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Is this Stock the “Next Page Industries”?

“What are you looking at?” my wife asked while staring at me.

“N-n-nothing dear!” I said. “I was just reading on a company.”

“All you guys are the same!” she said while rushing out of the room without even giving me a chance to explain.

“I knew this would happen!” I said to myself while turning back to that website of…Lovable Lingerie Ltd. (LLL).

I was looking at this company after a long-time reader of The Safal Niveshak Post, Nitin Shetty, asked me how he should go about researching this company and whether this could be the “next Page Industries” (the company behind the “Jockey” brand of innerwear in India).

“This is my first step in analyzing the company and valuable suggestions would be appreciated,” Nitin wrote to me.

I feel great whenever a reader asks me how he or she should start researching a particular company. This is not because I feel proud to be in a position to give my suggestions…but because someone is taking the pains to do the hard work to make his/her money work better for him/her.

99% of investors don’t fall in this “I-will-do-the-hard-work” category, thus it feels good to interact with the 1% who take this road less travelled. So Nitin, congratulations as you seem to be on the right track to become an independent, successful investor. 🙂

Anyways, LLL’s comparison with Page Industries Ltd. (PIL) is valid on one, and just one, count – and that is that both these companies are in the branded innerwear market. While PIL largely serves the men’s innerwear market (though it also has products for women), LLL has presence only in a woman’s wardrobe.

Now, before I even start analyzing LLL, I must first get over a bias, which in this case is known as the “Next Page Industries bias”. And this bias comes when I see this chart.

Data Source: Ace Equity

Here’s a stock that has multiplied by more than 7x in the last five years, and has left the broader markets way behind.

7x in five years is an amazing rate of return any investor would love to earn, and this is what creates the bias – “What if LLL is the next PIL?”

Or at least, investors start imagining returns from another stock that they have seen a “similar” stock earn in the past.

This isn’t an unusual way of thinking because, by nature, we try to create patterns where none exist…and especially when it comes to stock markets.

So the starting point for many people while analyzing stocks isn’t whether, “Let me find out whether XYZ is a good company,” but “Can XYZ be the next ABC?”

And this is where the first big mistake in stock analysis is committed. It’s same as thinking that if Salman Khan is a crowd puller, so will be Arbaaz Khan or Sohail Khan. After all, all of them carry the same genes. But that isn’t true you see. One can be a star (for any reason) and the others, who carry the same genes, can be disasters.

So the lesson here is – Whenever you encounter a case like LLL, begin your analysis looking at the company or its stock independent of any other company or stock that it resembles.

This is because no two businesses are the same. While they might appear same in many senses (which is also true of LLL and PIL), there are many points of differences as well.

Here is a table that showcases the difference in the businesses of LLL and PIL. These are just some parameters you can use to identify how two “similar” businesses you are researching could be different.

Data Source: Ace Equity, Safal Niveshak Research

So, as you see from the table above, both PIL and LLL are two completely different animals – with different competitive scenario, buyer behaviour, product segments, and financial performance.

Such a comparison should remove the bias that the business you are about to research (LLL in this case) could be like another business that “sounds similar”, but in reality is entirely different.

Like there isn’t the “next Infosys”, there isn’t the “next PIL”, and knowing this is the first step before you even start analyzing a company that you like on the face of it (like LLL in this case).

Here are the next few steps you need to use in your analysis…

Step #1: Analyze the industry
Understand how competitive the women innerwear industry is, what drives demand and supply, and where do the future opportunities and challenges lie.

For instance, Nitin also mentioned in his email that the female to male ratio in India is increasing over the years and now it stands at 940:1000.

This is one important number that hints towards the opportunity that lies ahead for LLL. Greater woman population can lead to greater demand for the company’s products. While this might not be the case, but it definitely hints at something.

You can get such statistics when you keep your eyes and ears open, and read the available information on the industry. Often, the annual report of a company itself gives a good enough overview of the industry, along with its future growth outlook.

Simultaneously reading the annual reports of two or three competitors (if there are competitors) should give a clearer picture.

Step #2: Analyze the company (and its business model)
After studying about the industry, the next step is to focus on the company’s strengths and weaknesses.

The strengths of a company are often reflected in things such as its brand identity, products, customers and suppliers. You can learn about a company’s business model from its annual report.

