We believe quality of underlying business in terms of smart management, competitive advantage, visibility of Revenue growth and profit margin should be the key parameters of equity investment.
Equity approach
EQUITY APPROACH
If you are investing in a quality business, you should be holding the investment at least for couple of years.
HOW WE INVEST
KEY POINTS
- Bottom-up investmentstyle , thrust on company fundamentals
- Low portfolio churn, buying and holding the stocks for long term
- We avoid businesses that are difficult to understand
- First-hand company research
- We aim to structure the portfolio by attractively priced stocks filtered through quality parameters
AN INVESTMENT IN QUALITY BUSINESS IS BEYOND THE TANGIBLES
An investment in quality business can be defined in various ways: By a good management, competitive business model, robust financials or a brand name.
At BIA Investment advisors we invest after ensuring that all the qualitative parameters of a good investment are in place.
QUALITY INVESTMENT TOO REQUIRES TO BE REVIEWED
Today, most businesses operate in a dynamic environment and to grow consistently is a challenging task. Some management lose their way.
We review our investment regularly and talk to management to get first hand information. We always want our portfolios to maintain the set quality standards.
A QUALITY INVESTMENT SUCCEEDS TO NAVIGATE THROUGH TOUGH TIMES
When markets fall, almost every stock corrects albeit extent of fall varies. Sound business attracts investment at lower level and recovers faster.
We focus on two aspects, what qualifies a good investment and right price.
Here we summarize the five aspects of quality we consider very important when assessing companies for inclusion in a portfolio.
BUSINESS MODEL AND VISIBILITY
Before investing, we should be confident about durability of company’s business model. Therefore we examine the data pertaining to industry growth rate, track record of the company and the strategy going forward.
SOME IMPORTANT QUESTIONS INCLUDE:
- Has the company been growing organically? Going forward, will it be able to sustain the growth?
- Does the company possess the moat to sustain the margins?
- Are we confident enough to hold the company for long term without worrying about its value accretion to portfolio?
INDUSTRY DYNAMICS
The industry is very important in various ways; some have high barriers to entry while some have low barriers to entry. The growth of the company is linked to growth of the industry.
SOME IMPORTANT QUESTIONS INCLUDE:
- Has the industry been growing consistently without government interference? What are the prospects?
- Is it capex heavy or asset light?
- Is the industry very competitive & fragmented or dominated by a few companies?
MANAGEMENT TEAM
The track record, expertise and depth of management team is very crucial. We also look at level of corporate governance in the company.
SOME IMPORTANT QUESTIONS INCLUDE:
- Is the management competent enough to manage the business?
- Has the management delivered on the said promises so far?
- Is it family run or professional managed company?
- How efficiently capital has been utilized so far?
FINANCIALS
We view the balance sheet as a better gauge of a company’s financial health. It provides a snapshot of a company’s assets and liabilities. Read properly, we can analyze various important aspects like leverage, working capital requirements and efficient utilization of funds. The strong balance sheet offers more comfort and safety.
A balance sheet with significant cash balance can boost shareholder returns via share buybacks and/or higher dividends.
SOME IMPORTANT QUESTIONS INCLUDE:
- Is the debt high compared to capital?
- How variable is the cost structure and thus profit margins?
- Does the business generate free cash flow during both good and bad times? (Free cash flow is the amount of cash a company has after expenses, debt service, capital expenditures and dividends.)
COMMITMENT TO SHAREHOLDERS
In a public limited company the shareholders are the owners. Good corporate governance ensures proper system of checks and balances. This in turn leads to a more subtle thing: Trust.
SOME IMPORTANT QUESTIONS INCLUDE:
- Are independent board members empowered to influence the direction of the company?
- Is there alignment between executive performance and interests of shareholders?
IN CONCLUSION
When there is a correction in markets, good stocks also go down. We focus on quality businesses and buy when the price is right. In case of a sound business, one should ignore negative sentiments as they never last long.
Good companies have clear vision, commitments to stakeholders, solid business strategies, worthy management, strong balance sheets and proper board governance.
We like companies with strong visibility as to earnings growth and sustainable profit margins, bearing in mind the systemic risks all businesses are exposed to.
Finally, valuation matters a lot. Even quality business may turn out to be underperforming investment if it is not purchased at right price.
But that is not the end of the process. The evaluation process continues to make sure that our investments retain their quality.