How to identify a good business?
– Largest in the business
– Look for market leadership
– Continues to gain market share
– Challenging the leaders
– Look for a great product
– Dominant franchise or a product
– Pricing power
– Low cost producer
– Lead industry with cost
– Look for capital efficiency
– Paying back you money
– Go with largest player during downturn
– Performs well during cyclical downturn
How to identify potential investments?
– Look at market leadership available at dirt cheap valuations
– Companies which are going through an economic downturn in their specific industry
– Companies that are extremely profitable or extremely large putting pressure on the competition
– Buy debt free company at cycle bottom
Example # 1: Asian Paints
– It has 55% market share
– 3 times cash flow of entire business
Example # 2: Ashok Leyland
– Lesser capital to grow market share
– Gaining market share, but not the leader
– Balance sheet shrinking
– Higher market share using lesser amount of capital
– It has lot characteristic of a company operating in a challenging environment
Example # 3: Blue Dart
– Ability to add more capacity without increasing the balance sheet/adding more capital
– Scalable business
– It has best infrastructure on ground
– Only profit making company in the industry
Example # 4: VA Tech Wabug
– Trading 3 times cash on book
– Strong cash flow
– Operating in a very tough industry
Kenneth’s Mantra:
– Pick financially sound companies, preferably debt free
– Choose companies that respect capital
– Try to stay with leaders in the sector
– Monopolistic companies make all the money
– Size of the opportunity larger and growing
– Cash flow is the single most important financial parameter to look for
– Avoid companies which try to expand its balance sheet
– Avoid companies which continues to put more money to work
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