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I Picked Voltas Over Thermax With This One Simple Idea

Sep 10, 2019

Tanushree Banerjee, Editor, The 5 Minute Wrapup

It was 2006.

We were to choose between Thermax and Voltas for an upcoming recommendation.

Both had strong order books. We had met both the managements and felt confident about their capital allocation skills. Both had excellent financials.

Add to that a stellar GDP growth and peak demand.

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India's GDP growth had been the highest ever for a few quarters. Better economy meant more infrastructure investments. So naturally, capital goods companies like Thermax and Voltas had order books several times their capacities.

We knew that Thermax and Voltas would both eventually create wealth.

But Rahul Shah and I kept debating the potential recommendation for days just to make sure we were not blinded by the historical performance.

Finally, Rahul in his trademark style, threw the gauntlet...

  • We know the similarities between the two businesses. What is the difference?

He drew my attention to a small bit of information on Voltas. It enjoyed a replacement demand on its key product which Thermax didn't.

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It may seem unreasonable to turn down a stock only because of lack of replacement demand. But Rahul's rationale was bang on.

The companies were enjoying stellar demand for the products at that point. However, that was unlikely to continue forever.

We knew when the economic cycle turned, Voltas would do far better than Thermax.

The replacement demand was less than 20% of Voltas' sales in 2006. Also, we were banking on less than 20% of the research we had done on both the stocks.

But Rahul's focus on the 20% worked wonders and how! Thermax underperformed Voltas on almost every fundamental parameter in a few years.

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The Pareto Principle, or what we commonly call the 80-20 rule, has been Rahul's core success formula for the past fifteen years.

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Warm regards,

Tanushree Banerjee
Tanushree Banerjee
Editor and Research Analyst, The 5 Minute WrapUp

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