Shubham Biswal Profile picture
A journal of the things I read/learn regarding businesses & investing (Caveat Emptor). Standing on the shoulder of giants.
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Apr 10, 2023 11 tweets 5 min read
Amit Mantri sir never disappoints. In his recent Q4 2point2 Capital investor letter, he mentions how Cash flow from operations is slowly losing relevance in identifying frauds and how FCF is a better judge for determining the quality of business (with a meme as well🤣): Image The two ways cos inflate accounting profits:
- Exaggerating revenue
- Under-reporting expenses

All frauds have one thing in common: lack of cash flows. Botching up the nos. (eg: commission paid to create fake bills) has become tougher with the advent of regulations like GST: ImageImageImage
Mar 7, 2023 18 tweets 6 min read
🔖IND AS 115: an accounting standard that has been buzzing around after the recent EKI disclosure. But what is it? And how does it work? What is the need for adjustments? I answer these questions with the help of some listed examples in this post. Let's go! IND AS 115 deals with revenue recognition from long-term contracts with clients. The technical definition:

"An entity shall recognise the amount of allocated transaction price as revenue once a performance obligation is satisfied."

So, say for example: I sign up for a deal with
Feb 26, 2023 25 tweets 9 min read
I have observed many people using PE ratio for life insurance companies. If you are new to the industry, it is natural to be confused. However, look no further than the FY17 AR of ICICI PRU. It contains the definitions of various terms used in the insurance industry, and why PE ratio might not be a good approach.

First, I want you to think about how a life insurance company works. We pay a premium every year, and we are assured a certain sum. The costs of acquiring a customer in a life insurance company don't get covered in the first year. Just
Feb 24, 2023 7 tweets 2 min read
🏪You might have heard this:
"Diagnostic businesses have almost no barriers to entry, but have high barriers to scale."

But why? Here's one reason. Diagnostic labs function on an ink cartridge-printer business model. For the ones selling the printers, say a company like HP, do you think they make any money on the printers? Nope. The major money is made on the ink cartridges they sell to the customer post that.

Another example: Do you think razor blade companies like Gillette make money on the razor or the razor blades? I think you get the point.
Feb 11, 2023 8 tweets 2 min read
Deepak Nitrite

The Q3 concall gives us an insight into how the management thinks non-linearly and about adjacencies. Here are some interesting snippets (not the complete note): - Becoming a truly backward integrated player: MIBC MIBK (40K TPA and 8K TPA respectively and finds application in cosmetics, paints, etc.), and IPA are derivatives of acetone. The company will consume 80% of the acetone that it manufactures. Deepak is aiming for import
Jan 16, 2023 16 tweets 8 min read
Are you an investor in the pharma sector? Here are some things that help me in its analysis. First, we have to understand that, unlike other sectors, the pharma sector cannot be clubbed into a category. Each firm is in a different part of the value chain, with their

1/n expertise in certain molecules. The demand-supply dynamics are different for different molecules. Thus, it is important to know what's happening with each molecule/drug on a granular level. Let us start with a molecule called Levetiracetam. Yesterday I came across an adverse

Jan 14, 2023 7 tweets 3 min read
📌Always avoid "treadmill" businesses. This term was coined by Bharat Shah, in his book - of long-term value. According to him, these are businesses with moderate ROCE (10-20%) but have high earnings growth (>15%). There are other ways to figure out if the company is in

1/n Image category. Let us take the example of the matrimony players. Case in point: This firm has been operational for about 15-17 years now but still struggles to reach the tipping point. What do I mean by tipping point? It is the point where the platform is

2/n Image
Jan 1, 2023 5 tweets 2 min read
This is a page from Bharat Shah's book Of long term value. He has categorised stocks based on their roce and growth rates. One thing that is clear is that, high roce without any growth and vice versa, do not generate substantial returns. The reasons are simple:

1/n If the firm makes a high return on its capital, but is not able to find reinvestment opportunities to deploy it in, ultimately the cash flow growth is subdued as well. "G" is the growth rate in cash flows, RR is reinvestment rate and ROIC is return on capital. (Comus investments)
Dec 31, 2022 8 tweets 3 min read
Forward integration is one of the ways firms expand their margins, by securing control over their downstream products. But is it always a good strategy? Let us understand with the example of two firms where one has opted to go further in its value chain, and the other didn't:
1/n First comes Divis Labs, who did not decide to go into formulations. The value chain in pharma starts at the KSM (key starting material) and ends at formulations. Divis is into manufacturing generic APIs & custom synthesis, which is like the raw material for formulators.

