WI July2012

July 2012 Wealth Insight 5

Editorial PolicyThe goal of Wealth Insight, aswith all publications from ValueResearch, is not merely togenerate profitable ideas for ourreaders, but to help our readersstart generating their own ideas.We will aim to bring youindependent, unbiased, andmeticulously-researched storiesthat will help you make better-informed investmentdecisions, as well as do your ownresearch.

All our stories will be backedby quantitative data. To this wewill add rigorous qualitativeresearch obtained by speaking toa wide variety of stakeholders.We will firmly stick to our belief infundamental research and value-oriented approach as the bestways to earn wealth on the stockmarkets. Equally importantly ourfocus will always be unwaveringlyon the long term.

Simplicity will be the hallmarkof our style. Our writing style willbe simple and so will our presen-tation of ideas. But that shouldnot be construed to mean that wewill over-simplify.

Read, learn and earn - andlet’s grow and evolve as weundertake this voyage together.

July 2012Volume VI, Number 1

Total pages 72, including cover

EEddiittoorrDhirendra Kumar

SSppeecciiaall CCoorrrreessppoonnddeennttMohammed Ekramul Haque

RReesseeaarrcchh && EEddiittoorriiaallNiti Kiran, Vikas Vardhan,Jatin Khemani, Vivek MalikVarun Chabba

DDeessiiggnn Mukul Ojha,Kiran Sindhwal, Manish Shukla

PPrroodduuccttiioonn Hira Lal

© 2012 Value Research India Pvt. Ltd.Wealth Insight is owned by ValueResearch India Pvt. Ltd., 5, CommercialComplex, Chitra Vihar, Delhi 110 092.

Editor: Dhirendra Kumar. Printed and published by DhirendraKumar on behalf of Value Research IndiaPvt. Ltd. Published at 5, CommercialComplex, Chitra Vihar, Delhi 110 092.Printed at Option Printofast, 46,Patparganj Industrial Area, Delhi-110092

Advertising Contact: Mumbai: 22838665 / 22838198Delhi: 22457916 / 22457918Manuel Fernandes +91-98212-10948Biswa Ranjan Palo +91-96640-75875

Value Research

Data ssource ffor sstocks:AceEquity

Take your pick:Timeless investingprinciples

Benjamin Graham Joel Greenblatt John Neff

Peter Lynch Walter Schloss

41 COVER STORY

This is a season in which we all are reveling in misery due to the glut of bad news comingfrom the market. But, do these doomsday predictions regarding the state of the economyaddress any of the problems besieging us? No. That is why we would not be dishing out theusual fare in this anniversary issue of ours.

So, in the following pages we would be looking at five stock picking gurus — BenjaminGraham, Walter Schloss, Joel Greenblatt, Peter Lynch and John Neff — and would employ thestringent filters put forward by them vis-a-vis the choice of stocks. What you’ll get will be adetailed list of Indian blockbusters spread across various sectors.

6 Wealth Insight July 2012

DISCLAIMERThe contents of Wealth Insight published by Value Research India Private Limited (the ‘Magazine’) are not intended to serve as professional advice or guidance and the Magazine takes no responsibility or liability, express or implied, whatsoever for any investmentdecisions made or taken by the readers of this Magazine based on its contents thereof. You are strongly advised to verify the contents before taking any investment or other decision based on the contents of this Magazine. The Magazine is meant for general readingpurposes only and is not meant to serve as a professional guide for investors. The readers of this Magazine should exercise due caution and/or seek independent professional advice before entering into any commercial or business relationship or making anyinvestment decision or entering into any financial obligation based on any information, statement or opinion which is contained, provided or expressed in this Magazine.

