Compounding 101

If you've spent any time reading about money, you've probably heard this classic riddle: *Would you rather take Rs 1,000 every day for 30 days, or a single paisa on day one that doubles every single day for a month?*

We naturally think in straight lines, the one paisa problem introduces us to thinking about exponential growth. It however makes us view compounding as a get-rich-quick scheme rather than what it really is: a slow, grueling test of endurance.

Let's quickly look at the math behind the trick.

If you go with the flat Rs 1,000 a day, you get linear growth. At the end of the month, you walk away with exactly Rs 30,000. Easy enough.

But if you pick the doubling paisa, you step into the world of exponential growth. Using the mathematical formula for compounding, that tiny 1 paisa transforms into a staggering Rs 1,07,37,418.23 by day 30. That's right—over 1 Crore! You end up with more than 300 times the flat daily rate.

Now, for the first two weeks, you'd probably feel pretty foolish about your choice. On day 15, you've only made a grand total of Rs 163.84. But because exponential growth builds on past results, those final few days cause your total to completely explode.

But here is the cold, hard reality check: While this is a brilliant mathematical illustration, the real world does not let you double your money in a day. When we bring this back to real-life investing, the illusion of speed shatters completely.

If we assume a very solid, optimistic growth rate of 12% a year, it actually takes about 6 years to double your wealth.

Think about what that means. One "day" in our magical 30-day puzzle is actually 6 years of your real life. If you work and earn for 36 years, you don't get 30 doublings. You only get 6. Over a standard career, your wealth can realistically only multiply about 64 times.

When we look at businesses as value investors, we search for companies with a high ROCE. In plain English, that just means they are highly efficient at turning every single rupee of profit into even more profit, and they have the runway to keep reinvesting it over long periods. But a business can only generate massive piles of cash if it has a solid capital base to start with.

The exact same principle applies directly to your own portfolio. Since you only have about 6 "doubling cycles" in your working life, your starting capital—that initial corpus—is the single most critical piece of the puzzle.

If your starting amount is practically zero in your 20s and 30s, multiplying it by 64 when you hit retirement still leaves you with a fraction of what you actually need. The money you save and invest in those very early working years does the heaviest lifting. It's what allows compounding to actually work its magic later on. Waiting to invest until you "make more money" robs you of the most powerful tool you have: time.

The Bottomline

Compounding isn't a magic wand. It's a heavy, stubborn flywheel that demands a lot of upfront effort, strong early capital, and decades of immense patience before it finally starts spinning on its own.

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• The Noise: What the AI hype-filter caught (and why to ignore it).

• The Signal: The fundamental truth about the cash flows and moats.

• The Verdict: A qualitative deep dive, not a quantitative score.

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The Noise

The Indian tech scene is going through a massive shift right now. You’ve probably noticed the wild market swings lately, with billions wiped off global software stocks in a matter of months.

Why? It comes down to the rapid rise of AI agents. Wall Street and Dalal Street are both sweating over what developers jokingly call the “SaaSpocalypse.” The fear is simple: autonomous AI will soon replace any digital product that’s just a pretty interface sitting on top of a database.

The Signal

Here is an interesting thought experiment. Let’s look at things through the “Death by Clawd” framework to see which platforms can actually survive.

The truth is, the golden age of the pure “software wrapper” is over. Building a sleek app interface isn’t a sustainable moat anymore; it’s just table stakes. But here’s the catch: AI has a fundamental limit. It lives entirely in the world of bytes. It really struggles with atoms—things like physical laws, government regulations, and human trust.

When we look at India’s listed tech companies through this lens, a clear divide opens up between the winners and losers.

1. The “Immortal” Cohort: Moving Things in the Real World

The companies safest from AI are the ones using software to manage chaotic, physical operations.

• Logistics & Delivery: Think Zomato and Delhivery. They are practically immortal to AI disruption. An AI bot can’t physically navigate India’s chaotic infrastructure to move millions of parcels across 19,000+ pin codes. Even if you tell your new AI assistant to “order my usual Friday biryani,” that AI still has to transmit that order through Zomato’s API (the digital bridge that allows software to communicate) because Zomato controls the actual delivery fleet on the ground.

• Maps & Omnichannel: MapmyIndia is another great example. They own the ground-truth map data that AI agents need to function in the real world—data collected by fleets of actual survey vehicles. The same goes for vertical retailers like Nykaa and FirstCry. Their physical warehouses and brick-and-mortar stores can’t simply be coded away.

2. The “Safe” Cohort: Heavy Regulation and Complex Networks

Deep B2B software and highly regulated financial platforms will survive simply because they are so deeply embedded in corporate systems.

• Fintech & Enterprise Tech: Companies like PB Fintech (PolicyBazaar) and Ramco Systems have a massive regulatory shield. Sure, an AI might know the tax code, but it’s prone to hallucinating facts. More importantly, an AI can’t legally broker an insurance policy without strict IRDAI licenses, and no company will let an AI blindly execute global payroll without rock-solid software keeping watch.

• B2B Networks: Unicommerce and IndiaMART are also fundamentally safe because they rely on verified, trusted business networks rather than just a search bar. RateGain has spent years embedding itself into the clunky, legacy reservation systems of hotels worldwide—something a basic AI can’t just hack its way into.

3. The “Sweating” Cohort: Pure Digital Middlemen

The biggest risk lies with platforms that simply act as digital matchmakers. If a digital workflow fits perfectly into an AI prompt, that business is in trouble.

• Online Travel Agencies (OTAs): MakeMyTrip, Ixigo, and EaseMyTrip face an existential threat. Think of OTAs as highly paid digital travel agents. If an AI can do the exact same job for free by talking directly to the airlines, the OTA’s beautiful search interface becomes obsolete. They risk going from highly profitable discovery platforms to simple, low-margin data pipes.

• Discount Brokers: Angel One and 5paisa revolutionized investing in India. But what happens when you can just give an AI secure access to your account to execute your trading strategies automatically? Once AI handles the execution, the broker’s fancy charting tools and sleek app features just don’t matter anymore.

• Digital Classifieds: Info Edge’s Naukri is up against specialized AI agents that can autonomously conduct voice interviews, bypassing the old keyword-search model entirely.

The Bottom Line

Record profits and great margins today don’t guarantee survival tomorrow. As the cost of building software drops to nearly zero, the true long-term value of India’s tech companies will detach from old metrics like “active users.” Instead, it will come down to the depth of their regulatory moats and how deeply they are rooted in the physical world.

Join the Hunt

The market is noisy. Your inbox shouldn’t be.

By subscribing to Budget Tiger, you’re making a commitment to rational, owner-oriented investing. Here is my commitment to you:

• One email a week: Delivered every Sunday at 8 AM.

• 100% Signal: Deep research powered by AI, vetted by human judgment. No spam, no filler.

• Always Free.

You’ll get one email a week from me. It will cover:

• The Noise: What the AI hype-filter caught (and why to ignore it).

• The Signal: The fundamental truth about the cash flows and moats.

• The Verdict: A qualitative deep dive, not a quantitative score.

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The Noise

It’s easy to get swept away by the roar of the crowd, isn’t it? If you’ve been watching the Indian market over the last four years, you’ve probably heard one deafening story: the unstoppable rise of Defense and Capital Goods. Driven by the very real “China+1” shift and government push, everyday investors have piled in, treating heavy metal manufacturers like the next tech titans.

Meanwhile, the IT sector has been left in the dust. Stock prices have stalled out, and headlines are dominated by fears of global headwinds. If you only look at the stock ticker, you would think Defense is a guaranteed gold mine and IT is a sinking ship.

The Signal

But if we look at businesses like owners, we know the stock ticker is often just a popularity contest. The real truth? It is written in the cash flow.

When we pull back the curtain and look at the fundamental data of companies with over ₹1,000 Cr market cap from April 2022 to April 2026, a completely different picture emerges. The true signal is the massive gap between price action and actual cash generation. While Defense stock prices have surged, their underlying cash flows have quietly evaporated. On the flip side, while IT stock prices have stagnated, their cash-generating engines are running hotter than ever.

The Value Investor’s Lens

Let’s look at the market through the eyes of a business owner across four key sectors:

The Illusion of Defense:

Think of a hot air balloon. It expands rapidly and looks incredible from afar, but inside, it is mostly empty air. The defense sector’s median P/E has ballooned from 31 to an eye-watering 56. Yet, the total cash flow from operations actually collapsed from roughly ₹38,500 Cr down to just over ₹15,000 Cr. This is a massive red flag. The 24% price increase is entirely driven by narrative and “multiple expansion” (which is just a fancy way of saying investors are simply willing to pay a higher price for the exact same earnings), not cash-backed value. We need to proceed with extreme caution here.

The Hidden Moat in IT:

If Defense is a fragile balloon, top-tier IT is a deep-rooted oak tree. Despite a 4% drop in price since 2022, the underlying business reality is rock solid. These companies require almost no capital to grow. The sector grew its absolute cash flow from ₹1.19 Lakh Crs to ₹1.52 Lakh Crs, all while maintaining a stable valuation multiple. The market is completely ignoring this cash generation. For patient owners who favor zero debt and high ROCE (Return on Capital Employed—measuring how efficiently a company turns capital into profit), there is real value accumulating right under our noses.

The Banking Cash Machine:

Banks have been doing something right. Armed with their cleanest balance sheets in a decade, strict lending rules, and strong access to cheap Current and Savings Account deposits (CASA), their return on capital bumped up nicely. Cash flows expanded to a massive ₹3.49 Lakh Crs. Because their valuations only expanded modestly, that impressive 58% price gain was fundamentally justified by real earnings growth, not pure speculation.

The Pharma Rebound:

A 69% gain is nothing to sneeze at, and the data actually backs it up. Total cash flow almost doubled from ₹42,000 Cr to nearly ₹72,000 Cr. Even though their efficiency metrics look flat, the sheer scale of operational cash generated means these companies successfully translated their sales directly into owner’s cash. The ones that survived the brutal downturn of the past few years without taking on reckless debt have proven just how resilient they really are.

Sector Performance & Fundamentals (Apr 2022 – Apr 2026)

ITBEES (IT Services)

• Price Change: -4.02%

• ROCE: 15.97% (2022) ➡️ 14.45% (2026)

• Total Sector CFO: ₹1,19,068 Cr ➡️ ₹1,52,813 Cr

• Median P/E: 22.74 ➡️ 23.50

PHARMABEES (Pharma)

• Price Change: +69.33%

• ROCE: 10.67% (2022) ➡️ 10.35% (2026)

• Total Sector CFO: ₹42,045 Cr ➡️ ₹71,809 Cr

• Median P/E: 27.12 ➡️ 30.44

MODEFENCE (Defense/Eng)

• Price Change: +24.17%

• ROCE: 7.29% (2022) ➡️ 8.93% (2026)

• Total Sector CFO: ₹38,598 Cr ➡️ ₹15,137 Cr

• Median P/E: 31.35 ➡️ 56.09

BANKBEES (Banking)

• Price Change: +57.78%

• ROCE: 19.98% (2022) ➡️ 22.08% (2026)

• Total Sector CFO: ₹2,76,677 Cr ➡️ ₹3,49,637 Cr

• Median P/E: 10.29 ➡️ 14.24

FINIETF (Financials)

• Price Change: +55.62%

• ROCE: 61.20% (2022) ➡️ 80.13% (2026)

• Total Sector CFO: Because of accounting quirk, operating cash flow are always -ve and is not great way to judge the sector

• Median P/E: 15.79 ➡️ 19.28

The Bottom Line

At the end of the day, you don’t get paid for buying what is popular; you get paid for buying what is mispriced. The market might be a voting machine in the short run, but in the long run, it is a weighing machine—and sooner or later, it always weighs the cash.

Disclaimer: Do your own due diligence before investing.

Join the Hunt

The market is noisy. Your inbox shouldn’t be.

By subscribing to Budget Tiger, you’re making a commitment to rational, owner-oriented investing. Here is my commitment to you:

• One email a week: Delivered every Sunday at 8 AM.

• 100% Signal: Deep research powered by AI, vetted by human judgment. No spam, no filler.

• Always Free.

You’ll get one email a week from me. It will cover:

• The Noise: What the AI hype-filter caught (and why to ignore it).

• The Signal: The fundamental truth about the cash flows and moats.

• The Verdict: A qualitative deep dive, not a quantitative score.

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This week, I want to share something I’ve been working on: a custom prompt designed to help you instantly spot the real story hidden inside any news article. It fits perfectly with our ongoing “Signal Vs. Noise” series.

Here is the prompt you can copy and paste:

Curious to see how it works? Let’s test-drive it on this week’s massive trending topic:

“The Nifty 50’s Historic 6% Weekly Surge Amidst US-Iran Ceasefire Hopes.”

Here is what the prompt uncovered:

1. The Bottom Line (The Real Story)

• Fact vs. Spin: The media is hyping up the Nifty 50’s roughly 6% jump (closing near 24,050) as the triumphant return of the bull market, supposedly triggered by a US-Iran ceasefire breakthrough. But if we put on our skeptic’s hat, the reality looks a lot more fragile. This is essentially a mechanical relief rally. People are scrambling to cover their short bets because Brent crude temporarily dropped by $20 (falling from over $115 down to around $95). Keep in mind, this “ceasefire” is just a two-week pause, and Foreign Institutional Investors (FIIs) are actually using this bounce to sell. In short? The smart money is using retail excitement to cash out, meaning they don’t buy that the geopolitical risks are over.

• Long-Term Impact: Flash in the Pan. Unless oil permanently drops into the $70–$75 range, foreign investors start buying heavily, and the Middle East conflict actually resolves, this 6% surge just doesn’t have the muscle to push the Nifty past the heavy resistance waiting at 25,000.

2. The Trust & Bias Check

Factor (Source, Emotion, Missing Facts)

Status

Observation

Headline Euphoria (”Historic Surge”)

⚠️ Caution

It masks the reality. The market had just plunged 11%. This 6% surge is just winning back recently lost ground, not hitting new highs.