For instance, LLL’s FY11 annual report clearly mentions the threat of low brand loyalty and fluctuations in raw material availability and prices as key risks.

Source: LLL’s FY11 Annual Report

By the way, LLL’s annual report also touches upon the factors that influence the choice of a woman consumer, which is so important in analyzing this company.

Source: LLL’s FY11 Annual Report

You won’t come to know of such things if you don’t read a company’s annual reports.

Step #3: Analyze the financials (and learn to read between the lines)
Understanding the financial strength of a company is the most crucial step in analyzing a stock. This is because if you don’t understand the financials, you cannot actually think like an analyst.

Often, numbers lying in the financial statements speak louder than the glossy words of an annual report (like we saw in the case of Temptation Foods the other day).

I have identified some key financial numbers for LLL in the table above, which paints a reasonably good picture for the company. These are some key numbers that you must use while analyzing any company.

Step #4: Study the management quality
Peter Lynch once said, “Go for a business that any idiot can run – because sooner or later, any idiot probably is going to run it.” What Lynch meant here is that you must always invest in simple businesses (which LLL seems to be).

But it’s equally important to understand the management quality. While it is the quality of the business that will drive your long term investment returns, it is the management that will drive the business’s quality.

One quick way to study the management quality is by seeing how it has driven the company in the past. And you can know that by the company’s past financial performance, especially through numbers like “debt to equity ratio” and “return on equity”.

Step #5: Calculate the intrinsic value (valuations)
Sensible investing is always about the price that you pay for a given value of the business. You can easily know the price the business is quoting at (that’s the stock price).

The difficult (and more important) part is calculating the intrinsic value (IV) of that stock.

I’ve explained several key methods of calculating IV in all the StockTalk research reports I’ve done so far, so you can use them for calculating LLL’s IV, if you’re keen to research the company.

Step #6: Understand signals from your stomach (the gut feel)
This step is one that will separate you from all the data and numbers, and let you listen to what your inner self is hinting at.

Sometimes, and you must have noticed this for sure, even after doing a thorough analysis on something you are looking to buy (like a television, laptop, or timeshare holidays), your gut tells you that something might not be right with your decision to buy that stuff.

But you realise this in actuality only after you buy it, and then you curse yourself for not having listened to your gut feeling.

This is also true for investing. Again, as Peter Lynch says, “In many ways, the key organ for investing is the stomach, not the brain.”

So even after you’ve found that based on your analysis, LLL is a worthy investment candidate, wait for a week (I sometime wait 2-3 weeks) and let your stomach tell you whether you would be comfortable owing the stock or not.

Believe me, you might sometimes be surprised with the answers.

The bottom line
The ultimate goal of every investor is to make a profit. However, as the saying goes, not all roads lead to Rome.

So, never blindly accept your first impression of a stock and never ever get biased that a given stock can be the “next something”.

What do you say? Do you follow a set of steps while analyzing stocks before investing in them? If yes, it will be great if you can share with others in the Comments below.

If not, do you think the steps I enumerated above make some sense?

(By the way, Nitin must be disappointed with me as I did not answer – “Whether LLL could be the next PIL?” – and have instead pushed him on the longer way to seek for himself ;-))

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.


  1. Sanjeev Bhatia says:

    He he he, your sadistic trait again surfaces, Vishal. and this time Victim is Nitin Shetty….LOL.

    Apt Observations. Like we discussed on last jam, no two companies are alike, even in the same sector the way even siblings of same parents are quite different in terms of nature, aptitude, personality traits etc.

    Like you said, the devil is in the numbers. I discussed about Thermax with you some time back. It is in the same industry where I operate (Thermal Process Equipment), even it is a competitor for me at times. The margins are good in this capital goods sector and I know many people just vouch/ won’t have anybody else other than Thermax. So I was thinking of buying its shares. But while going through their annual report cursorily, I noticed that their financial performance does not reflect this. For eg while their top line has grown by about 10%, net profit has grown by only 6%, indicating reduced margins. Moreover, lately there has been emerging competition at local levels due to huge price differential, both in Thermal process and Environmental division. So for the time being, I have decided to sleep on it and let more clarity emerge.

    I must admit that I was able to remove this bias having gone through your blog, your lessons on smart investing and trying to establish a set process/methodology for investments. Thanks.

