Case 076Stock pitch and thesis defenceWarm up

Give me a two-minute pitch on Rangrez Paints: one thesis, one catalyst, one risk.

Northern TrustChicago · 2022

The situation

Rangrez Paints sells decorative paint through a network of dealers. Revenue is Rs 2,400 crore and has grown 14% a year. The EBITDA margin is 17%, so EBITDA is Rs 408 crore. After Rs 48 crore of depreciation, Rs 24 crore of other income, no debt and tax at 25%, net income is Rs 288 crore.

The shares trade at 42 times earnings, a market value of about Rs 12,096 crore. Over the last five years the stock averaged 50 times. It fell after a large new competitor announced capacity, but so far Rangrez's growth and margin have not moved.

Your task

You have two minutes. Pitch it: one thesis, one catalyst, one risk, and the number that ties them together.

Quick check

Which single number should anchor this pitch?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

Rangrez is a long because the market has priced in a price war that has not shown up in its numbers. It trades at 42 times earnings against its own average of 50, a 16% discount, while revenue still grows 14% at a 17% margin. The catalyst is the next two quarterly results. The risk is the new entrant: a two point margin loss would cut earnings by 12.5%.

Step 1What does an interviewer want from two minutes?

A view they can repeat to someone else. Think of recommending a restaurant to a friend in the lift: you say where it is, the one dish worth ordering and the one thing to avoid, and you stop. A short pitch is one thesis, one number and one risk; anything more is a list, and a list is not a view. Candidates lose this question by reciting everything they know about paint, the dealers and the history, and running out of time before they say buy or avoid.

Here the whole pitch hangs on one gap. The price fell from 50 times to 42 times earnings when a competitor announced capacity. The business did not fall: growth is still 14% and the margin is still 17%. De-ratingA fall in the multiple investors pay for each rupee of earnings, as opposed to a fall in the earnings themselves. without damage is what a long thesis is built on.

A two-minute pitch fits on one card: one view, one number, one riskRangrez Paints: long2 minutes42x earnings vs its own 5-year average of 50x, a 16% discount,while revenue still grows 14% and margin holds at 17%.1 ThesisThe market de-rated it for a price warthat has not reached its growth or margin.2 CatalystNext two quarterly results: volume growthholding near 14% with margin near 17%.3 RiskA new entrant forces a 2 point margin cut:earnings fall 12.5%, Rs 36 crore of 288.AOne view, stated firstBOne number that prices itCOne event, with a dateDOne risk, with a size
The Rangrez pitch fits on one card: a long at 42 times earnings against its own 50 times average, a thesis that the feared price war has not arrived, a catalyst in the next two quarterly results, and a risk sized at a 12.5% earnings cut.
Step 2How do you say it in two minutes?

Read the card top to bottom. Open with the view and the number in one sentence, then give the thesis, the catalyst and the risk in that order. The thesis: the market is pricing a price war that has not arrived, and a dealer network built over decades does not switch brands in a quarter. The catalyst: the next two results, which will show whether volumes held near 14% after the entrant's launch. A catalyst without a date is a hope, so name the quarter.

Step 3How do you size the risk rather than just name it?

Put a number on the thing that would prove you wrong. If the new entrant forces a two point margin cut, EBITDA falls by Rs 48 crore, Rs 36 crore after tax, and earnings fall 12.5%, about the size of one year of growth. So even at an unchanged multiple the damage is roughly a year's progress lost, not a broken business. That sentence shows you have thought about the downside rather than hidden it.

Rs croreTodayMargin down 2 points
Revenue2,4002,400
EBITDA408360
Depreciation(48)(48)
Other income2424
Net income after 25% tax288252
Change in earnings-12.5%
A two point margin loss on Rs 2,400 crore of revenue removes Rs 36 crore of Rangrez's Rs 288 crore of net income, a 12.5% cut, close to one year of its 14% growth.

Say the limit too. At 42 times with 14% growth, the stock still costs about 3 times its growth rate, so this is a relative call, cheap against its own past, not cheap in any absolute sense. A good closing line names what would change your mind: two quarters of volume growth below 10% or a margin below 15%. That is the part interviewers remember.

Where candidates lose it

The common loss is spending ninety seconds on the company story, the brand, the dealers, the industry, and reaching the view only as time runs out. The interviewer hears a description, not a pitch, and the one number that makes the case never gets said.

The second is naming a risk without sizing it. Saying competition is a risk is true of every company; saying a two point margin cut costs about 12.5% of earnings shows you know how much the thesis can absorb.

What the interviewer asks next

  • What would make you close the position in six months?
  • Why is the stock's own five-year average a weak anchor on its own?
  • How would the pitch change if the new competitor were already cutting prices?
  • Pitch the short side of the same stock in thirty seconds.

Asked at Northern Trust, Private Wealth Management, Chicago, 2022 (Wall Street Oasis): was asked about my view on some stocks and I gave a brief pitch

Company names and figures are illustrative.