Break Even Analysis and Contribution per unit (#Poll2Learn : 7 & 8)

I have started #Poll2Learn series where we will learn together by poll and explaining my point of view . You are welcome to correct me or provide your input .
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The correct answer for #Poll2Learn :7 is reward the salesperson with promotion because he is not just smart salesperson but also knows finance and work betterment of his organization.

Surprised, you will surprise more for the correct answer of #Poll2Learn :8 , the correct answer is loss very much likely to decrease.

How is the Josh ???

I do not have any accounting background but I will try my level best to explain. To check if you understood the concept correctly I will ask #Poll2Learn :9 after this article.

To understand correct answers you will have to understand the following concepts, I would recommend to learn these concepts in details from other websites and Youtube videos.

• Fixed Cost
• Variable Cost
• Contribution (per unit or Margin )
• Break-Even Point

Variable costs vary based on the amount of output, while fixed costs are the same regardless of production output. Examples of variable costs include labor and the cost of raw materials, while fixed costs may include lease and rental payments, insurance, and interest payments.

Contribution is Contribution of each unit toward organization bottom line (Profit).

Contribution = Selling price per unit - Variable cost per Unit 

Break-Even Point = Total Fixed Cost / Contribution 

Now came to #Poll2Learn :7 

The following diagram shows details of 3 different companies A, B and C

All 3 companies has different contribution per unit and different break-even point to go in profit if sales at 600 even though the total fixed cost is the same.

Total cost(fixed+ variable) per unit is 500 , if all these companies start selling below the current total cost 500, assume 450 

Will they ever able to break even after selling below cost ? 

Lets check 

Surprisingly, they can still break-even even after selling below cost price. However, these time break-even quantity is increased by 50 to 100% for A , B and C.

In nutshell, the company can make profits if Contribution is positive however, they will have to play volume game.

Let's assume in our poll 50k quantity has positive Contribution of Rs 200 per unit even at the low price of 450 then our smart salesperson did the smart deal, if Contribution is negative at that price then we could have fired him.
This strategy will reduce net profit margin but can be applied in recession time or bad time for company.

Now move to #Poll2Learn : 8 

We already know that if Contribution is positive then profit increases 

What about the loss-making company?

You can see initially loss of 8 lakhs but after selling an additional 500 Units @ 440 ( below the existing cost of 500), loss of organization reduced by 95k instead of most of you expected increase in loss .

Stock Valuation :Twitter Poll 6 #Poll2Learn

I have started #Poll2Learn series where we will learn together by poll and explaining my point of view . You are welcome to correct me or provide your input .
Follow me on twitter to participate in poll.
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#Poll2Learn : 6

Some of you might surprise to know that if we exclude dividend then high or low valuation doesn't matter if entry and exit valuation is the same. In other words, if we don't include dividend then starting (even exiting ) P/B is either 1 or 100 or 1000. Your return will be the same. But , if you include dividend then high P/B valuation stocks will give low returns.
In our case, A has P/B of 40 then starting price will be 4000 and it will give a dividend of 72 ( Dividend yield around 1.8) in the first year .
If the cost of equity capital( or expected return) is 15 then A has to give around 13.2 CAGR to meet cost or expectation of investor. A which has high ROE and the extremely good quality company, As per my calculation will give less than 10 CAGR. This time high valuation came in the picture and play its role. A has qualities almost similar to Hindustan Unilever Ltd(HUL). Maybe, you can understand why not everyone buys HUL when everyone knows it will remain quality after 10 years and will produce high ROE. 

Check CAGR of  A,B,C and D including dividend. I would like to warn these are just for illustration, no one can predict 10 years ROE. But, even if can predict in some range then half of your work is done. 

One can make good money where the scope of reinvestment with high ROE is present even though entry valuation is high and going to remain the same till exit. If entry valuation is high and it doesn't remain high then CAGR will go for a toss. No one can predict exit valuation after 10 years.

One can identify reinvestment or size of the opportunity in many ways, one of them is Bharat shah's size of opportunity framework to identify suitable companies.

Stock Valuation :Twitter Poll 5 #Poll2Learn

I have started #Poll2Learn series where we will learn together by poll and explaining my point of view . You are welcome to correct me or provide your input .
Follow me on twitter to participate in poll.
Follow Me  


or https://twitter.com/Value2WealthIND

#Poll2Learn : 5

We will try to learn valuation in the next few polls. If we calculate valuation based on book value then option C "10 years ROE 35 and DD 30%"  is the clear winner " . But, if we include expected dividend and the market is giving the same valuation for all 4 stocks ( practically not possible) then there is a good fight between option A,B and C , if assume the simple valuation of P/B of 1 (entry and exit) for each stock. If we consider dividend re-investment then option then A will be the winner.

Everyone knows the obvious better quality stock but when we put price/valuation then it is doesn't remain that much easy . Next Poll, we will put some valuation and check which one is better when the valuation was put into the picture.

Twitter Poll #Poll2Learn : 3 (Purchasing Power Parity )

I have started #Poll2Learn series where we will learn together by poll and explaining my point of view . You are welcome to correct me or provide your input .
Follow me on twitter to participate in poll.

