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Gordon
@gordonmax
, 11 tweets, 2 min read Read on Twitter
1/ THREAD on improving understanding of a business.
Usually the first step in fundamental investing. Over time I have found it useful to simplify the complex positioning of a biz into a few simple categories
2/ Most biz I know can be classified into one or more combinations of the following categories (pt3) Some simplified examples later in the thread to explain.

Disclaimer: This is limited to my understanding. It’s not perfect. It’s not a formula. May not work for you.
3/ These basic categories are:
- Manufacturing / Production
- Financing / Leasing
- Store / outlet
- Rental
- Construction / Project based
- Distribution
- Trading / Arbitrage
- Platforms / Exchanges
- Capacity creation
- Intellectual Property monetisation
- Manpower
4/ Ex: FMCG / Durables - mfg (or trading) + distribution
Aviation / Telecom - capacity creation + distribution
Pharma - IP monetisation + mfg + distribution
Power - capacity creation + mfg + (distribution)
5/ Indian IT - arbitrage + manpower + IP monetisation (sometimes?)
Hotels - capacity creation + outlet
EPC / Real Estate - construction / project
Banks - Lending + platforms (select)
6/ Why I use this? Helps me quickly understand what to analyse. Identify strong / weak areas. And gives you an idea of where value lies or where value can be built / get destroyed. Also helps identify how you want to structure your themes
7/ Ex: Educomp (for those who remember) wasn’t an education business. At its heart SmartClass was a product leasing business.
Ex: Telecom towers are a rental biz.
8/ Ex: Pure lending is a financing biz. But quality mgmt can make it a lending + platform biz (ie product cross-sell = fees)
Ex: By this frame real estate players = EPC players since it’s a project / construction biz
9/ Ex on playing themes: One can play real estate through projects / construction (operators) or mfg + distribution (building materials) or capacity creation + distribution (cement) or lending (HFCs)
10/ More ex on theme plays: Play power through capacity creation (plants) or distribution (elect appliances). Play tourism through capacity creation (hotels) or manpower + distribution (forex, travel ops)
11/ I could go on but I hope you get the drift. Most importantly simplifying a biz to basic elements can help you call out incorrect positioning or avoid paying too much for stories. Happy to hear views /fin
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Gordon
@gordonmax
1/ A few thoughts on evaluating store / outlet based businesses. Most analysts value them on absolute earnings (ie corporate EBITDA, PAT) which mix SSSG and store expansion. Metrics like SSSG also don’t provide sufficient insight if store growth is high.
2/ I would rather value operational stores (min 65-70% value for today’s stores in market cap) + franchise value (~30% of market cap). % range will change depending on franchise quality
3/ At the store level one can run a DCF of a steady state store. You need capital invested per store and steady state margins. Assuming margins = cash since incremental working cap per store is not much unless product mix changes or heavy discounting takes place
Read 6 tweets
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Gordon
@gordonmax
Promoter of decently successful SME on why we haven’t been able to realise our potential in manufacturing: “At heart most entrepreneurs in India still have a trading mentality.” He was obviously referring to peers in the SME space not large industrialists. (THREAD) /1
2/ Got me thinking. Connecting the dots from a recent book I read, almost all of India’s large industrial houses today started as traders, agents. Ploughing profits of trading to backward integrate in mfg.
3/ Similar trend among todays SMEs. Over the last year I have met many entrepreneurs who have sought private equity to grow new ventures within their groups. A vast majority started out as traders a generation or two ago. Some as late as 10y ago.
Read 9 tweets
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Gordon
@gordonmax
@prosperotree 1/ Let me attempt this with some rough calcs. METHOD 1: Below snapshot from company data except for avg store size which is calculated. Note that the revenue CAGR is driven by sqft growth. Why this is imp later in METHOD 2
@prosperotree 2/ With the avg store data I attempted to value a single store. Revenue is avg store sqft x Avg rev/sqft from tweet (1) – gives a FCF stream. Obviously many assumptions made
@prosperotree 3/ Discounting this FCF stream at diff exp return rates gives an avg value per store. At 18% discounting each store is worth 68 cr and existing stores are worth 10k cr or 11% of market cap and so on
Read 7 tweets

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