The Sunil Agrawal Lecture Video and Slides

On 28 Jan, 2015, Sunil Agrawal, Chairman and MD of Vaibhav Global Limited delivered an inspirational talk to my students at MDI about his journey as an entrepreneur. Displaying extraordinary candor, he talked about the story of his ups and downs and what he has learnt over the last 35 years.

You can watch the video playlist from here and his presentation slides from here.

Before Sunil delivered his lecture, I had written a teaching note for my students which you can get from here.



20 thoughts on “The Sunil Agrawal Lecture Video and Slides”

  1. Sir, in your teaching notes you talked about moat created by fixed costs and by low profit margins, and how these combine to create profitable businesses. Considering that these advantages are hard to replicate by competitors, they indeed can provide an enduring moat.
    But what about the potential downside of relying on fixed costs and low profit margins. High fixed costs act as ‘leverage’, even though it might be operating in nature. We very well know what financial leverage can do to companies. Under certain circumstances operating leverage can also act in the same manner, multiplying the profits in good times, but also multiplying the losses in bad times. Similarly, while low profits margins represent a strong barrier to entry, it can be easily wiped off in bad times due to the the high operating leverage. Thus, these sources of strength can also be potential sources of fragility under certain circumstances.
    Considering this, how can we make an appropriate trade off between the two different characteristics when making investment decisions?

    1. Syed, that’s an excellent question. As you point out, there is no real difference between operating and financial leverage on the P&L. Both involve fixed expenses. In both cases, the bottom line is more volatile than the top line. If the business expands, the profits expand more than revenues. And vice versa. It cuts both ways.

      VGL is a high operating leverage business model by design. The payments for airtime are mostly fixed costs. So you can’t do away with the high operating leverage.

      But the earlier avatar (before 2008) of VGL had additional issues. For example, the business was very capital intensive. Bricks and mortar stores cost a lot of money. So did high costing inventory (gold, platinum, silver, diamonds). This high capital intensity meant that VGL needed a lot of debt to expand its operations. This resulted in a highly leveraged balance sheet.

      Financial leverage and operating leverage can be a lethal combination. VGL went into bankruptcy because of that and at least one more reason. That reason is this: In the earlier avatar, VGL was selling fine jewelry where average price was more than $140 per item. That kind of business, as the company found out, is prone severe contraction during recessions. When the recession of 2008 came, people dramatically reduced their buying of fine jewelry. Management was forced to go in for a closing down sale. That’s when they accidentally discovered that even in a deep recession there is one type of jewelry people keep buying. That’s discounted, fashion jewelry. Sunil then decided to overhaul the business model.

      Out went bricks and mortar stores. That brought down capital intensity dramatically. The shift from fine jewelry to fashion jewelry meant that average prices dropped from more than $140 to about $20 now. While business VOLUMES soared the value of INVENTORY at cost dropped dramatically. These two developments significantly reduced the capital intensity of the operations.

      Then, as the businesses expanded further, the positive side of operating leverage kicked in. Once the break even point was crossed, cash started pouring in. That allowed Sunil to reduce debt. By the end of FY15, the company is expected to be debt free. So, no more financial leverage (I hope).

      So, earlier, VGL had operating leverage, high capital intensity, financial leverage, and a business model in which revenues were prone to severe contraction in a recession. Now, that’s a deadly combination.

      Today, VGL has high operating leverage in an expanding business, low capital intensity, negligible financial leverage and a business model in which revenues are far less prone to severe contraction in a recession. If anything, people normally trade down during recessions.

      Moreover, now there’s a moat from a low-cost edge. VGL is now is so efficient that, for potential, rational competitors there is little incentive to enter it’s space and direct competitors like JTV who already are in that space are gasping for breath, while VGL is delivering ROE’s north of 40% a year and is about to become debt free.

      So, keeping all those things in mind, in my view VGL’s business model now is much safer than it was in 2007.

      I also believe that the management today is also much wiser than it was in 2007. They might make more mistakes (everyone does) but I doubt it if they will repeat their past mistakes. If they did, they will prove me wrong.

      One of my favorite Buffett quotes in understanding businesses is that any business should be viewed as an unfolding movie and not a still photograph. I use the “unfolding movie” metaphor a lot while thinking about the future quality of a business. While evaluating VGL, looking at the past is very useful to understand its history, but to understand where the business is headed, one should not ignore the unfolding movie angle. As Wayne Gretzky, a Canadian professional ice hockey player and coach used to say: “Go to where the puck is going to be, not to where it is.”

