India and The 10 Rules of Successful Nations

What will it take for India to succeed? When will we shed the tag of emerging nation and graduate to developed nation status? Why is 28% of our population still poor? We explore these questions in detail in this article based on the book ‘The 10 Rules of Successful Nations’ by Ruchir Sharma.

The Covid Pandemic has thrown most plans out of the window. Before the pandemic, India was talking about becoming a $5 Trillion economy by 2025. While there were questions raised on the path to this goal even before the pandemic, the current struggle seems to be around how to get back to the pre-covid growth trajectory with the second wave and the many regional lockdowns. We are also seeing news of the wealthy and well-footed making plans to emigrate permanently amidst the collapsing health infrastructure of the country. In contrast, there are many who can afford to leave but are vowing to stay back and rebuild the country.

Before all these chaos began, any Indian who has ever visited a developed country and experienced their public infrastructure, transportation and health facilities would have wondered at least once, “When will India reach this level?” “What is stopping us?” Most people answer this question with one word Overpopulation. We are a nation of 1.3B people and unless we control our population growth we will always struggle. I wanted to understand this in depth and began reading up on what makes nations successful, the history of nations like South Korea and Japan that went from Emerging to Developed Nation status in a few decades and what is holding India back? There is no better place to start this journey than with the many books by Ruchir Sharma – ‘Breakout Nations’, ‘The Rise and Fall of Nations’ and ‘The 10 Rules of Successful Nations’.

Over the last few days I have been reading ‘The 10 Rules of Successful Nations’. Each chapter in the books lays down a rule and goes on to explain the same with the help of supporting data. I decided to evaluate India’s performance across these 10 rules to understand where we are doing well and where we are faltering.

Rule #1 : Population – Successful nations fight demographic decline

Most productive age of a human being lies roughly between 15 – 64. Countries like Japan, Germany etc have a shrinking population in that age group. Bringing more women into workforce, increasing the retirement age to 70, encouraging couples to have more babies by providing subsidises, welcoming immigrants in this age group (especially students who are then allowed to continue working in the country), automation and adding robots to workforce are some of the things countries do to counter the threat of a shrinking working age population.

India is lucky in this regard. We have a huge population that falls in the productive age range of 15 – 64. We will continue to enjoy this advantage dubbed ‘the demographic dividend’ for around 37 years starting back in 2018.

Image courtesy –

Rule #2 : Politics – Successful Nations Rally behind a Reformer

Politics seems to follow a circle where a national crisis leads to reform which leads to good times which in turn leads to complacency and from there to another crisis. During times of crisis, nations tend to elect a reformer as their leader. More often than not these are fresh faces with a massive support base. The first terms of these leaders are filled with promise and action but by the second year of their second term they tend to stagnate unable to push big reforms. Democracies tend to fare well compared to autocracies with a reformer at the helm and politicians with massive support bases tend to do well compared to technocrats.

India seems to be following this rule to the T.

Rule #3 : Inequality – Successful Nations Produce Good Billionaires

Good billionaires come from industries that make products and services that increase productivity like technology, manufacturing, e-commerce and entertainment whereas Bad Billionaires come from rent seeking industries that mainly involve extracting resources from nature like mining, real estate, construction etc. Two metrics we can keep track in this case are % of wealth held by billionaires vs GDP and % split of Good and Bad Billionaires. The former should be less than 10% and the latter should be 75:25 for emerging countries.

The numbers for India are

Total Billionaire Wealth / GDP = 14%

Good Billionaire : Bad Billionaire = 71 : 29

In both these metrics we don’t score that bad.

Why should Total Billionaire Wealth not exceed 10% of GDP?

Any economy works when people spend money. The problem with the rich becoming richer is that there is only so much money one can spend on food, clothing, appliances etc.

How does the rich keep getting richer?

Money introduced into the system by stimulus programs announced by governments during downturns, low interest rates etc aimed at increasing productive investments instead ends up getting diverted to purchasing stocks, luxury homes and other financial assets pushing up their prices. Most of these assets are owned by rich people and hence they end up getting richer. it is not the poor getting poorer but the rich getting richer that widens the gap.