    • Ha-ha, Sanjeev! Nitin must be cursing me on reading this post! 😉

      Thanks anyways for sharing your inputs and personal experience. As you’ve shown, it indeed pays a lot to do a first hand research (and I’ve outlined some steps above) instead of depending on the first impression that the stock might give. And it’s equally important to sleep over a stock idea, even if you like it very much, to let the initial emotions pass. Regards.

    • Manish Sharma says:

      Thanks Bhatia ji for throwing some light on thermax. A lot of people in investment community vouch for thermax as well. I have avoided it because i only prefer to invest in something that i know about and i don’t know anything about engineering. Seems one can safely stay away from thermax….

      • Sanjeev Bhatia says:

        Its still on my radar Manish. Few things are bothering me though. Net profit mgn is only 7.8%, although ROCE and RONW are 42% and 30% respectively. Cash from operating activities is reduced though sales have increased. For someone like thermax which don’t sell on credit, this is surprising. I just meant that I have to look deeper into the financials to have a better opinion. I understand engineering and I had anticipated their balance sheet to be much better since they are leaders in some of the segments they operate in.

        Need to look deeper, dig deeper. And above all, follow the adage – If in Doubt, Stay Out. There are much better opportunities elsewhere. Go ahead and invest in LLL – atleast you will get a much better looking Annual Report 😉

        • Hi Sanjeev, good that you raised the point about Thermax’s margins and also its return ratios. This thing is that I wouldn’t consider a low net margin of 7.8% as poor till the time the company has a good asset turnover. This is because, a company like Thermax with an asset turnover (sales [divided by] assets) of around 4 times can continue to earn 8% margins and still earn a 32% return on asset.

          Here is how I explain this:

          ROA = Profit/Asset, which can also be seen as – Profit/Sales (which is net margin) x Sales/Asset (which is asset turnover). Here, Sales in the numerator and the denominator gets cancelled and you are remained with Profit/Asset, which is your ROA.

          So again, what this means is that a company like Thermax, which is having a high asset turnover, can continue to earn good return ratios even with an 8% net margin. So I wouldn’t be worried much on this front.

          Here, what you can help me understand is whether the “asset turnover” of 4x is good as compared to the industry or not (my view is that this is a good enough number, but then I might be wrong here).

          Of course, as you said rightly, the concerning part about Thermax is its rising debtor or receivable days, which has shot up over the past 2 years. So we need top understand whether this is a one time jump due to clients delaying payments (due to the slowdown) or whether this is a structural change. If this is a cyclical issue, then it is a non-issue as when good times return, Thermax’s debtor days will revert to normal.

          So this is million-dollar question as far as Thermax is concerned. Otherwise, the numbers broadly look fine.


          • Sanjeev Bhatia says:

            That’s why it is still on my radar Vishal. The asset turnover ratio is good enough. Normally, Thermax doesnot sell on credit. The usual method is payment against Proforma Invoice PRIOR to shipment, so this increase in receivables in surprising. As I understand, it can be due to the fact that due to increased competition, Thermax has been forced to modify their payment terms or face the threat of losing orders. Already in Punjab, I see 2-3 major vendors making dent in Thermax market that of boilers. They are anyway not that prominent in environmental division. Capital Goods by itself is cyclical, all orders have to come from either putting up New Units or expansion in old ones. Due to poor economic scenario, neither of this is in pink of health, which can further increase the problems of high overhead costs companies like Thermax vis a vis lower overhead cost small scale nimble players. As I mentioned earlier, I am sleeping over Thermax right now till more clarity emerges. Even if good days come, as they are bound to, once you lose market share, you are not sure you will regain it again.

            • Sanjeev Bhatia says:

              Another thing. I have noticed that their current ratio has been consistently low. Though it has been increasing of late (FY11-12: 1.25; prev year: 1.1, still back about 0.8-0.9). What does this imply?

              • Yes Sanjeev, you are right about the part on market share. Thanks so much for your “insider” inputs on Thermax. That is the power of knowing your circle of competence!

                As for the point about “current ratio”, the reason this number was low because the company was keeping low debtors (current asset) in the past as compared to its creditors (current liability), which was most likely the result of the fact, as you mentioned, that Thermax did not use to sell on credit.

                Generally a high current ratio suggests a comfortable position. But then there are companies with negative working capital like Thermax (which receive money faster from their clients than they have to pay to their vendors), which is also a good position to be in.

