VARIANT PERCEPTION

A FRAMEWORK THAT WORKS IN THE INDIAN STOCK MARKET

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School of Intrinsic Compounding
 “To be able to take advantage of such
divergences, you have to think in a way
that departs from the consensus; you
have to think different and better. This
goal can be described as second-level
thinking or variant perception.”
-Howard Marks

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PATTERN RECOGNITION

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School of Intrinsic Compounding
 MENTAL MODELS FOR VARIANT PERCEPTION

MARGIN OPERATING
EXPANSION LEVERAGE
CORPORATE
ACTIONS DEMERGER

DELEVERAGING MANAGEMENT
CHANGE
PRODUCT MIX
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CHANGE INDUSTRY
CYCLE

CAPEX COST
REDUCTION
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School of Intrinsic Compounding

Cost Efficiencies +
Industry Cycle
(In tons)
2,50,000
INDUSTRY SLOWDOWN
ICK
T
UP 1,99,213 2,11,261
2,01,716
2,00,000

1,72,420
1,54,156
1,47,535
1,50,000
1,38,339 1,42,810
1,33,039

1,11,544
1,00,000

50,000
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0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
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INDUSTRY
SLOWDOWN

CK
TI
P
U

INDUSTRY SLOWDOWN
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A Great Company going

through a Tough time
4,000 Sales

3,366

3,000 2,841
Industry Slowdown
2,277 2,277
2,096
2,000 1,940
1,596

1,000 School of Intrinsic Compounding

0
2014 2015 2016 2017 2018 2019 2020
 School of Intrinsic Compounding

BROWNFIELD GREENFIELD
CAPEX CAPEX

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Better Asset Turns Lower Asset Turns

Better ROCE Lower ROCE
Margin Accretive Lower Margins
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Improving Margins through

a Brownfield Capex

20%

16%
15% 15%
15%
14% 14%
13%
12%
11% 11%
10%

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5%

0%
2012 2013 2014 2015 2016 2017 2018 2019 2020
School of Intrinsic Compounding

HIKAL
CON CALL- Q FY
In FY 19, we have initiated a capex of Rs.350 crores
which should be completed in the next 18-24 months,
of which major investments will be in Panoli facility
where we will be at Panoli facility where we are adding
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multi product of Intrinsic
facilities Compounding
along with the associated
infrastructure for both pharmaceuticals & crop
protection businesses. This Capex will be funded by a
mix of debt & internal accruals. The average asset
turnover on this capex is expected to be around 1.5x.
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 Product Mix Change
Margins in Different Products

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Spray Dried Coffee Powder Spray Dried Agglomerated Freeze Dried Coffee
Margin Profile: 2  Margin Profile: 3  Margin Profile: 1 

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Recent Capacity
Expansion
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Product Mix Change

Fixed Assets Expansion

In crores
750 724

500

393 371 383

250
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0
2017 2018 2019 2020
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Product Mix Change

30%
28%
27%
25%

21% 21%
20%

10%
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0%
Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20
 Changes in Capital Allocation

According to the new Dividend distribution policy of

ITC, the company would pay 80-85% of its Profits
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After Tax to its shareholder from FY 2020.
Opting for Joint ventures in the Hotel Business
Addressing key concerns of substantial capital
earnings at low rates of return

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School of Intrinsic Compounding

What will happen to ROCE if

margins expand?

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 School of Intrinsic Compounding

Improving Margins

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Improving Margins
8 MR PRODUCTIVITY IN RS MN

6.5
6.1
6
5.6
5.2
5.0
4.6 4.7
4.2
4

2 School of Intrinsic Compounding

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2011 2012 2013 2014 2015 2016 2017 2018
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Sales Mix
100%
10% 11% 11% 11% 13%

75%

50%
90% 89% 89% 88% 87%

25%
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0%
FY 15 FY 16 FY 17 FY18 FY 19
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Operating Profit Margins

20%
18% 18% 18%
16%
15%
15%

11%
10%

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5%

0%
2015 2016 2017 2018 2019 2020
School of Intrinsic Compounding

Operating Profit Margins

20%

16% 16%
15% 15%
15%
14%

11%
10%
9%
7%
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5%

0%
2013 2014 2015 2016 2017 2018 2019 2020
 When the Good, the Bad &
the Ugly trade together

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When the Management Changes

Blackstone spent Rs. 3215 crores for a 75% acquisitions in

Essel Propack. Essel makes 8 billion laminated tubes a year
& it makes 1 out of 3 toothpaste tubes worldwide.
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Blackstone improved the performance of Essel by entering
newer regions & segments like beauty, cosmetics &
Pharmaceuticals.
 Chemical Industry, Pharmaceutical
Industry & API Manufacturers
Value Chain Analysis

Manufacturer of Manufacturer of
Glass Lining Equipment Amines

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School of Intrinsic Compounding

Growing to Fast
"We feel there's so much about a financial institution that you don't
know by looking at just figures, that if anything bothers us a little bit,
we're never sure whether it's an iceberg situation or not"
-Warren Buffett
Nearly 100% Cagr of loan growth to property developers from fy16-fy19.
Writing off Losses directly against the balance sheet rather than P&L. If this isn’t a
red flag then i don’t know what else is.
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Nearly 8% of Bank capital given out as unsecured loan to IL&FS. Moreover,
disclosure wasn’t made in a timely manner.
Acquisition of Bharat Financial is like a double edged sword. In good times it will lead
to a bump up in ROE, but if the bad times strike which they do in our country. ROE’s
will go down and credit cost will spike. Let’s see how this goes.
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The Next

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Big Fish in a Small Pond

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 Peak Margins &
Peak Valuations

Exposure to intense competition in the overseas marketSTL derives about half its
revenue from exports amid the intense competition it faces in the international OF
and OFC markets.
In the domestic market also, these segments are susceptible to capex cycles of
telecom service providers. School of Intrinsic Compounding
Globally, most contracts are finalised through an intensely competitive bidding
process, which limits the pricing power of players.
However, STL is the largest player and a clear market leader in the domestic market,
despite competitive pressure from peers such as Himachal Futuristic
Communications Ltd, Vindhya Telelinks Ltd, Aksh Optifibre Ltd, and Finolex Cables
Ltd.
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 School of Intrinsic Compounding

Peak Margins + Peak Valuations

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 School of Intrinsic Compounding

School of Intrinsic Compounding