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Rakesh Bhaiya always taught us that Prashant business is built on cash flow and he always gave us the example of Titan that you are generating so much cash, you want to leverage it and grow with it because if I am a shareholder and a bigger shareholder than me is a promoter and ultimately I have set out on my wealth creation journey, then the less dilution there is in it, the better it is.
Every time you are doing equity race, so friend, next time why should I take your share because after six months you are going to come and give it to me, so in whichever company there is constant dilution, wealth creation cannot happen, so if you look at his entire thesis and his entire wealth creation journey, you will not see a single business of e-commerce, that was his belief and a very important saying, not his behavior, that belief, neither was his belief that there would be no cash flow, so if by mistake someone came up with a business that he would incur loss for the next six years, then he would make profit, then entry They also did not get it, no brother, he also used to say that this is not always right, in fact Buffett also did the same, so when Buffett got the news of dot com, then someone among Buffett's shareholders asked him why he was not doing it, he said that I do not do any business with cash flows, so I am your share holder, don't you think it is your responsibility to learn, if you do not know how to learn, then luckily Rakesh Bhaiya does not manage anyone's money, he had his own money, but one school of thought was that brother, businesses are made from cash flow, the other school of thought was that it is not necessary that businesses are made from cash flow, it is necessary that I scale a business, value gets to scale, then I take it to scale, then I will get value, but to reach that scale, according to the nature of the business, like today you talk about Zomato or our investment of Everstone in pharmacy, if you look at the structural, then the old school of businesses used to invest in plant machinery, the new school says friend, I need to focus on the balance sheet.
Here I am investing in brand building and customer acquisition, so what is the difference, I could also have capital, my balance sheet looks big, but the accounting standard of Chartered Accountant Society is that if I spend on marketing, it will go through PNL, so you are seeing a loss, ultimately I will also try to build a business, both are schools of thought, which one is right or wrong, but we did a big exercise when I came with Bhaiya, Research Head Rakesh Sir, with Rakesh Bhaiya, we did a lot of research on how businesses have destroyed most wealth and when we did a lot of research on this, most wealth has been destroyed because of capital misallocation, if you do not respect capital, then ultimately the stock market will punish you, a very interesting example, Bhaiya used to tell us about Raymond, I don't think there is a bigger or more powerful brand than Raymond, right, we all grew up with the Raymond man and what do you know, even today there are suitings and The suits had a gross margin of 50-60%.
I do n't know what to do with that money. This was a brand. At that time, a new company came up. Sanjay Lal Bhai started Arvind Mills. Arvind Mills took a different point of view. I make denim, but I will be the denim supplier to the world, whether you are Levis, Gap, or anyone, I will supply to you.
So, he opened a big plant and started expanding. He started bringing denim prices to a huge level. The stock market liked this story very much, so they gave Sanjay Lal Bhai's company a market cap higher than Raymond. Friend, there will be pain somewhere, right? Entrepreneurs, so I will make it Raymond.
By calling it a business with a return on capital employed of 70-80%, he went and took out all the capital that was coming in as cash flow and invested it in denim. Denim was a business with a return on capital employed of 8% in the market. What stupidity is this? He got such a punishment. Now, in the last one and a half years, Raymond has come back to its recognition, so capital allocation.
Becomes a very important decision for wealth creation The only difference is when you are building a business through cash flow Capital will never be misallocated because you have so much cash flow If you want to see more such insightful shorts and clips then subscribe to this channel
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