        • Manish Sharma says:

          Sure Sanjeev, LL AR would be better looking indeed! But, I don’t want to be embarrassed in front of my wife like Vishal 😉

  2. Manish Sharma says:

    Nice post, and really detailed analysis. I was just thinking that you have not mentioned free cash flow. How’s the comparative performance on that count? But, it’s good all-round research. I too was thinking of subscribing to LL’s IPO but then I don’t investment in IPOs and so I missed the initial gains. Don’t have any regret as investment journey is filled with such missed opportunities. But, after reading your post I think i should take a small position, i might not know much about stocks, but i do know a bit about women 😉

    • //…after reading your post I think i should take a small position//

      But Manish, I’ve not suggested anywhere that I have a positive view on LLL! Neither have I suggested what could be the comfortable buying price for the stock. Hope your thinking of taking a small position in the stock is based entirely on your study of the company and its IV calculations.

      Anyways, as for FCF, yes I forgot to mention the same in the post. Both the company’s have not been strong FCF generators in the past (LLL however scores better here), especially because they have been expanding their capacities and are also spending a lot of money on the sales, marketing and distribution fronts. As per the last five years’ numbers, the “FCF to Sales” ratio for LLL has stood at 3%, while the same for PIL has been -3%.

      • Manish Sharma says:

        hehe…It’s alright Vishal, i will not held you liable for any consequences of any investment decision. And, i am still at preliminary investigation stage, I am yet to commit the crime 🙂 Although, you have not mentioned any intrinsic value but the financial information that you have researched doesn’t paint such a bad picture that won’t warrant a second look. There is a line at the end of a Ashwath Damodaran book – If you want Guarantees, then don’t invest in stocks.

  3. vikrant says:

    ok, This one is truly nice for one reason and the reason is it makes me think about the important of researching a company more and more before i dive in, So far you have made it easier for people like me with Stock Talk, so i feel good one way and feel bad the other way that i am getting depended on you on other side, cause i am getting a detailed Research report from someone i trust [ You are not liable though 🙂 ] .

    Yes one thing is sure, i have read the Annul report of all the companies that i have invested in and have learned a lot of the annul report.

  4. All you guys are the same, classic 🙂
    Excellent article as always and some good lessons like getting off stock bias, sector bias, independent analysis etc. I am still slightly confused on your point # 4, analyzing the management quality. Would you please elaborate this point? You have given the example of Debt/Equity under this, how does this relate to management quality? The reason I am asking is that a capital intense company or a growing company will have some higher debt in its books.
    Some of my filtering stocks include: Hyderabad based company, debt/equity over 0.5, cyclical stocks, high Enterprise Value, low current ratio, hot stocks, stock whose price has jumped/fallen deep, promoters shareholding pattern and shares pledged, Realty sector stocks and some more.
    Then, I check on Sales, EPS, OPM, ROE, Cashflow for the past 5-10 years. If it passes these, I go on reading more on the Financial statements, also google other information about the company. Then work on calculating intrinsic value and consider MoS on this. Although, I will have to admit, I have not been successful at calculating intrinsic value, this is something I try to learn.
    Please provide your input on the process I am following. I also have adapted your 20 point checklist and try to cover most of the answers. I have only recently started following that.
    Thanks again for a great article.

    • Sanjeev Bhatia says:

      One thing I have always noticed, you don’t see anybody else’s photo in comments except Manoor’s. …… Just see the Vividness bias in action here. 🙂

    • Thanks Mansoor! You are right in saying that a capital intensive company or a growing company will have some higher debt in its books, but then my concern lies in a management that gets too aggressive in its growth pursuits and thus destroys the balance sheet. So debt policy is one factor I look for while analyzing a management. RoE in another factor as it indicates how well (or badly) the management is utilizing the shareholders’ funds.

      As for your process for stock selection, I see it it heading in the right direction. So all the best with the same!

  5. karthik says:

    Interesting one vishal..and a nice analysis on Thermax too… The current problem in the capital goods industry is undercutting prices by new competitors.. not sure how long this can run..and there are issues like fly by night operators entering power sector and try to reap milegaes.payment becomes problem fro them when they get stuck up and this leads to increase in debtors level….
    so there will be a beating in their Margins… Any Views?? thanks

    • Yes Karthik, you are right in your assumptions. This is simply because most products and services that Indian capital goods (CG) companies are offering are like commodities – and thus these companies face low entry barriers, price competition, and shrinking margins. Indeed this is true of most companies in most industries in India, and not just those from the CG industry. Regards.

