High ROIC companies create value by trying to increase growth, Low ROIC companies create value by trying to increase

ROIC. Growth = ROIC x Investment Rate; Cash flow = Earnings *

(1 –Investment Rate); Industry Attractiveness: Where is the industry in its life-cycle? How is the industry structured? How and where does the value get created in the industry? What and
how difficult are the barriers to entry (and exit) into the industry? Is the cost structure of the industry relatively stable? How is the capacity distributed within the industry? Is there excess
capacity? Where does the demand lie? Is there a demand outside the country? Are the customers in the industry price sensitive? Willing to pay for product differentiation? What bargaining
power do suppliers have? Can the industry provide for vertical/lateral integration? What is the outlook for the industry? Are there potential disruptors to the business model? Are there critical
factors/dependencies faced by firms within the industry? Can the industry provide for vertical/lateral integration? Firm Competitiveness: What is the market share (revenue share/profit
share/capacity share) of the firm within the industry? How does the cost structure of the firm compare with that of its peers? How does the investment strength of the firm compare with that
of its peers? Does the firm have pricing power (brand value premium) for its product? How elastic is the brand premium? (switching costs) How does the innovation/R&D bench strength of
the firm compare with that of its peers? Is the firm a first mover or a follower? How sustainable is the firm’s competitive advantage? Managerial Competence: Does the firm have a clear
vision? Does it change that vision often? Does the management team have the “right incentives”? Is their compensation aligned with that of the shareholders? Is the management team stable?
Are there key man risks for the firm? Does the management team have a good track record of execution? Is the management entrepreneurial? Are there red flags that show managerial
weakness? What is the ethical track record? Are there corporate governance checks in place?

Cost Curve: Cash cost, transportation cost, working capital, cost of capital return, closure cost; Market price is the price of the next unneeded capacity. ROIC = EBIT/IC; IC = Net FA –
NWC; Performance  Conduct  Structure; Key Takeaways: From a profitability perspective supply side is more important than demand side. It is difficult to displace incumbents –new
entrants succeed when incumbents mess it up. Your profitability depends on your relative cost position. It is important to understand what is setting the price and how that will change.

