I have noted how I think about money managers. Before I begin though, I have to say I admire Mohnish Pabrai; he is a great guy doing stuff for the underprivileged on a scale that probably I cannot do. So more power to him, always.
Yet, I wonder why he had to manage money for others; there was no need since he is such a good investor. He has set goals to make investment returns of 26% annually over a very long period. Let's analyze.
Based on his talks I gather that he had cash of $1 m in 1994. It became $10 m by 1999, and $160 m by 2007. By his own admission, its market value came down by 65% in 2009, and later recouped. Apparently as of now, the initial cash is worth $170 m. This can be corroborated: Let's start with $1 m in 1994. Based on his target rate of return, his investments value should double every 3 years. This means by 2017, it should be worth about $170 m. This is one side of the story.
Apparently, he sold his IT consulting business, TransTech, in 2000 for $20 m. Let's do the math again. If he had invested $20 m of his own cash in 2000, by his own standards the market value would be $890 m by now. That's annual compounded returns of 25% over 17 years. So, he could have had a total of $1 b if he had invested with his own money.
I am not sure of his actual current net worth, but, $1 b is a lot of cash, and is enough cash to fund his philanthropic interests. Instead, he chose to manage money for others and thus, pick fee income. I have no business to interfere; yet, what the heck is this lure for other people's money?. Of course, Mohnish is a huge Buffett fan; and so am I. Nevertheless, I have not stopped questioning Buffett.
On another note, Pabrai funds bought 6.4 m shares of KRBL at Rs.594 per share.
KRBL has been a great business. In the last 5 years, revenues grew by 14% annually, operating income by 26%, and net income by 40%. Earnings per share grew by 41% during the period. It carried out stock buybacks twice in 2013 and 2014; the highest market value in 2013 was Rs.7 b, and Rs.11.8 b in 2014. As of now, the market value of its equity is Rs.135 b. Of course those buybacks made sense. The upside of the business has been tremendous: The lowest market value in 2007 was Rs.1.6 b, and Rs.3 b in 2012. From 2015 onwards, the markets took fancy to the stock, and accorded double digit earnings multiples. As of now, the multiple is over 30 times earnings.
The stock is priced at Rs.575 per share as of now. Pabrai bought it at Rs.594. Is it really worth it? While I cannot predict its prospects, here are some facts. For 2017, the business clocked negative growth in revenues, down 6%; never mind one year. Operating margins increased from 10.77% (2010) to 18.49% (2017). Net margin improved from 7.89% to 12.68%. Return on equity for 2017 was 26.66%, and aftertax return on capital was 16.47%. KRBL has about Rs.10.9 b of debt. I have not made adjustments for its advertisement costs and leases, which in my view don't make much of an impact.
Its working capital requirements have been quite erratic moving back and forth from positive to negative over the years. KRBL spent Rs.8.7 b on capital expenditure in the last 5 years. There have not been much of free cash flows. In fact, 5-year cumulative FCFF was negative Rs.1.5 b. When you have capex plans and large working capital requirements, that's what happens.
Let's do some math. In 2017, KRBL had revenues of Rs.31.5 b. If they grew by 20% each year (which they never did in the past 3 years), they would be Rs.78 b in 2022. Let's hope that its net margin stands at 15% (which it never did in the past) by that time; the net income then would be Rs.11.7 b. If we assume that markets give KRBL a multiple of 30, its market value would be Rs.352 b. Assuming further that there are no equity dilutions, the annual rate of return for the investor would be 21% over 5 years. With similar assumptions over a 10-year period, the rate of return would be similar too. Now, 21% is not a bad return even if it is falling short of Pabrai's target rates.
The key question is whether our assumptions and hopes are realistic. Can KRBL do what was never done before? That's a question Pabrai probably has answers for.
On another note, Pabrai funds bought 6.4 m shares of KRBL at Rs.594 per share.
KRBL has been a great business. In the last 5 years, revenues grew by 14% annually, operating income by 26%, and net income by 40%. Earnings per share grew by 41% during the period. It carried out stock buybacks twice in 2013 and 2014; the highest market value in 2013 was Rs.7 b, and Rs.11.8 b in 2014. As of now, the market value of its equity is Rs.135 b. Of course those buybacks made sense. The upside of the business has been tremendous: The lowest market value in 2007 was Rs.1.6 b, and Rs.3 b in 2012. From 2015 onwards, the markets took fancy to the stock, and accorded double digit earnings multiples. As of now, the multiple is over 30 times earnings.
The stock is priced at Rs.575 per share as of now. Pabrai bought it at Rs.594. Is it really worth it? While I cannot predict its prospects, here are some facts. For 2017, the business clocked negative growth in revenues, down 6%; never mind one year. Operating margins increased from 10.77% (2010) to 18.49% (2017). Net margin improved from 7.89% to 12.68%. Return on equity for 2017 was 26.66%, and aftertax return on capital was 16.47%. KRBL has about Rs.10.9 b of debt. I have not made adjustments for its advertisement costs and leases, which in my view don't make much of an impact.
Its working capital requirements have been quite erratic moving back and forth from positive to negative over the years. KRBL spent Rs.8.7 b on capital expenditure in the last 5 years. There have not been much of free cash flows. In fact, 5-year cumulative FCFF was negative Rs.1.5 b. When you have capex plans and large working capital requirements, that's what happens.
Let's do some math. In 2017, KRBL had revenues of Rs.31.5 b. If they grew by 20% each year (which they never did in the past 3 years), they would be Rs.78 b in 2022. Let's hope that its net margin stands at 15% (which it never did in the past) by that time; the net income then would be Rs.11.7 b. If we assume that markets give KRBL a multiple of 30, its market value would be Rs.352 b. Assuming further that there are no equity dilutions, the annual rate of return for the investor would be 21% over 5 years. With similar assumptions over a 10-year period, the rate of return would be similar too. Now, 21% is not a bad return even if it is falling short of Pabrai's target rates.
The key question is whether our assumptions and hopes are realistic. Can KRBL do what was never done before? That's a question Pabrai probably has answers for.
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