Rule #4 : State Power – Successful Nations have Right-Sized Governments

A right sized government for a country like India is one whose spending is around 31% of the GDP. This spending should also go to productive investments for the economy to keep growing at a healthy pace. The ideal budget deficit should not exceed 3% of the GDP. While over spending is bad, underspending is equally bad. Underspending leads to creation of a black economy in the country. Once the black economy is a certain percentage of the GDP the tax revenue of the government drop as people avoid banks.

In India the government spending as a % of GDP stands at around 17.7% for FY22 and the budget deficit is around 9.5% of GDP. While the government spending at 17.7% looks reasonable if we were to look at what the government is spending on we will come to the conclusion that most of the money goes into subsidies and schemes.

India Government Expenditure


India Government Expenditure

You can refer the linked PDF for more details –

Rule #5 : Geography – Successful Nations Make the Most of Their Location

Location still matters in the Internet Age. Physicals goods amount to $18 trillion of global trade compared to $4 trillion of services. Being located near and around trade routes matter a lot. Countries that don’t actively work towards building this connectivity to global trade routes suffer. Equally important is to distribute the wealth thus amassed by port cities to other provinces in the interiors of the country. China is the master of this game building many ports along its coastline devoid of natural harbours. Income earned through export allows a nation to build factories and roads, import consumer goods without building up foreign debt.

When it comes to India the Trade as a % of GDP has been hovering around the 40% mark. This percentage is fine for countries like India with a huge domestic market.

What India doesn’t do well is in terms of spreading the wealth across the country. The biggest marker for this failure is the lack of metropolitan regions across the country. While China has around 100 cities with more than a million population (the threshold to qualify as a metropolitan region), India has just 50. This means that the bulk of the population is concentrated in the main metro cities because the bulk of the opportunities are limited to those cities.

Another marker is the absence of boomtowns or towns where the population went from around 2.5L to 10L in a few decades. While China has 19 such boomtowns, India has just two and that too were created when authorities redrew the local administrative maps.

Shipping Routes of the World. Created by London-based data visualisation studio Kiln and the UCL Energy Institute

Rule #6 : Investment – Successful Nations Invest Heavily, and Wisely

Economy grows strongly when investment is somewhere between 25 – 35% of GDP. Now the problem with investment is that you can invest in good things as well as bad things. Good things like technology, roads, ports and factories fuel growth. Bad investment binges in things like real estate and commodities don’t fuel growth or raise productivity. In fact when investment in real estate becomes 5% of GDP there is a good chance of a bubble burst following.

Going by this rule, India’s investments hover around the 30% GDP mark. But very little of that investment goes to manufacturing. Most of the factories in India are also in the Small and Medium categories as larger factories tend to attract more bureaucratic scrutiny.

Rule #7 : Inflation – Successful Nations Control the Real Inflation Threats

Inflation refers to the uncontrolled increase in prices of goods and services. It is denoted as a % increase from last years prices. For emerging economies inflation ideally is in the 4% range and for developed nations it is in the < 2% range. There are two ways to control inflation. One is by increasing competition in the market thereby forcing companies to maintain or reduce their prices. The second is by raising the interest rates as people are reluctant to borrow money at higher interest rates. The opposite of inflation is deflation where prices of goods continue to fall year after year. There are two kinds of deflation, the good one is created by advances in technology that lowers the labour and other costs involved in producing goods thereby reducing its price. Then there is the bad deflation caused by a shrinking demand amongst consumers.

Inflation is tracked by a metric called CPI or Consumer Price Index. To calculate CPI, you first choose a base year (t1) and figure out the cost of goods (p1) for that year. Then to find the CPI of a subsequent year (t2) when the prices are (p2), you use the formula

CPI = (p2)/(p1) * 100

CPI has been steadily increasing in India for the last many years.

India CPI
India Inflation %

Rule #8 : Currency – Successful Nations Feel Cheap

US Dollar is the most traded currency in the world. For this reason most countries hold bulk of their foreign exchange reserves in US Dollars. In the event a country’s currency under goes a rapid devaluation, the dollars from the reserve can be used to pay the various import bills. For countries doing a lot of exports it is in their best interests to keep the value of their currency low compared to dollar. This means 1 dollar can buy more goods in a country thus attracting more people to trade with you. Subsequently your dollar reserves also increase.