Quant Investing: maximize risk adjusted returns; fundamental themes Vs systematic factors: cheap-value, with a catalyst – momentum, strong customer base- indirect momentum, safe –
stability, sounding accounting practices – earnings quality, not fighting the sentiment – investor sentiment, trustworthy management – management signalling; Expected value add vs
expected tracking error: enhanced indexing, fundamental/quant, Active concentrated fundamental; Asset Allocation Process: Find an efficient frontier  Select a point in the frontier 
Estimate portfolio structure  Set constraints and optimize  Determine Asset Classes  Estimate volatility and return correlations  project expected returns; Optimization function
using returns: Maximize Expected Return[ 𝑖=1𝑁𝑤𝑖∗(𝐸𝑅𝑖−𝐶𝑖)] (w1, w2…wN ) Subject to a. Wealth constraint (
𝑖=1𝑁𝑤𝑖=1) b. Risk constraint (𝜎𝑝2=𝝈𝒅𝒆𝒔𝒊𝒓𝒆𝒅𝟐) Additional constraints: c. Long only constraint (wi>= 1) d. Sector
specific constraints; Optimization Function Using Risk: Minimize Expected Risk [𝜎𝑝2] (w1, w2…wN) Subject to a.
Wealth constraint ( 𝑖=1𝑁𝑤𝑖=1) b. Risk constraint [ 𝑖=1𝑁𝑤𝑖∗(𝐸𝑅𝑖−𝐶𝑖)=𝑬(𝑹𝒅𝒆𝒔𝒊𝒓𝒆𝒅)] Additional constraints: c. Long
only constraint (wi>= 1) d. Sector specific constraints.; Limit to optimization as no. of assets increase; Alpha =
Expected excess return over the benchmark = E( Rp –Rbm ); Tracking error = Additional idiosyncratic risk taken by the
manager = Std. Dev of ( Rp–Rbm ); Objective function: Maximize alpha given a target tracking error; Information ratio
(IR) = Alpha/Tracking error; 𝐼𝑅=𝐼𝐶∗sqrt(𝑁) ; IR= information ratio (return relative to risk); IC= information coefficient
(accuracy of forecasts) -skill; N= number of independent forecasts–breadth; Factor-based portfolios: Market (long
stocks and short cash), Size (long small and short large), Value (long high B/M and short low B/M), Momentum (long
stocks with recent price gains and short stocks with recent price losses), Quality (long stocks managed well and short
stocks managed poorly) Portfolio : Core strategy + Overlays : Overlays depends on risk budget, capacity and of course
expected alpha; High transaction cost of individual securities lowers net alpha limited capacity for the strategy;
Capacity is different during normal and stressful periods; For a security: 1.Liquidity 2. Relationship between cost and
size of trade 3. Size of the position relative to average daily volume; For a strategy: 1. Herding 2. Type of securities that
can be used for implementing the strategy (and their liquidity) 3. Trade-off between adding capacity and tracking error;
High O score – Overvalued; Principal components: 1. Flat, 2. Positive Slope 3. Inverted U curve; Level factor –Impacts
the parallel shift in yield curve; Slope factor –Impacts the steepness in yield curve; Curvature factor –Impacts the
curvature in the yield curve; Absorption ratio = Fraction of total variance that is explained by a fixed set of PCs of asset
returns; High AR  More systemic risk; Smart beta: exposure to factor-based portfolio OR exposure to alternatively weighted market index,Still ‘passive’ but provides better risk-return
trade-off compared to standard beta; Factor-based portfolio: exposure to systematic (but uncorrelated) factors that earn risk premiums; Alternative weightings: Volatility weighting, sales
weighting etc. Alpha= Allocation Effect + Selection Effect + Interaction Effect; Allocation: Are you over-weighting (under-weighting) segments that are expected to perform well (badly);
Selection: Are you selecting the right set of securities within the segment; Interaction: Effects not explained by allocation and selection; 𝑉𝑎𝑅1−∝=𝑃𝑉∗𝜎𝑝∗sqrt(𝑑𝑎𝑦𝑠)∗𝑍𝛼; PV = portfolio
value; 𝜎𝑝= daily portfolio std dev; days = #days for VAR; 𝑍𝛼= Z-score (# sigma’s) needed for desired confidence interval; Portfolio Variance = w2A*σ2(RA) + w2B*σ2(RB) +
2*(wA)*(wB)*Cov(RA, RB); Correlation = covariance / sigma(A)*Sigma (B); Maximum Drawdown = (T-P)/P;

Ind – AS: Benefits: Enhanced comparability and transparency of reported results, Improved investor confidence in Indian companies, easier to list on foreign exchange, cost of raising
foreign capital gets cheaper, better comparison of investment options, ease in implementing cross border transaction; Fair Value: the price that would be received to sell an asset, or paid to
transfer a liability in an orderly transaction between market participants at the measurement date; A fair value measurement assumes that the transaction to sell the asset or transfer the
liability takes place using the price either In the principal market for the asset or liability in the absence of a principal market, in the most advantageous market for the asset or liability; Fair
value measurement of Non-financial assets takes into account the highest and best used of the asset. The highest and best use of a non-financial asset must be: physically possible,
legally permissible and financially feasible. Hierarchy: L1: unadjusted quoted prices in active markets for identical assets or liabilities L2: Inputs other than the quoted price included in level
1 that are observable either directly or indirectly L3: Unobservable inputs; Valuation Technique: Intangible assets: •Multi-period excess earnings method •With-versus-without
method •Relief-from-royalty method; Property, plant and equipment: •Market approach •Cost approach; Investment property: •Yield method •Discounted cash flow
technique; Biological assets: •Market approach •Income approach; Unquoted equity shares: •Market multiples of comparable entities •Discounted cash flows; Inventories:
•Estimated selling price less costs to sell; Recoverable amount is higher of: asset’s fair value less costs to sell, or its value in use. CGU is smallest identifiable group of
assets that generates cash inflows that are largely independent from other (groups of) assets.

