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

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

Insolvency resolutions suck for creditors, but this one takes the cake.

Listed company gave loan to related party, defaulted along with other dues. Related party creditor acquired the listed entity via insolvency.

Only losers are operational creditors w/ 88% haircut.

Company name is Covidh Technologies Ltd - really old bankrupt company. Not a significant event, just an observation.

Correction: Listed company *took* a loan from related party (in first tweet)

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.

These small cap stocks with 30-40 crore market cap went up 23X and 11x in a span of 24 months between April 16 and April 18. The story looked great then, but subsequently once liquidity and interest disappeared, the prices went right back to where they came from.

When in the thick of the action, it can be difficult to keep a level mindset. To keep the narrative believable, these companies are able to massage their top-line and bottom-line for a short period of time to show an imminent turnaround. Note the trends in these financials.

The company usually exhausts its ability to massage the financial statements very soon and the business health plummets dramatically. One collapsed so dramatically it has been selling fixed assets. The other one is Uniply Industries - a simple search on Twitter will suffice.

Newer small cap investors may be subscribed to many Twitter handles, Telegram channels, groups and even premium advisory services. Don't take anybody's word for the narrative being sold to you. On-the-ground-research and scuttlebutt can be plain fiction.

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.

A word of advice and caution. When you buy a High Pe stock. Make sure that you are very certain about the growth. Plenty of good and bad examples

Eicher=Growth stopped, Got derated.

Pi Industries= At 52+Pe in 2015, growth continued (5bagger since then)

Symphony=Growth stopped as more competitors copied them, painful time correction.

Astral=Kept growing and entering newer adjacencies since 2015 when it was at 60+ Pe. (Been a 10 bagger since then)

Page Industries=Growth stopped as the company matured. No returns for last 4 yrs.

Bajaj Finance= Kept growing (barring Pandemic). Kept rerating with the earnings growth.

HDFC Life=Been absurdly valued since 2018. Leading to very poor returns.

Relaxo=Kept getting rerated on back of earnings growth.

High Pe means market is expecting strong earnings growth. What happens when it fails to come? Likely derating or painful time correction.

Paying a high multiple, you need to make sure that the growth is certain.

What I do to grasp such opportunities or to ignore them is to have a mix of deeply valued companies (like some financials I own) with Companies where I think they will grow at 30-35%+ (Navin).

This is what my framework is:-

Pf=High Pe+Already seen value+Strong earnings growth

If the Adani stocks trading at more than 50x sales are able to sustain for next 3 years, we will enter a new era of valuation.

And we have never entered in the new era of valuation before.

There was only one since the beginning.

If you know, you know.

@Gautam__Baid He laid down very similar principles a decade ago in his 1976 letter (Source: https://t.co/6Z5v0qEaIg)

What's amazing is how consistent he's been in following his philosophy even after nearly 5

When you think a marquee leader in a sector is richly valued, discounts the distant future, is over
owned and has run its course, take a clean break.

Sell and go away. Don't seek lesser opportunities in weaker companies.