(done the right way)

A practical discussion covering

 Key financial drivers
 Cash flow statement
 Primer on valuations
FIRST THINGS FIRST
PR OP E R F O RM
 PR OP E R F O RM
Particulars Y 2018 Y 2019
Revenue 8,494 10,393
COGS 4,641 5,430 → Costs directly attributable to product/service

Gross profit 3,853 4,963

Indirect expenses 3,024 3,714 → Costs not directly attributable for product/service
E.g. employee cost/other expenses etc.
EBITDA 830 1,249
Depreciation 413 419
EBIT 416 830
Interest expense 331 328
Other income 166 87 → Other income never a part of EBIT or EBITDA
PBT (pre exceptional) 251 589
Particulars Y2018 % Y2019 %
Exceptional items 15 - Revenue 8,494 100% 10,393 100%
PBT 236 589 GP 3,853 45% 4,963 48%
Taxes 135 50 EBITDA 830 10% 1,249 12%
EBIT 416 5% 830 8%
PAT 102 539
PBT 236 3% 589 6%
PAT 102 1% 539 5%
KEY ITEMS THAT MATTER
 LE T ’ S D E BA TE
Company X Which company is fundamentally stronger? Company Y
Particulars Y1 Y2 Y3 Y4 Particulars Y1 Y2 Y3 Y4
Revenue 113 130 155 196 Revenue 915 1,098 1,263 1,389
Operating profit 19 27 36 55 Operating profit 174 198 202 208
Interest 5 4 3 2 Interest 54 61 67 71
Depreciation 8 9 10 11 Depreciation 35 39 42 47
PBT 7 14 23 42 PBT 85 98 93 91
Tax 2 4 6 11 Tax 21 25 23 23
PAT 5 11 17 32 PAT 64 74 69 68

CFO 13 19 25 38 CFO 70 79 81 83
Capex 15 15 15 15 Capex 150 170 120 125

Equity funds 100 111 128 160

Equity Value 250 324 393 461
Debt 50 44 28 18
Debt 450 508 516 527
Capital employed 150 155 156 165
Capital employed 700 832 909 988

Total assets 150 155 156 165 Total assets 700 832 909 988
LE T ’ S D E BA TE

Start with a common size statement

Company X Company Y
Particulars Y1 Y2 Y3 Y4 Particulars Y1 Y2 Y3 Y4

Revenue 100 100 100 100 Revenue 100 100 100 100

Operating profit 17.0 21.0 23.0 28.0 Operating profit 19.0 18.0 16.0 15.0

Interest 4.0 3.0 1.6 0.8 Interest 5.9 5.6 5.3 5.1

Depreciation 6.6 6.9 6.5 5.6 Depreciation 3.8 3.5 3.4 3.4

PBT 6.4 11.0 14.9 21.6 PBT 9.3 8.9 7.3 6.5

Tax 1.6 2.8 3.7 5.4 Tax 2.3 2.2 1.8 1.6

PAT 4.8 8.3 11.2 16.2 PAT 7.0 6.7 5.5 4.9

100 bps increase in cost leads to 6% 100 bps increase in cost leads to 20%
drop in net-profit drop in net-profit
LE T ’ S D E BA TE
LE T ’ S D E BA TE

Company X Company Y
Debt/EBITDA Debt/EBITDA
7.8

5.7 4.7
4.5
4.0 4.2
4.4

3.0

Y1 Y2 Y3 Y4 Y1 Y2 Y3 Y4
LE T ’ S D E BA TE

Company X Company Y
Particulars Y1 Y2 Y3 Y4 Aggr. Particulars Y1 Y2 Y3 Y4 Aggr.

FCF (2) 4 10 23 36 FCF (80) (91) (39) (42) (252)

LE T ’ S D E BA TE
TH E KE Y M E TR I CS TO LO O K F O R
Non-financials
Particulars Remarks
3Y CAGR - Revenue Check the trend
3Y CAGR - EBITDA Higher than revenue growth implies margin expansion
3Y CAGR - Net profit Higher the better

Total Debt/Equity Relative measure; more than 2x worrisome

Net debt/EBITDA Relative measure; more than 3x worrisome

CFO/EBITDA (%) Higher the better; measures working capital needs

WC needs Lower the better

FCF Aim for positive figure over longer term

Dividend payout (%) Relative measure; higher the better
RoE (%) Aim for minimum 15% (or in the future)
F O C US A RE A - C F O

1. What exactly is CFO?

CFO is cash generated (purely) from operations.

2. What's more important – CFO growth or PAT growth?

Both are important but CFO growth is very important.