The Magazine contains information, statements, opinions, statistics and materials that have been obtained from sources believed to be reliable and the publishers of the Magazine have made best efforts to avoid any errors and omissions, however thepublishers of this Magazine make no guarantees and warranties whatsoever, express or implied, regarding the timeliness, completeness, accuracy, adequacy, fullness, functionality and/or reliability of the information, statistics, statements, opinions and materialscontained and/or expressed in this Magazine or of the results obtained, direct or consequential, from the use of such information, statistics, statements, opinions and materials. The publishers of this Magazine do not certify and/or endorse any opinions contained,provided, published or expressed in this Magazine.Reproduction of this publication in any form or by any means whatsoever without prior written permission of the publishers of this Magazine is strictly prohibited. All disputes shall be subject to the jurisdictionof Delhi courts only. ALL RIGHTS RESERVED

9 EDIT

A happy (andprosperous?)birthdayBY DHIRENDRAKUMARValue investing is backin vogue and all youneed to do is stayfocused on your agenda

28 MAINSTREET

Not just government’sdoingBY SAURABHMUKHERJEAThree major factors thathave hindered the Indianeconomic growth

32 STRAIGHT TALK

Seeking visionaryleadershipBY ANAND TANDONIt is wrong to blamedemocracy for slowgrowth

34 THE CHARTIST

Currency indispensabilityBY DEVANGSHU DATTAInequitable distributionof natural resources is aproblem but doing awaywith the currency sys-tem itself will not helpsolve the problem either

39 GUEST COLUMN

Equity to the rescueBY MANISH BHANDARIEncouraging long terminvestment in equitiesand channelising domes-tic savings in the financialassets can help createwidespread wealth

Columns

14 MARKET COMPASS 56 OUR PICKS

Are we headed toGloom or Boom?While on one sidethere is fear amongthe investors, thereare voices ofoptimism as well.Definitely, we areat the inflectionpoint of a change.But what’s in thestore, only timewill tell

A performanceanalysis of 39stocks whichwe had recommendedover the past12 months andhow most ofthem beat theSensex by afair distance

TThhee TTooppNNoottcchh

A glance at some of ourrecommendations that

turned out to be winners

Creating Wealth


For stock investors, it’s been sixlong and eventful years since Wealth Insight waslaunched. For the most part, these haven’t beenparticularly happy years as far as investments areconcerned. We’ve seen one huge crash and many otherupheavals of smaller intensity, and not to speak of longperiods of stagnation when the markets didn’t really goanywhere. All in all, it hasn’t been easy for investors tokeep their faith in equityinvestments.

For Value Research, WealthInsight was not a natural extensionof its activities. In the two decadessince we started, people have cometo rely on us as India’s most trustedsource of mutual fund research andanalysis. However, much of ouraudience never saw equity analysisas our core competence. To be frank, before Wealth Insight waslaunched, equity analysis was not amajor activity for us. However, start-ing a magazine like Wealth Insightwas always something that I’ddreamed of; believing fully all thewhile that Value Research would be able to pull it offhandsomely.

The reason is simple and is now for all to see — thekind of equity research that Value Research does for itsreaders is very different from what is being done by oth-ers. The name Value Research derives its genesis fromthe concept of value investing, and value investing is

something that is much more directly related to equityinvesting than it is to mutual fund investing.

Finally in 2006, we got the opportunity to bring thisdream to life in the form of a tie-up with ICICIdirect, theonline brokerage arm of ICICI Bank. What followed wasthe launch of a magazine with a sharp focus on fundamentally-driven value investing principles.ICICIdirect, meanwhile, committed itself to distribut-

ing the magazine to its most activemembers. The end result: we start-ed reaching a huge audience rightfrom the day one of our launch.Even more importantly, this wasthe perfect audience for us — seri-ously interested in equity invest-ments, and as an online audience,one that could warm up to the newideas fairly easily.

Over these six years, we’ve come along way from those beginnings. Wehave built a great team of analystsand writers who create the maga-zine, and we’ve also evolved ourapproach to the content we carry. Infact, a contemporary issue of

Wealth Insight has hardly anything in common with oneof the early issues. Everything that a reader gets todayhas evolved far beyond from where we began — today’sWealth Insight offers the best set of articles, ideas andanalysis on fundamentally-guided and value-orientedinvesting in India.

