SOIC INVESTING CHECKLIST

What is the name of the stock and the market capitalisation?

Which category of the stock am I looking at?

Slow Growers
Stalwarts
Fast Growers
Cyclicals
Turn-Arounds
Asset Plays

What is the quality of Accounting?

What is the Debt/Equity of the company? (Prefer<0.7)
Is the company misallocating capital? (Non-core
business)
Has the company shared the wealth with the
shareholders historically? (Check Dividend Payout &
Share Buyback)
What is the EBITDA/CFO & CFO/PAT for the last 1, 3 & 5
years? (Higher the better & also compare with peers)
Does the promoter have private entities in the same line
of business?
How high are the Related Party Transactions compared to
sales?
Is there any contingent liability that threatens survival?
(Extremely high tax disputes in Inox's leisures case)
What is the auditor's opinion & are there any red flags in
the auditor's opinion (E.g: Shankara Building Products)
What is the Gross Working Capital when compared to the
Industry? (GWC= Receivable Days + Inventory Days)
How many times has the CFO changed in the last 5 years?
What percentage is the goodwill as a percentage of total
assets? (Is the goodwill acquired due to acquisitions in the
non-core areas)
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How high are the miscellaneous expenses as compared to
the other expenses? (E.g: Wockhardt as compared to the
rest of the industry)
The biggest red flag is if the Auditor resigns without any
explanation
How complex is the corporate structure? (E.g: UPL)
Are there any unaudited subsidiaries? (E.g: Motherson Sumi)
High Pledge (more than 30%) + High Debt is a lethal
combination

What are the qualitative filters to look for?

What is the Industry growth rate? (Are we looking at an

expanding or a contracting pond)
Is the company able to grow its sales in the last 5 years?
(Sales growth > 10%)
Who are the competitors?
Are the margins sustainable or volatile? (We prefer
sustainable & improving operating margins. Look at the last
5-10 years of operating margins)
Has the management walked the talk?
Are we looking at consolidated profit pools or fragmented
industry?
How good are the disclosures? (Do they conduct Con Calls
and give detailed investor Presentations & Annual Reports)
Is the Industry prone to booms & busts?
Cross cycle ROCE over 15%+
What type of Industry are we looking at?
1) Structural (E.g: FMCG, CDMO, Platforms)
2) Shallow Cyclicals (E.g: Off The Highway Tyres, Chemicals)
3) Cyclicals (E.g: Graphite Electrodes)

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What is the Competitive Advantage of the business?

Switching Cost + Critical Application

Brand
Distribution
Economies of Scale
Low-cost Producer
Regulatory Barriers to Entry
Network Effects
Intellectual Property/Technical Know-How
Exit Barriers

What Type of Business are we looking at?

Business to Business (B2B)

Business to Consumer (B2C)
Business to Government (B2G)
Business to Institution (B2I)

What are the Key Financial Metrics?

ROCE/ROE of last 5 years (ROCE > 15% compared to peers)

Gross Margins when compared to peers
Operating margins when compared to peers
Sales Growth of last 3-5 years
Debt/Equity < 0.7
Interest Coverage Ratio < 5 times
Fixed Asset Turnover of last 5 years
Trend of Receivable Days & Inventory Days
Check the Capex from CFI (If a manufacturing business)

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Do I completely understand the sources of earnings
growth of the company? (Circle them)

NEW PRODUCT GEOGRAPHICAL GROWTH IN THE CLIENT TAKING AWAY

INTRODUCTION EXPANSION END USER INDUSTRY MINING MARKET SHARE

INDUSTRY NEW BRAND EXPANDING

DISTRIBUTION ACQUISITION CAPEX
GROWTH INTRODUCTION

Which type of Investing am I doing?

Variant Perception (Typically Buy at < 1 time PEG Ratio)

Growth at Reasonable Prices (Typically Buy at < 1.5 times,
max 2 times PEG Ratio on the basis of forward estimates of
earnings)
Quality Investing (Typically hold for decades irrespective of
the price)
Deep Cyclical Investing (Typically buy at the bottom of the
cycle)

What is the Key Metric to track?

"You need a different checklist and different mental

models for different companies."-Charlie Munger

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What are the Thesis Pointers for Buying the stock?

MARGIN OPERATING
EXPANSION LEVERAGE
CORPORATE
ACTIONS DEMERGER

DELEVERAGING MANAGEMENT
CHANGE
PRODUCT MIX
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CHANGE INDUSTRY
CONSISTENT CYCLE
COMPOUNDERS
COST
CAPEX REDUCTION

What are the Thesis Pointers for Selling the stock?

I NEED CASH
THE GROWTH
HAS STOPPED

MY THESIS IS
WRONG

ACCOUNTING
FOUND A BETTER QUALITY WORSENS
OPPORTUNITY E.G: AUDITOR
RESIGNATION

"When the facts change, I change my mind. What

do you do sir?."- John Maynard Keynes

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Other reasons for selling?

There are two types of volatility:

1) Market Specific Volatility (When the entire market
corrects & this is not a reason to sell)
2) Stock Specific & Sector Specific Volatility (When the
stock corrects by 35%-40% in isolation. The trailing
stop loss for long-term investors should get triggered)

Where am I standing today?

SOIC 5 BUCKET FRAMEWORK

BUCKET 1: BUCKET 2: BUCKET 3:

HIGH ROCE + GOOD ROCE +
HIGH ROCE +
LOW/NO EARNINGS GROWTH HIGH EARNINGS GROWTH
HIGH EARNINGS GROWTH

REINVESTMENT MOAT + SIZE OF OPPORTUNITY REINVESTMENT MOAT + LARGE SIZE OF OPPORTUNITY

LEGACY MOAT + LIMITED SIZE OF OPPORTUNITY

BUCKET 4: BUCKET 5:
GOOD ROCE + GRUESOME ROCE/HIGH ROCE +
LOW/NO EARNINGS GROWTH LOW/HIGH EARNINGS GROWTH

LEGACY MOAT + LIMITED SIZE OF OPPORTUNITY CYCLICALS = SOMETIMES REINVESTMENT & SOMETIMES LEGACY

"Go where the puck is going to be"

-Warren Buffett

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"It's better to better to be roughly right than

precisely wrong."-John Maynard Keynes

Thumb Rules for Valuation

DCF Analysis does not work as it is built on too many

assumptions
Use Price/Sales in only manufacturing businesses
Use EV/EBITDA and compare with the peers that have
similar margins & ROCE
Use Price/Cash Flow when earnings are depressed due to
high depreciation
In Asset Light businesses, like IEX, CDSL use EV/Free Cash
Flow, Price/CFO
Look at the average P/E multiple of the stock in the last 3-5
years
Make a rough estimate of earnings & sales growth in the
next 3-4 years
Create Bull, Base & Bear Scenario 4 years out
In the Base Scenario assume the current multiples to sustain
In Bull Scenario, expect expansion in the current multiple
(Compare it with the highest valued peer in the sector)
In Bear Scenario, assume contraction in the current multiple
by 20%-25%
Your Margin of Safety is built into the assumptions that you
take while building Scenarios
If you are a quality investor, all that matters for you is the
consistency in growth and the company's competitive
advantage

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The Feedback Loop & How to Improve as an Investor?

"It's very important to have a feedback loop,

where you're constantly thinking about what
you've done and how you could be doing better
- Elon Musk

Date of buying
Percentage Allocation:
1) 6%
2) 8%
3) 10%
4) 2%-4% Tracking Position/Satelite
Period of Holding
Reasons for Selling
Lessons that I've learnt from either the success or failure in
my thesis:

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