Stock Analysis: Wonderla Holidays Limited

In this post, I would like to present my analysis on Wonderla Holidays Limited, which is currently an operator of three theme parks in India. I hope the readers would find my work useful.

Understanding the Theme park Industry

Theme parks offer thrill and entertainment to patrons across age groups through a variety of dry and wet rides and other such engaging experiences. Naturally, visiting a theme park being a leisurely activity, demand for theme parks hinges upon discretionary spending of the population. It is widely anticipated that the quantum of discretionary spending in India wound go up enormously in the coming few decades on account of rising prosperity and the demographic structure of Indian population.

Indeed, reports corroborate this idea in the context of the theme park industry. The size of the global theme park industry was Rs. 2.66 trillion in 2016. In comparison, Indian industry measured just Rs. 29.3 billion (almost 1/90 th of the global industry). This looks minuscule when looked at in conjunction with the fact that every sixth human being is Indian! While making such comparisons, we should be aware of the fact that foreign geographies differ drastically from India in terms of infrastructure standards, spending power, size of investments, and regulatory environment. However,directionally I do believe that the industry should grow at a fast clip in the next decade or so.

Stock Analysis: KRBL Limited

I have been evaluating companies from the standpoint of long term investing for past couple of years now. And, I have realized that without maintenance of elaborate documentation of analysis of companies, the process of identifying worthwhile investments tends to get languid and sometimes ineffective. Often, one finds great businesses unattractively valued in the market. On such occasions, waiting for the right price is the only strategy one can adopt. However, the right price may take a while to show up and presence of written analysis helps us to gather our thoughts on the company effectively when it does.

With this thought, I would like to develop the habit of enumerating my thoughts on companies I will analyse from time to time. To start off, I would like to present my analysis of KRBL Limited.

KRBL Limited is the largest basmati rice company in the world, with a track record of about 13 decades. It was founded by two brothers, Mr. Khushi Ram and Mr. Bihari Lal, after whom the company is named. India Gate is the flagship brand of the company.

Learning about the Industry first.

Understanding the industry landscape would help us evaluate the competitive position of the company in question. Hence, it would be worthwhile to study the rice industry and basmati rice sub-industry in particular.

How much to pay for great businesses?

Like every common investor, I have pondered over this question on numerous occasions, many times arriving at different conclusions.  Traditional Benjamin Graham methods insist on some kind of bargain on the intrinsic value of the security, while more avid followers of Warren Buffet and Charlie Munger advocate ‘paying up for quality’. Of course, one should pay up for high quality businesses earning excellent returns on capital. But, how much? This post endeavors to partly resolve the conundrum.

Consistently high returns on equity are the foremost attribute of an attractive company from the standpoint of long term investing. The ability of a company to allocate its capital with extraordinary profitability over very long periods of time also indicates presence of economic moat in its business model. Of course, aspects such as the quality of earnings and generation of free cash flows should be studied to ascertain that the apparent strength in the business model is genuine and is not on account of accounting shenanigans. Besides, high ROEs may also be generated with the help of high leverage, which can expose the company and its investors to serious risks during lean economic periods. Thus, investing in a company that generates high ROEs with minimal leverage and good quality of earnings increases the probability of long term success.

However, presence of an economic moat and a strong business model does not guarantee great investment returns, generating which is our ultimate goal of investing. The quality of management and the valuation at which the shares of the company are acquired form the remaining part of the puzzle. A good management works towards increasing the competitive edge and longevity of a company, while acting in the interest of shareholders, especially the minority ones. And, buying securities cheaply is central to the whole idea of value investing. While assessing management quality is a highly subjective domain, we can develop a somewhat deterministic model to think about valuations, that ties the aspect of valuation to ROEs.