At the same time, we’ll be the first ones to confess that

EDIT

A Happy (and Prosperous?)Birthday

Value investing is back in vogue and all you need to do is just stay focused on your agenda

Value investing issomething thatis much moredirectly related to equity investing than MF investing


Wealth Insight is not meant for everyone. The magazineappeals to the thinking elite among the India’s stockinvestors. This set of investors isn’t interested in gettingjust a prescription, or any random list of stocks to buy. It,instead, focuses on people who’d like to learn how toanalyse, and understand the reasons as to why a certaininvestment is good (or not). Observing what others sayand then adapting it to one’s own needs is a far better wayto invest then just following instructions.

A perfect example of this approach is the cover story ofthis issue. For this, we have selected five of the greatestinvesting gurus the world has seen. Obviously, we havechosen from those who are associated with value invest-ing and avoided the showmen who infest the airwavesnowadays. We have written about the principles of eachof them — Benjamin Graham, Walter Schloss, JoelGreenblatt, Peter Lynch and John Neff — and then haveapplied those principles to the Indian stock marketstoday; with the goal of coming upwith a set of companies which couldfit their investing style.

The five gurus differ a lot fromeach other and they all belong tovery different eras. Graham, the old-est, was born in 1894 and was activeas an investor from about 1920 tillthe mid-1950s. The youngest, JoelGreenblatt, was born 63 years afterGraham and has been investingsince 1985. However, the basic ideahas remained unchanged throughthe decades. Find a stock that haslong-term quality, make sure it’savailable at a lower price than whatit’s intrinsically worth and invest in it for the long-term.

The most important fact about these gurus is that theyare not theoreticians, but actual practitioners. Each ofthem gained fame not by writing about investing butactually doing it. As you read the set of articles and datatables that comprise the cover story, you’ll find that thebasic formula differs considerably in details. For exam-ple, in the Graham screen, we have built starts with earn-ings yield with the current yield of AAA-rated bondsserving as a qualifying post. By contrast, in John Neff ’ssystem, low PE plays a central role. Surprisingly to mostinvestors, Neff actually considers high-growth as a dis-qualifier. His approach incorporates decent but not veryhigh growth. In the modern paradigm of investing,where growth is next only to god, this would be consid-ered blasphemy. And yet, it makes perfect sense in Neff ’sapproach to value investing.

In many ways, the most difficult system to understand

is that of Peter Lynch, simply because it is the most sub-jective. Lynch begins not with numbers but with theknowledge that investors themselves have about compa-nies’ businesses, and the numbers come later. In ourstory, we’ve created a screened list of stocks that we thinkLynch would like in India today, but you should take thisparticular list just as something that provokes thinking.The very essence of Lynch’s approach is that you muststart with your knowledge and understanding and there-fore it is axiomatic that you, the reader, must know moreabout your investments than us.

No doubt, there are contradictions in the approach ofthese five gurus. Benjamin Graham has little in commonwith Peter Lynch. But that’s the whole point of readingabout them — it’s more about learning how to do yourown thing than just copying our approximation of whatthese gurus did. In fact, as you’ll see from some of these(Graham, in particular), the right conclusion could well

be that there isn’t anything on theIndian stock markets today thatwould end up appealing to a particu-lar investor. But that’s actually fine— not investing in anything at agiven moment is as much a legiti-mate investment decision as a list ofstocks to buy.

Regular readers of ValueResearch’s publications would besurprised to see Warren Buffettmissing from the list. The primaryreason is that Buffett is no longer astock picker but someone who buysentire companies, something inwhich the main step is a subjective

evaluation of the quality of management. One canadmire Buffett but the methods of the five we have cho-sen are actually more educational for ordinary investors.

