62-Bagger and Counting: An E-commerce Business That Actually Makes MONEY But Almost Didn’t

Here is a teaching note I prepared for my students before tomorrow’s guest lecture by Sunil Agrawal, CEO of Vaibhav Global Limited in my class at MDI.

Disclosure: I own shares in VGL. This note is not a recommendation to buy VGL’s shares. Rather, it’s a document I have written to help you understand what I liked about VGL. To be sure, there are many things to not like about VGL. There isn’t enough time to list them all. In any case, you should assume that I am biased and I could be wrong. I have been wrong many times in the past.

33 thoughts on “62-Bagger and Counting: An E-commerce Business That Actually Makes MONEY But Almost Didn’t”

  1. Whether it is IKYA or Vaibhav, while preparing teaching note; the kind of detail orientation and qualitative analysis (in addition to providing relevant numbers) you pour in is simply amazing. No analyst can prepare the kind of notes and presentations you are making. Simply superb professor. Good to learn about one more company from you.

  2. Dear Professor,

    When you came to Chennai last year for TIA meet, you mentioned that you have evolved over years as a ‘buy and hold’ investor of quality companies for long term; even for a period of 20 years or more.

    Do you have core and non-core holdings? Where do companies like Vaibhav Global fits into your philosophy? Can Vaibhav be classified as a quality company which can be held for 10 years or 20 years?

    Reading your teachings over years, I’ve evolved a buy and hold investor of quality companies for long term. For last 2 years, I don’t buy a company if I cannot hold it for 10 years or more. It has made my investment process stress free.

    Since you made a reference about Robert Cialdini; he along with Steve Martin and Noah Goldstein has written a latest book, The Small Big- Small changes that spark big influence. I bought the book yesterday. Yet to read it. Still thought of suggesting the same to you because of Cialdini.

  3. Sir I had looked at this business sometime ago and given it a pass…..After reading your analysis, some of these questions still remain in my mind

    1) Red queen effect – Even though the company uses multiple psychological tools to retain customers, along with a good value proposition, don’t you think that the switching cost is negligible. How hard is it for customers to be swayed away by some new selling fad in the near future……And once the customer’s habit is interfered with, how likely will he/she return to VGL..

    2) You mention about it being hard to re-create the economics of VGL….My question is does one need to re-create it to compete…Don’t you think mom and pop retailers collectively create a competing value proposition. You see millions of facebook business groups, websites, exhibition stalls, all set up at low costs too….And in a fragmented way all compete to sell the same products using their street-smart psychological effective, selling tools. And when there is unsold inventory here, it may be even sold below cost out of fear that the trend would soon die down and the individual retailer will be left holding the piece

    3) I am assuming a lot of purchasing of fashion jewelry would be unplanned. Don’t people (especially women) like to move around trying out different pieces of jewelry on themselves in front of the mirror. Ultimately wont that be the lasting trend. Since there is no standardization in jewelry, how does TV/online purchase offer a better value proposition

    4) Sir, finally VGL’s business model offers a medium to sell jewelry. With viewership moving quite dramatically away from TV and into the computer, isn’t at least that part of the business against the trend. Then when you are left as an e-commerce play, you are competing for the millions of other low cost websites all grabbing for eyeballs, using their own strategies.

    So the question then is, is it possible that the numbers look good primarily because of a low base effect. Or that it is a relatively new thing and customers seem to be enjoying ‘the game’ at the moment. Will there be a threshold number of customers after which growth could be slow

    Thank you

  4. Thank you for generously sharing. I am now weighed by burden of Reciprocity! Case studies such as these help me make the jump from as you say, “looking at it from a financial lens” to “looking at it from a psychological lens”

  5. Very well written note. Having stayed in the US for a couple of years in different geographies, I can say these products are superbly received by the African-American community in particular.

  6. Thanks a lot for sharing the analysis. Reminds me of the story of ITC blowing up its business model of IBD (International Business Division) as explained in the book, Making Breakthrough Innovation Happen in India by Porus Munshi

    It feels as if we have three types of companies:

    1. Very rare companies, like ITC, where the problem is detected early and if required the whole business is shut if it does not have good economics. So, they basically avoid getting in the hole.

    2.Few companies like Vaibhav Global, where you learn from your mistakes.So, they stop digging when they know they are in the hole.

    3. A vast universe of companies where they keep committing the same mistakes and never stop digging.

    While one can easily spot the ones which lie in the two end of the spectrum, it’s a real challenge to spot the ones like Vaibhav Global which lie in the middle.

    I believe even Mr. Buffet and Mr. Munger try to focus on getting hold of the first category companies and avoiding the third category companies.

    Thanks again for putting up such a wonderful piece of analysis.