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#Poll2Learn : 3

•1 Euro =  1.11 USD and 1 USD = 71 INR and 1 EURO = 79 INR

•Mathematically , 1 Lakh EURO  = 79 lakhs INR , will be highest .

•But , wait , quiz was not to test your mathematical knowledge.

•In Economics , There is term Purchasing Power Parity (PPP)

•Purchasing power parity is a theoretical exchange rate that allows you to buy the same amount of goods and services in every country. World bank releases PPP rate based on basket of items in every country.

•As per world bank current PPP rates are

•1 USD in USA = Around 20 INR in India

•1 EURO in Switzerland = Around 15 INR in India

•If we convert salary based on PPP rate then “25 Lakhs INR in India” will be highest package.

Try site like http://salaryconverter.nigelb.me/ to calculate real salary based on PPP.

Topic Learnt : Purchasing Power Parity (PPP)

Twitter Poll #Poll2Learn : 2

Every option again correct, it defined your risk-taking ability attitude.

Nothing wrong in option "90% chance of 10% CAGR" which was chosen by the majority. But if I have provided another option of "98% chance of 8.5% CAGR" then the same investors might have chosen this instead of earlier one. It might be returns on EPF or PPF. All option return more or less same but Mathematically, 25% chance of 10 times returned would have more return. My motive was not to test your mathematical skill but to self asses our own risk profile.

The equity market is a game of probability and uncertainty. If you have chosen the stock market then I can't satisfied with a return equivalent to safe investment, if I have taken the risk then my reward should also be adjusted accordingly. But, my point is also not to go with "25% chance of 10 times", choose whatever your risk profile and stock market knowledge confidence indicate.

My point is the stock market is a game of probability and uncertainty. Investors should love uncertainty and that is possible only if one doesn't need invested money immediately.

Let's assume one has chosen "50% chance of 20% CAGR" then he should have hawk-eye with patience on the stock market and his stock watch list. If that person gets an opportunity where he comfortably feels it is either "80% chance of 20% CAGR" or "50% chance of 30% CAGR" then he should attack it. It is very easy to say here but really difficult unless one has required knowledge of the stock market.

Only for just illustration purpose, no recommendation, one has Tata Elxsi Ltd in the watchlist of "50% chance of 20% CAGR". If Tata Elxsi gives bad result for next 2-3 quarter and the overall market is in bear market trajectory (especially the auto industry) then the market will give a valuation of the cyclic industry to it. It may go down even below 450. You know 1/3 rd of revenue comes from the auto industry but somehow you do analysis and believe that this dependency is going to be reduced drastically then you can recalculate probability and CAGR to true intrinsic value for long term. If it offers a margin of safety also then one can attack it, but one should have confidence in his analysis.

I prefer portfolio creation with all 4 options in it . Some are risky bets and some are safe .

Twitter Poll #Poll2Learn : 1

I have started #Poll2Learn series where we will learn together by poll and explaining my point of view . You are welcome to correct me or provide your input .

Poll#1
Hindustan Unilever Ltd has ROE around 80% . Which of the following option will be certainly reduce it to around 40% in next 8-10 year? #Poll2Learn

It was a poll so every answer is the right answer. But, I will explain my view.
One word used was certainly. I will go with the change in dividend distribution policy to distribute only 20% dividend.
All other reasons may or may not drop the ROE but reducing dividend will certainly going to reduce ROE.
Formula for ROE 

OR

HUL has earned EPS of around 28 and given a dividend of 9+13 = 22 + DDT = 26.25.
So it distributes around 95% profit in a dividend.
FY19 HUL book value is 36.31 if HUL reduced dividend distribution to 20% of profit then from next year onward book value will increase by 22 , 22+ G  ..................
HUL is so big that it can not grow more than double of nominal GDP or not feasible so management distributes more than 90% profit .
If HUL decides to keep 80% profit then book value will become more than 400 in 10 years . It will be impossible for HUL to earn EPS of 320 on it to satisfy ROE of 80. Even ROE of 40 will be very much difficult.

Garden Reach Shipbuilders (New Value Pick added to my portfolio) CMP 117.50

Hello Everyone,

 My next value pick is Garden Reach Shipbuilders & Engineers Ltd (GRSE).There are lot stocks now available on reasonably good valuation. A lot of investors asked about my value pick during 2017 and 2018 but the market was overvalued and was not offering value pick with a margin of safety. So, I haven't discussed anything in the blog. However, last year(Aug) I briefly provided my new growth stock list.
1)Sirca paint India Ltd  ( Avg 161)
2)Sterlite technologies ( Avg 340)
3)Vimta Labs  (Avg 215)
Sirca has doubled to 316 ( bonus adjusted) CMP 208 in a difficult market. However, Sterlite is half due to pledging and prices of fiber optics. Business performance perspective it is still a good bet. Vimta is also on track.
From my earlier picks which discussed in detail only I was not able to sell TechNVision near the top. Rest of others I was able to give sell call at the top.
e.g. Intrasoft bought around low of 45 and within a year given sell call at 500. Olympia sold around 300 and it is now around 13.
A lot of investors focus on the art of buying but forgets the art of selling.
It doesn't mean to sell a quality business. One should understand aukat of the company ( Type of company).
There are the following type of companies exits in Indian stock market
1) Ordinary Companies  (90% companies)
2) Current Bull Run/Cycle
3) Enduring quality 
If one has to do be successful then need to understand type of company and take sell call. You can't sell quality companies just because of the market cycle.

