Vivek Karwa, Chief Executive Officer – Vridhi Investment, says “the first thing to look at is how long the company has been in business. That is one important point. And is there any more? For example, when you talk about paints, which company comes to your mind? When you talk about theatres, which company comes to your mind? So there are companies which have extremely high moat and brand recall. Those companies always tend to do better.”
What is fundamental analysis and what should one keep in mind while analyzing companies based on fundamentals?
There is no one fixed formula even in fundamental analysis. There are so many things. And anytime you analyze a company, there are so many revolving parts and you have got to put everything together and then come to a conclusion whether you want to buy or not.
For example, the first thing I would look at is how long the company has been in business. That is one important point. And is there any more? For example, when you talk about paints, which company comes to your mind? When you talk about theatres, which company comes to your mind? So there are companies which have extremely high moat and brand recall. Those companies always tend to do better.
Also, does the company also enjoy a monopoly or certain restrictions from the government side? For example, you simply cannot open a casino or you simply cannot, say, put up a cement plant that easily. There are a lot of entry restrictions. So wherever the company has entry restrictions, has some kind of moat and has a brand recall, would be a nice bet.
Plus, always avoid companies which keep changing their names as per the situation. You will find that when there is a tech boom, the companies become technology companies. And when there is a real estate boom, the same company would change its name to a real estate company. In the last 15 years, if you go and see, you will find many such companies.
Secondly, look at the sales and the net profit growth. I will be happy if a company is earning, say, 7-8% yield and over and above that, another 7-8% inflation so maybe 13 to 15% of profit growth. So if the company is growing at 15%, it means it is growing with the country, at least at that speed, if not more. And then the sales. So any company has to continue doing good at the sales front to continue this kind of profit. If the sales are declining, the competition is high, you have got to be careful from such companies.
Many people don’t notice that companies earn money and profits, but they do not pay taxes. So you have got to be careful out of such a situation. You have got to find out why these companies are not paying taxes. It is simple. If I am earning money, I have got to pay taxes. If I am paying GST taxes or income tax, it means I am earning money. So it is interlinked. But if I am earning money, I am showing in my books that I am really earning good, but not paying taxes equivalent to that. Then there is always a red flag.
Lastly, what is the promoter’s skin in the game? How much stake does the promoter hold in the company? You will find companies where promoters hold 75%, which is mandated by SEBI. Above that, it is a problem. But there will be companies wherein promoters keep selling. You will get data quarter-on-quarter that either they have sold their stake, they have pledged their shares or even they have sold their ESOPs. If the promoter is buying in the market, there are many companies where promoters keep adding their shares. That gives us confidence that if the promoter is buying, definitely there is something good happening in the company.
How much I analyze, I would still not know better than the promoter who is managing the business day to day. I can only look at the numbers and then analyze. So if the promoter also has a really good interest in the company, he will actually try to increase the stake and not decrease. So these are a few points. As I said, there are many other things and we can keep on talking for the next three days. If you look at these three, at least 80% of the problems will get solved.
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