Doglapan - Lessons Shark Tank Judges Can Teach You in Investing

Two decades ago, every night at 9 pm, all my family members religiously tuned in to Star Plus to watch Mr Amitabh Bacchan host KBC.

I am sure a lot of you guys would also have had the same ritual as the options were limited.

To be honest, prime time few decades ago was dominated by either Ekta Kapoor's regressive serials or KBC.

Nonetheless, was a perfect family bonding time for me and my family.

Fast forward to 2023...

The options are unlimited, with television viewership being marginalised and taken over by OTT apps like Netflix, Amazon and Hotstar.

I mean who could have imagined this revolution.

Legacy television companies like Sony and Star too had to pivot and capitalise on the OTT trend.

It was either done via a merger where Walt Disney took over Star India or through strategic alliances.

Just like KBC at 9 pm was a ritual, the same has been replaced by Shark Tank for a lot of people including my family and me.

The concept is borrowed from Shark Tank USA. The Indian version too is a mix of drama and business.

In my view, there is an investing lesson which we can learn from the profile of Shark Tank judges.

Over the weekend I was going through a thread on twitter about the companies run by the Sharks themselves, and their financial performance.

Most of the so-called sharks are running loss making companies except for Boat which has been profitable since inception.

I mean, if you look at the quantum of losses, it is a tragedy in the making.

The only reason why losses are appreciated these days is because of the whole toxic venture capitalist culture and the theory of greater fools.

The logic is very simple. VCs and PEs fund losses when the capital is abundant and cheap. Once the company becomes a sizeable name with strong brand, the VCs take an exit via an IPO.

Basically, it's the greater fool theory at play where you sell an over inflated asset at a high price to someone who sells it at even a higher price without any material value addition.

While I agree, the brands which the sharks have created are strong and offer good quality products.

However, we are wearing an investor's hat and valuations are not the only thing. What matters is value created.

Ashneer Grover coined the term Doglapan which means hypocrisy.

Think about this... Most of the sharks run companies with increasing sales at the expense of bottomline, losses being funded by VC money, but expect participants on Shark Tank to make profits. Isn't that Doglapan?

Isn't the whole objective of doing business is to make profits?

If you compare Shark Tank USA with its Indian counterpart, there is a startling difference.

In the American version, every shark is running a company (many running multiple companies) that make profits, rather than riding on PE money.

Majority of sharks in the Indian version have failed at generating sustainable profits , but reject deals of profit generating company as the valuations don't justify the profits ?

It was quite common for the judges cut the valuations of most of the contestants by more than half.

The whole reason of bringing this topic up was to emphasize on a couple of things when investing in the stock markets.

• Profitability

  Sustainable valuations are a function of profitability and ability to generate cash. The holy grail of investing is profits. Brand narratives are just eye candy. The real deal is company's earnings and cash profits.

  Let's consider the case of of D Mart - One of the best retailers with the best management pedigree. In fact, the CEO is ex HUL.

  When companies in the retail sector especially grocery and other essentials are finding it difficult to make profit, D Mart has always focused on capital efficiency with strong ROCEs and ROEs.

  However, the stock has been a gross underperformer over the past 2 years not only relative to the mid cap index but also the benchmark indices.

  Great brand, great pricing, strong positioning, best management...

  However, the only problem was its valuations.

  The market had positioned the stock way ahead of the underlying business's numbers. To justify a 100x P/E multiple, earnings should grow at 30% every year.

  But the problem is that the base effect catches up and that is exactly what is happening to D Mart.

  Growth has been slowing down on a huge base., as compared to an average of 55% in the initial years. And hence the correction.

  DMart: Earnings Growth Struggling to Meet Expectations

  	Mar-14	Mar-15	Mar-16	Mar-17	Mar-18	Mar-19	Mar-20	Mar-21	Mar-22
  Profit growth (%)	72%	31%	51%	49%	68%	12%	44%	-15%	36%

  Data Source: BSE, Equitymaster
  

• Expectations

  An investor's edge lies in how much is priced in the stock. A prime example would be companies in the pharma sector which have been beaten down over the last 1 year. Even a marginal surprise in earnings could re-rate the stock.

The reason I started with shark tank judges running superb but loss-making ventures and brands is to point out categorically a company can be a house hold name but still be a bad investment. And that's something you must always remember while considering investing in IPOs that these companies will plan sooner or later.

Warm regards,


Richa Agarwal
Editor and Research Analyst, Hidden Treasure