To know how much a country exports and how much it imports we look at the Current Account of the country. When the exports of a country is greater than its imports we have a Current Account Surplus and a Current Account Deficit in the opposite scenario. A deficit means the country is importing or consuming more than it is exporting or producing. This excess has to be funded by borrowing from abroad. If the Current Account Deficit of a country keeps growing for 4 continuous years and peaks at the 5th year above 5%, trouble follows. Foreign investors and even domestic investors will start fleeing as they lose confidence in the economy.

source: – India Current Account Deficit

When we look at the Current Account data for India, at least for the past 10 years our Current Account Deficits have been dropping consistently settling to around -1.7% of GDP for Oct – Dec 2020 quarter as per RBI data. Running a Current Account Deficit is not all bad if the excess imports being made are in productive sectors. Importing plants and machinery for manufacturing, state of the art telecom equipments are examples of productive imports.

Rule #9 : Debt – Successful Nations Avoid Debt Mania and Phobia

When private sector debt grows faster than the GDP for 5 straight years, crisis follows. The pace of growth of debt is more important than the size of the debt. When government intervenes to save the economy it is usually done through assuming some of these private sector debts. They also come in the form of bail outs and write offs. When a 5 year increase in Private Debt to GDP goes beyond 40% an economic downturn is imminent.

Private Debt as % of Nominal GDP India

Debt mania is something India seems to have been successfully avoiding. But India has been plagued with a lack of private credit especially for small and medium businesses. This gap is estimated to be around the Rs. 25 Lakh Crore range.

Rule #10 : Hype – Successful Nations Rise outside the Spotlight

Success comes through hard work and hard work is often done in silence away from all the hype. By the time media hype comes around usually a nation might have already peaked in terms of success. It might very well be on its way down or regressing to the mean. Ruchir Sharma calls this the Cover Curse. By the time a story reaches the cover of Time or Newsweek, it’s dead. So it might be a good idea to look beyond magazine covers if you are looking for upcoming successful nations.


Design Basics for Content Creators – Guide

Here is a small guide I made on Design for Content Creators.

It covers the basic elements and principles of design, Gestalt Principles, Colour Theory, Mobile Phone Photography and Videography basics.

Please wait while flipbook is loading. For more related info, FAQs and issues please refer to DearFlip WordPress Flipbook Plugin Help documentation.

Design Resources

The below is a comprehensive list of resources linked to in the above guide


Here are a list of free tutorials on youtube to help you on your path to becoming a better content creator


01. Mobile photography basics –

02. Lighting basics for portrait photography –

03. Basic composition techniques for photography –

04. Mobile photogprahy ideas and hacks –

Image Editing

01. Snapseed image editing –

02. Snapseed basic tutorials –

03. Double exposure technique –

04. Making your images awesome with lightroom –

Video Editing

01. Kinemaster basics –

02. Another Kinemaster tutorial –

03. Inshot tutorial –

Free Design Resources

Here are a bunch of resources that might come in handy

01. – free stock images

02. – free stock images and videos

03. – free vector and png icons

04. – free vector and png icons

05. – free sound effects for your videos

06. – free sound effects for your videos

Learnings from life – Part I

This is one post I have been trying to pen down for quite some time. While these are some of the learnings I have had in my life they are by no means some golden rules for anyone to follow as they are a result of my unique experiences.

