We all aim to own businesses at a price less than what it will be worth in the future. For this, the company must have an advantage over its competitors, sustain and increase that advantage, and earn a reasonable growing rate of return on the capital deployed.
How do you arrive at that conclusion?
Most investment research focuses on the quality of a business' operations, competitive position, returns on equity, earnings growth, and so on--and rightly so--but equal attention must be paid to the quality of the people running the business.
A company’s vision may be bold, but is the management capable of executing a strategy that will help them achieve it?
One must evaluate how well a management team has played the hand it has been dealt. But hindsight must also be coupled with foresight, and whether or not management's interests are aligned with yours, and if it treats shareholders as partners or simply capital providers.
To get to the place where you are sanguine about the prospects of the company, you need to dig hard.
Abhijit Chokshi, investor and founder of Stockifi, shares the questions he has employed during his interactions with mid- and small-cap companies.
Industry
- What headwinds or threats do you foresee coming your way?
- Do you see disruption? If yes, how do you plan to circumvent it or capitalise on it?
- What is your view on the growth of the industry and what is your strategy given your hypothesis?
- What has been the sectoral growth rate over the past decade? What is the expected growth rate in the coming give years?
- Can you share some insights about the industry that is not readily available in the public domain?
Competition
- Can you name one company in your industry that you truly respect, and can you explain what it is about it that has earned your admiration?
- Name your top competitors and tell us how you stand out vis-à-vis them. Products? Technology? Service?
- How is your marketing strategy positioning you?
Consumers
- Name your top customers and tell us what percentage of sales do each of them account for?
- Do you have any global customers? From various geographical locations or just one? What percentage of sales do each contribute to? Do you see it increasing or decreasing?
- What is your market share segment-wise? How much is it likely to be in three years and why?
- What are the entry barriers?
- How strong is customer stickiness? What are the switching costs?
Financials
- What is your debt retiring plan?
- What is the company's dividend distribution policy?
- How concerned are you about the company's stock price in the next few years?
- As a shareholder, are you hoping for a higher market cap in the near future?
- Do you hope to be acquired?
- Are you looking at expansion? If yes, how do you plan to raise money for it? Do you plan to incur debt?
- What measures are being implemented to address the company’s rating profile?
Employees
- What are you doing to make your employees happy?
- What is the current manpower?
- Are you planning to recruit any experienced industry professionals in the future?
- What is the management remuneration policy? Are you following the 11% managerial remuneration mandate?
- Do you have an ESOP policy in place?
Promoters
- What is the current share of the promoters? Any plans of increasing the stake further?
- Any plans of diluting equity?
- Barring the promoters who are the major shareholders?
- Do any of clients or input suppliers have a major position in the company?
- Do the promoters have any other business interests?
- Should something happen to the promoters, what is the succession plan? What contingency measures have been undertaken?
Production and Operations
- Has a new product been recently launched? If yes, how has the market responded? How much has it contributed to sales? Any scope of margin expansion?
- Which is the lowest cost producer of your output in India and globally? How far are you in catching up?
- What is the current order book? By when do we see these orders being fulfilled?
- What is the sales target for the next 2/3 years?
- What is the inventory? If it is high, what is the reason for it?
- What is the present capacity utilization ratio?
- Any plans of bettering the Working Capital Cycle?
- What is the present replacement costs of assets?
- Name the dominant raw materials that go into production? Are any linked to crude?
- What is the overall raw material/ input price scenario?
- Can you increase the scale of operations coupled with improved profitability margins and efficient working capital management?
Abhijit Chokshi is the founder of Stockifi, SEBI Registered RA No. INH000008376