Ceasefire Durability

⚠️ Caution

It’s a strict two-week truce. The underlying military tensions, closed oil plants, and proxy wars (like in Lebanon) are still very much active.

Oil Price Relief

⚠️ Caution

Crude dropped to ~$95, but structural supply issues remain. For an import-heavy country like India, $95 a barrel is still highly inflationary.

Institutional Activity

⚠️ Caution

Domestic money is flowing in, but foreign investors are still selling. Historically, breakout momentum doesn’t last without foreign money backing it up.

3. The Ripple Effects

• Who Benefits:

  • Options Writers (The Bears): Sophisticated traders are heavily writing call options at the 25,000 Nifty mark. They’re betting that everyday investors will buy into the “breakout” hype right before the rally stalls out.

  • Iran’s Strategic Position: A proposed “10-point formula” might give Iran unprecedented control over the Strait of Hormuz. This could turn a free-flowing transit route into a permanent geopolitical weapon—and a potential source of toll revenue.

  • Aviation & Paint Sectors: Companies like InterGlobe Aviation and Asian Paints get a quick, immediate profit boost from the sudden drop in crude oil prices.

• Hidden/Everyday Impacts:

  • A Permanent Global Tax: If Iran keeps control of the Strait of Hormuz, global shipping insurance is going to stay permanently high. That’s essentially a hidden tax on the global supply chain, and guess who ultimately pays it? You and me, at the checkout counter.

  • Sticky Domestic Inflation: Oil dropping to $95 prevents an immediate economic crash, but it doesn’t cure inflation. The costs passed down to Indian consumers for fuel, shipping, and everyday groceries will stay high, which means the RBI probably won’t be cutting interest rates anytime soon.

4. The Historical Reality Check

• Precedents: We’ve seen this movie before. This perfectly matches the “war relief rallies” from the early days of the 1991 Gulf War or the brief truces during the 2022 Russia-Ukraine conflict. The moment the absolute worst-case scenario (like losing 90% of Iran’s oil) is taken off the table, markets often rip higher in a single week.

• Hype vs. Reality: History tells us that a brief pause in a war rarely kicks off a durable, multi-year bull run. For that, you need growing company earnings, plenty of cash flowing through the system, and central banks lending a hand. Right now, global growth is sluggish (US Q4 GDP was a tiny 0.5%), and cash is tight in India. Mathematically, a straight shot past 25,000 based purely on a 14-day truce is a major long shot.

5. The Other Side of the Story

• The Bear Case: The most logical, data-backed argument against the current optimism? The ceasefire falls apart on Day 15. If talks break down and the Strait of Hormuz gets completely blocked, Brent crude could easily shoot past $120 a barrel. The RBI would be forced to step in aggressively to protect the Rupee, squeezing domestic cash even further. That would send the Nifty plunging right back below 23,000—trapping everyday investors who bought at the top, while the foreign funds safely walked away.

• Our Blindspots: Everyone is equating a “ceasefire” with things “going back to normal.” That’s a huge mistake. The real blindspot is what we gave up for peace. If the West handed over control of the Strait of Hormuz just to get a truce, it changes the global energy map forever. The market is happily pricing in “peace,” but we might actually be looking at appeasement with some severe, long-term costs attached.

The Bottom line

So, the next time you spot a headline that feels just a little too perfect, you’ve got a secret weapon ready to go. Copy the prompt, paste it in, and let it do the heavy lifting for you. Navigating the 24/7 news cycle right now can honestly feel like drinking from a firehose, but having a system to filter out the noise makes finding the real signal a whole lot easier. Give it a spin this week with whatever big story crosses your feed, and hit reply to let me know what hidden truths you uncover—I’d love to hear how it works for you. Until next week, stay curious and keep questioning the narrative!

Join the Hunt

The market is noisy. Your inbox shouldn’t be.

By subscribing to Budget Tiger, you’re making a commitment to rational, owner-oriented investing. Here is my commitment to you:

• One email a week: Delivered every Sunday at 8 AM.

• 100% Signal: Deep research powered by AI, vetted by human judgment. No spam, no filler.

• Always Free.

You’ll get one email a week from me. It will cover:

• The Noise: What the AI hype-filter caught (and why to ignore it).

• The Signal: The fundamental truth about the cash flows and moats.

• The Verdict: A qualitative deep dive, not a quantitative score.

Leave the noise behind. Enter your email below to receive next week’s edition of Budget Tiger in your inbox.

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The Noise

If you’ve heard of Kirloskar Industries Limited (KIL) lately, it’s probably because of the drama. A multi-generational family feud, messy court battles, and regulators stepping in—it’s exactly the kind of corporate soap opera the media loves to eat up. When family members are fighting it out in court, big institutional investors usually run for the hills, slapping a massive discount on the stock. For most everyday investors, it just looks like a chaotic mess you’re better off avoiding. But if you’re a value investor looking for long-term wins? All of this highly visible warfare is just one thing: noise.

The Signal

So, let’s hit mute on the legal theater for a second. What’s actually going on underneath? Historically, KIL has been a passive holding company. Think of it as a giant vault holding the assets of the 135-year-old Kirloskar Group, rather than a company out there manufacturing things itself. The stock market notoriously hates pure holding companies and usually punishes them with a steep discount—around 68% on average—because of tax leakages and a lack of direct control for everyday shareholders like us.

But here’s the exciting part: KIL is quietly changing the game. They’re stepping out of that passive vault role and actively creating value. Through their subsidiary, Avante Spaces, they are building a massive Grade-A commercial business park in Pune. We’re talking 1.7 to 1.9 million square feet of prime real estate. And this isn’t some wild gamble. It’s backed by a ₹1,150 Crore loan from ICICI Bank at a super competitive 8% interest rate. By mid-2027, this project is expected to generate ₹200 Crore in cold, hard cash every single year. That independent cash flow completely breaks the old “passive holding company” stereotype.

Looking Under the Hood

To really figure out what KIL is worth, we have to look at it like business owners. You can’t just glance at their basic earnings report. Think of KIL like a financial Matryoshka doll. The market is staring at the wooden outer shell and completely ignoring the incredibly valuable, heavily protected businesses hiding inside. Let’s unpack them:

• The Foundation (KFIL): KIL owns a massive 45.95% stake in Kirloskar Ferrous Industries. They make the heavy-duty stuff—pig iron and specialized castings. Their secret weapon? Deep, sticky, decade-long relationships with major auto and tractor makers. Once KFIL’s parts are designed into an engine, it’s a massive headache for the manufacturer to switch suppliers. That gives KFIL incredible staying power.

• The Growth Engine (KOEL): KIL holds 5.68% of Kirloskar Oil Engines. In India, KOEL is basically synonymous with power generation. Beyond farm pumps, they dominate the diesel and gas generator market. They’ve built an unbelievable, pan-India distribution and service network that would take a competitor years and a fortune to copy. Plus, with the current boom in data centers and infrastructure spending, they are riding a massive wave.

• The Defensive Giant (KBL): Here, KIL owns 23.91% of Kirloskar Brothers. These guys are global fluid management heavyweights. We’re talking mission-critical water projects, from giant irrigation setups to nuclear power plants. When governments are building that kind of critical infrastructure, they don’t skimp on pump reliability. That gives KBL serious pricing power and a consistently awesome Return on Capital Employed (around 27%).

• The Specialist (KPCL): KIL has a 9.97% stake in Kirloskar Pneumatic Company. They dominate the super-niche markets of air and gas compressors. It’s a specialized, capital-intensive club with huge barriers to entry. They enjoy high margins and a steady stream of recurring business from heavy industries like steel and oil & gas.

The Math

When you add up all these listed pieces, throw in the value of the new Pune real estate project, and subtract the debt, the math gets pretty wild.

Let’s look at a worst-case scenario. Imagine the stock prices of all those subsidiaries do absolutely nothing, and the market applies a brutal 70% holding company discount. Even in that gloomy scenario, KIL’s true value sits comfortably around ₹2,450 per share.

Right now, KIL is trading at roughly ₹2,700 per share. So, we’re basically buying it just a hair above that rock-bottom, worst-case price. The market is stubbornly applying a 68% to 69% discount and giving KIL exactly zero credit for the ₹200 Crore cash flow that’s right around the corner. If KIL just hits a normal, base-case scenario and that discount shrinks to 60%, the value shoots well past ₹3,400 per share. And once that ₹200 Crore starts rolling in? Management can use it to aggressively buy back shares or hand out special dividends to us.

The Bottom Line

The takeaway here is pretty simple. Even the most stubborn market discounts can completely shatter when extreme pessimism bumps into a genuinely positive change. In value investing, having a massive margin of safety like this doesn’t just protect you from losing money—it drastically lowers the bar for what needs to go right for you to seriously compound your wealth.

Picture a heavy-duty steel coil spring. When a business is deeply undervalued, or when the market is throwing nothing but pessimism your way, it’s like a massive weight is pressing down on that spring. It gets compressed tightly. To the untrained eye, it looks small, squashed, and completely stuck.

But you and I know the secret of a compressed spring: it isn’t broken. It’s actively storing up explosive potential energy. The harder the market pushes down with massive discounts and skepticism, the more tension builds up inside your investment.

All it takes is one solid catalyst—like a new stream of cash flow or a smart business pivot—to finally knock that heavy weight off. When that happens, the spring doesn’t just casually stretch back out. It violently snaps back to its true size, releasing all that pent-up energy at once.

Disclaimer: Do your own due diligence before investing.

Join the Hunt

The market is noisy. Your inbox shouldn’t be.

By subscribing to Budget Tiger, you’re making a commitment to rational, owner-oriented investing. Here is my commitment to you:

• One email a week: Delivered every Sunday at 8 AM.

• 100% Signal: Deep research powered by AI, vetted by human judgment. No spam, no filler.

• Always Free.

You’ll get one email a week from me. It will cover:

• The Noise: What the AI hype-filter caught (and why to ignore it).

• The Signal: The fundamental truth about the cash flows and moats.

• The Verdict: A qualitative deep dive, not a quantitative score.

Leave the noise behind. Enter your email below to receive next week’s edition of Budget Tiger in your inbox.

Subscribe now

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The Noise

If you’ve ever lived through an Indian summer, you know the drill: the blistering heat feels like it will never end, right up until the monsoon finally breaks. The stock market works the exact same way. Between 2021 and 2023, the Indian specialty chemicals sector basked in a “golden era” of supernormal profits. Today? That heatwave has broken into a freezing, industry-wide oversupply.

For Aarti Industries, this macroeconomic winter has been severe. If you’ve looked at the chart lately, you’ve seen the stock tumble from the Rs 750 range down to around Rs 417 over the last three years.

Tune into the daily market chatter, and the panic is loud. The narrative usually blames one big boogeyman: Chinese dumping. And while recent earnings showed a tiny glimmer of hope—with Net Profit rebounding slightly to Rs 133 crore—the core of Aarti’s pain is actually a mix of global shifts and some classic, self-inflicted wounds.

If you study the history of heavy industry, none of this should be a surprise. We are watching a perfect replay of the 2014–2015 global commodity crash. Back then, China’s slowing economy led them to aggressively dump cheap steel and chemicals across the globe. It took roughly three to four years, plus some heavy-handed anti-dumping duties from the Indian government, to clear that excess inventory. We are currently living through that exact same playbook.

The Signal

It’s tempting to look at a beaten-down chart and pray for a quick, V-shaped bounce. But let’s be real: those massive 25%+ profit margins from 2021 aren’t coming back anytime soon. Baseline profitability has structurally reset lower, settling into the 13–15% range.

Why? Because the massive factory expansion we are seeing in China isn’t a temporary glitch. Facing a real estate crisis, Chinese chemical makers are frantically dumping their excess supply onto global markets. And because the US recently slapped aggressive tariffs on Chinese chemicals, all that excess inventory is being pushed right into non-tariff markets like India.

The Value Investor’s Lens

When we put on our business owner hats, our main question is simple: Does Aarti Industries have the cash flow and the structural advantage to survive this winter and steal market share from weaker, dying competitors?

The “Moat” Reality Check

You will often hear analysts rave about Aarti’s “isomer balancing” like it’s an exclusive magic superpower. Let’s ground this in reality. In the brutal world of heavy chemicals, highly efficient, zero-waste processing isn’t magic—it is a baseline survival requirement.

Here is what that means in plain English: When you mix chemicals in an industrial reactor, you get a messy mix of variations (isomers), some of which are essentially toxic waste. If a competitor tries to make just one high-demand chemical, they pay a fortune to dispose of the waste, ruining their margins. Over 40 years, Aarti has figured out how to use or sell every single scrap. This doesn’t make them invincible, but executing this zero-waste process at their massive scale gives them a serious cost advantage.

They also benefit from high switching costs. Once they are locked in as a supplier for a heavily regulated pharma or agrochemical company, it’s a nightmare for that client to switch. That’s why Aarti keeps about 95% of its top 50 clients year after year.

Capital Allocation: The Self-Inflicted Wounds

We have to talk about the elephant in the room. Aarti’s wounds aren’t just China’s fault. Management made a classic mistake: they assumed the “golden era” of 2021 would last forever. They borrowed heavily to build a massive Rs 2,600 crore factory expansion (Zone-IV) right at the absolute peak of the cycle.

Bringing these expensive new factories online just as global prices plummeted has devastated their Return on Capital Employed (ROCE), dragging it down to a multi-year low of roughly 6%. Aarti is currently transitioning from a high-margin growth darling into a capital-heavy endurance play, burdened by surging depreciation and interest costs.

The Valuation “PE Trap”

Please don’t assume that just because a stock is down 45%, it’s inherently “cheap.” During this crash, Aarti’s underlying earnings collapsed much faster than its stock price, which actually pushed its Price-to-Earnings (PE) ratio up to around 40x. Now, a 40x PE usually screams “overvalued!” But in heavy, cyclical industries, a sky-high PE often marks the bottom of the cycle because earnings are temporarily crushed. The market is already looking past today’s pain and pricing in a decent recovery. You aren’t buying a traditional, dirt-cheap value stock here, but because of those temporarily depressed earnings, you aren’t necessarily buying an overvalued one either.

