Value Investing- An Introduction

To start understanding what value investing really means, we 1^st need to understand the true meaning of investing.

Investing is the act of committing money or capital to an endeavour (a business, project, real estate, etc.) with the expectation of obtaining an additional income or profit. Investing also can include the amount of time you put into the study of a prospective company, especially since time is money.

In words of Benjamin Graham - Investing is "an operation which, upon thorough analysis, promises safety of principal and a satisfactory return"

So to differentiate investing from speculation you need the following:

1. Thorough study of the business.

2. Expectation of regular return or income.

3. Safety of the invested capital or money.

Benjamin Graham is considered the father of value investing. He began teaching the Value Investing Concept at Columbia Business School in 1928. The two of Grahams most known students are Warren Buffet and Irving Kahn.

The Value Investing Concept has 5 fundamental rules.

Rule 1: Companies have intrinsic value

An intrinsic value is the true value of a business. A business's intrinsic value could be estimated from its financial statements, namely the balance sheet and income statement. This concept maybe explained with the help of a simple example- Most sensible shoppers go to purchase a TV when its on sale rather than purchasing it on full price. The quality or properties of a TV do not change when its on sale. They remain same. The similar assumption holds true for a stock. The prices of a stock may change even when the true value of the company remains the same. The fluctuations in the market change the price but they do not change what a buyer purchases.

The various methods one can use to find the approximate intrinsic value of a company are- asset based approach, cash flow based approach, study of prior transactions and relative valuation of the company. But be warned, the intrinsic value that you may arrive on may not always be true as any estimate of the intrinsic value is based on a numerous assumptions about the future.

Rule 2: Always keep margin of safety

When market price is significantly below your estimation of the intrinsic value, the difference is the margin of safety.

” A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck or extreme volatility” – Seth Klarman

The future is inherently unpredictable, thus a margin of safety provides protection against bad luck, human error or bad timing.

The margin of safety concept may be explained better with the following example:

If you were asked to build a bridge over which 10,000-pound trucks were to pass, would you build it to hold exactly 10,000 pounds? Of course not, you’d build the bridge to hold 15,000 or 20,000 pounds. That is your margin of safety.

Rule 3: Consider the Efficient Market Hypothesis wrong

The efficient market hypothesis or EMH states that it is impossible to beat the market. It assumes that all stocks trade at a fair price on the stock exchange. Thus making the purchase of undervalued stocks and sale of inflated value stocks, difficult.

Value investors believe that sometimes stocks are under-priced or over-priced.

Rule 4: Value investors do not follow the others

Value investors are often considered contrarians. They go against the crowd. Value investors not only reject the efficient-market hypothesis, but when everyone else is buying, they're often selling or standing back. When everyone else is selling, they're buying or holding.

Value investors do not consider buying the popular stocks as they are usually over-priced.  They look at companies which are usually unloved, neglected and typically cheap but not low in quality.

Rule 5: Have patience and diligence

To become a value investor it is necessary to know your circle of competence. To enhance ones circle of competence one should do what he knows. One should do his/her research well. Value investors never get compelled to invest in an area because everyone else is investing there.

The circle of competence of a person enhances over a period of time. Unlike sportspersons, investors get better as they age.

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[1] Definition of investing as per www.investopedia.com

The Indigo Airlines- Strategic Map

The IndiGo airlines’ activity map depicts the core strategies on which the organization functions. The purpose we made an activity map is to see whether any new decisions or ideas fit the existing strategy which the airline follows; its effect on various other functions connected to it. It also shows how every function is inter-related. According to us, the three main functions that IndiGo undertakes to attain operational effectiveness are:

1.    Customer centric services

2.    Performance

3.    Focus on aircrafts

The above mentioned functions are facilitated by a number of other factors as depicted in the activity map. We would highlight the factors which are unique to IndiGo airlines, they are as following:

Deft route planning

  IndiGo has shown skillful planning in capturing local market and adding new customers to its list. It aims in operating its connecting flights such that in case of including any new destinations for the flight it is ensured that the customer will not have to look at a non-Indigo flight to go to any of the newly added destinations.