These last six years have been a rollercoaster ride forthe markets and in terms of general mood in the country,this is probably the lowest point. However, this is whenvalue investors need to stay focused on their agenda.There are many businesses that will flourish very well inthe future and now is the time to make sure that you par-ticipate in their prosperity.

As always, we’ll do everything to make sure thatWealth Insight helps you do exactly that. WI

DHIRENDRA KUMAR

The author is editor, Wealth Insight. [email protected]

EDIT

There are contradictions inthe approach ofthese gurus butthat is the wholepoint of readingabout them

Avid readers of our publi-cations would be awarethat quite often, weadvise investors to have

a small and concise portfolio ofmutual funds. Investing in toomany funds doesn’t always makesense because apart from the likeli-hood of having an unnecessaryoverlap of holdings, there is alsothe problem of manageability. Themore funds you have, the moretime and effort you’ll have to spendin looking after them. If you’reinvesting via SIPs, you will have tokeep a tab on every new transac-tion in each one of your funds. Andthen there’s the tedious process ofcalculating short-term as well aslong-term gains made on yourinvestments for taxation purposes.

Well, that’s one thing you don’tneed to worry about much. You canuse the Value Research PortfolioManager’s Capital Gains tab to find

out exactly how much your unre-alised and realised gains are.

Let’s suppose you invest in equi-ty as well as debt funds via SIPs.Now, the tax treatment on gainsmade on both of these types offunds is different. Long-term gainson equity funds are tax-free, butshort-term gains are taxable. In thecase of debt funds, both long-termand short-term gains are subject totax. By itself, this is complicated. Itgets even more complicated whenyou invest through SIPs, becauseeach individual SIP is treated as afresh investment. And when yourealise your gains, the units thatwere bought first will be deemed asthe ones sold first. So it might bepossible that only a part of realisedgains will be tax-free long-termgains (in case of equity funds).

We know this is too much to thinkabout and calculate for most indi-vidual investors, which is exactly

why we’ve developed the CapitalGains tab in our Portfolio Manager.All you need to do is record eachtransaction into the PortfolioManager, the calculation will bedone automatically for you. TheCapital Gains tab shows you thename of your investment, initialdate of purchase, total cost of thefund, current market value, unre-alised short-term gains/losses,unrealised long-term gains/losses,realised short-term gains/losses,realised long-term gains/losses aswell as gains/losses from dividends.

The Capital Gains tab puts thenumbers right in front of you. Noneed to sit down with a list of yourinvestments, a pen, paper and a cal-culator. Just create a free accounton www.valueresearchonline.comand get started with our PortfolioManager. It’s easy, handy and allyou need to smoothly manage yourinvestments. WI


Efficient Tax Computations Calculating your short-term/long-term gains is just a click away

CAPITAL GAINSValue Research v a l u e r e s e a r c h o n l i n e . c o m Home | My Portfolio | Tax | Funds | Learning Center | Archive | Ask | Subscribe | About us | Free Sign Up | Feedback | Disclaimer


MARKET C MPASS

Are we headed to Gloom or Boom?Is India on the verge of kick-starting or ready to sink further? Wealth Insightanalysts Niti Kiran and Jatin Khemani debate how the future can shape up

The strategy of complementary opposites waspostulated by Chinese strategist Sun Tzu of theArt of War fame. Day follows night. Booms leadto busts. Youth leads to age. Ignorance leads toknowledge.

India’s economic growth plunging to a nine-year low in thequarter to March may have come as a big shock to many. Themid June downgrading by S&P, which was followedby Fitch, does not sound good, with the risk of Indialosing its investment grade status. Yet, FDI datapaints a different picture with $36,504 million find-ing its way in 2012 so far and Swedish Retailer IKEArecently announcing plans of investing 1.5 billionEuros, which adds up to `10,500 crore in India overthe next two years.

