Interview with Basant Maheshwari [Part 3] by Vishal Khandelwal, Safal Niveshak

Disclaimer: Please note that the views expressed in this interview are those of Mr. Basant Maheshwari and do not necessarily represent the views of, and should not be attributed to, Safal Niveshak.

Safal Niveshak (SN): Do you believe in the importance of maintaining an investment checklist? If yes, what are the most important points on your checklist?

Basant Maheshwari (BM): Let’s take an example of, say, a company like ITC Holdings Corp. The first question I will ask is, “Is it cyclical or non-cyclical?” It’s not cyclical. So, basically it means that you can predict.

I assume that I don’t know anything about ITC. Now, I will open the company’s annual reports and see the fourth year figure. So if I’m in FY14, I will see how much revenue it earned in FY10.

From FY10 to FY14, in four years, it has got to double. If the revenue has not doubled in four years, then I don’t get excited. I am just looking at revenue at the moment. I have not yet dabbled with profits.

I will then look at the return on equity (ROE). ROE should be more than 25%. Then, if I find the ROE to be above 25%, I will look at the dividend yield.

Then I will look at the profits. So if the revenue has doubled in four years, and if the profits have quadrupled, and if the EBITDA margin is sitting at 30%, I’ll say that margins can’t expand from here on.

So if the EBITDA margin is at 30% and the revenue is not growing at more than 18%, there there’s some risk involved. Then I will look at similar businesses across. I will also look at the management – how much dividend it pays, and does it pay taxes or not. Then I will ask whether the industry is growing or not.

You see, this is just a two minute check on how I do it.

SN: While they are very critical, “competitive moats” are also tough to define. How do you define a moat, and assess whether it is sustainable or fleeting?

Basant Maheshwari: See, some moats are good only in the textbooks. For instance, look at Container Corporation. It has got a good moat. Indian Railways has a fantastic moat, but it does not make money.

Full article here Safal Niveshak