  7. Sir ,
    Thanks for all the sharing and insights
    One query to you , actually two queries

    1- as you keep on turning so many stones , just want to check how many stones you unturn to get a jem like this –

    this will be a learning ratio to us to know much hard work is needed to reach at this stage , because we only see result ,and try to follow same path , but we don’t know or imagine how much effort it needs to reach here

    2-is as you find this , and ashiana , piramal , shriram ,symphony & so many more , what is the key decision factor for you to instead of adding to existing holding,you buy new business or switch from an X to Y business (as WB recommends to compare every new idea with your best idea to get a cost of opportunity)

    Really thanks again and I feel jealous of your students who get to know all these insights first hand


  8. Sir,

    I think you have seriously been out of touch with the markets, TV is dead now and it is the Web and Smartphone that are what is the need of the hour.

    2,642.44 Crores valuation for a jewelry selling company by TV is a joke.


    1. Web and smartphones have definitely been growing trends, but telesales on TV (e.g. TSN, etc.) continue to remain strong across the world. I have lived in a few countries, and daytime (and late night TV) are almost consistently the same, and has been for several years. I don’t have the note handy, but these companies also have evolved in how they sell. While some of the shine has undoubtedly come off due to market fragmentation, they continue to remain profitable. In Australia, for example, there are 4 free-to-air TV shopping channels that are strong; grown from maybe two a few years ago.

      I won’t comment on the valuation, but I suspect that the business model continues to remain vigorous, and will remain in the foreseeable future. Fast internet and streaming video content may kill the video library, but free content and low-cost mass marketing still has its space.
      – PD

    2. Bhaskar, I never talked about valuation in the note other than mentioning that owner earnings should be used which is the correct method to value any business.

      I did not recommend the stock either.

  9. Hello Professor,

    I read your work very closely, thank you for remotely being the teacher I never had. On this piece, I think characterizing a user base as being lonely white females and drawing parallels to Requiem of a dream is a little extreme. There are depressed people here in america, but as you taught me the mental flaws you discussed apply to all human beings: depressed, lonely, happy, rich, smart etc.

    Secondly, I see you tend to remove R&D, Advertising, and other moat building accounting expenses which Buffett does too and it makes sense . But doesn’t that require them to be capitalized and added to the capital base over which the return is being calculated. Isn’t using owner earnings, and ROEs [derived from accounting income] on the same page a little incoherent?

    Valuation always intrigues me, the more I learn the more clueless I become. Piramal’s interview with you, he said DCF is useless. But I’ve found no other way of objectively combining earning power/ cash-flow generative ability, and balance sheet discipline (high ROCEs) to arrive at one number (albeit an estimate). My darkness in valuation (despite going through aswath damodarans course remotely) keeps me from buying those really good businesses trading at higher multiples. That’s despite reading your famous article on buying quality 10 times.

    I hope to read some articles on how you implement valuation in your job as a fund manager. It will certainly help me straighten my convoluted mind.

    1. I never recommended (and nor did Mr. Buffett), the removal of cash layouts for building moats from the P&L. Based on whatever I have understood about Mr. Buffett’s thoughts on owner-earnings, I merely recommend amortizing them over more than one year. In my own analysis, I never amortize such expenditures over more than 3 years. And there are two conditions that must be satisfied before warranting such adjustment and those are volume growth and market share gains.

      Such an adjustment, if made, will, in a growing businesses where such expenditures are also growing result in owner earnings exceeding reported earnings. They will also, as you point out, result in the recognition of an intangible asset in the economic balance sheet. So, we’ll end up with higher real profits and higher real capital base on which those profits are earned. So far so good.

      Now, there are two questions: One, how do we evaluate the economic attractiveness of such a business where such adjustments have been made? And second, how do we value such businesses?

      My answer to the first question is this: Ignore economic goodwill, and compute economic earnings/tangible assets to think about the economic attractiveness of the business. This is in consonance with Mr. Buffett’s advice in his wonderful essay called Goodwill and Its Amortisation: The Rules and Realities in which he writes:

      “In analysis of operating results- that is, in evaluating the underlying economics of a business unit — amortization charges should be ignored. What a business can be expected to earn on unleveraged net tangible assets,excluding any charges against earnings for amortization of Goodwill, is the best guide to the economic attractiveness of the operation.”

      My answer to the second question is this: In a business with a moat, where money is being spent on expanding the moat, and an adjustment is made (in accordance with the advice I mentioned above), the correct number to use for determining fair value, is the economic earnings number. That’s the number one would discount back from the future, to arrive at fair value.

      And here is the crucial part of that exercise. Once valuation based on the above method has been done, it may or may not result in a low or high P/E or P/B based on reported earnings or historical accounting book values. As Mr Buffett has written:

      “Whether appropriate or not, the term “value investing” is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield. Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments. Correspondingly, opposite characteristics – a high ratio of price to book value, a high price-earnings ratio, and a low dividend yield – are in no way inconsistent with a “value” purchase.”

      If such a valuation results in a seemingly high P/E or P/B multiple, so be it. P/E or P/B multiples are not the starting point of valuation. Instead, they are simply the result of it.

      1. Great to hear from you sir! That was very helpful. A followup question. You mentioned you would discount economic earnings to arrive at an intrinsic value. what exactly goes into the economic earnings number?