The optimists see the markets at a fair value, yetin recent months there have been high equity fundfolio redemptions. Rising inflation impactsgrowth, but a different set of experts feel risinggrowth impacts inclusion which is the root causeof everything else. Yet, as you will read in laterpages, the operating profit of the Nifty companiesis on the rise and the profit after tax is better thanwhat it was in 2008-09.

In economics, we talk about supply and demand,what goes down must go up is a generic idea, justthe way Physicists refer to opposites attract or statisticianstalk of variation and regression to the mean. In this specialMarket Compass section, Wealth Insight articulates boththe pros and cons across several factors. Definitely, we areat the inflection point of a change. This increased opti-mism in the ability of India to understand problems, toachieve change, and to maintain high ethical standards.Gloom or boom, we are not headed to doom.


MARKET C MPASS

Ratings downgrading seems to be taking thesneezing route. Like sneezing, it is conta-gious because it is partially a response tostimuli in the nose and partially in the mind.

Fitch followed S&P’s in downgrading India’s credit rat-ing. The ratings downgrade follows several questionsposed by large investment houses on India’s invest-ment climate. No doubt policymakers should take upthese red flags as a wake up call, because to achievegrowth, investment needs to pick up and for this, majorprojects should take off.

Downward credit rating will make it difficult for theIndian government and corporates to raise foreignloans, and they are likely to end up paying high inter-est rates as well. The negative outlook will also lead toforeign investors turning more cautious resulting inreduction in the flow of much-needed foreign fundswhich will further impact investments and increasepressure on the weakening rupee (more on that later).

The negative outlook reflects India’s limitedprogress on fiscal consolidation and, in particular, onreducing the central government deficit despiteimprovement in the financial health of state govern-ments, according to the Fitch report.

Art Woo, director in Fitch’s Asia-Pacific sovereignratings group, said: “Against the backdrop of persist-ent inflation pressures and weak public finances,there is an even greater onus on effective governmentpolicies and reforms that would ensure India can nav-igate the turbulent global economic and financialenvironment and underpin confidence in the long-rungrowth potential of the Indian economy.”

Definitely, the mood does not favour India at themoment which can only lead to deterioration of brandIndia as emerging market investment destination.

Global ParadoxEurozone Crises

Debt-GDP Unemploy- GDP Creditratio ment Growth Rating*

(2011) (April’12) Rate (%)

Greece 165.30% 21.9 -6.9 CCCItaly 120.10% 10.2 0.4 BBB+Ireland 108.20% 14.2 0.7 BBB+Portugal 107.80% 15.2 -1.6 BBSpain 68.50% 24.1 0.7 BBB+

Source: Eurostat, *S&P

1 The Eurozone crisis has resulted in rising govern-ment debt, trade imbalances and structural crisis

Ratings GameAAA+ AABBB-DCCC-

India is an excellent long-term investment,but foreigners and locals are neglected asthe government plumps for populism saysJim Walker, MD, Asianomics

Critics rate arts, films, books, music and several other things. Likewise, there are rating agencies that eval-uate and assess the quality of investments of products as well as countries. These ratings are arrived at usingboth quantitative and qualitative data and assigned a grade. For instance, there are 12 grades of ratingsfrom AAA, which is the safest, to D, which is the least safe.

Ratings are dynamic and depend on several factors. For instance, at present, India’s rating is BBB-compared to Brazil’s BBB or China’s AA-. As ratings are dynamic, they tend to change with time. Oneneeds to view ratings in the right context before interpreting them.

Reaction to ratings can be extreme. In August 2011, Standard & Poor’s downgraded US’ credit whichresulted in criticism from US officials just the way the Indian government officials are panning the down-grading by Moody’s and Fitch. However, unlike the US, which voiced against the downgrade resulting inDeven Sharma, the CEO of S&P steping down, India does not have the necessary voice or muscle.


MARKET C MPASS

For economists and policy watchers, macroeco-nomic indicators, which are budgeted andestimated before the actual numbers emerge,give ample room to debate and paint gory pic-

tures. With only limited policy room, growth in India islower, mainly due to adverse spillovers from theEurozone area via trade and financial channels thatworsen the effects of existing weaknesses.