  1. There are no play-books. If you want to blaze your own path in life, understand that there are no play-books to follow. Most of our life from childhood onwards we are asked to follow different play-books. Most of the times these are based on journeys taken by people who ended up being successful. These people, their lives and journeys are often cited as examples of a path to take to achieve success and we end up blindly following them. Variables like your nature, your network, your interests and abilities are not considered and these often determine your success. So the next time you are presented with a play-book to follow, sit back and ask some questions. Find your answers and chart your own path.
  2. Don’t wait for permission. We are conditioned to ask for permission from the time we are a toddler. Hardly any decisions we take are under our control almost till the time we start college. We are taught to take permission from parents, teachers and elders to do pretty much anything in our childhood. This is mostly done to keep us out of harms way however almost 18 years of this habit naturally tends to make us reluctant when it comes to big decisions. We are always looking out for the ‘elder’ to ask for permission. This reluctance limits our chances of success. As they say it is often easy to ask for forgiveness than for permission.
  3. Learn to delegate. Delegation work to someone is something most of us come across in our 30s. This is mostly when most people reach middle management and have people reporting to them. Till then tasks were delegated to you and you have become pretty adept at finishing things you were assigned. Delegating work though is a different ball game and most people are uncomfortable with it at least initially. Start by delegating smaller tasks whose outcome don’t matter so that even if it gets messed up you can either redo it or no one cares. Try to give away at least 20% of your daily tasks to people reporting to you and take it from there.
  4. Strong opinions loosely held. It is good to have opinions and having strong opinions allow you to commit to decisions and directions. Interestingly opinions change over time as you gain more experience and more often than not you will see contradicting evidence to your opinions. When that happens swallow your pride, take it as a lesson learned and change your opinion.
  5. Data based decision making. In God, we trust everyone else must bring data. This is one of the posters that hang in our office. It is very easy to get lost amongst anecdotes and stories. The loudest mouths and storytellers can weave stories to push their points sometimes misleading the decision-making process. With data, everyone is looking at the same picture and drawing conclusions from it.
  6. Reading books. Reading is crucial and it can help you get ahead in life. However many people get into the trap of counting pages or books they have read. Recently I have come to think of reading as a means to gain knowledge, provoke deep thinking or inspire actions on topics you care about. By that definition, an article you read, a documentary or a movie you watch or an annual report of a company can all have the same effect. I no longer set targets or maintain a long list of books I need to read. There are 3 – 4 topics of interest for me at any point in time and I try to consume any content on those topics be it books, videos, articles or tweets. Re-reading books that I liked in the past is another thing that I have started doing. I take copious amounts of note and consume additional content on the topic like author interviews, summaries, reviews of the book to build on top of the initial reading.
  7. Habits vs Goals. This is an idea popularised by Shane Parrish, James Clear etc in their blogs. Although I still do set goals for myself on an yearly basis most of these are broken down into daily habits or tasks that are part of my daily routine. For instance fitness for me is a daily 30 minute session rather than getting a 6 pack abs or getting the fat content to < 10%.
  8. Start with something. A blank canvas can sometimes look like a chance for infinite creativity or a steep hill to climb. The key is to get the first stroke in and work from there. There is an interesting concept called ‘The 5 second Rule’ that I came across in Mel Robbins site. It essentially says ‘If you have an impulse to act on a goal, you must physically move within 5 seconds or your brain will kill the idea’.
  9. No one is thinking about you as much as you. A lot of our time is spent on thinking about what others think about us. This fear or concern is natural as we are social beings and for many years in our history, our survival depended on how likeable we are in the group that we are part of. However, this thought can make us self conscious unnecessarily. Accept the fact that there will be people who will like you, hate you and not care about you. The vast majority will be the last group.
  10. People remember how you made them feel. Treat people nicely irrespective of their social status or in whichever levels of man-made hierarchies they fall into. It doesn’t cost anything.
  11. Avoid toxic people at all costs even if it benefits you temporarily. Some times in life you will find yourself in the company of toxic people. The fact that both of you are on the same side and consequently want the same thing is no excuse to put up with these people. At the end of the day, they are a big energy sap for you both physically and mentally. The warning signs often come early in your interactions and it is best to avoid these people.
  12. Plan your day in advance. I go by the adage, “No one plans to fail but fails to plan”. A day planned in advance allows you to avoid distractions and gives a clear sense of purpose. Write down 3 big things you want to accomplish the next day before you go to sleep. That is all it takes.
  13. Take notes… a lot of it. I have filled my share of moleskines and notebooks with copious amounts of notes and margin doodles. Some of these notes I never refer back to and I was concerned about that for a while even questioning the habit of taking notes. But lately, I have come to realise that they serve not just as records you can go back to but also as a way to structure thoughts and assimilate information when you take them. That alone justifies taking notes.
  14. Figure out what you would enjoy doing even if no one paid you to do it. Life doesn’t happen in a straight line, there are many ups, downs and about turns. Not everyone discovers their passion by the time they are out of college. People end up in careers they might not enjoy but pays the bills. Once you are stuck at the wrong job it will slowly start affecting your happiness and your well being. It pays to take time and consider your options while choosing a career path.
  15. Who wants what? Negotiations happen everywhere and not just in business. It helps to know what the motivators for the person sitting across you are. Money? Respect? Speed? Use that as leverage to arrive at a favourable outcome for both parties.
  16. Anchor effect is powerful in negotiations. Name your price first. Make it at least 2X or 0.5X depending on which side of the table you are of what you would be happy to walk away with. Once this number is in everyone’s mind it is difficult to get it out and you have a better chance of closing the deal at your desired number.
  17. How you do anything is how you do everything. This one comes in handy especially when you are hiring people. Traits like attention to detail etc are so ingrained in people that no matter what tasks they do it shows. Candidates who turn up a shoddy presentation for an interview citing lack of time is suddenly not going to become perfectionists once you hire them.
  18. Don’t be embarrassed or afraid to talk about money. Yes, everyone is doing it for the money.
  19. Trust – The world goes around because of trust. Whenever I get into any sort of relation – business or personal – I begin with 100% trust on the other party. Second guessing every action by someone is a sure shot way to strain the relation and get into all sorts of trouble. Calibrate the trust as you move along.
  20. Unlike the digital world, real-world is not binary. A binary world is easy to understand. There are clear rights and wrongs. However, the real world is messy. There is black and white on opposite ends and a huge grey area in between. Almost everything you deal with will fall into the grey area. So, get comfortable operating in this zone.
  21. Good, bad, evil are all relative. One man’s freedom fighter is another man’s militant. As long as you are not hurting people or on the wrong side of the law everything is game.
  22. Your success is not limited by your intelligence. Don’t despair if you are not the smartest guy in the room. Often times your success is the result of a combination of intelligence, hard work, patience, EQ etc.
  23. Mental models and cognitive biases are good to understand but hard to implement and watch out for. A simpler way is to understand the basic human tendencies and use that as a guiding post. Read about the 7 deadly sins. Most humans are fallible to these. Learn how to avoid them, spot when other’s actions are poisoned by them.
  24. Every now and then, stop doing and start thinking
  25. The #1 productivity hack is to get up early. Early depends on a number of factors like are you single and staying alone? do you have roommates? are you married and have kids? Very simply it means to wake up at least 2 hours before anyone else at home wakes up. This gives you two hours of uninterrupted work time and believe me you can get 80% of work for the day done in this time.