      1. Fantastic explanation sir. The way you discover Buffett/Graham quotes in Indian businesses like these just takes your research to a new dimension. Its the AHA moment which people are waiting to hear !! And that’s the cornerstone of all your lectures too.

  2. Thanks a lot for sharing the video and that too making it easy to watch by breaking into small subject.. Appreciate your way of looking the business like unfolding movie and sharing the same.

    1. Mahesh, I will respond to a more generalised question relating to your comment. The question is this: How should long-term investors respond to negative comments from consumers about a business? This is particularly applicable to B2C businesses and VGL is one such business.

      Take a look at this. The link provides information on comments made by consumers who bought stuff from QVC – the big daddy in home shopping business. The link shows (at least at the time I am typing this) that “QVC customer service is ranked #251 out of the 771 companies that have a rating with an overall score of 41.46 out of a possible 200 based upon 130 ratings. This score rates QVC customer service and customer support as Disappointing.”

      As I type this, the link also shows that there are 130 comments about QVC, of which 119 are negative.

      Now, take a look at page 24 of Sunil’s presentation in which he provides some crucial information about QVC. That page shows that during 2013, QVC sold a total of 134 million pieces, had a customer retention rate of 89% and repeat purchases of 24 from an average customer. This aggregate data relating to QVC is BASELINE INFORMATION.

      In large part, it is the baseline statistics which produced this for QVC’s long-term stockholders.

      In any B2C business, there will always be a few dis-satisfied customers who would complain. There will also be many dissatisfied ones who wouldn’t bother complaining but that doesn’t mean they do not exist. And then there will usually be fewer still who will make the effort to go online to say nice things about QVC. Finally, there will be people who were delighted, did not say nice things about QVC but voted with their wallets – they went back and bought more stuff from QVC. Repeat buying and customer retention are not just abstract ideas. They are critical drivers of operating performance of most B2C businesses.

      There’s a natural tendency to complain when you’re not happy, but not be bothered to go on a site to say how delighted you were with the purchase and/or the service. If you take a sample of 100 feedbacks, the majority are likely to be negative.

      There is another problem about sample size. The number of people who gave feedback about QVC in the link above were just 130 of which an overwhelming majority who were negative were 119. But the sample size of the baseline information runs into millions.

      So, now we have two issues. First, the baseline information tells us that millions of people keep coming back to QVC. And second, there are very tiny fraction of people who complain and even more tiny proportion say good things about QVC.

      How should we respond to all of this? My suggestion is go with the baseline information, unless you have reason to believe that the negative comments (if they are true) have devastating legal or other consequences for the business. For example, if a company sells baby food, and a baby dies because it contained poison, you must not ignore that single isolated incident even though millions of babies who consumed the food did not die. In such a situation you should disregard the baseline information and focus on that one isolated incident.

      But if there are many customers who are saying that baby food was not tasty, or the price was too high or the service quality was bad etc etc, then you should disregard these isolated cases and look at aggregate baseline information.

      This is a very important point in my view. People react to what they see and not what is hidden or not easily available to them. The statistics about complaints are easy to find out thanks to search engines like Google. But baseline information about the averaged-out experience of millions of customers (evidenced by bland statistics like retention rates and repeat buying) is not easy to find. So the availability heuristic causes people to over-react to what they can easily find and under-react to what they cannot find so easily.

      So, I leave you with two pieces of advice. One, always back up to baseline information instead of isolated incidents. Second, do not ignore isolated incidents if they are true and could have devastating consequences.

      If you google you will find that there are some customers who are not happy with Ashiana Housing. My dad sued Thomas Cook many years ago because they ruined his holiday. And there’s a fellow who wants to rename makemytrip to ruinmytrip.

      To be sure, reading negative customer reviews about a business is an important part of due diligence. But one must not lose sight of potential for mis-cognition arising from bias from availability heuristic and insensitivity to base rates.