However, the story is not always without exaggera-tion. In April this year, the Reserve Bank of India gov-ernor D Subbarao said that rising fiscal deficit andshort-term debt levels are ‘quite disturbing’ but thenation is not facing a repeat of a 1991 balance of pay-ment crisis. While the 1991 crisis was triggered by highoil prices and gold imports, almost drying foreignreserves and currency crash; large fiscal deficit andcurrent account deficit are lead indicators of stressbuilding up in the system again.

Although, the fall in GDP growth is a matter ofimportance, what has played against India is the nega-tive sentiments around the government and its work-

ing. There are serious concerns about macroeconomicmanagement, policy environment and governance.India’s current account deficit is rising largely due tohigh oil exports which went up by 40 per cent to touch$140 billion in FY12.

While fiscal deficit is not entirely structural innature, it touched 5.76 per cent of GDP on account of`208,503 crore doled out in FY12 to oil, food and fertiliz-er subsidy. Moreover, a third of the government’sexpenditure is spent on non-productive expenditureslike interest payments and subsidies. Some of thesewelfare measures are only likely to go when the FoodSecurity Bill and the Right to Education Bill get imple-mented in full.

The combined effect of these three factors has a cas-cading effect on tax collection, interest rates, capitalexpenditure and inflation. Moreover, the Indian gov-ernment has faced a series of high-scale corruption

Gloomy Macro Indicators

IT exports remain bleak for the nextthree-five years because of a slow recovery in the US and problems in theEurozone according to Infosys co-chairman S Gopalakrishnan

GDP Growth Rate

Current Account Deficit

Fiscal Deficit

1 GDP growth rate has gone down from the heydays of9% because of several global factors that are at playat present

1 Historically, current account deficit has averaged at$1.08billion which had touched the all time high inMarch 2004 to $7.26 billion

1 The Fiscal Responsibility and Budget ManagementAct, passed in 2004 aimed a fiscal deficit of 3% ofGDP and zeo revenue deficit by 2008-09


MARKET C MPASS

and scams that has resulted in what many refer to aspolicy paralysis. In the wake of such widespread fearand chaos, major policy decision and bills are pendingin the Parliament such as the Direct Tax Code, theGoods and Service Tax, Mining Bill, Pension Bill andseveral others that can have an impact on the economysuch as FDI in retail and increasing the FDI in theinsurance sector. Moreover, the government’s disin-vestment plans have taken a backseat and losing thenecessary push that can revive the economy throughdivesting its stake in several profit making PSUs.

India’s economic growth during 2011-12 slipped tonine-year low of 6.5 per cent, down from 8.4 percent in the preceding two years. Though theGovernment expects the GDP to expand by 7.6%in the current fiscal, it does not look achievablein the current scenario going by lack of a clearroadmap to address these issues.

It is fashionable to laugh at India’s falling GDPgrowth rate. And depending on which group yousupport, you can take the credit or discredit for thefall. At a time when economists have been revising

and re-revising their GDP growth forecasts downwards,what is being missed is that India’s GDP growth is wayahead of the global GDP growth rate, according to datafrom the IMF’s World Economic Outlook report. Thegraph below indicates how over bear as well as bull phas-es, we have fared better than the global average.

A lot is riding on India’s growth, because any spurt inthe Indian GDP cushions the global economy. After the2008 financial crisis, growth in India slowed more thanthe forecast due to a greater-than-expected effect ofmacroeconomic policy tightening and weaker underly-ing growth. India has responded to the fallout of the

financial crisis with moderating domestic demandwhich is compounded with slowing external demand.