Making progress through continuous improvement and step changes

“Go to bed smarter than when you woke up.” ~ Charlie Munger

This quote by Charlie Munger embodies one of the principles I try to follow in life, which is to get a little better everyday. Progress is vital in any aspect of your life be it professional or personal. Some times progress is made through continuous improvements and other times by adopting radical step changes. The journey of continuous improvement is like a marathon and radical step changes are like 100m sprints.

One thing I have come to realise is that life is a long marathon interspersed with many short sprints. It pays to be aware of which method to use to make progress in any aspect of life. But first let’s try to understand what works for and against each of these methods.

Continuous improvement is unsexy

Simply because there is little to show immediately for the effort whereas step change gives you the bragging rights. There are no pivotal moments or momentum shifting events when it comes to continuous improvement. Step changes gives you a pivotal BC/AD…the time before the change and after the change. It makes it easier to anchor your conversations around the event.

Sprint vs Marathon

Continuous improvement is all about the daily grind. You have to summon the energy to do things every day even when the results don’t tell the story. A step change is more like a rallying cry for the leader to pull his team around and lead the charge. It’s like a sprint where you have to spend your energy in a short bust.


Continuous improvement works like mini loops or cycles where you make a change, observe the feedback and slowly progress to the next loop. This makes it difficult to make any large direction change whereas step changes by nature are suitable for making quick direction changes. Because of this with step changes you get the agility and flexibility to explore more opportunities.

Silent Compounding vs Radical Innovation

Continuous improvement is like compounding. It happens silently in the background. No one notices it daily. Step changes however are different. They stir things up. People take notice. Books and case studies are written about it and business legends are created.

Choosing between Continuous Improvement and Step Change

When you have a long term horizon continuous improvement is a better method as the benefits compound over a period of time without disrupting. Step changes are a bit disruptive, so whenever you adopt a step change in one aspect of your life more often than not some other thing breaks or suffers. So for long term horizon things like health, relationships, learning etc a continuous improvement strategy helps.

