Module 11 · Solutions

Warm-up

E11.01 Queue (5 min: mispricing reason?); kill test (30 min: disqualifiers? one question for triage?); triage (3 h: variant perception and asymmetry?); deep dive (2–3 weeks: numbers, people, price all pass? what breaks it?); memo and decision (1 day: hold at 2× size for three years?); monitor (1 h/quarter: breakers? price beyond bull?).

E11.02 Screens (analytical/neglect); 52-week lows (forced/emotional selling); demergers (structural forced selling); buybacks/open offers (mechanical arbitrage); insider buying (informed flow); sector work (structural change ahead of the market); competitors' calls (informational).

E11.03 See 11.3 and 11.1 key terms.

E11.04 \(f^* = (pb − q)/b\); \(f^* ≈ (\mu − r)/\sigma^2\); position ≤ acceptable portfolio loss ÷ bear-case loss.

E11.05 Legitimate: thesis broken; valuation full; better opportunity; position too large. Illegitimate: the price fell; the price rose; boredom/noise; "it will come back"; taxes as the reason to hold a broken thesis.

E11.06 STCG 20%; LTCG 12.5% above ₹1.25 lakh a year (listed equity, STT paid; > 12 months); F&O profits are non-speculative business income at slab rates (as of September 2026; verify each budget).

E11.07 Confirmation → write the market's view first and pre-mortem; anchoring → value before price, reverse DCF only; narrative → numbers and sources; overconfidence → grids, calibration; recency → 10-year histories; disposition → breakers on facts, no cost basis in reviews; sunk cost → re-underwrite; authority → say-do tables.

Core

E11.08 Compounders: Sales growth 10Years > 12 AND Profit growth 10Years > 12 AND Average return on capital employed 10Years > 18 AND Debt to equity < 0.3 — traps: fully priced; survivorship (the 10-year screen only shows those that made it). Improving cheap: Price to book value < 1.5 AND Return on equity > 10 AND Cash from operations last year / Net profit last year > 1 AND Debt to equity < 0.5 plus F ≥ 7 from an export — traps: governance not screened; cyclicals at peak earnings with low P/B.

E11.09 Rubric: three sentences; 5-year numbers (16.6% CAGR, 12–15% EBITDA margin, ROCE 13–19%, CFO/PAT 3-yr 78%, ND/EBITDA 0.8x); people (58% promoter, 6% pledge, mandatory auditor rotation, no SEBI actions); scores (M −2.14, F 4, Z 6–7, accruals 2.3%, cash yield 7.4%); valuation (26x, 13.7x, 3.3x vs peers 35x/21x); mispricing reason (misunderstanding of the growth's quality); verdict: TRIAGE — question: "are the solar receivables collectible and does the market know they are the growth engine?"

E11.10 Rubric: eight bullets matching the memo's content (unit economics per segment; pump industry map; 0/6 say-do; ₹390 implies 14.1% growth; variant perception on growth quality; refutation: receivable days < 80 and 15%+ growth by Q3 FY27).

E11.11 Rubric: header "BUY, value ₹416 bull / ₹320 base"; variant perception "the market is treating a temporary working-capital bulge from a public-sector customer as a structural problem"; thesis bullets on the ₹410 Cr order book, Hosur ramp (57% → 75%) and the state track record of eventual payment — each with a number; the honest bull case still needs the receivables to normalise.

E11.12 E.g., (1) GNPA above 3.5% at Mar-2027; (2) credit cost above 2.5% for two consecutive quarters; (3) cost of funds up 75 bps with NIM below 9%; (4) CRAR below 22% without an equity raise plan, or a QIP below book value.

E11.13 Reference tree from ₹260: f > 100% (the three-point tree has no tail below −35%); with a 12% chance of −80% (25/44/19/12 across +60/+23/−35/−80): f ≈ 36% → quarter-Kelly ≈ 9%; max-loss 2.5%/35% = 7.1% (or 2.5%/80% = 3.1% with the jump as the reference loss); lower of the two ≈ 3–7%; halved for Amber → ~2–4%, consistent with the memo's ~4%.

E11.14 Position ₹7.5 lakh = 0.375× ADV; at 20% participation, ~1.9 days; with ADV halved, ~3.8 days. Acceptable.

E11.15 10 names ρ 0.5: ≈ 26.0%; 25 names: ≈ 25.2%; 10 names ρ 0.8: ≈ 31.7% — the third is a portfolio with one shared thesis variable; diversification by name count has done almost nothing.

E11.16 Results vs expectations: growth below base path, margin below, receivable days worse (breaker 1 red), provisioning improved (a partial positive). Say-do: another miss on days. Probabilities → 40/45/15; weighted ≈ ₹274. Price ~₹260: near fair value with a worsening distribution — hold, do not add; exit if Q3 confirms; journal entry.

E11.17 LTCG (6.00 − 1.25) × 12.5% = ₹59,375; STCG 1.5 × 20% = ₹30,000; total ₹89,375. With a ₹2 lakh short-term loss: offset STCG fully (₹30,000 saved) and ₹0.5 lakh against LTCG (₹6,250 saved) → total ₹53,125.

E11.18 Re-underwrite from the current price: expected return low, asymmetry poor, 11% weight above the risk- justified size → trim to 4–5%. Tax: at 10 months the gain is short-term (20%); waiting two months would cut the rate to 12.5% — worth it only if the two-month downside is small relative to the tax saving (here, with the bull case 8% away, likely yes: trim half now, the rest after month 12, unless a breaker fires).

E11.19 Hit rate 50% vs 75% stated: 25 pp overconfident. Changes: shrink stated confidence toward 55–60% for similar decisions and size smaller; widen valuation ranges (use P10–P90 bands) and track calibration by decision type.

E11.20 Implied mean absolute move ≈ 7% (1σ ≈ 8.8%) vs expected ~3%: (a) sell a covered call at the bull-case strike (or a cash-secured put at the base value if adding); (b) flat: a short straddle is the pure expression but unbounded — a short strangle or iron condor with defined risk, small; constraints: stock must be F&O-eligible, physical settlement on single-stock options, upfront premium and margin rules, possible ban period if MWPL is breached.

E11.21 Hedge notional = 1.4 × 5% = 7% of the portfolio in Nifty futures (short). Not removed: sector, size/style factor, liquidity and idiosyncratic risk; basis and roll costs added.

E11.22 The put pays a premium for waiting and assigns you at ₹260 regardless of why the stock got there; the limit order costs nothing and can be cancelled when the reason is bad. The put is only right if you would buy at ₹260 unconditionally — which the memo's trigger (receivable days < 85) says you would not.

Stretch

E11.23 Rubric: shared variables named (domestic flows/SIPs, government capex, rates duration, the small-cap liquidity regime, one governance-flagged name sized as Green); caps on any variable's aggregate exposure; a liquidity ladder.

E11.24 Rubric: all journal fields; the belief; what the market believes; expectations with dates (Q4 FY27 receivable days, FY27 growth, ECL); reversal conditions; sizing logic; confidence; mood; a one-line pre-mortem.

E11.25 For: growth-optimal with a perfectly known distribution; against: the distribution is estimated, tails are unknown, drawdowns at full Kelly are extreme, and the investor is not a repeated bettor with unlimited horizon. Practical: full Kelly as a ceiling; quarter-to-half in practice.

Real-world task

E11.26–28 Rubric: queue with sources and kill log; a memo with the required sections and a sizing calculation; a tax position computed from actual statements with harvesting opportunities and the rule that stock selection is not driven by tax.