So, is India’s GDP poor? A school of thought says oneshould focus on the debt to GDP ratio and not on the fis-cal deficit ratio: A parameter on which India has donewell. We have achieved GDP growth while lowering thedebt ratios, with the debt intensity of GDP ratio beingless for India at about 0.7, which is remarkable because itindicates that India’s growth is not debt intensive.Compare the same for the UK which has a debt intensityof GDP ratio of 2, which means that the UK has to addtwo units of debt to generate one unit of GDP. Moreover,India’s public finance is in good shape, and it will onlyget better once the RBI cuts interest rates as it will sparkoff growth, which will lead to higher tax collectionwhich, in effect, will reduce the fiscal deficit.

Racing ahead

Indian GDP growth has always surpassed World GDP growth


MARKET C MPASS

MARKET C MPASS

1 In the first six months of 2012, FIIs have investedaround `42,336.6 crore in the Indian markets,despite net outflows in April and May

2 The FDI flow in 2011-12 has gone up with theChemical sector attracting 1,722 per cent increaseto touch $7,252 million

3 Investment growth was 3.6% y-o-y from 0.1% con-traction in the previous quarter

India has been one of the highest receivers of FII flowsin 2012 ($ mn)

2008 2009 2010 2011 2012*

India -12918 17639 29321 -512 8536S Korea -36641 24659 19800 -8584 6401Brazil -24630 20597 2978 -625 1866Russia 3986 2878 2935 1703 1007

*Year till date Source: Bloomberg & Business standard

Attracting Investments

When it comes to attracting foreign funds,the government stresses on the need forforeign direct investment (FDI) thatstays for a longer period in the country

compared to foreign institutional investments (FII)which is largely made up of investor money whichtakes flight depending on which market is attractive.The India story is intact with FDI inflow steadilycoming in over the years, with the inflow touchingnew heights in FY12.

Despite the negative sentiments around India, for-eign investment is finding way into the countrybecause of special initiatives by several states. Statessuch as Gujarat and Bihar have demonstrated theadministrative efficiency with pro-investor schemesand moves which has attracted several large multina-tionals to invest selectively in India. Almost all states,be it Tamil Nadu, Karnataka, Andhra Pradesh,Chhattisgarh or even West Bengal, are fast holdingglobal investor meets to pitch their state as a pre-

ferred investment destination.The FII flow is completely driven by the attractive-

ness of the Indian markets. In the backdrop of afalling rupee, the inverse currency parity makes theIndian stock market far more attractivethan what it was when the rupeewas strong. However, FIImoney needs to be treat-ed with caution; moneycomes in and goes out atthe same speed on manyoccasions. Moreover, many atimes FIIs exit Indian marketsowing to issues impacting themin their home countries. Thecapital exodus in 2008 resultedin net FII outflows of `54,182crore because of concerns inthe US and Europe on theback the financial crisis.

Foreign Fund Flow

Tracking Flows


MARKET C MPASS

The rupee weakness is largely due to theEuropean crisis but its impact is being feltacross the economy. India imports around 70per cent of its crude oil requirement and the

government will have to pay more for it in rupee terms.A higher import bill pushes the fiscal deficit, which inreturn pushes up inflation. Unlike some other econom-ic factors, the RBI does not intervene extensively tocontrol a falling rupee.

The RBI has, so far, responded to the sliding rupeewith no more than a symbolic intervention, because itreally cannot afford to do anything more than that,given the country’s foreign exchange reserves of $306billion. This reserve may not be enough to defend therupee, especially when the intervention comes as areaction to global factors. Moreover, the RBI has also toworry about the widening current account deficitwhile formulating the strategy for any intervention tocurtail a falling rupee.

But a fall in rupee has its share of beneficiaries. FIIsand NRIs find the Indian markets attractive, which isindicated by an incremental money flow from both theentities. In the case of NRIs, there has been a signifi-cant rise in deposits, because every dollar, pound ordirham sent to India gets more bang for the buck. NRIs

are taking advantage of the fall which is further aidedby high interest rates which are unlikely to abate anytime soon.