  6. Srinivasan says:

    This is an excellent analysis and you are rendering valuable service to the true value investors. Apart from the above analysis, one has should consider market potential, market share, pricing power, how expensive by looking at the EPS, PE, Bookvalue, PEG…Governance…to name a few

  7. Reading your each and every articles (even older ones) from archive … Most of the times I wonder how do you plan your day – you reply to mails, comments and phone calls; then you write new blogs; then you do stock research; then you read a lot; then you plan your workshops and also your business. How do you plan your day then? It would be so nice of you if you can write on this aspect i.e. planning each day – day after day.

  8. vikrant says:


    The Stock talk page is not present on the home page, Is it possible to add that on the home page, I had to Go to my reader and pull the post where you mentioned first time about stock talk to submit the stock.

  9. Vishal,
    //Here is how I explain this:

    ROA = Profit/Asset, which can also be seen as – Profit/Sales (which is net margin) x Sales/Asset (which is asset turnover). Here, Sales in the numerator and the denominator gets cancelled and you are remained with Profit/Asset, which is your ROA.//
    how is it. ? can’t understand.
    Return on Assets is Net Income / Total Assets. Net Income = Sales x Net Inc Margin (%) whereas
    Asset Turnover = Sales / Total or Fixed Assets. is this not different.
    My understanding is Return on Assets denotes return vis-a-vis money invested in assets whereas Asset Turnover denotes efficient usage of assets. somehow not able to get this relationship as envisaged by you.

    • Hi Sri, in your calculation for RoA, you are first redefining the numerator, i.e. Net Income = Sales x Net Inc Margin (%). I am not doing this. What I’m doing is break the formula into 2 different aspects:
      (Profit/Sales) x (Sales/Asset), which ultimately gives me “Profit/Assets” or RoA. In other words, what I’m saying is: RoA = Net Profit Margin x Asset Turnover Ratio.

      What this explains is that a company that utilizes its Assets efficiently (denoted by high Asset Turnover Ratio), can have a low Net Profit Margin, and still earn a good RoA (as in case of Thermax).

      I hope this clarifies. Regards.

  10. //Sanjeev Bhatia says:
    Another thing. I have noticed that their current ratio has been consistently low. Though it has been increasing of late (FY11-12: 1.25; prev year: 1.1, still back about 0.8-0.9). What does this imply?

    Vishal Khandelwal says:
    As for the point about “current ratio”, the reason this number was low because the company was keeping low debtors (current asset) in the past as compared to its creditors (current liability), which was most likely the result of the fact, as you mentioned, that Thermax did not use to sell on credit.

    Generally a high current ratio suggests a comfortable position. But then there are companies with negative working capital like Thermax (which receive money faster from their clients than they have to pay to their vendors), which is also a good position to be in. //

    probably due to poor market conditions, stock lying unsold….forcing the company to sell (at price with low profit margin) on credit….both ways getting squeezed.
    comparison of liquid ratio over the years can throw more light i believe….
    Sundry Debtors breakup may also throw light…sometimes advances given to suppliers also comes in current assets…(relate high assets turnover ratio)…

  11. Girish Deshpande says:

    As a sanity check I would also check Growth rate implicit in the current market price and check if I am comfortable with that growth projection.

    I utilise standard DCF and residual earnings valuation and see what results I get. I try to use most conservative values and that too a range based on low and high end projections. I never use the current growth rates. For page Ind I will not use 25 and 30% growth rate. I will use somehting like 15 to 20% max and that too it is because it is Page Ind. Then I will use 15% or so required return regardless of company. For page like strong Moat companies I do not mind paying 15-20% less than intrincic value (arrived using very conservative projections). But for the rest I seek min 40-50% discount. In indian markets (typical third world country) you frequently get situations where such discounts are created. But most important lesson I have learnt is that nature of business and management quality overrides every thing else. Valuation and other KPIs should be looked into only afterwards.
    Happy investing!

  12. Just came across your blog from This post has me hooked.. Everyone talks about finding the next Page Industries but how , no one answers.. I will be definitely reading this in detail in evening from home

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