The Valuation Reality Check

If we look through a Reverse Discounted Cash Flow (DCF) lens, the math gets interesting. At a current Enterprise Value of roughly Rs 19,000 crore (market cap plus debt), let's assume their normalized free cash flow is Rs 1,000 crore. We base this on their operating cash flow from the past three years, deliberately ignoring the temporary, massive expansion costs to see what the business actually earns in a steady state. To justify today's stock price, Aarti only needs to grow its cash flow by roughly 4.5% a year for the next decade.

Historically, Aarti has grown sales at 11.7% a year. The 2021 peak was pure hype, but today’s implied 4.5% growth rate? That is much closer to historical industrial reality.

Here is the bull case the market is completely ignoring right now: If management actually hits their goal of Rs 1,800 to Rs 2,200 crore in EBITDA by FY28 as those new Zone-IV factories fill up with orders, that Rs 1,000 crore in free cash flow we just modeled will rapidly double. Because the heavy lifting (the expensive factory building) is already finished, almost all of that new revenue will flow straight to the bottom line as pure free cash flow. If you look at it today, you are essentially getting the entire upside of that massive Zone-IV expansion for free.

The Pre-Mortem (What could go wrong?)

A good investor always tries to destroy their own thesis. If we look back in ten years and realize we lost money on Aarti, what exactly killed the investment? Here are the top three threats:

• The Tariff Domino Effect: If the US keeps raising tariffs on China, China will keep dumping into India. If the Indian government hesitates to step in with its own anti-dumping duties, Aarti’s pricing power will remain permanently crushed. Those 14% margins won’t be a cyclical bottom; they’ll be the permanent ceiling.

• The Empty Factories: If the demand they expected for that Rs 2,600 crore expansion never shows up, those new factories become stranded assets. The heavy debt load will constantly eat up their cash, trapping the stock as a “value trap.”

• The Farming Slump: Agrochemicals (farming chemicals) make up 30% of Aarti’s revenue. The global farming sector is stuck in a nasty slump right now. If the agricultural economy stays depressed, Aarti’s expected volume recovery will stall out, leaving their new reactors gathering dust.

The Bottom Line

In 2021, the market treated Aarti like a tech stock and priced it accordingly. Today, reality has set in. In heavy industry, returns eventually gravitate back toward the cost of capital because competition is ruthless. For Aarti Industries, the next two years will be an exhausting, unglamorous exercise in survival as they digest their massive new factories. But with the market only demanding a 4.5% normalized growth hurdle, you aren't paying for a miracle—you are simply betting that a 40-year-old heavy industry survivor can outlast the winter.

Disclaimer: Do your own due diligence before investing.

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The Noise

There’s a great saying in India: you can’t judge the depth of a well just by looking at its shadows. But let’s be honest, the stock market absolutely loves to obsess over shadows.

Right now, the story surrounding Quess Corp Ltd looks like a pretty terrifying optical illusion. If you pull up any financial portal, it looks like the stock has completely cratered—dropping from its 52-week high of Rs 379 all the way down to around Rs 178 today. Throw in the fact that foreign investors (FIIs) have been quietly trimming their stakes over the last few quarters, and it feels like the underlying business is falling apart. But as investors who think like owners, we know better than to panic at a sea of red. Let’s separate the market noise from the economic reality.

The Signal

Here’s the truth: that dramatic drop in Quess Corp’s share price? It’s basically just a mechanical adjustment from a recent three-way corporate demerger, not a sudden wipeout of the company’s value.

Let me break down exactly what happened. On April 15, 2025, Quess Corp hit the reset button. They spun off their digital/IT staffing and facility management arms into two totally separate companies: Digitide Solutions and Bluspring Enterprises. Because a huge chunk of Quess’s assets moved over to these new entities, the parent stock price and market cap naturally had to adjust downward to reflect what was left.

This didn’t destroy shareholder wealth. If you held Quess shares, you received one share of Digitide and one share of Bluspring for every Quess share you owned (these new ones listed on June 11, 2025). So, what’s left in the parent company? A laser-focused, pure-play workforce management and staffing operator. Stripped of all that extra conglomerate noise, this core business of deploying human resources is incredibly solid and pumps out cash. By stepping in as the legal middleman to handle the heavy lifting of EPFO, ESI, and complex payroll for corporate India, Quess is perfectly positioned to ride a massive, decades-long wave as India shifts from unorganized to formal labor.

The Value Investor’s Lens

Today, Quess operates strictly as a business-to-business (B2B) staffing provider. It’s all about supplying human capital and handling HR operations for other companies. Here’s a quick look at how their engine runs:

1. The Core Value: Quess doesn’t just match job seekers with companies. They actually step in as the legal employer for hundreds of thousands of contract workers. Corporate clients use Quess to completely hand off the massive headache of HR logistics. By doing this, clients offload the risks of navigating India’s strict labor laws—like managing EPF, ESI, and payroll—straight onto Quess.

2. The Main Segments:

• General Staffing: This is their bread and butter. Think massive deployments of blue-collar and grey-collar workers for retail, e-commerce, logistics, and manufacturing. It’s a high-volume, low-margin game.

• Professional Staffing: Here, they supply highly skilled white-collar pros, especially in IT and Global Capability Centers (GCCs). Since these skills are specialized, the profit margins here are much sweeter.

• Overseas Business: They do the exact same thing internationally, with a strong focus on the Middle East, APAC, and North America.

3. Show Me the Money: This industry runs on a “pay and collect” model. Quess pays its deployed workers their salaries and benefits on time, out of its own pocket. Then, it bills the corporate client for the employee’s cost plus a service fee. This means Quess needs a lot of working capital to float payroll while waiting weeks or months for clients to pay their invoices.

The Red Flags: What Went Wrong

Charlie Munger always championed the idea of via negativa—studying what to avoid. To really grasp Quess Corp’s current valuation, we have to look at their past habit of doing exactly what not to do with cash.

Historically, Quess’s management gave a masterclass in how to waste capital. They took the reliable cash flow from their core staffing business and blew it on a confusing, sprawling empire of random acquisitions. They bought a cash-burning digital platform like Monster (now foundit) and even made a disastrous leap into professional sports with East Bengal FC—which ended up being a total write-off. The recent demerger is basically management quietly admitting that the last ten years of empire-building destroyed a ton of value.

We also can’t ignore the financial controls, which are still looking a bit sketchy. For FY25, Deloitte actually flagged material weaknesses in their internal controls, specifically noting they failed to keep daily localized backups of their accounting servers. In a business built entirely on payroll data, that’s a glaring red flag. Add in a massive, looming tax dispute over Section 80JJAA deductions—with recent demands for AY22-23 alone hitting nearly INR 159 crores, and cumulative disputes pushing toward the INR 300 crore mark—and you’ve got a company with some serious baggage.

The Moat & The Opportunity

Despite all that historical baggage, the core business refuses to die. Why? Because it has a strong competitive moat built on two things: massive scale and the sheer pain of switching. Quess is an absolute giant in India, deploying over 483,115 workers. For its 3,000+ clients, Quess is a vital shield against India’s notoriously rigid labor laws. Firing Quess means trying to migrate thousands of employees to a new vendor, risking operational chaos and government scrutiny. It’s just too hard to leave.

Because of its past mistakes and that ongoing tax drama, the market has priced Quess like it’s never going to grow again. The stock is trading at a depressed P/E multiple ranging from 11.6x to 16.0x. If you run a reverse DCF—which basically means working backward from the current stock price to see what kind of future growth the market is predicting—it assumes an abysmal 0% to 3% free cash flow growth over the next decade. That’s a huge disconnect from their historical median sales growth of 26%.

Now that they’ve surgically removed the capital-heavy facility management arm (Bluspring) and the cash-burning digital segments, Quess’s working capital cycle is drastically cleaner. Its Return on Capital Employed (ROCE) is mathematically pre-programmed to bounce back from its recent single-digit slump to a much healthier industry standard of 16% to 18%. And the best part? While we wait for the business to normalize and the market to realize its true value, we’re getting paid to wait with a juicy 5.69% dividend yield backed by a very comfortable pile of liquid cash.

Let’s Talk Valuation

When you compare Quess to its biggest rival, TeamLease Services, the valuation gap is impossible to ignore. TeamLease trades at a P/E of around 15x, while Quess is stuck at a max of 11.0x. Now, TeamLease earned that premium—they’ve historically had better returns (ROE of 13.59% vs. Quess’s 9.30%) and a much cleaner track record with their cash. But here’s the kicker: post-demerger, Quess’s standalone financial profile is going to look a lot more like TeamLease’s asset-light model. With the dead weight gone, that valuation gap is highly likely to close.

The odds here are definitely skewed in our favor. Let’s look at the worst-case scenario: say they have to pay out that entire INR 296+ crore tax bill in cash, wiping out two full years of free cash flow, and their profit margins stay stuck at a measly 1.9%. Even in that highly painful scenario, the downside to the stock price is only about 10-15%, thanks to their massive cash reserves and that strong dividend yield acting as a safety net.

On the flip side, what if things go right? If they resolve the tax dispute favorably, actually realize the cost savings from the demerger, and the market re-rates their P/E multiple back to a normal 20x, we’re looking at a massive upside. You could potentially see the market cap double over a standard 3-to-5-year investment horizon.

The Bottom Line

Quess Corp is your classic value investing setup. You’ve got an inherently robust, cash-generating business hidden underneath a messy history of management overreach and regulatory headaches. But in investing, just like in life, enduring value isn’t found by looking for a flawless past. You find it by accurately pricing a reasonably predictable future.

Disclaimer: Do your own due diligence before investing.

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• 100% Signal: Deep research powered by AI, vetted by human judgment. No spam, no filler.

• Always Free.

You’ll get one email a week from me. It will cover:

• The Noise: What the AI hype-filter caught (and why to ignore it).

• The Signal: The fundamental truth about the cash flows and moats.

• The Verdict: A qualitative deep dive, not a quantitative score.

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The Noise

If you’ve been watching Dalal Street lately, you’d be forgiven for thinking traditional gas-powered vehicles were banned yesterday. We’re in the middle of an absolute trading frenzy fueled by a very tempting story: EVs are taking over, and nimble startups are going to crush the sluggish, legacy automakers. Toss in some recent geopolitical tension in the Middle East—which the market loves to treat as proof that we need EVs right now—and you’ve got a recipe for pure exuberance.

This wave of hype has pushed Ather Energy’s stock up more than 2x since its IPO. It’s the classic Bollywood blockbuster effect—a flashy trailer and massive opening weekend box office numbers. But as value investors, we know that when the market treats a stock like a guaranteed hit, it’s our job to quietly start looking for the exit signs.

The Signal

Let’s pull over and look under the hood. If we strip away the shiny tech branding, building electric vehicles is still a brutally competitive, hyper-expensive industry where the odds are heavily stacked against you. In fact, the failure rate for hardware-heavy mobility startups in India is pushing a staggering 90%.

To really understand the EV space today, we need to rewind to October 2021. Rajiv Bajaj, the veteran head of Bajaj Auto, famously laughed off the threat of highly valued EV startups with a brilliant line:

“Champions eat OATS for breakfast.”

The “Champions” were the legacy guys (Bajaj, Enfield, TVS). The “OATS” were the darlings of the easy-money era: Ola, Ather, Tork Motors, and SmartE.

Fast forward to today, and that startup graveyard is getting crowded. Tork went under, Ola is struggling with a broken service network, and SmartE smartly stayed in its B2B lane.

Yet, Ather survived. Why? Because they actively tried to escape the traditional “hardware trap.” They aren’t just bending metal; they’re running a software-first business designed to keep riders locked into their ecosystem.

The Value Investor’s Lens

Ather’s strategy goes way beyond just building scooters. They’re building a complete electric mobility ecosystem. Here’s what makes their engine tick:

• Doing the Hard Stuff In-House: Ather designs its scooters, battery packs, motor controllers, and software completely in-house. They outsource the basic parts to save cash, but they keep a tight grip on the core tech.

• Asset-Light Showrooms: Instead of burning cash to buy up real estate, Ather partners with third-party retailers to run their “Ather Space” showrooms and service centers. It lets them grow fast without the massive price tag.

• The “Non-Vehicle” Cash Cow: This is Ather’s secret weapon. They sell a software subscription called the “ProPack” (giving riders over-the-air updates, navigation, and anti-theft alerts). When you add up software, charging fees, and accessories, this high-margin revenue makes up 12% to 14% of their total sales.

• Owning the Plug: They’ve poured money into their own nationwide fast-charging network, Ather Grid. It kills range anxiety for buyers and creates a fantastic competitive moat.

• Pivoting to the Masses: They started with premium performance scooters, but they’re smartly expanding into the massive family commuter market with the Ather Rizta and upcoming budget models.

The Ather Anomaly: Standing on Their Own Two Feet

Ather is the sole survivor of the OATS group because they acted less like a reckless Silicon Valley startup and more like a disciplined engineering firm. By focusing on safety and quality, they’ve carved out a very respectable 18% market share (in EVs).

Here is how that growth is fundamentally fixing their financials:

1. Grabbing Serious Market Share Ather isn’t a niche player anymore. In FY22, they had just 7.9% of the market. By Q3 FY26, they hit a robust 18.8%. They are gobbling up territory right as their weaker competitors are folding.

2. Surviving Without the Government (The Real Moat) A good rule of thumb? Avoid businesses that need government handouts to survive. FAME subsidies used to be life support for Indian EVs. But thanks to cheaper batteries and smart engineering, Ather’s adjusted gross margin surged from a flimsy 9% in FY24 to a highly impressive 25% by Q3 FY26. Even better? If you strip away all government subsidies, Ather is still making money. Back in FY22, their margin without subsidies was a dismal -17%. By Q3 FY26, it was a healthy +23%. They can finally stand on their own two feet.

3. Shrinking the Losses Selling more scooters absorbs those massive factory costs. In FY22, Ather’s operating (EBITDA) margins were a catastrophic -62%. But by Q3 FY26, they nearly hit breakeven, narrowing losses to just -3%.