Instead of deciding to wake up at 5AM, hit the gym 7 days and go on a diet in one go to loose 8kgs in 8 weeks. Expand your time horizon, think of it as a lifelong marathon and not an 8 week sprint. If you wake up at 8, may be start waking up an hour early first. If you haven’t set foot in a gym ever, may be start going on alternate days first. Instead of going in to a calorie deficit diet from Day 1, may be reduce the portions and avoid soft drinks first. This way while you are trying to get healthy the other aspects of your life like work, relationships etc can go on smoothly instead of being sapped out of energy by putting it all on getting healthy.

Step changes can be useful in getting things accomplished where the time horizon is short. Want to set up a new home office or tidy up your room? Want to clean up your code base or hire a new team, in such cases step changes help so that the real work can start.

Tips & Tricks

Here are some tips and tricks before we wind this down

  • If you need to radically improve an aspect of your life, start with a step change upfront
  • Follow a step change with a calm period. This allows you to get used to the new normal
  • Run multiple experiments before committing to a new direction and then aim to become a little better everyday
  • Monitor progress daily and avoid the temptation of churning things up every day

Business Valuation in 5 minutes

This is a 5-minute read on Business Valuation for Start-Up Founders  looking to understand the basic mechanism behind valuation.

Basics of Business Valuation

There are 3 common approaches for valuing a business

  1. Cost Approach – What is the cost to build a factory or what is the cost to build a new factory in place of an old one
  2. Market Approach – Compare with the valuation of listed companies in similar space or based on a private deal that has happened recently
  3. Discounted Cash Flow – Value derived by projecting the cash flows of a business into the future and getting the Present Value of these future cashflows

In any valuation exercise, a registered valuer will use at least 3 methods, assign weightage to the value attained through each method and arrive at a Fair Value.

In India, a valuation certificate can be issued only by a SEBI registered Category 1 Merchant Banker. Earlier this could be issued by Chartered Accountants as well but not anymore. Charges for the same can run from a lakh to even up to 15 lakhs depending on the size of your business and the valuation firm.

Before we get into the 3 most commonly used methods of valuation, we need to understand what a Valuation Multiple is.

Business Valuation Multiples

Valuation multiples are broadly of two types – Enterprise Value Multiples and Equity Value Multiples. If you are running a business, there are two common ways for you to raise money for it. You can either sell shares in your company to an investor or you can take a loan or debt from a bank. If you use both these methods to raise money there will be a certain portion of business owned by the Equity Investors and another portion owned by the Debt Investors. This means that at any point in time the total value of your business or the Enterprise Value is a sum of the Equity Value + Debt Value.

Enterprise Value = Net Debt + Equity Value

So, back to valuation multiples now. Common Enterprise Value (EV) multiples are EV/EBITDA, EV/Revenue, EV/EBIT. Common Equity Value (P) multiples are P/E, P/B, P/CF. To keep things simple we will look at EV/EBITDA and EV/Revenue multiples only for now.

You can go to Google Finance and Yahoo Finance to find out the values for these multiples for few companies to get a general sense of things.

Business Valuation Methods

Like we discussed earlier, a registered valuer will use at least 3 methods in the valuation exercise to arrive at the Fair Value of a business. The most commonly used methods are

  1. Comparable Companies Method
  2. Comparable Transactions Method or Precedent Transactions Method
  3. Discounted Cash Flow or DCF Method

Comparable Companies Method

If you were to value an e-commerce company you would choose companies like Amazon, eBay, Easy, Alibaba, etc as Comparable Companies. The valuation multiples for these companies are readily available online. We can calculate the Median of these values to arrive at the final multiples to be used for calculation.

For eg: If the median EV/Revenue multiple of the comparable companies is 6.5x and the Revenue for your business in the year where you turn profitable is Rs. 1,00,00,000. Then the EV = 10000000 * 6.5 = Rs. 6,50,00,000. Once you have the EV, you can subtract the net debt to arrive at the Equity Value of the business. 

Of course, this is simplifying things a little too much. To the multiple, we will have to apply various discount factors like a Small Company Discount as your business is much smaller compared to Amazon, a Lack of Marketability Discount etc.

Comparable Transactions Method

Now, let’s look at the Comparable Transactions Method. In this case we look at the various Private Deals that have happened in the industry and find out the valuation multiples at which those transactions happened. The math remains the same as above. Although it sounds pretty simple it is incredibly difficult to find private deals data that are relevant to your business.

