentioned that one needs to read around 500 pages daily I mean really- 500 Pages!
Phew. I dont know if there is any time left in the day after that. Charlie further mentions Mental Modellots and lots, multi-disciplinary approach, learning from other people, power of Focus, a man with a
hammer syndrome, Thors hammer and loolapaloza effect. Moving back to professor - Prof wrote
about Staying power that got my eyes and then my heart and then my mind. The concept of staying
power changed my perspective on how to answer the question: why should I retain any stock for
decades. He explained the staying power from the perspective of Balance sheet, Profit and loss,
Capital structure, Investor, corporate culture- that is what I remember now. I bet there were more
perspectives to staying power.
From twitter, I got to know about many investors that has a concentration on small caps. One such
person is Paul Lountzis of Lountzis Asset Management. He talked about many other such investors:
Ralph Wanger and Chuck Royace of Royace Funds. Though I did not have much time to go and read
more about these guys, but I noticed that there are many expert opinions available to catapult the
whole process for me that I can leverage see I have started applying Charles Munger learning
from others!. Then I read about the intense focus required to gather information on small caps
companies because the information is not as readily available as in the case of Large caps, no analyst
opinion available on the companies. This led me to another place Valuepickr. I read about it in
Forbes India. A person fed-up with the lack of availability of history on the companies, especially small
ones, formed this website where potential investors come and share their views or, more aptly,
apprehensions ( It seemed to me that people on the web-site want an acceptance of their ideas/ stock
picks because they were not that confident. Then some so called expert came in with reams of
information and suddenly the whole idea either gets the over-night recognition or gets thrashed. I read
some co-relation of increasing prices of these stocks though never verified. Looks like this person is
capitalising on the fear of other people and making a lot of money, A nice but immoral business
model). Coming back to the website, I read how people are doing scuttle-butt and how people are so
forthcoming with questions that they bluntly want to put to management. People there looked more
aware as they mentioned going to AGMs, meeting Investor relation people etc. Anyways, all this led
me to believe that all this theoretical proposition of scuttle-butting and questioning the management is
possible, kinda boosting my ideas that IT IS POSSIBLE. So, Now I have a) Charlie Munger b) a
professor c) an idea d) most important that it is possible.
(And I got to know a book the sounded very interesting to me A Whack on the side of the head. A
recommendation from Prof. It is about the learning how to think imagine someone can teach you
how to think. Silly! Isnt it? But imagine if he could that can change something in me. So I put that on
the reading list. Also, there were cartoons in it so I got more inclined lol).
Now there is a lot to write but not sure from which thought to start. Lets try- it is going to be messyvery messy. It may be that if I read this again, I would either not make out my own thought process or
be more confident that I cant even pen my own thoughts. Nevertheless, I want to give it a shot.
I started thinking about the investment in small-caps. From the Ben Graham, investing in stock is like
investing in business owning stock means owning the company or a part of it. So, i started thinking
about investing in business. Next thing I found myself thinking about was who does business
people. So, I focused on people- management. I drifted to another question- why one does business.

Now that is the part which got me thinking thinking about the answer and further questions and
further answers. Why does one do business? Obviously for Profits/ money. For power/ dominance.
For Social status/ money. To bring about a change/ a craze. To do new/innovation. Out of current
status quo/ frustrated by inefficiencies, so they build disruptive business. Next question was which
among the list is better. Money, power, profits looked morally not appropriate A question for me is it
right to think so ultimately I am doing this for money. So why to outright-ly be partial against
them.....will be back on this topic. So zeroed in on the others. Then I found a reason for choosing the
others a pattern of purpose. The answer further formed another question now a company specific
why a company is in a business in which it is in a business? The answer to this question may
give you insights about the existence philosophy, approach of people in management and
sustainability of the company. This is somewhat told by Paul Lountzis in his interview his example
on NIKE. (Ok, this is not the hindsight benefit interview bytes dont get me this idea. It is jsut that the
idea came and I connected with what I listened in that interview).
I felt that there are two ways to evaluate a stock a people perspective and a process perspective.
People perspective you focus on people, their approach, their behaviour, their decision making
process, their passion, their delivery etc. And then you try to bet, taking long position in their
companies stock. You are making an assumption here- this person will continue to do the same. Also
the circumstances though will not be the same as those situations when you found them worthy, will
be managed by these people so as not to have any significant impact on their performance. You
measure the results of these people performance using numbers such as EBIDTA, ROCE, ROE,
Assets turnover ratio, working capital management, capital raising, leverages, change in sales or EPS
over time, Cash generation capacity, or capex growth etc.
Process Perspective: You do the analysis on the numbers and try to reach a conclusion on the
business and in turn people. So it is the other way round.
Now given that information on people is not easily available or more frustratingly, even if available it
will be so full of biases (there can be opinion about people not facts) that render it difficult to analyse,
the thrust shift to process side which is comparatively less subjective and driven by measureable
results. All you need to do is to put all that performance over the periods and comparative study - in
a continuous thread to get a whole picture of what had happened. From there you extrapolate linear
or non-linear- and bet on that.
Now I have a) Charlie Munger b) a professor c) an idea d) it is possible mindset and e) two
perspectives.
Mind is messing the things again. I am going to reflect back on the process to analyse the companies
that I followed in last 4 months yes I started in Mar 2015. Very slowly. Using the knowledge from
reading Ben Graham, Buffet, Charlie Munger, Philip Fischer and a half read book on risk and its
evolution (Book: Against the Gods by Peter Berinstein) and of course my Chartered Accountancy
degree. I must that the degree is the least useful of all.
A digression: is Formal and structured education worth pursuing or an unstructured one adds more
value. I am yet not in a position to answer that question even after been exposed to education for the
last 24 years I started schooling at the age of three!!! But I must say that in the last 6 months of
reading after GMAT plans were put on back burner I have learnt a lot. I am still unable to use it
though. The application part is the most difficult or should I say I am not attuned to it. That led me to
accept that the GMAT score in verbal part identified a problem in me. i.e lack of skill to evaluate the
argument, reasoning and questioning. It is evident in my 3 appearances for GMAT; I hit quant at the
top percentile in all three but was able to improve a bit in verbal only in last appearance. But I
continuously denied this lack of skill. Now it is haunting me again. I read but dont get it. I dont
question while reading. I dont recognise patterns, analogies. I may get the logic but it is like a novice

accepting the argument on the face of it and move on. It is making the whole process of learning from
reading very lengthy, laborious, and not so enjoying. I am still trying. Hoping the reading will help
improving the analytical reasoning. I Came across a blog by a person who mentioned that there is a
book on how to read. He provided some snippets from the book. It was like an instruction manual
again very cumbersome. I am still trying.....
So I started analysing the companies. The approach was quantitative more towards process part.
From this initial philosophy, I first would look at the following data point in the sequence of importance:
ROA, gross profit margins, Assets turnover ratio, Leverage, interest coverage ratio, increase in sales,
increase in profits, increase in Capex, and surplus cash generation etc. Besides these data points, I
looked at PE ratio, BV, Market cap and the comparison of the companies on the said all data points. I
ended up with PSUs Metal companies. It is more like Benjamin Graham like investing. Charlie called
it Cigar-butt investing.