4. The “Razor and Blades” Model Ather sells the scooter at a competitive price (the razor) to capture the market, and then makes its real profits on software subscriptions and charging (the blades). If they can keep this up, they aren’t just surviving; they’re evolving into a high-margin tech ecosystem.

Valuation: The Razor-Thin Margin of Safety

As value investors, we have to separate a great business turnaround from a great stock to buy. When you look at Ather’s shrinking losses and surging market share, it’s incredibly easy to fall in love with the story.

But here’s the reality check: the market already knows all of this, and it has priced the stock accordingly.

Let’s break down the cold, hard math:

• Paying for the Harvest Too Early: At its IPO in May 2025, Ather was valued around ₹11,500 to ₹12,000 crore. Today, it has skyrocketed to roughly ₹27,000 crore. When a stock doubles purely on the expectation of future profits, all the good news is already baked into the price. You’re paying for a fully grown teak tree when you’ve only got a sapling in your hands.

• The Multiples Are Stretched: Because Ather is still technically losing money (posting a net loss of ₹84.6 crore in Q3 FY26), we have to value it based on its sales. Right now, it’s trading at an eye-watering Enterprise Value-to-Sales (EV/Sales) multiple of 8.5x to 10.3x. For context, massive, highly profitable legacy giants like Bajaj and TVS trade at just 3x to 4.7x. You are paying software-company prices for a capital-intensive hardware business.

• Tuning Out the Noise: Dalal Street analysts love the stock right now, stamping it with a “Strong Buy” and an ₹838 price target. They are modeling for sunny days, pointing to the amazing 91% of buyers who opt for the software subscription. But as value investors, we have to model for storms.

The Bottom Line

While Ather Energy has undoubtedly built a much stronger business, buying the stock today requires a massive leap of faith. They are still burning cash and need external funding to keep the lights on.

Benjamin Graham taught us to always look for a “margin of safety”—buying at a discount just in case things go wrong. At a ₹27,000 crore valuation, Ather’s margin of safety is practically zero. To justify this price, the company has to be absolutely flawless: they must hit total profitability immediately, nail their upcoming product launches, and beat back the legacy giants without a single misstep.

Ather is building a great company. But in the unforgiving world of Indian autos, paying for perfection is the most expensive mistake you can make.

Disclaimer: Do your own due diligence before investing.

Join the Hunt

The market is noisy. Your inbox shouldn’t be.

By subscribing to Budget Tiger, you’re making a commitment to rational, owner-oriented investing. Here is my commitment to you:

• One email a week: Delivered every Sunday at 8 AM.

• 100% Signal: Deep research powered by AI, vetted by human judgment. No spam, no filler.

• Always Free.

You’ll get one email a week from me. It will cover:

• The Noise: What the AI hype-filter caught (and why to ignore it).

• The Signal: The fundamental truth about the cash flows and moats.

• The Verdict: A qualitative deep dive, not a quantitative score.

Leave the noise behind. Enter your email below to receive next week’s edition of Budget Tiger in your inbox.

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The Noise:

Let’s be real—in India, the monsoon isn’t just a weather report. It practically dictates the entire rural economy. So, when the rains don’t show up on time or dump too much water at once, the whole agricultural supply chain feels the sting.

Lately, there’s been a ton of panic surrounding Dhanuka Agritech Ltd., mostly because of some serious short-term bumps in their earnings for the 2025–2026 fiscal year. Have you looked at their stock lately? It’s taken a massive hit, dropping about 50% from its 52-week high of around ₹1,960 to land somewhere near ₹985 today. The market absolutely hates missed expectations, and it has punished this stock relentlessly.

Here is exactly what triggered the panic:

• Earnings Drop: Profit took a 27.33% year-over-year dive in Q3 FY26, landing at ₹40.00 crore. Naturally, investors flinched.

• Dialing Back Promises: Management had to swallow their pride, downgrading their hopeful “double-digit” growth forecast to a much more cautious “flattish” outlook.

• The Weather Trap: Thanks to those erratic monsoons, they saw an unprecedented amount of unsold goods returned by farmers—roughly ₹220 crore worth in just the first nine months of FY26.

• Regulatory Headaches: A sudden government freeze on bio-stimulant sales threw a massive wrench into their day-to-day operations. That sudden stop ended up costing them an estimated ₹49 crore in lost revenue over just nine months in FY26.

• The Cost of Growing: They’re pouring over ₹300 crore into a massive new manufacturing plant in Dahej. Right now, it’s dragging down their overall profits because it isn’t making money yet.

The Signal:

When you see a stock chart fall off a cliff, it’s incredibly easy to assume the business is broken forever. But if we tune out the short-term noise, the long-term fundamentals actually look incredibly solid.

What we’re really looking at is a fundamentally strong company going through a massive, deliberate transformation. For decades, Dhanuka made incredible returns by acting as the exclusive Indian distributor for patented Japanese agrochemicals. Now? They’re taking control of their own destiny. They are building their own chemicals at the new Dahej facility and buying up global rights to products—like their recent ₹165 crore deal with Bayer AG.

Their core ability to generate cash is still very much alive. The competitive moat around their business is intact, even if their baseline return on capital is taking a temporary dip while they get these new factories up and running.

Looking Through the Value Investor’s Lens

To figure out if this is a classic “value trap” or a genuine mispricing opportunity, we need to think like business owners. Here’s a quick snapshot of what Dhanuka actually does:

• What They Make: Everything from weed killers and bug sprays to plant growth boosters. They have over 300 registered products and actively sell about 90 of them.

• Where They Make It: They run four factories across India, including that brand-new, heavy-duty plant in Dahej, Gujarat.

• How They Sell It: This is their true superpower. They have an insane network of 6,500 distributors and 80,000 retailers, allowing them to reach roughly 10 million farmers across India.

• Global Friends: They partner with big global players (especially in Japan and the US) to bring advanced, patented chemicals to India. And with that recent Bayer deal, they are stepping onto the global stage themselves.

Here is how the business breaks down when we look closely:

1. A Deep, Defensible Moat

Dhanuka’s ability to win in a tough market comes down to two big advantages:

• The VIP Pass to Global IP: Instead of spending decades trying to invent new chemicals from scratch, Dhanuka perfected a smarter model. They are the go-to partner for Japanese innovators like Nissan Chemical and Mitsui Chemicals. These exclusive deals make up about half of Dhanuka’s revenue and give them the power to set prices without worrying about cheap knock-offs. Plus, that ₹165 crore Bayer deal I mentioned? That makes them the actual owner of the intellectual property in over 20 countries.

• The Last-Mile Network: In India, the best chemical doesn’t win on its own. It wins when it comes with the right advice from a local agronomist right there in the village. Even if a foreign company invents a better product, trying to replicate Dhanuka’s army of 80,000 retailers would take way too much time and money. It’s just easier—and more profitable—for them to partner with Dhanuka.

2. Financial Fortitude (Because Survival Comes First)

You can’t grow your wealth if the business goes under. Luckily, Dhanuka has a fortress of a balance sheet, sitting on over ₹250 crore in cash and liquid investments.

Let’s look at how they’ve performed over the last five years:

What does this actually tell us?

• Debt is a Non-Issue: At 0.08x, they basically don’t have any debt. We don’t have to lose sleep over them struggling to pay back loans.

• Earnings are Real: The actual cash they bring in consistently matches or beats the profits they report on paper.

• Expectations Need to Shift: We have to accept that the glory days of 35%+ returns on capital are probably behind us. As they build and run their own manufacturing, a solid 22% to 25% return is the new, realistic normal.

3. The Governance Check (Looking for Red Flags)

We always want to protect our downside, so we have to look for cracks in the foundation. Being a family-run, mid-sized company, Dhanuka has a few quirks we need to watch:

• They loaned ₹15 crore to a lab owned by the founders. That’s a classic red flag when it comes to how they handle our cash.

• They tossed ₹30 crore into an unlisted drone startup. That’s a total distraction from their core business, and worse, it’s now tied up in nasty litigation.

• There’s a massive ₹121.32 crore tax demand from the government hanging over their heads. We need to keep a very close eye on how that plays out.

4. Valuation: Is it Actually Cheap?

Right now, Dhanuka is trading at a Price-to-Earnings (P/E) ratio of about 16.3x to 16.8x. If we do a little reverse math, the current stock price suggests the market only expects them to grow their free cash flow by a measly 5.2% over the next 10 years.

But historically? They’ve comfortably grown sales and cash flow by 8.5% to 9.3%.

What this tells us is that the stock has a really compelling margin of safety right now. The market is obsessing over today’s bad weather and factory costs, and giving them absolutely zero credit for the future growth that those new Bayer molecules will bring.

5. The Pre-Mortem: How Could We Lose Our Shirts?

Before we buy, we need to figure out what could go wrong. If we look back in five years and realize we lost money on this, it’ll probably be because of one of these three “killers”:

1. The Dahej Plant Flops: Our whole theory relies on this new plant hitting 80% capacity and turning a profit by FY27. If management struggles to run it, or if China floods the market with dirt-cheap chemicals, Dahej could become a giant money pit.

2. The Japanese Walk Away: What if global partners like Nissan decide India is finally big enough for them to sell directly to farmers? If they bypass Dhanuka when contracts renew, we lose our high-margin products and get stuck selling cheap commodities.

3. The Taxman Wins: Remember those tax demands of ₹121.32 crore? If the courts rule against Dhanuka, it won’t bankrupt them, but it will wipe out half a year’s profit, kill any chance of share buybacks, and seriously spook investors.

The Bottom Line

Right now, the market is looking at a painful stretch of bad weather and the temporary costs of building new factories, and confusing it all with a permanent decline. As smart investors, we know that time is the friend of a wonderful business and the enemy of a mediocre one. Enduring a little temporary noise? That’s just the price of admission for creating real, long-term wealth.

Disclaimer: Do your own due diligence before investing.

Join the Hunt.

The market is noisy. Your inbox shouldn’t be.

By subscribing to Budget Tiger, you’re making a commitment to rational, owner-oriented investing. Here is my commitment to you:

• One email a week: Delivered every Sunday at 8 AM.

• 100% Signal: Deep research powered by AI, vetted by human judgment. No spam, no filler.

• Always Free.

You’ll get one email a week from me. It will cover:

• The Noise: What the AI hype-filter caught (and why to ignore it).

• The Signal: The fundamental truth about the cash flows and moats.

• The Verdict: A qualitative deep dive, not a quantitative score.

Leave the noise behind. Enter your email below to receive next week’s edition of Budget Tiger in your inbox.

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The Noise: Mr. Market’s Binary Obsession

You know how the stock market constantly swings between extreme FOMO and absolute panic? Well, this February, we saw a textbook case of pure panic.

Driven by fear, the Nifty IT index took a massive 20% nosedive—its worst month since the 2008 global financial crisis. Just like that, about Rs 6 lakh crore in wealth simply vanished from India’s top tech firms.

What spooked everyone so badly? Anthropic just showed off “Claude Code,” an AI agent that can autonomously navigate and fix decades-old legacy systems like COBOL. The panic actually started on Wall Street when IBM—which leans heavy on legacy mainframes—lost $30 billion in a single day after a blog post detailed Claude’s new tricks. Speculators immediately assumed that if IBM is vulnerable, Indian IT service providers must be next in line.

Right now, the market is treating these blue-chip companies like they’re just temp agencies renting out bodies to type syntax. It’s a completely flawed way to look at the industry. Thinking an AI that writes COBOL will replace enterprise IT is like thinking the invention of the nail gun made the general contractor obsolete. It totally misses what these firms actually do.

The Signal: The Reality of Enterprise Plumbing

Writing code is just one small piece of the puzzle. The panic selling completely ignores the gritty, friction-heavy reality of big business: corporate compliance, data privacy, risk management, and tying messy, complex systems together.

Here is what the panic sellers missed:

• The AI Security Check: Remember those Claude Code vulnerabilities (CVE-2025-59536 and CVE-2026-21852) that cybersecurity folks found right after the crash? Hackers could use them to steal highly sensitive API keys. That’s a huge reality check. Big banks (which make up 30% of Indian IT’s revenue) aren’t going to let an AI loose in their systems if a single hallucination could crash a global payment gateway.

• Better Margins, Not Less Work: Yes, AI is changing things. Instead of billing by the hour, IT firms are shifting to charging for outcomes. By using AI to do the routine grunt work, they can deliver the same results with a fraction of the labor cost. That actually translates to higher profit margins for them, not obsolescence.

• The Big Picture: Despite all the doom and gloom, Nasscom still projects the Indian tech sector will hit $315 billion in revenue for FY26, growing at a solid 6.1%.

Instead of eliminating the need for tech partners, AI is making enterprise IT environments vastly more complex. Modernizing these data pipelines is a massive undertaking, and Indian IT firms are the ones trusted to orchestrate it.

Looking Through a Value Investor’s Lens

When I look at this as an investor, I’m searching for strong competitive advantages (moats), smart management, and a good price. Right now, this dislocation is offering all three.

1. Institutional Trust is the Real Moat

Companies like TCS, Infosys, and HCL don’t win because they own a specific coding language. They win because ripping them out of a Fortune 500 company’s tech stack is a logistical nightmare. That deep institutional trust and incredibly high switching cost is their real moat.

2. Smart Leadership Under Pressure

It’s always telling to watch what management does during a crisis.

• TCS: CEO K. Krithivasan recently told his team to use AI to work faster and cheaper, even if it hurts short-term billing. By proactively disrupting themselves and passing savings to clients, TCS is deepening its moat and building loyalty.

• Infosys: As fear drove prices to multi-year lows, Infosys took advantage of the clearance sale. They announced a massive Rs 18,000 crore share buyback at Rs 1,800 per share—an 18% premium. Retiring stock while it’s artificially cheap is the smartest way to reward long-term shareholders.

