Industry Analysis:

• Figure out industry structure – Monopoly, Duopoly, Oligopoly, Average competitive, Highly competitive.
• Historical market shares of industry participants, along with analysis of changes in market shares.
• Competitive intensity – Competition on price or product/service features.
• Deciphering Industry growth – Volume vs Pricing factors.
• Structural/Cyclical/Seasonal trend analysis.

Company Business Analysis:

• Research on products/service of the Company.
• Positioning of Company’s products/service vs those of competition (features/perception/appeal, price).
• Pricing power of Company’s products and its sustainability.
• Competitive position of suppliers/customers/substitutes/distribution channel.

Peer Comparison:

We prepare a comparison of historical financial ratios across multiple Companies within a sector including some global peers. This comparison (in sync with industry & business analysis done above) helps us to:

• Check the financial position of each Company within a sector.
• Cost structure and margin profile of Company vs competitors in the industry.
• Trends evolving in other emerging markets and the developed world.

We evaluate quality of Promoters on following parameters:

• Quality of Business Strategy decisions taken in history.
• Quality of Board of Directors (as explained below).
• Honesty and fairness in financial reporting.
• High dividend payout vs Empire building/cash hoarding approach to capital allocation.
• Related party transactions.

We evaluate quality of Board of Directors on following parameters:

• Technical expertise and experience of directors.
• Board Composition: Proportion of promoter directors vs independent directors.
• Credibility and independence of independent directors.

We have observed that once an analyst starts liking the business/financials/management of a Company, he starts ignoring risk factors relevant in that Company. When the ignored risk materializes, investors end up making large losses.

To ensure that we do not ignore any relevant risk factor, either due to behavioural traits of an analyst or sheer human negligence, we have designed a process driven quantitative approach towards identification and evaluation of risk.

We have identified important Company specific risks that we face as an equity investor and modelled them in our ‘White Equity Risk Score’. This process directs analyst’s attention to the key risk parameters and helps look at risk independently of his views on business/financials/management of the Company.

‘White Equity Risk Score’ has 15 parameters including the following:

– Change in Promoter Holding
– Pledged Shares
– Contingent Liabilities
– Quality of Auditor
– Related Party Transactions
– Disclosure Quality
– Aggressive Accounting Policy

At the conclusion of this step, we have a good understanding of financials, business and management of the Company. We have also evaluated the relevant risks factors in this Company. This forms a good base to draw up conclusions and value the Company.

Conclusion:

White Equity Grade Classification:
We have listed all the key parameters on Company Research in one module. Analyst draws up his conclusions on quality of financials, industry structure, business, management and others in this module. Each parameter is given a weight depending on its importance in the overall Company analysis. Using this metric, we arrive at White Equity Grade Classification (Good/Average/Bad Company). Portfolio allocation limits are based on this grade classification.

Projections:

We take a five year view on direction of key financial metrics & draw up annual financial projections. We make only base case projections of key metrics, to get a broad valuation band for the Company.

Valuation:

Our valuation method depends on the Company’s financial and competitive positioning. An asset light business having a sustainable competitive advantage, likely to generate above cost of capital returns, we value the same using earnings based valuation approaches. Asset heavy businesses are valued differently. Our Valuation methods are designed to give a broad sense of intrinsic value of the Company. This module also calculates the 5 year prospective return range if an investment is made in this Company at current stock price. Our valuation metrics give a good sense of both entry and exit prices.

This concludes our initial Company research. We move key conclusions and valuation to White Equity Coverage Index.

For the Companies in active coverage, we track them using multiple tools & alerts. We update them on a quarterly basis using the following information sources:

• Quarterly financial results.
• Investor presentations.
• Press releases.
• Analyst/Investor conference calls/meets.
• Media interviews of management.
• Direct communication with Company IR.

Uses of tracking/monitoring:

• Keep up with the latest news/events on the Company.
• Helps increase our conviction on the Company.
• Tracking actual performance vs our projections.