Views on Life & on Equity Investing

Wonder, Wealth & Abundance

When bad operating metrics are a good thing

with one comment

As investors in the companies we look at operating metrics in isolation, and in general want the metrics like DSO to come down, NPA to come down, ROE to increase and so on.

To increase the attractiveness of the company, sometimes the opposite needs to happen.

Example 1: Muthoot Finance India (

Muthoot Finance has increasing NPA, which is a good thing.

Someone emailed me this today to which I agree.

In the latest con call, 95% of the questions were around Gross NPA.
muthoot revealed that they try to avoid auction as much as possible at the risk of increased NPA, which is just technical in nature. Auctioning would reduce the NPA figure to make it look good but it actually upsets the customer ( coz may be he’s just a month behind in payment) and reduces interest income. They give him a chance to renew the loan and retain him as a customer and offer 5% casback. So if he borrowed 100 and was meant to repay 120 and has paid 110, he gets 5% off on 20, has to pay the difference and loan is renewed. Win win. Which is why interest income is going gang busters and they r winning market share.


Its NPA means gold jewellery needs to be auctioned, [in reality there is no NPA, (as long as humans consider gold to be liquid, has been so for few thousand years now), and unless the value of gold does not drop more than 20% a year.]

Customer has emotional attachment with jewellery. Would prefer it not to be auctioned.

For the company, auctioning it would fetch lower rates than, giving the customer 5% discount.

At first look you may hate the GNPA, but not if you look deeper.

Example 2: Supply Network Ltd Australia (

This company carries imported spare parts for trucks and is the market leader in ANZ. A truck is worth 200,000$ lets say. One day of non operation will cost 2-3000$. There are 1000 of SKU and spare parts meaning if you keep them locally in Australia your capital is locked, meaning as an investor, you will hate the company for high inventory, but not if you look deeper.

Why would a trucking company ever go to another supplier that takes 1-2 days extra to import the parts unless that company has lots of idle trucks ? So, it makes sense for such supplier to stock them inhouse and increase inventory (manage that risk, etc.)

Things are not what they seem at first glance.

Disclosure: Vested interest in positions discussed. Views are personal notions and do not represent any organisation or company. Investment in stock market can (and many a times do) result in loss of principal capital.

Written by amitdipsite

February 10, 2018 at 10:31 pm

Posted in Uncategorized

One Response

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  1. I agree on Muthoot Finance logic. The rationale explained is right and logical both for the company as well as the borrower. If the money is recoverable, then, NPS is actually a notional figure. And you provide provisions against a notional loss.


    February 12, 2018 at 5:31 am

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