Dec 30, 2022 9 tweets 4 min read
ROE & ROCE. They are also called the capital efficiency ratios. But have you ever wondered why there are two seperate formulae? And is this this difference significant for an investor? Why is PAT considered as the returns for computing ROE and EBIT for ROCE? Lets see why.

1/n Image Before we proceed further, i know there are some people who are new to these terms. Please refer to some of my write-ups, attaching the link below. I will come up with detailed write-ups soon.



Nov 16, 2022 10 tweets 5 min read
Usually, we tend to avoid companies with debt. We end up going to the screener, and use the debt/equity ratio. A firm with d/e ratio of greater than 0.2 times, is not considered fit for investments. However, I carry a different view on debt. Let us understand with some examples👇 Image First, let us understand what debt & debt/equity really means for a firm. Usually a firm takes long term & short term debt to finance its short term operations (wc) or to fund its long term projects (setting up fixed assets). However, debt beyond a point can get harmful.
Nov 14, 2022 4 tweets 3 min read
Is there a link between most ceramic/tiles companies concentrated in Morbi/areas near Gujarat? Turns out there is! These companies use Natural gas as a fuel to power their facilities. Also, at <400 km of a pipeline of Natural Gas, the prices of gas delivery are cheaper! ImageImage Gujarat accounts for about 32% of natural gas consumed in our country. Source:… (Image attached below)
Observe how both Cera & Kajaria were affected by the sudden rise in Natural Gas prices in the most recent quarter. Now you know why! ImageImageImage
Nov 2, 2022 6 tweets 4 min read
A meta-post of all my posts, will keep updating this thread as I write more stuff. If you find some value, please rt & like. Thank you😄

1. The post on price/sales, how to look at it. How it varies with operating margins of the business and why:

2. A write-up on how peak margins/peak valuations don't sustain with case studies - ⚙️

3. A different take on the PE ratio, how I view it:

4. Are loss-making stocks always that bad? Cases where they are actually investable:
Nov 2, 2022 13 tweets 5 min read
When Rakesh Jhunjhunwala Sir was asked - "When do you decide to sell a stock?"

He gave a few pointers, but the one that stood out was - If the firm is trading at peak multiples and is operating at peak margins, I exit. I was always a believer of the buy and hold, but now: 1/n Image Things have changed for me. I realized some stocks are just not worth holding at obnoxious valuations if they are not able to keep up the earning growth rates & their margins. If there are cheaper alternatives, I would rather exit and go for them. As Benjamin Graham says - 2/n Image
Nov 1, 2022 14 tweets 6 min read
(Price/sales) is one metric that is becoming popular now, with all the new-age businesses coming up. I avoid new-age businesses, but I still feel (Price/sales) is a good valuation metric for good businesses with temporary headwinds. So what is it?🤔Let's try to understand: 1/n Image Basically, price/sales is another valuation metric. It simply means the price you are willing to pay to acquire the firm, for every rupee of sales done. So simply put if p/s for a firm is 1, I am paying 10rs for every rupee of sales done. However there is a problem. 2/n Image
May 29, 2022 11 tweets 4 min read
For Part 2 into understanding roce/roic of a business - roce/roic although by general definition sounds very simple, I.e the returns a company is generating on its invested capital, sounds very simple prima facie and a bit similar to ebit/op margins. However - contd. Remember this "capital employed" Is the money employed for buying the raw materials, for funding capex growth etc. So in a way this doesn't show much about the value addition that a company does to its raw materials (which operating/ebit margins does).
May 28, 2022 6 tweets 2 min read
I think not a lot of people understand the difference between two very important return ratios : operating margins and roc/roic. Both seem very similar but there's a huge difference. Both have their own merits that help you understand the key competitive advantage of any business Operating margin/ebitda margin simply means how much value a company can add to its raw materials to sell the final product. It has two key elements - sales and (cogs+sga). So if a company has high ebidta margins it simply means two things :

1. That the company is able to