Financial Companies: Financing is an operating activity. You don’t assume an efficient debt market. How you fund the balance sheet (i.e., liability side) creates value, WACC NOT
RELEVANT. Focus on ROE. Cash flow has no meaning. Revenue: LP: Interest income based on wholesale rates for relevant duration, Fee income T: Interest rate positions, Equity and
forex positions AP: Interest rate charged to customers, Fee income; Cost : LP: Interest paid to customers Operating costs T: Operating costs AP: Interest expense based on wholesale rates for
relevant duration, Operating costs, credit costs; Capital requirement : LP: Operating risk T: Operating risk, marketing risk AP: Operating risk, credit risk; Advantages of being a bank:
“Opportunity” to lower cost of funds by raising low cost retail deposits, Generally can operate at a lower capital ratio. Disadvantages of being a bank: Priority sector lending requirements,
Statutory liquidity ratio requirements, Cash reserve ratio requirements. Managing profitability in a bank Ratio of low-cost deposits to equity is key. Transactional deposits (Current accounts
and Savings accounts –CASA) are lower cost deposits. So CASA/Equity is key. If you have “excess equity”: Non-funded exposures, Offshore branches, Lend through an NBFC subsidiary.
Why do we use ROA: PAT = ROA X Assets; Delta PAT = Delta ROA X Delta Assets; This allows you to relate PAT (or EPS) to Balance sheet growth It is less sensitive to leverage than
ROE (NOTE: ROA IS affected by leverage but the impact is low and in the negative direction); Strictly speaking RORWA is a better measure; DECOMPOSITION OF NET INTEREST
MARGIN (NIM): Assets (A) = Equity (E) + Liabilities (L); Interest income (I) = A * interest rate on assets (i); Interest expense (B) = L * interest rate on liabilities (b); NIM = (I-B)/A = I/A
–B/A = i–bL/A = i–b(A-E)/A = i–b + b*E/A = interest spread + contribution of equity;

Valuation Approaches: Strictly speaking Operating Liabilities are different from Net working capital 1. Operating liabilities could be long term (i.e., grant for capex like NH) 2. Short term
debt is not part of operating liabilities Linking dividends to DCF: Cash flow to capital providers = EBITDA –Taxes –Capex–Change in WC*= PBT + Interest +Depreciation –Taxes –
Capex–Change in WC = PBT + Interest –(Capex–Depreciation) –Taxes –Change in WC = PAT –Change in Fixed Assets –Change in WC + Interest = PAT + Interest –Change in IC Now if
we keep debt constant. Then, Cash flow to equity providers of capital = PAT –Change in IC = PAT –Change in Book value = PAT –Retained earnings = Dividend Note: In the growth phase
you can think of a capital issuance as a –ve dividend Problems with EV/EBITDA: 1. You can’t compare companies with different levels of vertical integration. 2. Even for similar business
models you can’t compare companies with starkly different levels of EBITDA/volume –because of the impact of maintenance capex a. Debt providers can take comfort from EBITDA. b.
Equity providers don’t have a claim on EBITDA. c. Interest, taxes and maintenance capex all have priority claim on EBITDA. SIMPLE STEADY STATE MODEL •In steady state:
Earnings growth = Book Growth = Dividend growth •P = D/(k-g)->P = E* p/(k-g)->P/E = p/(k-g) •g = delta B/B = E(1-p)/B = r(1-p)•->p = 1-g/r •So: P/E = (1-g/r)/(k-g) = 1/r * (r-g)/(k-g)
•And since r = E/B •P/B = (r-g)/(k-g) Cost of equity = Returns= Stock appreciation + Dividend yield P/B = (r-g)/(k-g); P/E = 1/r* P/B; Payout ratio = (1-g/r); Dividend yield = (E/P)*Payout;
Stock Price Growth + Dividend yield P/B vs. ROE: Linear relationship •P/B = (r-g)/(k-g) •P/B = (k-g)*r –g/(k-g) •Equation of straight line is: Y = mx +c •For a given industry in steady state:
k and g are constants •So: P/B and ROE should form a straight line •Note: No similar robust rationale for PEG ratio Linking ROE to ROIC E + D = C (i.e. Equity + Debt = Capital); Pre-tax
ROIC = c = EBIT/C; Interest rate = d; Post tax ROE = e; ROE = PAT/E = (EBIT –Interest)*(1-t)/E; = (c*C –d*D)*(1-t)/E; = (c* (E+D) –d*D)*(1-t)/E; = (c* E + c*D-d*D)*(1-t)/E;
=(c*E+(c-d)*D)*(1-t)/E; =c*(1-t) + (c-d)*(1-t)*D/E; 1-t) is what the business is generating; (c-d)*(1-t)*D/E is the contribution of leverage. It becomes negative if c<d.

