1. 2
1 8 7
2
6
3
4
5
1

3. 2
1 8 7
2
6
3
4
5
1

4. Business Analyst
Vantage Point # 1
Balance Sheet - Breakup of Capital Employed, Capital Structure
Income Statement - Margins, Turnover,
Cash Flow - reconciliation with income, maintenance capex.
Interpretation - Capital requirements, Return on Capital, Business Volumes

5. Balance
Sheet

7. Average net fixed assets over 6 years = 109 cr.

8. Surplus cash of Rs 173 cr or Rs 114 per share

9. working capital for each of the last six years = -30 cr, -68 cr, -87 cr, -124 cr, -94 cr, -96
cr. Average = -83 cr.

10. Income
Statement

12. Cash Flow
Statement

13. Total cash flow generated from operations for 6 years = Rs 567 cr.
Annual Average = 94 cr. Since last two years were less than average, we assume March 10 as
sustainable i.e Rs 81 cr.

15. Average Cash Flow from Operations = Rs
83 cr. p.a.
Average Capital Employed in the Business =
Rs 26 cr.
Average return on capital = 319%
What’s causing this business to be insanely
profitable?

17. Indirect Taxes
Out of Rs 1158 cr of gross revenues the govt takes away 663 cr.

18. Why does capital employed not go up?
Business is not capital intensive
company pays most of its earnings out as dividends

19. Direct Taxes
Out of a PBT of Rs 85 cr, the govt takes away 27 cr.

21. Prudent
Banker
Vantage
Point # 2
How much money would you lend to this business?
What are the key factors?
Size, Interest Cover, Cyclicality
What is the company’s debt capacity on a per share basis?
Rs 81 cr cash flow/ Interest cover 3 times. Rs 27 cr of interest. Assume interest rate of 9%
p.a.. Debt capacity = Rs 300 cr.
No of shares = 1.54 cr. So debt capacity of the BUSINESS per share = Rs 195. Cash is Rs 114
per share. So value per share can’t be less than 309. Why? Why can the business NOT be
worth less than Rs 300 cr or Rs 195 per share? Has it sold below debt capacity?

22. debt can be paid off in 7 years

23. Shrewd Value
Investor
Vantage Point
#3

24. “An equity share
representing the
entire business
cannot be less
safe [and less
valuable] than a
bond having a
claim to only a
part thereof.”

25. “There are instances
where an equity
share may be
considered sound
because it enjoys a
margin of safety as
large as that of a
good bond.

26. “This will occur, for
example, when a company
has outstanding only
equity shares that under
depression conditions are
selling for less than the
amount of the bonds
that could safely be
issued against its
property and earning
power.

27. “In such instances the
investor can obtain the
margin of safety
associated with a bond,
plus all the chances of
larger income and
principal appreciation
inherent in an equity
share.”

28. “Our research seeks to appraise the
intrinsic value of a share of stock by
estimating its acquisition value, or by
estimating the collateral value of its
assets and/or cash flow.

38. Bond Fund
Manager
Vantage
Point # 4
How can a bond market value a PART of the business for less than what the equity is valuing
the WHOLE DEBT FREE COMPANY for?

39. Henry
Kravis
LBO Artist
Vantage
Point # 5

40. In 6 years Kravis can pay off all the debt.
What will he now own?

41. MM’s
Vantage
Point # 6
MM on Capital Structure

42. MM on Capital Structure

43. Value
Oriented
Manager
Vantage Point
#7
Special Dividend.
Buyback:

44. MM on Capital Structure
MM on Dividend

45. My Own
Vantage
Point # 8
How to get closer to the truth….. - look at multiple points of view.
look at broad picture - zoom out - look from civilization point of view… Why is this company prospering?
What can go wrong? Increased Regulation - increased taxes, ban on advertising Ban on smoking? Can it happen?
Dependence on tax revenues. Why does it exist in the first place? If it did not exist, would it be allowed today? Why is it
allowed?
Drop in smoking itself…
Medical costs not borne by tobacco. What if they were?
Virtue and Vice Effects

46. Virtue and Vice Effects

47. Vice Effects

48. My Own
Vantage
Point # 8
The truth is that VST is prosperous because its involved in a vice where it the benefits are enjoyed by its
stockholders while the costs are borne by society. How long can this last? I don’t have good answer to
that question. Life is cheap. Money is expensive. Will you buy the stock, and overlook the vice effects?
Maybe not. But, at a price, maybe you would. You see man is not rational animal. Rather he is a
rationalizing one. You do know now however, that you get closer to the truth by seeing different points
of view, some of which are wrong. And that by itself is quite something. Isn’t it?

49. Thank You