Minimum turnaround time

  Turnaround time refers to the time during which the aircraft must remain parked at the gate. . The strategy is to ensure that the aircraft don't stay grounded for too long because they make money only when they are in air. That is why it has signed up "power by hour" agreements with vendors under which it pays for every hour the aircraft flies; in return, the vendors provide full spares and replacements whenever they are required.

C-checks

 Even its C-checks, which an aircraft has to go through regularly, are planned with cost in mind. IndiGo gets these checks done in Sri Lanka, unlike its competitors who send their aircraft to as far as Dubai, Hong Kong, Singapore and Kuala Lumpur. The advantage is that less fuel is burnt to reach Sir Lanka and, since all the planes go to one place, they get a better price.

Point to point transit

 IndiGo travels directly to a destination, rather than going through a central hub. This way they save on fuel and additional costs.

    

 Its consistent record of profitability has also helped the airline in getting more attractive financing deals to pay for its lease rentals.The effort to prune costs and improve profitability doesn't end here it has ordered A-320 Neos which are 15% more fuel-efficient and can make a substantial difference to the economics of the game.

Ravinder Raj vs Maruti Udyog Limited and M/s Competent Motors Co. Pvt. Ltd

Case: Ravinder Raj vs Maruti Udyog Limited and M/s Competent Motors Co. Pvt. Ltd

Case Facts:

Ravinder Raj is the petitioner and Maruti Udjoy limited is the respondent 1 and M/s Competent Motors
Co. Pvt Ltd being the respondent 2. In the year 1985 Mr. Ravinder Raj booked  a cream colour Maruti 800 car by paying Rs. 10,000. On 15^th July 1988 the petitioner was informed that his Maruti Car allotment has matured for delivery. The next day i.e on 16^th July 1988 the petitioner paid  Rs. 78351.05 towards the total cost  of the car. On 1^st March 1989 there was an increase in the excise duty payable , causing a price hike of Rs. 6710.61. The petitioner thus received a letter from the respondent 2 to deposit the excess amount payable which the petitioner denied to pay .

Judgment:

The court did not accept the petitioners claim

Comments:  

According to us the court took the right decision. As according to the Sales of Goods Act 1930 Section 64A (2) any contract for the sale or purchase of goods without the stipulations about the payment of tax where the tax was not charged at the time of making the contact, or for the sale or purchase of such good any increase in the tax or any part of tax is payable, the seller may add the amount equivalent  to the increase in tax to the contact price and he shall be entitled to be paid and to sue for the recovery of the additional amount. These provisions are applicable to the following taxes

1.      any duty of customs or excise on goods

2.      any tax on the sale or purchase of goods.

Under section 46A(1) of the Sales of goods Act the respondent has the rights of an unpaid seller. The claims of the petitioner failed and the case was given the right judgment. Any increase in the future tax rate is not in the hands of the producer and thus he should not bear the extra cost.

Law included: Sales of Goods Act 1930 

Vodafone International Holding vs Union of India

Case Facts:

Vodafone International Holding and Hutchison telecommunication international limited or are two non-resident companies. These companies entered into a transaction by which Hutchison telecommunication international limited transferred the share capital of its subsidiary company based in Cayman Island i.e. CGP international to Vodafone International Holding.

Vodafone acquired 67% of controlling interest in Hutch. The Indian Revenue authorities issued a show cause notice to Vodafone as to why it should not be considered as “assesse in default” and thereby sought an explanation as to why the tax was not deducted on the sale consideration of this transaction.

The Indian revenue authorities thereby through this sought to tax capital gain arising from sale of share capital of CGP on the ground that CGP had Indian Assets (Joint venture between Hutch and Essar).