Discounted Cash Flow (DCF) Method

Lastly we have the Discounted Cash Flow method. Unlike the other two methods here we use the financial projections of the business and hence arrive at the Intrinsic Value of the business. Financials projections are usually made out to around 5 years from current financial year and for each of the 5 years you arrive at the Free Cash Flow to the Firm. From these yearly Free Cash Flows (FCF) you calculate the Present Enterprise Value by assigning a discount factor to each years FCF.

For eg: If a Company X has FCF for Year 1 till 5 as Rs. 100, 200, 300, 400, 500, to calculate the Present Enterprise Value, we have to first find out the Discounting Factor for each of the years from Year 1 to 5. The formula for Discount Factor is

Discount Factor = 1/(1+Discount Rate)^Time Period

Discount Rate is essentially equal to the Weighted Average Cost of Capital or WACC and the formula for WACC is 

WACC = (Cost of Equity * % Equity) + (Cost of Debt * (1 – Tax Rate) * % Debt)

Cost of Equity = (Risk Free Rate + (Beta * Equity Risk Premium))

Cost of Debt = Avg. Yield on Debt

Risk Free Rate, Beta, Equity Risk Premium, Avg. Yield on Debt are values that change from country to country and Industry to Industry. So based on this data you can calculate your WACC and subsequently your Discount Rate and Discount Factor.

Once you calculate Discount Factor * FCF for each of the 5 years, you can sum up these to arrive at the Enterprise Value

Now you subtract the Net Debt from the Enterprise Value to find out the Equity Value

Equity Value = Enterprise Value – Net Debt

Now to find out the value of a single share you use the following formula

Value per share = Equity Value / Total No. of Shares

Fair Value

Once you have the Equity Value calculated with the three methods, you can assign weightage to the value obtained from each of the methods and arrive at a Fair Value of the Company. 

Further Reading on Business Valuation

As I mentioned in the intro this is a basic 5 minute read on the vast topic of Business Valuation. If you want resources which can help you get a deeper understanding on the topic you can take a look at the following

If you are looking to get into the details of calculation with proper numbers and all the above video will be helpful

If you are looking to understand how an expert in Valuation thinks, the above Talk by Prof. Aswath Damodaran will be helpful

If you really want to get your hands dirty then you can probably take the course on Business Valuation by the CFI Institute and maybe even get a certification. This is what I did.


Margins – how they can make or break your business

Gross Margins, Net Margins, Profit Margins, Operating Margins are few of the terms thrown around when we talk about the profitability of a business. What do they mean? Why are they important? In this post, I will try to cover these in very simple terms. If you are a start up founder looking to understand these terms then read on.

The Donut Business Margins

Let’s say you are running a donut business. To build a sustainable business you need to make profits. To make profits you need to know all your expenses and price the product appropriately. So what are the expenses involved in running a donut business?

There is the cost of ingredients needed to make donuts like flour, sugar et. Let’s call these the ‘Cost of Goods Sold

Then there is the expense of operating a store like rent, employee salary, electricity bill etc. Let’s call these the ‘Operating Expense’

What else? Well, if you had taken a loan out to set up this business, then there is the Interest you have to pay out for that. There is also the tax that you have to pay to the the government. Let’s club these under ‘Interest and Taxes’.

Now let’s say in a month you buy ingredients worth Rs. 1000 to make 100 donuts. This means your Cost of Goods Sold = Rs. 1000. 

Your rental, employee salary, electricity bill etc. comes around to Rs. 500 a month. So, Operating Expenses = Rs. 500.

The interest and tax expenses comes out to around Rs. 100 per month. So, Interest and Taxes = Rs. 100.

Adding all these expenses your monthly expense comes out to around Rs. 1600. So, by selling the 1000 donuts you need to make a minimum of Rs. 1600 or Rs. 1.6 per donut. At Rs. 1.6 a donut you are essentially at break even or no profit, no loss. 

Now if you want to expand your business you need more money. You can raise this money by getting a bank loan, approaching an investor or by raising the price of your donuts. So, if you were to raise the prices of donut by Rs. 0.4 you would now be selling donuts at Rs. 2.