      1. Sir , Thanks for such a detailed explanation , Now i understood the way one should think about these B2C issues . After doing so much of research about the company , if one sees such a bad customer reviews entire conviction that is developed will go for a toss . This kind of thinking is a must in investing world . Again Thanks a lot sir 🙂

        1. Sure. Just keep in mind that it’s always a good idea to keep a watch on what customers are saying about the business, including the disgruntled ones…

      2. I forwarded this thread to Sunil. Here is his reply:

        Dear Sanjay,

        Thanks for the heads up on the low rating by this site. Interestingly this site- also gives 1.3 ratings to QVC as well as HSN. While we will definitely contact the customers who have posted these reviews, such sites makes me realize the importance of being highly vigilant on the customer service front. While hyper connected world today offers umpteen advantages, it is also has its downsides.

  3. Sir, your endeavor is helping people like me in increasing knowledge and get a holistic view of analyzing something. Countless reverence to you and please keep this good work going eternally.

  4. Dear Sir,
    Why VBL is paying negligible tax on their yearly earning? Normally companies pay 25-30% of PBT. Are they getting any tax rebate?


    1. Why don’t you find out and tell me? All the information you’d need to answer your question is in the annual reports, company presentations, and conference call transcripts.

  5. Amazon Jeff Bezos’ : “I very frequently get the question: ‘What’s going to change in the next 10 years?’ And that is a very interesting question; it’s a very common one. I almost never get the question: ‘What’s not going to change in the next 10 years?’ And I submit to you that that second question is actually the more important of the two — because you can build a business strategy around the things that are stable in time. … [I]n our retail business, we know that customers want low prices, and I know that’s going to be true 10 years from now. They want fast delivery; they want vast selection. It’s impossible to imagine a future 10 years from now where a customer comes up and says, ‘Jeff I love Amazon; I just wish the prices were a little higher,’ [or] ‘I love Amazon; I just wish you’d deliver a little more slowly.’ Impossible. And so the effort we put into those things, spinning those things up, we know the energy we put into it today will still be paying off dividends for our customers 10 years from now. When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it.”

  6. Sir, I request you to take a look at v-mart. They seemed to learn from mistakes made by retailers in previous decade in this business. They operate 107 stores in tier-II, III cities with excellent control over supply chain. Plans to open new stores with cash flows generated and not in any case to extend D/E by 0.75. Provides fashion at reasonable price. Feels very good after visiting their stores.

  7. Sir,

    Just wanted to point out a great example of the power of incentives here. Mr. Agrawal mentioned in the talk that they changed the outsourcing contract from a per call to a per hour basis so that the call centre wouldn’t focus on completing the call as quickly as possible.

    This is quite similar to the example of the FedEX case that Mr. Munger cites as a testament to the power of incentives.

    My question is, Vaibhav will probably end up spending more due to this change. But should that be considered as a bad thing for the company’s PnL or should it be taken as a moat building expense that will probably generate higher sales in the future? (Like marketing)


  8. Sir,

    I want to be value investor. i am following your blog from last 2-3 months and appreciate the way you help people via your blog.

    Can you plz guide me on the two things.

    1) Being from the non commerce background how can I make my fundamentals correct. I know your answer would be reading but a few suggestions for that plz.

    2) For that person who’s not an MBA how he can develop a circle of competence. Like when a person like me who is not an entrepreneur or part of management of a company, how can we know a business. I feel banking is safe, so if I want to specialize in banking what do I do?

  9. Sir
    Don’t you think by not considering entering India at this point of time Mr. Sunil is making big mistake. Firstly, India as a market he understands due to his background and base here in India which means possibility of being completely wrong and a big fiasco by entering here is eliminated. Secondly, India today represents a big burgeoning middle class which has aspirations with increasing disposable incomes but not remotely sufficient to buy original gold and diamond jewellery. Fashion jewellery perfectly substitute for the same as security concerns are vanished, its light on pocket and looks even more beautiful. Demand obviously is unsatiable and by entering now he will have first mover advantage as India is now at its inflection point. Sir, Please provide your perception here.

  10. Sir,

    Thanks for your time and fantastic analysis.

    I was looking at the inventory holding days of VGL vis-a-vis Titan. The inventory holding days for the former is around 166 days as against 175 days for the latter. While a high inventory day holding period for Titan is understandable, one for VGL seems tad too high for an online business model. Ideally, their inventories should be much lower, for they don’t need to stock the same at different stores. Obviously, when it comes to working capital, Titan scores on having customer advances financing part of its inventory days – but I can’t figure why the inventories (Finished – 60%, WIP & RM – 40%) are high.

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