Vodafone filed a writ petition in the High Court challenging the jurisdiction of Indian revenue authorities. This writ petition was dismissed by the High Court and Vodafone appealed to the Supreme Court which sent the matter to Revenue. The revenue authorities decided that it had the jurisdiction over the matter and then matter was sent to the High Court which was also decided in favour of Revenue Authorities and then finally a “Special Leave” petition was filed in the Supreme Court.

Judgment:

The High Court held that the Indian revenue authorities do not have jurisdiction to impose tax on an offshore transaction between two non-residents companies where in controlling interest in a (Indian) resident company is acquired by the non-resident company in the transaction.

Comments:

After reading the case facts and other news related to the case we feel that the Supreme Court ruled the correct judgment. We say that on the basis of the following :

·   1. Section 2 (14) of the Income Tax Act defines what a “capital asset” means. According to that definition transfer of shares does not fall under Section 2(14).

·   2. The judgment also benefitted the overall economic confidence of other multi-national companies operating in India. It made them have faith in the Indian judicial system.

Cases covered: Companies Act 1956 (Amended in 2013) and Income Tax Act 1961

TiE Summit 2013:Working with the Government - A talk by Mr Sanjay Jaju, IAS, Secretary IT and Communication Department Govt. of Andhra Pradesh

As a Secretary in the IT& Communications Department, Government of Andhra Pradesh, Mr. Jaju leads the ICT  industry Promotion and e-governance initiatives. He has been instrumental in promoting  the Electronic System Design and Manufacturing sector in the state through various Policy initiative.

Mr. Jaju had a very optimistic view about the opportunities coming up in Hyderabad. He spoke about how India has made a big name in the ITeS business in the past 20 years. He started his speech by explaining how the image of Indians had changed over the years and substantiated this by his experience while visiting the Silicon Valley. According to the statistics provided by him, out of every 3 Indian in the Silicon Valley, one is from Andhra Pradesh.

He stressed upon Hyderabad’s power to create great potential entrepreneurs through start-ups in the IT sector. He also spoke about the deficiencies in the infrastructure and the inability of the Government and corporate sector in providing the proper “eco-system” for the companies to work.

He enlightened the audience by providing information about the various policies and incentives that the State Government provides to the start-ups in the IT industry. He spoke about the State Government’s progressive development plans for Hyderabad city which might be of use for some budding IT entrepreneurs at IMT Hyderabad.

Next he talked about the electronic hardware industry coming up in Hyderabad. The Government plans to provide infrastructure for these electronic hardware companies .By providing such facilities it will help these companies to bring down their costs and the Government also has special provisions for research and development in this sector. Another astonishing fact that he told is that there are many provisions for funds available for electronic hardware start-ups but the entrepreneurs are not aware of it and all the funds go back to the Central Government. There is indeed a lack of awareness about the support that the Government provides.

There are many incentives also for the IT start-up companies in special areas like Vijayvada, Tirupati. E-Seva portal of the Government provides easy access to the entrepreneurs about these incentives provided by the government. The process of application for applying for these incentives is explained in the same website.

He even talked about the Animation and Media industry . Hyderabad is the only state in the country which has “Game Policies”. He even told about Hyderabad’s contribution in this industry. The successful movie Life of Pie had majority of its animation outsourced to Hyderabad. Chota Bheem is another successful story that started from Hyderabad. To promote the budding talent in this area the government also plans to set up an Animation and Media academy in the next two years.

Overall it was an enriching experience. It educated us about the various support systems that the government provides for the start-ups. It was truly motivational for budding entrepreneurs like me to see so much support from the government.  

Beyond Integrated Marketing Communication: What next…?

The strategy of using different modes of communication synergistically to provide a holistic appeal to the target audience has become a norm today. This integration of marketing communication has lead us to a scenario where when Big B endorses Maggi noodles, he is seen endorsing it everywhere from the idiot box to the magazines high on gloss and low on substance. From hoardings staring at us on traffic junctions to in-store promotional material of Maggi where the size of his image dwarfs the product itself.