Rs. 2000

Rs. 2 / donut * 1000 donuts

Cost of Goods Sold (COGS)

Rs. 1000

Cost of ingredients

Gross Profit

Rs. 1000

Revenue – COGS

Operating Expenses

Rs. 500

Rent, Salary etc

Operating Profit

Rs. 500

Gross Profit – Operating Expenses

Interest & Taxes

Rs. 100


Net Profit

Rs. 400

Operating Profit – Interest & Taxes

Calculating Margins

Once you have the above values you can calculate the margins with the following formulas

Gross Margin = (Gross Profit/Revenue) x 100%

Operating Margin = (Operating Profit/Revenue) x 100%

Net Profit Margin = (Net Profit/Revenue) x 100%

From the above calculations we can understand that higher gross margins ensure that you have more money left to spend on sales, marketing, rentals and employee salaries after paying for the raw materials cost. But not all industries work on high gross margins. Industries dealing with physical goods usually have low gross margins as it involves a higher Cost of Goods component. Industries dealing with digital goods, financial services etc have higher gross margins as there is 0 or very low Cost of Goods component.

Business Moats

So naturally for low gross margin businesses the key lies in volumes and the size of transactions. Slight variations in any of the two can send these businesses to a tail spin. Low gross margin business that survive for a long period of time usually develops a defensive moat around them. These can be 

  1. Network Effect Moats – eg: Any social media network becomes more useful as more and more of your friends join it. This is the moat that Facebook, Twitter etc take advantage of
  2. Cost Moats – eg: Switching Costs – If your company has been using Amazon Web Services there is cost involved in moving to Microsoft Azure or Google Cloud
  3. Cultural Moats – eg: Brands like Patagonia, Starbucks etc have huge brand value which makes it difficult to beat these brands
  4. Resource Moats – eg: Pharmaceutical companies like Pfizer own many IPs, patents etc which makes it difficult for upstarts to compete with them

In über competitive spaces companies are willing to work on negative margins as long as they can raise external funding and drive out the competition in the area. Post that they can raise their prices to become profitable. Most of the heavily funded start ups deploy this strategy as this is the easiest to implement. So in the donut example, if some one was selling donuts for Rs. 1.2 you will obviously have to sell it at 1.2 or lower to compete provided that the donuts are of the same standards. Who will blink first depends on who has the deepest pockets.

Further reading on business margins


The resilience of Costco Notes

Recently came across a deck on the Resilience of Costco, I have tried summarising my learnings on the same below

Gross Margin vs Membership Fees – How Costco Makes Money

Financial data Costco

Costco is the second-largest retailer in the world by sales volume – 149B USD.

Costco doesn’t make much money on the 149B product sales. Their gross margins are in the 11% range. Instead, it makes money out of the 60$/yr membership which totals to around 3.3B that goes directly to the bottom line. Costco has 50M members and 27% of US household are cardholders. 75% of the bottom line or Net Income is from membership sales. The renewal rate of membership is around 87%.

Paid Membership Growth of Costco

The Costco Flywheel

It is this membership fees that allows Costco to lower the cost of the products it sells thus initiating a flywheel. Lower Costs > More Memberships > More Sales > More Leverage on Suppliers > Lower Costs

"For every dollar we save, we give 0.90$ to the customer" 

Key aspects of Costco Operations

  • Limited selection – 4,000 SKU vs 120k of Walmart and 600M of Amz. Most products have just one choice
    • This means they are the largest customer of their suppliers and hence enjoy better prices
    • Efficient employees as there is less reordering, figuring out suppliers, tracking orders from suppliers etc – leads to the highest rev/emp and profit/emp
    • Surprisingly lesser choices mean less cognitive load for customers and thus keeps them happy and confident in their selection
  • High quality
    • By selling only high-quality items you can eliminate the need to advertise
    • You can also reduce the returns
  • Bulk Sizes
    • Bulk sizes end up making customers spend more
    • It makes it difficult to steal stuff. Costco has a 0.2% of rev theft rate annually
  • Custom Packaging – display-ready pallets shipped directly from the supplier
    • Saves cost
    • Saves employee time spent sorting and organising stuff
  • Warehouses
    • No backrooms. Every square inch of space is used to sell and earn revenue
  • Labour
    • Wages of 22$/hr compared to 15/hr for Amz and 14/hr for Wmt
    • Annual employee turn over rate of 5% compared to 59% for the industry thus saving on hiring, training and replacement costs
    • Good employees with longer tenures provide better customer service
  • Inventory turn over time in Costco is around 26 days. If you consider Net60 payment term for vendors, then essentially the vendors finance the whole operations