ASK Investment Managers

Research Process

"The research process is a strong blend of quantitative and qualitative factors: evaluation of the business, management, and judgement on valuation are matters of qualitative appreciation."

Defining the Investment universe:

At ASK Investment Managers, the research team regularly scans the whole universe of stocks on certain well-defined objective criteria such as:

• Market capitalisation
• Trading liquidity
• Size of profits
• Profitability ratios such as ROCE (Returns on Capital Employed), Return on Equity (ROE), incremental ROCE and ROE, dividend yield, return on market capital, etc.
• Without any subjective judgement superimposed and having generated the screens, the investment team applies qualitative filters to arrive at final screens to be taken up for final evaluation. This is an ongoing process deployed to define the current investment universe.

Sector evaluation:

The next stage is evaluation of the size of addressable business opportunity of the stocks that have been selected. While evaluating, the size of an opportunity is a very critical criterion in context of the size of the company as well as the portfolio mandates under management. This requires a comprehension of:

• The concerned sector or industry and the future prospects.
• The long-term growth expectations.
• Sector specific risks - regulatory, competing products, shift in consumer preferences, demand supply equation in case of commodities, etc.

Business Characteristics:

While the previous stage sensitises an analyst to the current and potential size of opportunity, this stage emphasises on the inherent characteristics of the business and instills an understanding of how "profitable" the opportunity can be through:

• Micro evaluation of the business dynamics-
  • Asset driven or cash generating?
  • Nature of capital intensity?
  • Predictable or episodic?
  • Structural or cyclical?
• Terms of trade
• The competitive scenario
• Entry barriers
• The ROCE potential of the business under normal and sustainable environment. This "normalised" ROCE should be superior to its benchmark cost of capital for the growth to be value creating.

Company specific evaluation:

This stage requires the evaluation of:

• The strengths of the company in terms of experience as well as expertise
• Its management bandwidth and integrity
• Its management depth, i.e., internal capabilities to provide leadership for a long period of time
• Corporate governance track record and accounting policies
• Leverage policy, if there is a steady requirement of external capital
• Capital allocation policy and record

Valuation of the Security:

Through a proprietary method of evaluation, the growth as well as the value in the company is taken into consideration. The valuation model passes through a rigorous cross-checking across senior team members to remove any subjective biases.

• Discounted Cash Flow (DCF) is the most preferred approach. Here, the cash flows are discounted to the firm and the total value split is derived across Cigar Butt (valuation assuming no growth in cash flow over the economic life of the business) and Growth Value (evaluating the growth component in the cash flows).
• Relative Valuation approach generally supplements the DCF. However, when DCF is ineffective, this becomes the principal tool. This approach is useful to see enterprise multiples and price multiples historically as well as for a peer comparison, if comparables are strong.
• Margin of safety is imposed on this derived value with which it would be comfortable buying the company and at which it will be agreeable to sell it.

Setting up Buy/Sell Strategies:

The important criteria in setting up the buy/sell strategies include - valuation, size of the company in context of the size and nature of mandates at the portfolio level, the liquidity constraints due to market factors, and the teams’ view on the macroeconomic undercurrent in the system. And the sequence of the investment approach mentioned above is sanctum sanctorum.