XBRL: Standardization: Label, Presentation, references Validation: calculation, context, formulas; XBRL: extensible Business Reporting language; ISO20022: For electronic data
interchange between financial institutions; SDMX: Statistical Data and Metadata exchange; RIXML: Research Information Exchange Mark-up Language; MDDL: Market Data Definition
Language; FIX: Financial Information Exchange Protocol; MISMO: Mortgage Industry Standards Maintenance Organisation; ACORD: Association for Cooperative Operations Research
and Development. Benefits: Standardization: Rationalisation of reporting elements, Harmonisation of returns reduced the reporting burden on banks, Reduced compliance burden
Improved Data Quality: In-built validations have led to improvement in data quality, Ensured cleaner data gets reported, Improved accuracy and reliability of data, Facilitated inter-return
validation; Facilitates Data Analysis: Report creation and rendering of data became easier, Facilitated aggregation and data analysis Automated Data Flow (ADF): Laid the foundation for
data to flow directly from internal systems to reduce scope for data manipulation, Reduced time lags in data reporting
Macroeconomics: 3 PROBLEMS IN MACRO ECONOMICS – 1. Supply side: Shift the trend growth rate from line A to line B (land, labour, capital and productivity)., Demand: Keep
the amplitude of the variations around the trend small. ELIMINATE OUTPUT GAP, Maintain stability –inflation and exchange rates. 2. Total factor productivity - Land, Labour, Capital ->
Output/GDP 3. G= (Delta Y)/Y = (K/Y) * (Delta Y/K) = Investment rate/ICOR, Where:Y = GDP, K = Investment, ICOR = Incremental Capital Output Ratio = K/ Delta Y, But we know
that: K = Domestic savings + Capital inflows = Domestic savings + Current account deficit 4. Simple economy: No government and no trade, C + S = C + I, Potential Output = 100, Potential
Output = 100, C + S + T = C + I + G,S –I = G –T, Private Sector Surplus = Government Deficit 5. IN FY 18 DEBT PORTFOLIO FLOWS HAVE SURGED…..LEADING TO A RESERVE
BUILD AND GOLD IMPORTS ( AND CURRENCY APPRECIATION) 5. Money multiplier(Broad money/high money): M3/H = (C + D)/(C+R) = (C/D + D/D)/(C/D +R/D), Let us
call:Cash to deposit ratio: C/D = c,Reserves to deposit ratio: R/D = r,Money multiplier = (c+1)/(c + r) alt. H = C + R, M = C + D, But:, D = (H-C) + (H-C)(1-r) + (H-C) (1-r)^2 + (H-C) (1-
r)^3+ (H-C) (1-r)^4……, D = (H-C)/r, So: M = C + (H-C)/r

