Bull runs in small caps are usually fast and furious, and the cycle repeats itself every 3-4 years. Every time, retail is sold stories of business turnaround and stock charts look fantastic for meteoric wealth creation. For the class of 2020-21, here's a couple of past stars.

The anatomy of Private Equity (PE) funding in a public listed company.

A thread 👇 (1/n)

PG Electroplast Limited, a contract manufacturer of various kinds of electrical goods and appliances, recently announced an 80 crore fund-raise through preferential allotment of equity shares and compulsorily convertible debentures (CCD) to Baring PE and family funds. (2/n)

Such transactions are a great way to understand Private Equity deals in a public setting. Because of disclosure norms for listed companies, everything related to a fund infusion in a listed company is made available to the public. (3/n)

From a retail investor’s perspective, it is easy to focus only on WHO is investing. In this thread, I will try to look at such a transaction from the perspective of all stakeholders – the company, the PE investors, and the public shareholders. (4/n)

PG Electroplast sees an opportunity in the Productivity-Linked Incentives (PLI) by GoI. Under this scheme, companies making incremental investments into manufacturing facilities receive up to 6% of the incremental sales generated from such investment as an “incentive”. (5/n)

@sohamdas Depends on your style, of course, but absolutely correct.

@Dinesh_Sairam @a_basumallick @ashwinidamani Questions that are only answered with time haha.

@a_basumallick @ashwinidamani Just to add - sustainable FCF is a faraway concept for most till (if) they gain scale or innovate/add value. Till then, it's generally always a struggle to manage WC and capacity addition. Wouldn't expect that to change for a while.

Every annual report tells a story.

In small companies, you can read between the lines to get a feel of the management style and business economics.

I take Fredun Pharmaceuticals Ltd (FPL) to illustrate how to go about this (it's not pretty).

Let's go 👇 (1/n)

Please note that the main objective of this review is to get a preliminary understanding without doing a thesis.

It is oriented towards a "quick and dirty" review to decide if you want to dig deeper.

Review financials on a screener website before reading further. (2/n)

Now, you can already guess Fredun Pharmaceuticals is named after Fredun Medhora. His mother, Dr Daulat Medhora and his father, Nariman Medhora, are the original promoters of the company. Interestingly, Nariman Medhora has stepped down from active involvement in June 2021. (3/n)

Then we have Dr Daulat Medhora, who seems to have the qualifications and a decent background in the pharma industry. However, she is 76 years old and unlikely to be actively involved for much longer. (4/n)

That leaves Fredun Medhora, who does not have a technical or scientific background and his primary qualification is an MBA.

The biography provided in the AR describes the CV of an MBA student, nothing on the contribution or role in the company. (5/n)

Paying 50-100x earnings for 'blue ocean' sectors has become normalized with promise of changing trends and immense future opportunity. Stock markets look forward, if the future opportunity is great, in most cases that 100x valuation already factors a 30x valuation in 3 years.

For investors, the question of where the buck stops is difficult to answer, because the goal post keeps changing. 30x is reasonable for one business, for another 70x is acceptable. So why not everything in between too?

Not every business captures the opportunity available. There is many a slip between the cup and the lip, as my English teacher used to say. When investors have seen valuations creep from 20x to 100x in a matter of a year or two, it is easy to to keep dancing to the same music.

But like we used to play musical chairs in childhood, someone will be left standing too. And here the rules aren't that 1 person gets eliminated at a time, hundreds get crushed at the same time. In childhood, we had a 1/X chance of being caught standing when the music stopped.

The margin of safety was high till you got down to the last 3-4 people playing the game. Similarly, your margin of safety reduces dramatically when valuation becomes irrelevant. A few months of underperformance and suddenly things don't look so rosy any more.

I don't understand all the puns and mocking of RJ on the news of a new airline.
He is putting 2-3% of his NW at a time when the environment is best suited for a new entrant. It's a bold but smart move from a smart investor. 1/n

Airplane lease rates are down. Manufacturers would be rolling red carpets. Incumbents are suffering and can't sustain price wars. Experienced staff looking for jobs. This is probably the best time to start an airline.
@finshots explains it very well. 2/n

Even if he loses this amt, it is not going to bankrupt him. It is less than a quarter's returns for him. He can make it back in no time. End of the day, he is one of the smartest investors around. He will also create new jobs. We shud be applauding this instead of mocking. End

Revenue growth over the last year (TTM)...
AMC: -40%
Zoom: +100%

Net Income over the last year (TTM)...
AMC: -$2.08 billion
Zoom: +$1.14 billion

Stock price over the last year...
$AMC: +1,131%
$ZM: -45%

Data via @ycharts

Remember in March when all the headlines/'experts' were saying that the 10Y was going to hit 2% very soon, and it was going to cause this and that to happen, etc.?

No-one actually knows what interest rates or the economy is going to do & people are just terrible at predicting it

Howard Marks strongly believes that investing based on macro predictions is a bad idea (macro predictions are more often wrong than not): “I don’t believe in macro forecasts”, here's an extract from his memo earlier this year as well:

Please do read.

Src: Primedatabase website.

Cycles | S. Naren

I thought this was a great quote from Charlie Munger: investors chasing the latest cyclical trend often forget that "the old cyclicality is going to come back"

(From @williamgreen72's "Richer, Wiser, Happier" book)