3. Can CFO growth exceed PAT growth in a year?

Yes it may happen.
 F O C US A RE A - C F O
Particulars Mar’11 Mar’12 Mar’13 Mar’14 Mar’15 Mar’16 Mar’17 Mar’18 Mar’19 Mar’20

Revenue 1,242 1,444 1,619 2,239 2,435 2,508 3,208 3,457 2,781 2,557

EBITDA 121 130 154 194 210 216 239 292 194 217

Particulars Mar’11 Mar’12 Mar’13 Mar’14 Mar’15 Mar’16 Mar’17 Mar’18 Mar’19 Mar’20 Aggregate

Cash flow from operations 27 -79 82 112 6 -217 6 -216 -76 245 -110

Cash conversion rate (%) 22% -60% 53% 58% 3% -101% 3% -74% -39% 113% -6%

CFO be negative when EBITDA is positive!

Calculate cash conversion rate as a hygiene factor

F O C US A RE A - F C F

1. How is FCF calculated?

FCF is CFO minus capex minus acquisitions.
You may also deduct interest on debt.
2. How is a negative FCF even possible?
..through internal accruals or raising of capital – debt or
equity.
3. Is negative FCF necessarily bad?
Look at it in light of returns on incremental capex
F O C US A RE A - F C F

Particulars Mar’14 Mar’15 Mar’16 Mar’17 Mar’18 Mar’19 Mar’20 Aggregate

CFO 43,261 34,374 38,134 49,550 71,459 42,346 98,074 377,198

Capex (60,087) (63,364) (46,898) (78,109) (73,953) (93,626) (76,517) (492,554)

FCF (16,826) (28,990) (8,764) (28,559) (2,494) (51,280) 21,557 (115,356)

Borrowings 138,761 168,251 194,714 217,475 239,843 307,714 355,133

F O C US A RE A - D UP ONT
F O C US A RE A - D UP ONT

Particulars Company X Company Y Company Z

ROE (%) 15% 15% 15%

Particulars Company X Company Y Company Z

Net profit margin 5% 10% 15%

Asset turnover 2.00 1.00 1.00

Financial leverage 1.50 1.50 1.00

F O C US A RE A - RE TU RN RA TI O S
Particulars Company X Company Y Particulars Company X Company Y
Fixed Assets 500 800 Revenue 800 800
CWIP 250 0 EBIT 250 250
Other Assets 100 50 PAT 75 75
Total Assets 850 850

Particulars Company X Company Y CWIP is not giving any returns yet

Equity 500 500
but adding to the base of capital
Borrowings 250 250
Other liabilities 100 100 employed.
Total Liabilities 850 850

Particulars Company X Company Y Formula

RoCE (%) 33% 33% EBIT / (Equity+Borrowings)
RoE (%) 15% 15% PAT / Equity

RoIC (%) 50% 33% EBIT/(Equity+Borrowings-CWIP) RoIC helps to bring a clearer picture
TH E KE Y M E TR I CS TO LO O K F O R
Financials
Particulars Remarks
Loan book growth Compare with leaders and system credit growth
NIM yield (%) Check the trend
PPOP growth (%) Higher the better
Net profit growth (%) Higher the better
GNPA (%) Check the trend v/s compare it to peers

Quality of book
Corporate: Retail split
Average loan ticket size
Risky segments
RBI divergence report
it is not a science
D I F F E RE NT S TO C KS - D I F F E RE NT M UL TI PL E S !
Company P/E
FMCG 1 71 P/E ratio is
FMCG 2 74 influenced by
FMCG 3 53
earnings growth
FMCG 4 27
FMCG 5 16
& ROE
FMCG 6 13

Sales growth PAT growth ROE

Company P/E
5 years 5 years (%)
FMCG 1 5% 14% 81% 71
FMCG 2 5% 10% 50% 74
FMCG 3 8% 16% 34% 53
FMCG 4 2% 7% 15% 27
FMCG 5 5% 10% 23% 16
FMCG 6 0.50% -2% 42% 13
W H Y M U LT I PLE S M O V E ?

36x PE to 80x
(120% gain just on
re-rating)

Why did it happen? Random walk?

W H Y M U LT I PLE S M O V E ?

Street rewarded the company for exceptional PAT growth

W H Y M U LT I PLE S M O V E ?

30x PE to 12x
(60% loss just on
de-rating)

Why did it happen? Random walk?

W H Y M U LT I PLE S M O V E ?

Street penalized the

company from poor
PAT performance.
PE G R AT I O

PE ratio disregards the future expected

growth rate

PEG ratio helps user understand what

multiple is given for what level of growth. It is
a more accurate valuation measure

Particulars Company X Company Y

P/E 25 45 PEG ratio – lower
Projected 3 years CAGR 12% 32% the better !
PEG ratio 2.1 1.4
I am reachable at

E: nagar.vikas11@gmail.com
L: www.linkedin.com/in/nagarvikas/