        If I understand correctly Buffett mentioned owner earnings= NI+depreciation-maintainance capex, now if one adjusts that figure for expansion capex and moat building capex (both amortized over time) would that be the economic earnings you are referring to?

        Secondly, with all the amortization business. How does one reconcile that with the fundamental discounted cash flow concept? As even Buffett mentioned “It [intrinsic value] is the discounted value of the cash that can be taken out of a business during its remaining life.”

        1. Read up Buffett letters for the answers. In particular, read the two essays “Goodwill and Its Amortization: The Rules and Realities” and “Purchase Price Accounting Adjustments and The Cash Flow Fallacy.” The second essay shows why your equation for owner earnings is wrong.

          Also read about Mr. Buffett’s investment in Washington Public Power Supply System in his 1984 letter. Search for the term “advertising” in his letters to learn how he thinks about that expenditure in the context of owner earnings. Search for the term “owner earnings” and also for “amortization” and carefully read up all the relevant passages that turn up in those searches.

  10. While studying the cases of major failures came across this article which shows that even when the steep discount is fake customers loves discount….Here is the link http://business.time.com/2013/04/09/the-5-big-mistakes-that-led-to-ron-johnsons-ouster-at-jc-penney/

    “In early 2012, Johnson announced a major overhaul of the way JC Penney does business, with a new “fair and square” everyday low pricing scheme to replace the “fake prices” used commonly in the past. The idea sounded great—in theory. Didn’t everyone hate those “fake prices,” which were inflated only so that the inevitable discounts would seem tempting?

    Well, no. Johnson thought it made sense to cut to the chase by listing realistic prices from the get-go and foregoing nonstop sales. It does make logical sense, after all. But shoppers aren’t purely logical creatures. They’re often drawn to stores not by the promise of fair pricing, but by the lure of hunting for deals via coupons and price markdowns. It’s all a game, and a contrived one at that. But it’s a game that shoppers are accustomed to playing, and that many — consciously or not — like playing, with the “How Much You Saved” line at the bottom of the receipt serving as a score.

    It didn’t take long for people to note that Johnson’s no-coupons, no-sales experiment was failing to attract shoppers. Sales collapsed through early 2012, and by the summer, even Johnson acknowledged the stores had made a big mistake”

  11. Sunil Agrawal: Vaibhav Global is like Southwest Airlines versus American Airlines and United Airlines. We are a discount player in this space where there is no other discount player and I do not know if QVC or HSN would want to convert to discount model because they have all different services and brands presented on their platforms, and they take returns and all that whereas with us below $200 we do not take returns because we give great value to customers. Our price points are very low. Compared to $60 with them, we are $20. And we are mostly on automatic IVR systems, 75% of our calls
    go through automatically without any human intervention whereas with them it is almost reverse. 75% goes through people and 25% through IVR. So it is more like comparison of say Wal-Mart or TJ Maxx versus say Macy’s or Saks Fifth Avenue or Neiman Marcus. So there is a different space, really.

    Click to access VGL%20-%20Q3%20-9M%20FY14%20-%20Earnings-Concall-Transcript.pdf

  12. Vaibhav Global had long-term investments and other exposures aggregating to Rs 418.9 crore as on 31 March 2014 in two of its subsidiaries. The financial exposure was in the nature of equity investment, loans and advances and trade receivables. These two subsidiaries have a combined negative net worth of Rs 37.9 crore end March 2014 and Rs 15.2 crore end September 2014. A provision of Rs 111.2 crore was created in the earlier years when the negative net worth was much higher. The auditors have drawn attention to this exposure.

    Vaibhav Global feels no further provision is required considering now only one subsidiary has negative net worth, which is expected to become positive by end FY 2015. Further, the performance of the subsidiaries has improved significantly with positive cash flows. Besides, these subsidiaries have substantial carrying value.

  13. I would like to thank Mr. Sanjay Bakshi and Mr. Sunil Agarwal for providing us with this great case study in Investing and Entrepreneurship. VGL is an excellent example of “Moat” built in to business where average price of SKU sold has been steadily decreasing over last few years with corresponding increase in Sales volume growth and EBIDTA margin. So VGL has indeed been hugely successful in its experiment with sales of deep discount products. To emulate this business would be difficult because of sourcing, operating, manufacturing, supply chain, marketing and sales efficiencies. I see VGL turning in to a Global brand few years down the line.

    Entrepreneurs like Mr. Sunil Agarwal who over the years develop their expertise in some particular industry, successfully build a customer centric organisation, protect or strengthen operating margins of business and at the same time identify new trends early on in their business to prevent it from being obsolete are prefect managers to bet your money on.

  14. Hi Professor the presentation on Vaibhav Global is very good. I just wanted to have one clarification the current market cap of the company is Rs 2600 Crs. If I look at the current yearly sale to market cap ratio it is approxametly at 2x. Also the year on year growth in sales is currently around 10%. What is the reason that they are growing at only 10% when the opportunity to grow as mentioned by you is immense.

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