Now, if this is what each and every brand is doing today in the name of Integrated Marketing Communication (IMC), the end result is not far to fathom.  We all are headed towards integrated marketing clutter. The level of sensory adaptation that this scenario is creating is numbing our senses and there is a desperate cry for innovation. So what new should we do…well, that’s a million dollar question. Should we take the integrated marketing communication to next level??? “Elementary my dear Watson!” as good old Holmes would say…but the question is what is this next level? Are we talking about MEGA IMC? I.e. to further integrate the prevalent marketing communication than it currently is. May be McDonalds’ snacks start to come only in ‘M’ shapes. A passenger wearing the Indigo colored dress is not charged by the particular airline in question. All these might seem nincompoop thoughts, but that is exactly my point…who defines the limit of this mega IMC? Common sense you say; well, we all know that this six letter word starting with C is not that common.

A 180-degree deviation from the current flow of thoughts can lead us to open another Pandora’s Box. How about de-integrated (not disintegrated) marketing communication? Wouldn’t the clutter be broken if each mode of communication has its own distinct appeal for the prospective client? In-store hoardings endorsing Maggi noodles might just show us the variants of the offered product and nothing else. Maggi’s TV ads would gloss only about it’s taste, Maggi’s print medium ads would only be about its beneficial health related information and the packaging can be distinct - showcasing just the product and its ingredients. Hence, each mode of communication conveys a different message and might generate a distinctive impact on the consumer. But then what about synergy here? Aren’t we taking our ad strategy back to the stone-age and negating the progress that has been made through the decades in this dynamic field of advertising?

So, what’s the next step? This is the big question that is staring at us today. When the teacher himself doesn’t know the answer or when he wants his pupil to think before gorging at the ready-made answer, he will leave his audience with the question to ponder over. Well, as they say…”the truth is out there”…so get going!!!

Cost Leadership: A Generic Strategy

Generic strategies , as the name suggests are broad strategies that are not dependant on an industry or a firm. These strategies are applicable at business level and they suggest ways of gaining a competitive advantage.

One of the generic strategy is Cost Leadership Strategy.

A low cost leadership strategy aims at enhancing the ability of a firm to produce goods and services demanded by the customers at a lower cost than that of the competitors. In most of the cases the firms who are trying to incorporate low cost strategies aim to sell mass products or in other words standardize products for the mass market. They generally do not advocate customization for a particular customer’s need , taste or preference.

The Low cost leadership strategies can be imitated by ones competitors, and thus low cost leadership is not a one time process. A successful way of adopting this strategy can be by using the Japanese mantra of “Kaizen” that focuses on continuous improvement. Continuous rethinking is important for the implementers of this strategy.

A continuous effort to reduce the cost than that of the competitor makes a company efficient in that area. Efficiency attracts more profit margins for the company and act as a strong barrier for the entry of new competitors. However there will always be a threat of big giants or small firms in collaboration with foreign firms entering the market and challenging the cost effective leadership.

In India Big Bazaar has been essentially working on a low cost leadership strategy. It sells branded products that other retailers are also selling but Big Bazaar sells at a price 10-15 percent lower than that of other retailers. How does Big Bazaar do so? Well, Big Bazaar works on a huge scale. It operates in more than 72 cities and is able to apply economies of scale effectively thus giving it the low cost advantage. However this one time idea cannot help them sustain their position as the market leaders, thus they kept innovating their cost structures seeking low cost suppliers and contracting with suppliers for steady supply. Big Bazaar showed how economies of scale and experienced efforts help to bring down the costs as the capacity grows.

McDonalds is another interesting example of being a cost effective leader. It has been very successful in giving its customers fast food at a very low price. Again the question arises how do they do so? They do so by hiring inexperience staff, they train them rather than keeping professional cooks. This lowers their Human Resource cost and they keep very few highly paid managers. This saving that they do in terms of recruitment helps them offer their products at bargaining prices. McDonald’s innovative ways to reduce the cost enables them to truly serve a “happy meal”.

“The ability to change constantly and effectively is made easier by high-level continuity.”

                                                                                                                  -Michael Porter