3. The Quantitative Reality

Just look at how cheaply you can buy these cash-generating machines right now:

| Enterprise 	| Current P/E Ratio 	| Hist. 10-Yr Avg P/E 	| ROCE   	|
|------------	|-------------------	|---------------------	|--------	|
| TCS        	| 18.67x            	| 26.89x              	| 35.45% 	|
| Infosys    	| 18.27x            	| 22.90x              	| 28.04% 	|
| Wipro      	| 15.89x            	| 18.98x              	| 12.03% 	|

(Data reflecting current stock market valuations as of late Feb 2026)

The Bottom Line

TCS is trading at a huge discount to its 10-year average, even though it’s generating a massive 35% return on capital. Getting a globally entrenched powerhouse like Infosys for around 18 times earnings while it prints over Rs 35,000 Cr in cash flow is the kind of setup value investors dream about.

When a temporary, misunderstood tech narrative tanks a great business with a wide moat, it ceases to be a value trap and becomes a generational buying opportunity. The real risk to your portfolio isn’t that AI will replace Indian IT—it’s letting market noise scare you out of owning world-class compounding monopolies at bargain prices.

Disclaimer: Do your own due diligence before investing.

Join the Hunt.

The market is noisy. Your inbox shouldn’t be.

By subscribing to Budget Tiger, you’re making a commitment to rational, owner-oriented investing. Here is my commitment to you:

• One email a week: Delivered every Sunday at 8 AM.

• 100% Signal: Deep research powered by AI, vetted by human judgment. No spam, no filler.

• Always Free.

You’ll get one email a week from me. It will cover:

• The Event: One trending topic, stripped of the hype.

• The Noise: What the AI hype-filter caught (and why to ignore it).

• The Signal: The fundamental truth about the cash flows and moats.

• The Verdict: A qualitative deep dive, not a quantitative score.

Leave the noise behind. Enter your email below to receive next week’s edition of Budget Tiger in your inbox.

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I know going dark for 2.5 years is basically a death sentence in the newsletter world, but I stayed quiet for a reason. Around 2.5 years ago, the post-COVID bull run took off, and suddenly everyone was a “multibagger hunter.” Twitter and Telegram were just flooded with noise.

Then AI hit. And honestly, at first, it just made things worse. It let content farms pump out surface-level financial “analysis” on steroids. The noise didn’t just double; it went 100x. I didn’t want to just add to the pile, so I stepped back.

I spent the time resetting. I went back to basics—owner-oriented value investing. The Buffett and Munger philosophy. I realized that beating the noise didn’t mean writing more; it meant researching better.

From Scores to Deep Dives

This brings me to a tough choice: I’m officially shutting down fundamentalanalysisscore.in.

I was proud of building that tool, but I’ve realized investing just can’t be boiled down to a single automated number. A score can tell you if a stock looks cheap on paper, but it can’t tell you if management is honest, if the moat is actually widening, or if the “growth” is just a capital-allocation trap.

You don’t need another scorecard. You need a thesis.

Budget Tiger 2.0

So, I’m restarting this newsletter with a different approach. I finally figured out how to make AI actually work for us, rather than just using it to generate more noise.

I’m using deep research agents to do the brutal grunt work:

• Scanning 5,000+ pages of annual reports and exchange filings.

• Flagging sketchy promoter pledging and related-party transactions buried in the footnotes.

• Filtering out the daily price-action hype.

The AI finds the raw data. I provide the judgment. Think of it like having a machine read the entire library, so I can just tell you which books actually matter.

What to expect starting next week:

You’ll get one email a week from me. It will cover:

• The Event: One trending topic, stripped of the hype.

• The Noise: What the AI hype-filter caught (and why to ignore it).

• The Signal: The fundamental truth about the cash flows and moats.

• The Verdict: A qualitative deep dive, not a quantitative score.

We’re sticking to our roots: demanding a margin of safety and waiting patiently for the fat pitch.

If you’re just looking for automated scores or hot tips, you’ll probably want to hit unsubscribe. No hard feelings at all.

But if you want to really understand businesses, filter out the madness, and compound your wisdom... welcome back.

Join the Hunt.

The market is noisy. Your inbox shouldn’t be.

By subscribing to Budget Tiger, you’re making a commitment to rational, owner-oriented investing. Here is my commitment to you:

• One email a week: Delivered every Sunday at 8 AM.

• 100% Signal: Deep research powered by AI, vetted by human judgment. No spam, no filler.

• Always Free.

Leave the noise behind. Enter your email below to receive next week’s edition of Budget Tiger in your inbox.

Subscribe now

I am thrilled to announce the launch of the https://fundamentalanalysisscore.in website, dedicated to simplifying fundamental analysis for stock market investing.

Previously, I delved into the concept of fragility in a series of posts, which you can find here

The Fragility series explores the four fundamental pillars of fragility which an investor needs to be aware of to eliminate fragility in their portfolio:

1. Pillar 1 - Avoid investing in Fragile Companies

2. Pillar 2 - Avoid investing in Overvalued Companies

3. Pillar 3 - Avoid investing in Companies with Management having a fragile mindset

4. Pillar 4 - Avoiding Shorter Timeframes

By adhering to these four pillars, we can minimize the impact of negative news and allow positive news to work its magic on our portfolio.

It's crucial to note that Pillar 4 is more about the investor than the company itself. Investors are required to give sufficient time to each of their investments for them to grow. On the other hand, the first three Pillars are what need to be evaluated while making an investment decision.

Based on these principles, I have conceptualized a company fundamental score, which is the core focus of the https://fundamentalanalysisscore.in website. The details are as follows:

The platform aims to simplify fundamental analysis using the approach based on the first three core pillars discussed in the fragility series.

1. Pillar 1 - Financial Strength: This is derived from the Fragility score card explained in the fragility series. The Financial Score in the website quantifies a company's financial strength/robustness, assigning a value between 0 and 10. It is derived from a combination of four key financial ratios based on the latest available audited/unaudited financial statements. The Financial Score is dynamic and subject to change every quarter or year, depending on a company's financial performance.

2. Pillar 2 - Valuation: The Valuation Score in the website quantifies the valuation of a company, assigning a value between 0 to 10. It is derived from a combination of historical 3-year, 5-year & 10-year price-to-earnings ratios, present price-to-earnings ratio, price-to-earnings-to-growth (PEG) ratios based on the last 5 years of earnings growth, and PEG ratios based on the last 10 years of earnings growth.

3. Pillar 3 - Management: This aspect is currently under development. While the website does not provide a Management score at this juncture, users should note that the Management score is a crucial factor in investment decision-making.

Company Fundamental Score: The platform calculates the company's fundamental score by combining the Financial Score and Valuation Score (i.e., Pillar 1 and Pillar 2), assigning a value between 0 to 10. This score simplifies risk assessment, with lower scores indicating lower risk and higher scores suggesting increased risk. It is imperative to consider this score before making any investment decisions. Presently, the company fundamental score does not include the Management Score, which users need to assess separately.

The fundamental analysis scores focus on companies with a market capitalization of over Rs 100 Crs, as smaller firms often operate in localized markets and inherently tend to be more fundamentally weak.

Visit https://fundamentalanalysisscore.in now to explore the simplification of fundamental analysis. If you found the website valuable, please share it with your friends and colleagues who might also benefit from it.

Introduction:

If you're a regular reader of my newsletter, you've likely noticed that I conduct thorough research on companies before making investment decisions. My strategy involves long-term investments, often spanning a decade or more. If you're new here, I recommend exploring my fragility series, which delves into the intricacies of my investment methodology. 

If you found my newsletter valuable, please like/comment and do share it with your friends and colleagues who might also benefit from it by asking them to subscribe to my weekly newsletter - weekly posts every Sunday at 8 AM (please note that there may be occasional interruptions due to personal commitments). You can forward this email or click on the social media buttons below. Thank you for reading and subscribing to my newsletter! Your support is greatly appreciated.

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In this post, I'll delve into one of the numerous aspects of valuation using Cipla Limited as case study.

Cipla Limited

Cipla is engaged in the Business of Pharmaceuticals and is India’s oldest Pharmaceutical company. Cipla is presently the 3rd largest pharmaceutical player in India and leader in therapies such as respiratory and urology. It also ranks 2nd in the overall chronic business. It is the 2nd largest Indian exporter in emerging markets. 

Cipla has nearly 90 years of rich history. In 1935, Cipla was founded by Khwaja Abdul Hamied as the Chemical, Industrial & Pharmaceutical Laboratories in Mumbai. In July 1984, the name of the company was changed to 'Cipla Limited',

One of his famous statements was:

"Never again will India be starved of essential drugs."

He said this in an advertisement of Cipla in 1947, when India was facing a shortage of medicines due to the partition. He also said:

"Unlike other pharmaceutical companies around the world, we are not here to make profits but to bring relief and healthcare to the poor who may otherwise have to die for want of quality drugs."

He said this while handing over his company to his son, Yusuf Hamied, who continued his legacy since the 1970s. In 1999, under Yusuf Hameid leadership, Cipla joined the Indian Pharmaceutical Alliance as a founding member in an effort to promote the development of generic drugs in India.

On July 27th, 2023, there was news from CNBC-TV18 that Cipla’s promoters are in talks with private equity firms to sell a part of their total holding in the company. At present, The promoters own 33.47 percent stake in the company.

Cipla immediately clarified the following:

This refers to the news on CNBC TV18 regarding Cipla promoters looking to sell a part stake in the promoter shareholding to private equity investors with some detail. Pursuant to Regulation 30 of the SEBI (Listing Obligations and Disclosure Requirement) Regulations 2015 (Listing Regulations), we hereby clarify that the Company is not aware of any event that requires disclosure under Listing Regulations. The Company will make appropriate disclosure in compliance with the Listing Regulations as and when any such requirement arises. Kindly take the above information on record.

There were subsequent news articles stating that the third/fourth generation of the promoter family is not interested in continuing the legacy and looking at exit. Further, Strategic investors like Torrent Pharma and Financial investors like Blackstone and Baring Asia are interested in acquiring a stake in the company. Cipla has not confirmed any of these news articles. 

The said news may or may not happen. In this post, as a thought experiment, I would like to address one of the many interesting aspects of valuation of a company.

Intrinsic Value of Cipla Limited

Before getting into valuation, let’s look at the financials of the company.

All the four key financial ratios indicate that the company is robust and not fragile. 

Now that we are convinced that the company is not fragile, we can move to the next step in the investment process i.e. valuation.

In FY2023, the company on consolidated basis earned revenue of ~Rs 23000 Crs and PAT of ~ Rs 3000 Crs as against revenue and PAT in FY2012 of ~Rs 7000 Crs and ~ Rs 1100 Crs. 

The Profits and revenue nearly tripled in 10 years which is a CAGR of 12%. If we extrapolate this growth for next 10 years, then the company will likely earn revenue of Rs 70000 Crs and PAT of Rs 9000 Crs. 

The company on an average traded at PE of 31 in the last 10 years. Considering this as terminal PE after 10 years, then the company's value after 10 years will work out to Rs 2,79,000 Crs. 

Now here’s where calculating intrinsic value gets interesting. The intrinsic value depends on the growth rate/return the investor is seeking. 

For example, if an investor looks at growing his/her investment at a CAGR of 15% for next 10 years, then we need to discount Rs 2,79,000 Crs by 15% to arrive at a present value of ~Rs 70000 Crs i.e share price of Rs 867 per share.

If an investor instead is looking at growing his/her investment at a CAGR of 12% for next 10 years,  then we need to discount Rs 2,79,000 Crs by 12% to arrive at a present value of ~Rs 93000 Crs i.e share price of Rs 1152 per share.

Cipla is presently trading at valuation of Rs 95,740 Crs at share price of Rs 1186 per share which is nearly 12% CAGR growth rate as calculated above.

While the average PE of Cipla in the last 10 years was 31, the PE fluctuated from as high as 55 to as low as 20. In the last 10 years,  If an investor had accumulated the shares of the company whenever PE was below 31 and held the shares without further accumulation whenever PE crossed 31, then the returns can be further maximized  over 12% as acquiring PE will be much lower than average PE of 31. This is one of the strategies an investor can utilize when accumulating shares of a company to maximize returns i.e. acquiring whenever share is trading below average PE. 

While I covered how intrinsic value can change with expected returns of minority investors like us and at PE levels at which the share is acquired. I also would like to cover another aspect of how acquisition by a majority investor can impact a company's valuation.

The Impact of Acquisition on Intrinsic Value

One of the strategic investor i.e. Torrent Pharma is looking at acquiring the company. We don't know whether this news is true or not as both Torrent and Cipla denied the news. However, what we are doing here is only a thought experiment. 

Torrent Pharma is valued at ~ Rs 63000 Crs is the 10th largest Pharma company looking at acquiring Cipla which is the 3rd largest Pharma company. Cipla’s promoters presently hold a stake of 33.46% in the company. They are expecting a sale price of Rs 1350 per share i.e. at market cap of Rs 1,10,000 Crs. Value of promoters' stake at Rs 1350 per share works out to Rs 36000 Crs.

Apart from paying ~ Rs 36000 Crs to acquire promoters stake, Torrent is also required to give an open offer of acquiring further 26% stake as per SEBI guidelines for a consideration of ~ Rs 28000 Crs. That means, Torrent Pharma or any other acquirer needs to be ready with funds of Rs 64000 Crs to acquire Cipla Limited.

The Rs 64000 Crs to be paid to acquire Cipla is more than market cap of Torrent Pharma. Torrent Pharma is required to raise funds at various levels including raising debt in Cipla itself to acquire the company. 

Raising debt in Cipla to acquire Cipla is called leveraged buyout. Raising Debt in Cipla will increase fragility in the company. To raise debt at moderate fragile levels, debt of 3 times PBT can be considered. PBT of Cipla in FY2023 is Rs 4000 Crs. That means, Torrent can look at raising debt in Cipla to the tune of Rs 12000 Crs to part fund the acquisition. In FY2023, Cipla had cash and investments of Rs 4500 Crs and Debt of Rs 800 Crs. Accordingly, net cash surplus available with the company is Rs 3700 Crs. Torrent can also look at utilizing this money for acquisition. Accordingly, Torrent can look at withdrawing cash of Rs 3700 Crs and also raise debt of Rs 12000 crs i.e. total amount that can be raised from Cipla for its acquisition is Rs 15700 Crs. 