Coming back to my value pick Garden Reach Shipbuilders & Engineers Ltd . 
The first thing one will notice with the company is that the market cap of the company is 1350 crores and it has cash more than 2700 crores. Does it mean we are getting the company free along with market cap cash? No, it is not the case, we will see in the moat with the float section.

About the company:
It is Govt of India company. GRSE is a shipbuilding company in India under the administrative control of the MoD, primarily catering to the shipbuilding requirements of the Indian Navy and the Indian Coast Guard.
Look more at http://www.grse.in/index.php/our-company/about-us.html 
Go through investor presentation  from  http://www.grse.in/pdf/investors/Analyst%20Presentation_GRSE%20Analyst%20Meet.pdf 

The margin of Safety : First of it will not be the company which will show a consistent profit every year. But , GRSE has a total revenue of 1386.42 in FY 2018-19 against the huge order book of around 28000 crores. It is almost 20 x . However, we need to remember most of the orders are for more than 4-5 years execution. Still, chances of revenue of 4000 to 5000 crores revenue is very likely in the next 3-4 years. VoP is maximum during 33 months to 63 months period where some of the big deliveries are going to enter in the next few quarters. 
Visibility of revenue eliminate downside but we never know in a bear market. Still,if it gets down it will come up fast relatively.
The second margin of safety is offered by dividend yield. It has declared a dividend of 6.95 per Share which is around 6 %. Interestingly, it has declared a final dividend of around Rs 5 but not paid yet. So, our effective rice will reduce by around 5 i.e. 117.5 - 5 = 112.5 , that will make a dividend yield 6.2% if the dividend remains the same next year.
The third Margin of safety comes from the negative working capital requirement which is due to the huge float enjoyed by the company.

Moat with the float: It is true that the company is debt free and it has cash and cash equivalent current asset worth of 3000 cr against a market cap of 1350 cr . 

So, you might be thinking you are getting this company free with extra cash. But, I will stop your dreaming by saying no, that is not the case.
This 3000 cr cash is float company enjoyed. It is not retained cash from profit. 

It has current liability around 2550 crores.

Let me explain this by example.
You are a famous caterer in the city. You enjoyed moat and powerful brand. Since you have moat you take the whole deal amount in advance but gives your supplies money after a week of the event.

If you prepared a balance sheet on year-end ( 31St March)  it will show that you have cash in hand of around 10 lakhs. Will, you distribute that 10 lakhs among your shareholder/partners. The answer is No. It is not surplus cash but your float ( working capital). Same as in the case of GRSE. You are not getting business free.
Last year the company did PBT around 180 cr out of that 170 cr came from interest income of float. So, almost no contribution of business in the bottom line that's why even cash from operations will come negative. Once, VoP increases even bottom line will also increase along with float interset it will make a double impact.
GRSE also enjoyed the moat due to Govt company and expertise in the field . It is not easy for some other company to destroy this moat.
There are two main private players Larsen & Toubro Ltd and Reliance Naval & Engineering Ltd apart from five state-owned groups Mazagon Docks & Engineers, Garden Reach Shipbuilders & Engineers Ltd, Goa Shipyard Ltd, Hindustan Shipyard Ltd, and Cochin Shipyard Ltd .
Govt extremely focus and in hurry to match Indian navy capabilities with China. Govt is ready to spend around 60000 crores for it.
On 1st July, MoD issues RFPs for shipbuilding projects worth Rs 15,000 crore.
https://economictimes.indiatimes.com/news/defence/modi-wants-global-warship-makers-to-build-6-6-billion-in-new-submarines/articleshow/70196404.cms 
 Now on 12th July, Govt wants global warship makers to build 45000 crores in new submarines. The Indian shipyard selected under the process would tie up with the chosen foreign company to establish dedicated manufacturing lines for the submarines in India. 

https://www.livemint.com/news/india/pm-modi-wants-global-warship-makers-to-build-6-6-billion-in-new-submarines-1562853283630.html

Negative Points: Since it is MoD company, there is always the chance of bad capital allocator and a piggy bank for government.
IPO had struggled and merchant banker had to revise price band downward.
So far not much contributed by business in the bottom line, mostly FD interest contributing to the profit.

Conclusion : After analyzing all positive and negative points, I have included in my portfolio, it is Heads, I win; tails, I don’t lose much! type of stock pick.

I will have to give at least 4-5 years to it.

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Disclaimer :  Please treat this post as starting point of your research and not conclusion to invest in any discussed stock. As always , please take the advice of a SEBI qualified financial adviser which I am not .