Why do Companies Get Distressed?•Change in business environment (regular business cycle risk vs. unexpected downturn risk)•Disruptions in product market (technology, consumer
preferences etc.)•Change in funding environment•Poor management (including fraud) Signs of Distress•Falling revenues and margins•High relative leverage ratios (and increasing over
time) and low debt service coverage•High relative turnover ratios (and increasing over time)•Asset sales•Employee exodusWhy Should Valuation of Distressed Companies Be Any
Different?•Going concern or not?•Widely different outcomes possible•Traditional measures like multiples may not work (P/E or EV/EBITDA)Questions to Ask Before
Valuation•Operational distress or financial distress?▫Financial engineering can help with financial distress but not with operational distress•Perspective?▫Buyout of distressed firm
(acquisition)▫Direct investment through private placement (PE)▫Indirect investment through share purchase in the open market (distressed fund)▫Valuation post-distress resolution (resolution
valuation)•With old or new management? Valuation Approaches for Distressed Firms•Liquidation valuation + value addition▫Collateralized vs. free assets▫Distress sale “discount” (can
there be orderly liquidation?)▫Carry forward losses as a potential asset▫Debt valuation▫Synergy valuation•Discounted cash flow (DCF)▫How to estimate cash flows? How to account for
truncation of cash flows?▫How to estimate terminal value?▫What discount rate to apply?•Market and transaction comparables ▫Earnings/value based multiples may not be appropriate;
revenue based multiple better but could have issue as well▫Recent transactions involving similar firms require proper matching of attributesStart with Enterprise Value (EV) first before
determining value of underlying securitiesDistress Firm Value = EVnodistress*(1-pd) + LV*pdLiquidation Value + Value Addition•Net asset valuation▫Plant (Adjusted replacement
cost)▫Real estate (Market value appraisal)▫Brand (Investment needed for an equivalent market presence/actual investment)▫Patents (Investment needed for an equivalent market
presence/actual investment)▫Clients (EV/Sales)•Synergy value addition▫Product market benefits (market share/pricing power etc.)▫People benefits (trained manpower etc.)▫Financial benefits
(tax loss etc.)Cash Flow Approach•Historical data is less relevant for forecast•Forecast period can be broken down into: ▫Transition period (from distress back to sound health)▫Period after
(in sound health)•Distance to default could be useful to estimate expected CFs during transition period•Terminal value could based on firm returning to sound health (or assuming
liquidation)•Uncertainty in CFs can be accounted for through changes in discount rate (WACC) as well▫Both costs of debt and equity are impacted by distress▫Debt-equity ratio is likely to
not remain constant▫Inadequacies of both book value and market value of debt▫What beta to use for equity?Cash Flow Adjustments For Distress•Adjustments are needed to account for
distress: ▫Stretched WC needs▫Market share pressures▫Difficulty to retain key employees▫Increase in financing costs▫Unique distress related costs including litigation costs•Tax shields may
or may not be valuable▫Carry forward losses could be valuable to the new investor•Retention rate may be negative in the earlier years•Use simulation to determine likely cash flows from a
probability distributionAndrade and Kaplan (1998) –Indirect cost of distress are 10-23% of firm valueDCF Approach•Modified DCF▫Use probability distributions to determine expected
CFs•Simulated CF▫Determine valuations under different scenarios where inputs to the DCF are simulated (like raw material prices, market share etc.)▫Determine probability of default
(truncating CFs) and use it to determine expected valuation of the company•Enterprise valuation under no distress but adjust for distress ComparablesApproach•Choosing the right
comparables▫Only distressed firms?▫Regular firms but make adjustments for distress in the multiple?▫Mix of firms that have liquidated and transitioned out of distress in the past?•Choose
the right multiple▫Revenue based or earnings based?▫Link multiples to objective measures of distress (like bond ratings) using data•Get earnings adjusted for distress▫Growth rates of bottom
percentile firms in the industry can be used•Transaction comparablesrequire apples-to-apples matched firms (control premium could be different)•Can be used for validation of other
approachesIssues with Equity Investment in Distressed Firms•Choice of investment timing•Limited disclosures•Composition of shareholders (short sellers/speculators may
dominate)•Triggering of bankruptcy process (may lead to delisting etc.)Other Issues•Frequent updationof inputs/valuation•Right people▫Value of the promoter (or existing
management)•Process of distress resolution▫IBC (analogous to Chapter 11 in the US)▫Will there be absolute priority violations?

The current public transportation options are insufficient, offering low substitutive power within the the Indian transportation
market (+ve) Bargaining power of suppliers: Suppliers are commonly specialized in one segment related to one type of client,
so their bargaining power is very low; The competition is harder today because of the entry of foreign firms into the domestic
market such as Volkswagen and Ford; There are a lot of products on the market (a great variety in the same range by multiple
manufacturers) and switching costs are low
Key structural risks: Emission norms, Technology shocks (electrification, autonomous and alternative models), Interest rate risk
(74 % of PVs are financed)

Continued development of retail points will strength top line growth and its moat • New production line will increase
Maruti :
overall production • New royalty formula will decrease current cost pressures • Significant progress has been made to launch
an Electric vehicle in India by 2020 • Portfolio diversification with new models targeting rural areas;Industry fundamentals
(penetration, rising discretionary spend) remain favorable over medium term

Maruti risk: JPY-denominated costs account for 10% revenues • Continued increase in commodity prices • Failure to launch or
poor reception of new product launches • Delayed price hikes and a significant increase in discount levels • Slower than
expected capacity ramp up

Eicher: 2
business lines VECV and RE Revenue 97% domestic based, 3% overseas (North & Latin America) so little exposure to
global risk (US and more) RE : Brand value : Loyal community driven + a true icon ! Quality : High R&D to innovate and best
value for money, strong track record of HQ, iconic motorcycles Leader in middle-weight motorcycle segment for India, only 3%
market share in overall motorcycle market VECV: High reduction in cost expected due to upcoming new supply chain IT system
within joint-venture Succesful recent launch of Eicher Pro heavy duty truck series