From a minority investor’s point of view, the value of Cipla will deteriorate by ~Rs 15700 Crs due to this leveraged buyout as that much money is taken out. Further, considering the increase in fragility of the company due to leveraged buyout, we may consider to further discount the value of the company by 20% i.e. another ~Rs 18600 Crs. Accordingly, value of the company will deteriorate by Rs 34300 Crs i.e. revised value of the company for an investor looking at 12% CAGR will now work out to Rs 58700 Crs i.e. Rs 730 per share as against present trading value of Rs 1186 per share.

As calculated, the value of a company can change due to changes in capital structure or how it is acquired.

Conclusion

Discount rate i.e. rate of returns sought by investors can impact valuation of a company. Further, change in capital structure like in leveraged buyout can also impact valuations of a company. 

Stocks discussed in this newsletter are not recommendations and are for education purposes only. 

If you found this post valuable, please like/comment and do share it with your friends and colleagues who might also benefit from it by asking them to subscribe to my weekly newsletter - weekly posts every Sunday at 8 AM (please note that there may be occasional interruptions due to personal commitments). You can forward this email or click on the social media buttons below. Thank you for reading and subscribing to my newsletter! Your support is greatly appreciated.

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Introduction:

If you're a regular reader of my newsletter, you've likely noticed that I conduct thorough research on companies before making investment decisions. My strategy involves long-term investments, often spanning a decade or more. If you're new here, I recommend exploring my fragility series, which delves into the intricacies of my investment methodology. 

In this post, I'll delve into one particular aspect of investing that concerns all of us. Is the company worth the share price we are paying for? I’ll use Zomato as an example for this.

Zomato’s business model

Business model comprises of 3 divisions

Food Delivery -

Operates a technology platform that provides customers with a convenient, on-demand solution to search and discover restaurants, order food, and have it delivered reliably and quickly. Orders placed on its platform are fulfilled by a last mile delivery fleet comprising of independent delivery partners. 

Hyperpure -

Hyperpure is B2B supplies offering for restaurants in India. Company sources fresh, hygienic, quality ingredients and supplies directly from farmers, mills, producers and processors to supply to its restaurant partners, helping them make their supply chains more effective and predictable, while improving the overall quality of the food being served. 

Quick Commerce (Blinkit) -

Blinkit is a quick commerce marketplace delivering everyday products to customers within minutes. 

Arriving at Intrinsic Value

Zomato as of Aug 2023 is valued on stock market at ~ Rs 100 per share with a market capitalisation of ~Rs 84000 Crs.

While it is difficult to arrive at an exact value for a company (this is one of the reasons why stock prices fluctuate), we can try to arrive at a conservative  estimate for intrinsic value of a company below which we get sufficient conviction to invest in the same. 

For Zomato, lets try to value the company by trying to value each division separately.

Food Delivery

One starting point for valuing this division is gross order value on the platform for the entire year. Gross Order Value means the total value of food ordered by customers on Zomato from various restaurant partners. 

Total gross order value in FY2023 is ~Rs 26,300 Crs and in FY22 is ~Rs 21,300 Crs. Remember this is the value of food ordered and not the revenue for Zomato. Out of this value, the actual revenue earned by Zomato (i.e. commission from restaurants, delivery fees, etc) is Rs 4,533 Crs in FY2023 and is Rs 3,415 Crs in FY2022.

While prima-face revenue appears to grow by 33%!!, if we recall, first quarter of FY2022 was affected by the second wave of COVID. Hence, the 33% growth figure is not a true representation of growth. The actual growth in FY24 might end up much lower. 

The company did not earn any profit from the division in FY2023 and incurred a loss in FY2022. 

If we look at the presence of the company, I feel the company’s market is already saturated and doubt whether any further steam left for the growth in the near future. Already nearly 1.7 Crs families are ordering from Zomato which implies ~5 Crs population which is equivalent to tax filing population. 

Further, whether the company can take advantage of operating leverage considering that delivering each order involves a lot of variable cost as well.

We can arrive at valuation through PE if the company is earning profit. Here, the company is yet to turn profitable. You might have come across lot of news chatter on Zomato making profit in June’2023 quarter. But if you actually look at the numbers, the profit earned for all three divisions is Rs 2 Crs and it is actually negative Rs 179 Crs if we exclude interest income of Rs 181 Crs earned on Fixed Deposits held by the company (unutilised money received through IPO!!!)

However, if we assume that somehow Zomato’s food delivery business does breakeven, then if we safely assume a profit margin of 10%, then on the present turnover of Rs 4533 Crs, profit can work out to ~Rs 450 crs. I would not pay a PE of more than 20 considering that the market might actually be saturated (as population ordering is equivalent to population filing income tax returns). Going by this assumption, the food delivery division should be worth Rs 9,000 Crs which I feel is still an aggressive estimate considering the division is yet to turn profitable.  

Hyperpure

This is a relatively new division and earned a revenue of Rs 1506 Crs in FY2023 as against revenue of Rs 538 Crs in FY2022. While there is scope for growth in revenue, whether the division can turn profitable is to be seen considering wafer thin margins in trading business (hyperpure is equivalent to trading) and also considering perishable nature of items.

The adjusted EBIDTA margin for FY23 is -ve 13% vs -ve 26% in FY22. The division is yet to turn profitable. As per the company’s Annual Report FY2023,

Quote

In March 2023, our oldest city Bangalore turned profitable (before allocating central corporate overheads). 

Unquote

Oldest city Bangalore is still loss making if central corporate overheads are subtracted!!

Again, as food delivery business, even if we assume that Zomato turns this division profitable and if we assume a profit margin of 2% (inline with trading businesses) considering it is simply a trading business of groceries and goods are also perishable, then out of 3 year forward revenue of Rs 10000 Crs, the profit works out to Rs 200 Crs.

If we assume a PE of 20 for this division. Going by this assumption, the Hypercure division should be worth Rs 4,000 Crs. Since this is based on 3 year forward PE, by discounting at 15% for 3 years, same works out to ~Rs 2500 Crs which I feel is still an aggressive estimate considering division is not yet profitable.

Quick Commerce (Blinkit)

The company got this division through Blinkit acquisition. The turnover in FY2023 is Rs 806 Crs and loss incurred is Rs 503 Crs. I have my doubts that this division will ever turn profitable as people will look for alternatives like deferred delivery of 2 to 3 days (like say bigbasket) instead of quick delivery if the delivery costs increase above a certain threshold. This limits the profit earning capability of the division. Even competition like Swiggy Instamart,  Zepto, BBnow are still burning cash and none of them are profitable. Even if Zomato is successful in turning this division profitable, at this juncture, conservatively, it is better not to attribute any value to the same from investment perspective.

However, if we have to value this division, one starting point is ~Rs 4500 Crs at which Zomato acquired Blinkit in June 2022. However, market did not take the news positively.

Shareholders give thumbs down to Zomato-Blinkit deal- The New Indian Express

Considering market view is not positive on the amount paid, wont a 50% discount on the amount paid is conservative estimate? If we go by this, then value of this division works out to Rs 2250 Crs

Apart from value of the three divisions, company has Cash in books of ~ Rs 4700 Crs (unutilised IPO money).

Intrinsic Value

After decoding all the three divisions of Zomato plus unutilised cash, we arrived at an aggregate value of Rs 18,450 Crs (i.e. ~Rs 21 per share price) for the company. 

Compared to this, the market is valuing the company at ~Rs 84,000 Crs (at share price of Rs 100 per share) as of Aug’2023!!! Lowest ever valuation given by market for the company post IPO in June 2021 is ~ Rs 40,000 Crs in July 2022

Assume you are a recruiter. In an on-campus recruitment drive, will you recruit a student who has backlogs or a student who cleared all his/her exams. We have to note that all three divisions are still loss making and Zomato is yet to prove its worth. Zomato is like a student who has backlogs. Even if we give the benefit of doubt that itll turn profitable someday, then the value being arrived at is Rs 18,450 Crs (i.e. ~Rs 21 per share).

Relative valuations

Zomato’s partners deliver food on 2 wheelers. The company i.e. Hero Motorcorp  with 34% market share in 2 wheelers in India and earning yearly profit of Rs 3000 Crs and has cash in books of Rs 11000 Crs is valued at ~ Rs 58,000 Crs vs Zomato’s valuation of Rs 84000 Crs which is loss making at various levels!! While comparison of the value of a company which manufactures 2 wheelers vs value of a company which delivers food on those 2 wheelers is not appropriate. This is just to give sense of scale of Zomato’s valuations.

Info Edge which has 14% shareholding in Zomato is valued at Rs 58000 Crs. If we subtract Zomato’s value from the company, then the valuation of Info Edge minus Zomato is Rs 46000 Crs (i.e. less Rs 12000 Crs - 14% of Rs 84000 Crs).

Info Edge comprises businesses like Naukri, Jeevansathi, 99 Acres, etc. Even if we ignore all other businesses and only consider Naukri for valuation purposes,  Naukri earned a revenue of Rs 1749 Crs in FY2023 and a profit of Rs 1027 Crs. This has been profit making and growing since the past many years. Naukri is a monopoly business (Linkedin is trying hard to enter but yet to be successful) unlike Zomato which has competition like Swiggy, ONDC, etc. The revenue of Naukri grew from Rs 669 Crs in FY2018 to Rs 1749 Crs in FY2023 at a growth rate of 22% y-o-y. Naukri has been consistently earning a profit margin of 55% to 60% for the past many years. And the market is valuing Info Edge (minus Zomato)  at Rs 46000 Crs vs Zomato valuation of Rs 84000 Crs!!

Conclusion

Its hard to arrive at a valuation of loss making companies. I generally prefer staying away from such companies altogether as they are yet to prove their worth. I prefer to wait for such companies to turn profitable. Here, we tried to arrive at valuation for one such company with lots of assumptions. 

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Introduction:

I regret to inform you that I missed last week's newsletter due to unexpected personal commitments. While my goal is to post every Sunday, there might be occasional gaps. I appreciate your understanding and patience during these times. Thank you for your continued support, and I'm excited to bring you more content this Sunday.

If you're a regular reader of my newsletter, you've likely noticed that I conduct thorough research on companies before making investment decisions. My strategy involves long-term investments, often spanning a decade or more. If you're new here, I recommend exploring my fragility series, which delves into the intricacies of my investment methodology. In this post, I'll delve into a particular aspect of investing that concerns all of us.

After conducting extensive research on a company and checking all the boxes, we make the decision to invest. However, amid this process, a specific question arises, one among many: "How frequently should we monitor the company's performance?"

This post aims to address precisely that.

Companies are more Animal than Robot

When analyzing a company and projecting its future performance, it's easy to fall into the trap of assuming they'll operate like machines—consistent and linear growth in sales and profits. Yet, companies are more akin to animals, and their behavior is slightly unpredictable. Volatility characterizes a company's sales and profits. Growth percentages aren't steady; they fluctuate annually.

A robot can be programmed to wake up and sleep at precise times each day. Animals, on the other hand, display variations in their waking and sleeping routines. While we can approximately estimate that an animal will wake up and sleep at least once daily, pinpointing the exact timings remains difficult.

Hence, while we can estimate a company's performance over a 5 to 10-year span, predicting its quarterly or annual performance with precision is a challenge.

To illustrate this point, I have plotted the profits of top 10 listed companies for the past 10 years in below chart. 

If you closely observe the chart, profits did not grow in a straight line for any of the top 10 companies. While profits of all 10 companies were higher than that of 10 years ago, the path is not a straight line. There is an unpredictable element in companies performance. 

With such volatility in performance, does it justify tracking companies performance every quarter? Or does it even make sense to track performance even yearly?

Considering the instability in a company's performance, one can only imagine the impact on its share price. Valuing such a company becomes a complex task for the market. Consequently, the market tends to overreact to a company's performance.

If a company slightly underperforms market expectations, its share price takes a hit. Conversely, if a company outperforms, the share price is likely to surge.

Look at the volatility in share prices of top 10 companies for last 5 years plotted below.

How investment journey in one company looks like

Let me take you through a journey of one investment in my portfolio. I deliberately did not reveal the name of the investment so that the point I wanted to make does not get diluted. 

In July 2015, I invested in a company that had witnessed a 50% drop in share price over the previous year. The decline was attributed to a reduction in profits. My rationale for investing rested on the belief that this profit reduction was temporary and would rebound. Unexpectedly, over the next year, the share price plummeted another 50%! Conventional wisdom would have dictated a cut-loss move, especially since sell ratings dominated research reports.

However, fueled by my independent research and a strong conviction in the company's business model, I held onto my investment. It took four years for the company's profits to recover, just as I had anticipated. Consequently, the market's overreaction manifested, leading to a tenfold surge in share price. Recognizing an overvaluation, I partially exited my position. With the market showing signs of cooling down, I re-entered, steadily accumulating shares over the past year.

My research, conviction, and investment were all established in July 2015. Had I scrutinized the company's performance quarterly or annually, anxiety might have driven an early sell-off, resulting in losses. Instead, I remained impervious to the company's performance and share price fluctuations, ultimately reaping substantial gains in the sixth year.

I learned this lesson, in my previous investments wherein I sold early before reaping benefits as I had given importance to others conviction rather than my own conviction. 

Conclusion

It's crucial to acknowledge that companies don't adhere to robotic predictability; they behave more like animals, displaying a degree of unpredictability. 

Equally important is cultivating personal conviction and adhering to it. Borrowed or weak conviction can lead to early divestment, ultimately making us sell early before reaping benefits.

If you found this post valuable, please share it with your friends and colleagues who might also benefit from it by asking them to subscribe to my weekly newsletter - weekly posts every Sunday at 8 AM. You can forward this email or click on the social media buttons below. Thank you for reading and subscribing to my newsletter! Your support is greatly appreciated.

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Introduction:

In my previous posts in the fragility series which can be found here Fragility Series, we explore building an Antifragile Portfolio, focusing on vital aspects of investment fragility. By following these guidelines, investors can safeguard their equity portfolios from negative impacts and maximize gains from positive news. The series covers four key fragility pillars for eliminating fragility and reducing downside risk. The goal is to create a portfolio that not only withstands adverse events but also leverages positive events for unlimited growth. Antifragility involves capitalizing on both negative and positive events, achieved by removing fragility through the discussed pillars. This approach unlocks a few "Antifragile Powers" that when utilized amplify positive impacts on returns.

I discussed two such Antifragile Powers - Power of Population Explosion & Power of Saying No in my previous posts. In this post, we will delve into another such Antifragile power - Power of Experimentation. 

Experimentation

One of the ways of achieving upside potential is through “Experimentation”. Experimentation is the act of exploring new ideas, approaches, and methods in order to achieve a desired goal. It involves stepping out of one's comfort zone, taking calculated risks, and venturing into uncharted territory. This approach stands in stark contrast to conventional thinking, which often discourages deviation from tried-and-true methods.

Incorporating experimentation into one's pursuits opens the door to a multitude of possibilities. It encourages individuals and organizations to break free from the constraints of routine and to push boundaries in search of novel solutions.

Experimentation like other Antifragile Powers, unlocks upside potential.

Companies can experiment by way of launching new products, acquisition, capacity expansion, R&D, etc.

An investor can experiment by finding new companies to invest in.

However, experimentation is like the act of launching arrows into the darkness – outcome can be either success or failure. Whether we hit our target (keep aside bullseye) is uncertain. 

Risk of Ruin

The maxim "Failure is the stepping stone to success" underscores the necessity of continually releasing arrows into the darkness, hopeful that we will eventually find its mark. Each miss (failure to hit the target) serves as a lesson that the target lies elsewhere.

We can also endup in total failure by exhausting all our arrows in our arsenal and not being able to hit the target. This is called risk of ruin. We should avoid the risk of ruin at all costs.

How can we navigate experimentation without succumbing to risk of ruin? Three core principles can guide us in avoiding the risk of ruin while embracing experimentation.

Maintaining a Sufficient Arsenal of Arrows: Engaging in experimentation necessitates a stockpile of arrows in our arsenal. Fragile companies often grapple with constrained cash flows, rendering experimentation unfeasible – effectively depleting their arsenal of arrows. Notably, such fragile companies can fall even without engaging in experimentation, due to the weight of their mounting debt.

Prudent Allocation of Arrows: Unlike a single massive launch of all arrows at once, which can render even a robust company fragile, it's wiser to release smaller, targeted new bets in proportion to the size of the portfolio and future SIPs. This approach safeguards against the risk of ruin, offering a buffer against substantial losses.

Continual Pursuit of Experimentation: To sidestep stagnation, one must consistently unleash arrows into the dark, symbolizing a commitment to ongoing experimentation. This practice is far more advantageous than hoarding arrows in the arsenal. Exploring uncharted territories and embracing calculated risks fuels growth.

Maintaining a Sufficient Arsenal of Arrows

We can throw arrows into the dark (experiment) only if we have arrows in our arsenal. Fragile companies have limited cash flows to afford Experimentation. In other words they do not have arrows in their arsenal. Further, fragile companies can fail even without experimentation to begin with.

Some of the large Indian fragile companies which failed are:

• Bhushan Power and Steel: This was a steel manufacturing company that was one of the 12 large defaulters identified by the Reserve Bank of India in 2017. It had a debt of US$6.9 billion and was admitted to insolvency in July 2017.

• Essar Steel: This was another steel manufacturing company that was also among the 12 large defaulters identified by the RBI in 2017. It had a debt of US$6.9 billion and was admitted to insolvency in June 2017.

• Lanco Infra: This was an infrastructure development company that had interests in power, roads, railways, and mining. It had a debt of US$6.3 billion and was admitted to insolvency in August 2017.

• Bhushan Steel: This was yet another steel manufacturing company that was also among the 12 large defaulters identified by the RBI in 2017. It had a debt of US$6.2 billion and was admitted to insolvency in July 2017.

• Reliance Communications: This was a telecommunications company that was part of the Reliance Anil Dhirubhai Ambani Group. It had a debt of US$4.6 billion and was admitted to insolvency in May 2018.

• Alok Industries: This was a textile manufacturing company that had a debt of US$4.1 billion and was admitted to insolvency in July 2017.

• Jet Airways: This was an airline company that had a debt of US$2 billion and was admitted to insolvency in June 2019.

These companies before getting admitted to insolvency had limited cash flows to experiment. They were fragile and succumbed due to their mounting debt.

For investors, future SIPs act as a tool to keep replenishing arrows in our arsenal. We can experiment with future SIPs i.e. we can always invest in new companies from future SIPs instead of existing companies in our portfolio. Alternatively, we can also replenish arrows in our arsenal whenever there is Population Explosion in our portfolio. We can partially exit stocks which experience Population Explosion and invest such money in new companies.

Prudent Allocation of Arrows

A robust company can become fragile by taking one large leveraged bet (launching all arrows including borrowed arrows at once). This can lead to Risk of Ruin. It should avoid throwing all arrows at once. One such classic example is Tata Steel acquiring Corus which is explained in following articles:

Tata Corus: 7 Lessons from a Deal from Hell | Founding Fuel

BACKSTORY: Tata Steel’s high-octane battle to acquire Corus (cnbctv18.com)

Tata Steel in 2007 acquired Corus which is 4 times its size through debt (it threw all arrows and once, it even borrowed few of the arrows). 

Look at its share price after that. It never reached its peak of Rs 88 per share in 2008 up until 2021. It could remain afloat only because of its strong Tata Parentage. 

For investors, we should avoid allocating entire money in one single company. We should also avoid taking debt to invest. This should not be confused with Power of Population Explosion. While we should encourage our investments to explode after we invest in them, we at the same time should avoid taking large bets when we invest to begin with. 

We should experiment within our means or limits.

Continual Pursuit of Experimentation

Robust companies keep generating surplus cash flows every year from existing businesses. They keep replenishing their arsenal with arrows. They can choose not to experiment by either building cash reserves from these surplus cash flows or sharing these cash flows as dividends or share buyback to investors. Such companies are not utilizing their Antifragile Power i.e. Power of Experimentation. However, these companies can become antifragile by using surplus cash flows to experiment i.e. by way of launching new products, acquisition, capacity expansion, R&D, etc.They need to keep taking multiple small bets instead of one large bet. They also need to avoid taking debt while taking new bets. Who knows, they might end up hitting bullseye like Infoedge’s investment in Zomato which led to windfall gains at the time of Zomato’s IPO or Eicher’s experiment with 2 wheelers which led to its dominance in the premium segment.

As investors too, we need to remain invested in the market through experimentation instead of keeping our savings in the form of Cash and trying to time the market.

Conclusion

In conclusion, the Antifragile Power of Experimentation offers a pathway to unlocking upside potential, reliant on a balance of resources, prudent allocation, and sustained commitment to venturing into the unknown. By wielding this power, we empower ourselves to navigate the realm of uncertainty, bolstering our portfolios against fragility and embracing the promise of unlimited upside potential.

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Introduction:

In my previous posts in the fragility series which can be found here Fragility Series, we have explored the four fundamental pillars of fragility which an investor needs to be aware of to eliminate fragility in their portfolio:

1. Pillar 1 - Avoid investing in Fragile Companies

2. Pillar 2 - Avoid investing in Overvalued Companies

3. Pillar 3 - Avoid investing in Companies having Management with fragile mindset

4. Pillar 4 - Avoiding Shorter timeframes

By diligently implementing the above pillars, we can reduce the severity of adverse events and allow favorable news to substantially enhance our portfolio. 

While the four pillars mainly focus on eliminating fragility and reducing downside risk, we also need to create a portfolio that not only withstands adverse events but also capitalizes on positive events with unlimited upside potential.

Antifragility entails surviving adverse events and minimizing their impacts, enabling us to take advantage of positive events with non-linear impacts and unlimited upside potential. To achieve this, we must harness certain "Antifragile Powers" that will enhance the impact of positive events and make our returns non-linear. We acquire these “Antifragile Powers” only if we remove fragility from our investments which we can do by following the four pillars of fragility. I discussed one such Antifragile Power - Power of Population Explosion in my previous post. In this post, we will delve into another such Antifragile power - Power of Saying No. 

Saying No

The significance of “Saying No" is showcased in the iconic movie "Rocky," recounting the journey of Rocky Balboa, a humble boxer from Philadelphia. The crux of Rocky's life narrative unfolds when an unforeseen opportunity arises to challenge Apollo Creed, the reigning heavyweight champion, subsequent to Creed's original opponent's withdrawal due to injury. Despite overwhelming odds, Rocky perceives this chance as a platform to prove his mettle and carve a distinctive identity in the realm of boxing.

Here’s the exact quote from the movie when Rocky confides in Adrian, his love interest, the night before his big fight with Apollo Creed, the world champion boxer:

"All I wanna do is go the distance. Nobody’s ever gone the distance with Creed, and if I can go that distance, you see, and that bell rings and I’m still standin’, I’m gonna know for the first time in my life, see, that I weren’t just another bum from the neighborhood."

The significance lies in the fact that Rocky's career teetered on the brink of collapse prior to the opportune encounter with Apollo Creed. His circumstances were inherently fragile, with limited avenues to propel his boxing career forward. Rocky lacked the luxury of the "Power of Saying No" to the match with Apollo Creed. Beyond merely Saying Yes to the bout, he was also required to prove his competence.

On the other hand, Apollo Creed is not fragile. As an established champion, Creed held the privilege of handpicking his opponents, opting for the relatively obscure Rocky as his adversary.

Moreover, it is worth noting that Creed possessed the power of “Saying No". Following a near defeat in the initial match against Rocky, Creed could have declined a rematch – a choice he opted against. Creed's actions underscore the notion that while the power of Saying No existed, it remained underutilized. In contrast, Rocky was devoid of such power, a predicament that dictated his inability to decline the original match or the subsequent rematch against Creed.

This concept extends beyond the realm of cinema. Consider two employees with comparable job roles. One (Employee X) carries lots of obligations, such as EMIs and children's education, leaving minimal room for financial flexibility. The other (Employee Y) boasts a substantial retirement fund and fewer obligations. Employee X's cannot afford to say no and always has the fear of losing his job. Employee Y, conversely, can confidently refuse tasks that do not align with preferences, embracing a stress-free work environment.

Similarly, companies which are not fragile can wield the Power of Saying No when encountering business propositions lacking favorable terms. Few examples are:

Reliance, Aramco call off $15 billion deal amid valuation differences: Sources - The Economic Times (indiatimes.com) Reliance did not go ahead with the deal as the valuation is not to their expectation. They used the Power of Saying No for the deal. 

Why did Bajaj Auto/KTM pull out of Ducati?: Rajiv Bajaj, Auto News, ET Auto (indiatimes.com) Rajiv Bajaj said they called off the Ducati Deal

“For two good reasons: too much overlap with KTM and a valuation that is beyond our limited comprehensions”. 

In Q2-FY2020 earnings call,, Wonderla Management informed the following with regard to Chennai Park:

The Government of Tamil Nadu has given the permission to exempt our park from the LBT (Local Body Tax) for five years from November 1, 2019. As per the Order, the Project execution period is also included in the exemption period of 5 years. This is an anomaly.

In a subsequent update in June 2023, company informed the following:

The Government of Tamil Nadu has granted waiver of Local Body Tax (LBT) of 10% for a period of 10 years from the commencement of commercial operations subject to the condition that the commercial operation shall be commenced within a period of 2 years from 2nd June 2023,, after persistent efforts by the Company

Wonderla already incurred a cost to the tune of Rs 109 Crs towards land acquisition for Chennai Project by the time the company started pursuing with the government. The company utilized its Power of Saying No in the form of not commencing the project and keeping the land idle till it could negotiate favorable terms.

Similarly as an investor, we also have the Power of Saying No in the following forms:

1. We only need to choose 10 to 20 companies out of 5000 companies to invest

2. We can say no to overvaluations

3. We need not invest incase of no good investment opportunities

Power of Saying No is acquired

Fragile companies do not have this power of Saying No.

Deal or Exit? Etihad to take final call on Jet Airways on 31 March | Mint (livemint.com) In the talks with Etihad, Etihad had the deciding power and not Jet Airways. 

Like the Power of Population explosion, it is imperative to recognize that the Power of Saying No is a power acquired through the elimination of fragility. A company cultivates this power by fortifying its core resilience, thereby wielding the ability to negotiate favorable business terms, mirroring the principle elucidated in the example of the movie "Rocky." 

As an investor, we acquire this Power of Saying No by investing only long term capital i.e. money which we don’t need for next 5 to 10 years and also maintaining a contingency fund. By doing this, we are not forced to exit during bear markets and need not be in a hurry to invest when we cannot find any good opportunities to invest. 

While following the four pillars of Fragility helps reduce the impact of adverse events, enhancing the impact of positive events requires us to leverage various Antifragile Powers like Power of Population Explosion and the Power of Saying No.

However, failing to utilize these Antifragile Powers would limit our upside potential. Similarly, there are other Antifragile Powers that we "acquire" by removing fragility from our investments. In my subsequent posts, I will explore these various "Antifragile Powers" that will enable positive events to thrive in our portfolio.

If you found this post valuable, please share it with your friends and colleagues who might also benefit from it by asking them to subscribe to my weekly newsletter - weekly posts every Sunday at 8 AM. You can forward this email or click on the social media buttons below. Thank you for reading and subscribing to my newsletter! Your support is greatly appreciated.

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Introduction:

In my previous posts in the fragility series which can be found here Fragility Series, we have explored the four fundamental pillars of fragility which an investor needs to be aware of to eliminate fragility in their portfolio:

1. Pillar 1 - Avoid investing in Fragile Companies

2. Pillar 2 - Avoid investing in Overvalued Companies

3. Pillar 3 - Avoid investing in Companies having Management with fragile mindset

4. Pillar 4 - Avoiding Shorter timeframes

By diligently implementing the above pillars, we can reduce the severity of adverse events and allow favorable news to substantially enhance our portfolio. I have also provided a consolidated checklist encompassing all these pillars, aimed at guiding investors towards effectively eliminating investment fragility.

However, it's essential to understand that 'robust' is not the true opposite of 'fragile.' The real opposite of fragility is 'antifragility.' We have previously explored this concept in the post titled "How to build an Antifragile Portfolio." While the four pillars mainly focus on eliminating fragility and reducing downside risk, we must now shift our focus to transforming our portfolio into an antifragile one. In other words, how can we create a portfolio that not only withstands adverse events but also capitalizes on positive events with unlimited upside potential? This will be the focus of our forthcoming posts in the Fragility Series.

Antifragility entails surviving adverse events and minimizing their impacts, enabling us to take advantage of positive events with non-linear impacts and unlimited upside potential. To achieve this, we must harness certain "Antifragile Powers" that will enhance the impact of positive events and make our returns non-linear. We acquire these “Antifragile Powers” only if we remove fragility from our investments which we can do by following the four pillars of fragility. In this post, we will delve into one such power - the Power of Population Explosion. 

Population Control

Mother Nature maintains a delicate balance between populations of various organisms, exemplified by the symbiotic relationship between zebras and lions on the African savannah. The abundance of vegetation supports a thriving zebra population, which, in turn, attracts the vigilant attention of the lion population that benefits from the availability of prey. This cycle of life depends on the existence of both species, each playing a crucial role in maintaining ecological equilibrium.

Similarly, the world of finance emphasizes the importance of diversification in an equity portfolio. Just as the population of zebras and lions are interlinked, acting as checkpoints for each other's populations, we too rebalance our portfolios regularly to ensure proper diversification and avoid concentration risk. For example, if a stock starts appreciating and starts contributing a significant share of our portfolio, we try to exit a portion of the same and invest in other stocks to avoid concentration risk.

Even SEBI has stipulated a Risk capping of maximum allocation of 10% in a particular stock for mutual funds. When HDFC and HDFC Bank merged, few mutual funds had to exit a portion of their allocation towards HDFC twins to comply with the 10% allocation. 40 equity mutual funds have more than 10% in HDFC twins - The Economic Times (indiatimes.com)

However, imposing too many restrictions on portfolio allocation can hinder our upside potential. By regular rebalancing and restricting maximum capping in a single stock in a portfolio to say 10%, aren't we limiting our upside potential? This works against the concept of Antifragility. Remember Antifragility means having as limited restrictions as possible for Upside Potential when positive events occur. By capping % allocation in the portfolio for a single stock, we are not letting positive events do their work. 

Power of Population Explosion

While following the four pillars of Fragility helps reduce the impact of adverse events, enhancing the impact of positive events requires us to leverage the Power of Population Explosion unlike Mother Nature which tries to control Population of various organisms. This means removing the restrictions we place on upside potential and allowing our winners to grow substantially within our portfolio. By doing so, we can maximize our returns when positive events occur.

To illustrate, let's consider an example: If we invest in ten stocks with equal 10% allocation in our portfolio, there is no guarantee that positive events will occur evenly across all ten stocks. What if all ten positive events happen in a single stock, and the others experience none? By strictly adhering to rebalancing practices, we might unintentionally limit our upside potential.

In the initial 5 years of my investing journey, I earned FD like returns of 7% per year or so as there were no major positive events in any of my portfolio stocks. However, things changed drastically in the 6th year when one particular stock became 10 bagger and started contributing 80% of my portfolio!! I let this stock grow till 10 bagger and then exited a portion of the same to diversify into other stocks. This enabled me to earn higher than market returns subsequently. If I had exited/rebalanced when it reached 10% or 15% of portfolio allocation, then I would have restricted the upside potential of positive events happening in this particular stock. 

Legendary investors like Rakesh Jhunjhunwala and Radhakishan Damani have experienced remarkable wealth creation by unleashing the Power of Population Explosion. Allowing their winners to grow significantly within their portfolios contributed to their outstanding success. Late Rakesh Jhunjhunwala bought 6 Crore shares of Titan at Rs 3 each in 2002-2003 i.e. a Rs 18 Crs investment. The share price of Titan has since become ~1000X. While he exited partially during the years, he (i.e. now his wife) continues to still hold ~4.5 Cores shares of Titan which is still contributing 40% of his wealth. Titan is a significant contributor towards his wealth creation journey. Similarly Avenue Supermarts (DMart) significantly contributed  towards the wealth creation journey of Radhakishan Damani.

Power of Population Explosion is “Acquired” 

The concept of not putting all our eggs in one basket is often emphasized in investment advice, promoting the idea of diversification. This strategy aims to mitigate risks associated with fragile investments, much like delicate eggs. However, what if each of our investments were more akin to rubber balls—resilient and even antifragile? In that case, we could confidently place all these rubber balls in one basket without fear. In other words, we could embrace concentration risk if our individual investments lacked fragility and exhibited robustness or antifragility.

By diligently following the four pillars of fragility, we "acquire" the Power of Population Explosion, which grants us the ability to take on concentration risk. This means that we can allow certain investments to grow significantly within our portfolio, maximizing their potential when positive events occur.

However, failing to utilize this acquired power of population explosion would limit our returns. Similarly, there are other Antifragile Powers that we "acquire" by removing fragility from our investments. In my subsequent posts, I will explore these various "Antifragile Powers" that will enable positive events to thrive in our portfolio.

To unleash the true potential of positive events, we must tap into these Antifragile Powers and cultivate an antifragile portfolio. By removing fragility from our investments and acquiring these powers, we can create a resilient investment strategy that thrives on the opportunities presented by positive events.

If you found this post valuable, please share it with your friends and colleagues who might also benefit from it by asking them to subscribe to my weekly newsletter - weekly posts every Sunday at 8 AM. You can forward this email or click on the social media buttons below. Thank you for reading and subscribing to my newsletter! Your support is greatly appreciated.

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As I have informed in my previous post, I had to take 4 to 6 weeks of break in my weekly posts due to personal obligations that required my full attention. I'll try to start posting on a weekly basis again, every Sunday at 8 AM, as I used to do earlier.

I'm back with a new post in the Fragility Series. In my previous posts in the series, I explained about the four pillars of investing. In this post, I would like to give a live example with regard to the fourth pillar of investing, i.e. Time. I gave a detailed explanation about this pillar in my post "Fourth Pillar of Investing: Time – Let’s make it our friend rather than a foe," wherein I explained how fragility reduces with Time; the longer the time horizon of our investments, the lesser the fragility.

Technical Glitch by Zerodha caused losses for a few traders on July 7th, 2023

You can find details of the Technical glitch in the below 2 news articles.

1. Zerodha glitch: Traders say unable to exit Sensex option trades, brokerage says 'issue with the ISPs' - BusinessToday

2. Netizens angry after losing money as Zerodha suffers tech glitch again | Mint (livemint.com)

Before we get into the details, we need to understand Equity Options, which is required for better understanding the issue.

Imagine you're planning to buy a new video game console, but you're not sure if you'll have enough money when it's released in three months. You really want to secure the option to buy it at the current price, just in case the price goes up later. So, you decide to pay a small fee to the store owner to lock in that option.

Now, let's translate this concept to the world of finance:

Equity options are like these "price-locking" agreements but for stocks (shares of a company). They give you the right, but not the obligation, to buy or sell a certain number of shares of a company's stock at a set price (called the "strike price") before a specific date (the "expiration date").

There are two types of equity options:

1. Call Option: This is like the price-locking agreement for buying shares. If you buy a call option, you pay a small fee (called the premium) to secure the option to buy the shares at the strike price before the expiration date. If the stock price goes up, you can buy the shares at the lower strike price and sell them at the higher market price, making a profit.

2. Put Option: This is like the price-locking agreement for selling shares. If you buy a put option, you pay a premium to secure the option to sell the shares at the strike price before the expiration date. If the stock price goes down, you can sell the shares at the higher strike price and then buy them back at the lower market price, again making a profit.

Keep in mind that options are time-sensitive, meaning they have an expiration date. If the stock price doesn't move in your favor before the expiration, the option may expire worthless, and you lose the premium you paid for it.

Apart from Options for shares of a company, there are also Index Options, i.e. call/put options for NIFTY or SENSEX.

Now there are few trading strategies that deal with trading Options on their expiry date. As I explained above, Options will become worthless if the price of a company or Index does not move in our favor at the time of expiration, i.e. at 3:30 PM on the expiration date.

A few traders were trading on BSE Options on July 7th, 2023, on the expiry date through Zerodha. They were unable to post their traders on the platform in the last 20 minutes of expiry, i.e. between 3:10 to 3:30 PM, due to which a few of the traders incurred huge losses, which eroded a significant % of their capital.

While it is regrettable that these traders incurred losses due to external factors and not due to their own doing. However, if we think about it, incurring huge losses in our portfolio due to a small technical glitch of a few minutes means the investment strategy is fragile. Fragility means getting significantly impacted by adverse events and antifragility means having minimal impact due to adverse events and taking advantage of positive events. Here, the technical glitch by Zerodha for a few minutes is an adverse event, and this event caused huge losses for a few traders, which implies that the strategy is very fragile. The strategy is overly dependent on the last few minutes of expiry of Options. Those few minutes are very critical for the strategy to work.

This is one of the reasons I prefer a long-term strategy as fragility reduces with time. As I explained in the four pillars of investing in my fragility series, we can eliminate fragility by following the first three pillars of investing, i.e. investing in companies with robust financials, are undervalued, and have management who does not have a fragile mindset. However, the fourth pillar, i.e. Time is equally important. Let me explain this using another example.

Another example with a technical glitch of 2 years!!

Wonderla Holidays is into Amusement Parks. I wrote a detailed post about the company here. The Amusement Parks of the company had to remain closed/ negligible footfalls for 2 full years due to COVID. Try to digest that information, Negligible revenue for 2 full years!!

Look at their quarterly results for that period. They had to incur a loss for 6 quarters due to COVID, which is an external adverse event and not because of their own doing. However, they came back strong with lifetime high profits in FY23 after the COVID effect was reduced.

Look at their share price during this period. While the share price fell from Rs 291 in Oct'19 to Rs 110 in May'20, it bounced back and reached an all-time high price of Rs 575 last month.

While COVID is an adverse event, lifetime high profits are partly due to a positive event called revenge tourism. Wonderla was able to absorb a 2-year adverse event and took advantage of a positive event. If this is not antifragile, then what is?

Wonderla was able to survive a technical glitch (COVID lockdown) of 2 full years vs. the traders who could not withstand a technical glitch of a few minutes!!

By looking at the above 2 examples, can’t we safely conclude that Wonderla is antifragile, whereas the trading strategy with regard to Options expiry is fragile?

Our strategy should be such that we can survive adverse events so that we live another day to take advantage of positive events. For this, we need to let the fourth pillar i.e. Time do its work. As they say, Time heals most wounds.

If you found this post valuable, please share it with your friends and colleagues who might also benefit from it by asking them to subscribe to my weekly newsletter - weekly posts every Sunday at 8 AM. You can forward this email or click on the social media buttons below. Thank you for reading and subscribing to my newsletter! Your support is greatly appreciated.

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I write this to inform you of an upcoming hiatus in my weekly posts for the next 4 to 6 weeks, due to personal obligations that require my full attention. During this period, I invite you to revisit my previous pieces in the Fragility Series, accessible here: Fragility Analysis (budgetiger.in). This series dives into the crucial aspects of investment fragility every investor should understand to effectively safeguard their equity portfolio. By adhering to these guidelines, you can better shield your investments from unfavorable developments, thereby maximizing the benefits of positive news.

The four pillars discussed in the Fragility Series include:

1. Steering clear of Fragile Companies: This requires an in-depth review of various financial indicators to determine a company's fiscal wellbeing and growth potential. Key metrics to consider include equity as a percentage of balance sheet size, breakeven sales as a percentage of actual sales, Return on Capital Employed (ROCE), and cash flow from operations compared to annual debt obligations plus depreciation, along with a comprehensive review of the company's industry, sales, and profit growth. For more information, refer to my articles:

   • How to measure fragility in a company using financial statement analysis 

   • Introducing the Fragility Score Card: Financial Statement Analysis made easy

2. Shunning Overvalued Companies: This necessitates evaluating valuation metrics such as the Price-to-Earnings (P/E) ratio and the Price/Earnings to Growth (PEG) ratio based on past and future earnings growth rates. The objective is to bypass companies with inflated valuations that are likely to be adjusted if the company fails to achieve projected growth targets. Read more on this in:

   • Overvaluation increases fragility of our investment & Stock Market is not always right

   • The Power of PEG: A More Comprehensive Valuation Metric Than PE Ratio

3. Avoiding Companies with Management Exhibiting a Fragile Mindset: This involves scrutinizing management behaviors including their funding strategies, cash reserves, surplus cash distribution, commitment to long-term growth versus short-term stock price valuations, frugality, and inclination towards debt. It's also critical to ensure no significant adverse findings are associated with the management or the company. You can find more in my article:

   • A Step-by-Step Approach to Management Analysis for Companies

4. Evading Shorter Timeframes: This encourages long-term investing (5 to 10 years or more) and patience during market downturns, as well as the maintenance of sufficient contingency funds to avoid premature withdrawal from equity investments in a bear market. Discover more in my post:

   • Time – Let’s make it our friend rather than a foe

By diligently implementing the above pillars, you can reduce the severity of negative news and allow favorable news to substantially enhance your portfolio. I have also provided a consolidated checklist encompassing all these pillars, aimed at guiding investors towards effectively eliminating investment fragility.

However, it's a common misconception to consider 'robust' as the antonym of 'fragile.' Yet, the true opposite of fragility is 'antifragility.' I have previously elucidated on this concept in my post titled How to build an Antifragile Portfolio (budgetiger.in). The four pillars predominantly focus on mitigating fragility in the portfolio, which inherently implies reducing downside risk or drawdowns. Yet, what about the upside? While eradicating downside risk contributes to a robust portfolio, how do we transform it into an antifragile one? I intend to explore this in my forthcoming posts once I return from my break.

Thank you for your understanding and continuous support. I look forward to reconnecting soon.

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