In the past, certain sectors of corporate India gainedfrom a falling rupee, especially the IT sector and thegems and jewellery segment which generate signifi-cant revenues from overseas markets. The technologycompanies gained because of their actual realisation ofrevenues in dollar terms with every one per centchange in rupee-dollar resulting in a 40 basis pointsimpact on the margins on the net profit numbers of ITservices companies like TCS and Infosys. The fluctuat-ing rupee has only resulted in anxiety amongstimporters who are fast taking recourse by using cur-rency trading desks to hedge their risks.

Crude dollar The fall in crude price is no more welcome, for it com-pletes negates any gains because of the fall in the rupee.When crude was at $120, the rupee was at 45 levels andnow when crude is at $90, the rupee is at 57 levels. So,whatever gains one has from a fall in crude prices is neu-tralised by the fall in rupee, which makes us weakerbecause we largely depend on oil imports. Moreover, ourexports are higher than imports, which is a furthercause of concern and worry. The only good thing aboutrupee at 57 is that India becomes cheaper from the FIIpoint of view, which is a reason for a spurt in FII moneycoming in even when the Sensex is around 17,000. WithEurozone issues more or less settled, foreign investorscan look back at India with its depreciating rupee.

Rupee on a Free Fall

Slippery Rupee effect

1 Fall in rupee leads to high current account deficit,which in turn can result in downgrade fears by rat-ing agencies

2 Costlier imports resulting in high current accountdeficit completes the cycle

1 Crude oil imports havegone up by 46 per cent totouch 16.35 crore tonnesfrom 11.15 crore tonnes in2007

2 In the past 46 months, fuelprice has gone up on 16occasions and clawedback on 5 occassions. Inthis period crude pricewent up from less than $45a barrel to cross $111 tosettle at $97

Slippery Oil Effect


MARKET C MPASS

The Nifty is attracting great FII interest. Butthe pull is in Singapore and not India. FIIshave shifted their trading positions toSingapore, where derivatives of Nifty are list-

ed. In May, the SGX Nifty open interest was worth over`16,200 crore while that on the NSE stood at over `9,250crore. As far as three-month contracts go, the Niftyfutures OI on the NSE is over `12,750 crore. Nifty is pre-ferred not just for the convenience of trading in themin Singapore, but also the fact that the Nifty companiesare actually faring well.

Analysing the past five years data the Nifty compa-nies indicate positive performance. There is growth involumes which is also reflected in their earnings growthand rising operating profits. But, the story is yet to turnrosy because the net profit margins are yet to pick.However, the cash and cash equivalent that Nifty compa-nies are piling points at good health. The `2,82,758 crorecash chest of the 50 Nifty companies is almost thrice ofthe levels it exhibited in 2007. Leading the cash pile arecompanies like RIL and Infosys, which are not diversify-ing or expanding their business due to economic andbusiness uncertainty. Shareholders are raising theirvoice and asking companies to pay out dividends than siton piles of cash which is going unused.

Although Indian corporates have not got into any bigacquisitions and take over, corporate India is sheddingits debt with several companies restructuring debt andexiting non core businesses and focusing on their core.The period of downturn has also been used by both theregulator and companies to address corporate gover-nance issues. Although, there has been no significantwealth creation by the Nifty companies over the pastfour years with return on equity falling to 17 per cent inFY12 compared to 24.4 per cent in FY08. The silver liningis that RoE levels are very close to those in FY09.

2012- 2011- 2010- 2009- 2008-11 10 09 08 07

Net sales 27.5 21.0 6.0 21.0 38.8Operating Profit- (Excl OI) 35.1 26.2 8.2 8.7 37.5Other Income -19.6 -2.2 40.3 8.8 46.3Profit After Tax 11.0 15.9 26.9 -8.9 32.5Source: Net sales of the Nifty companies is better than 2008-9 and operating

profit is close to the 2007-8 days, which is a positive indication

Net performance

Nifty PE

Profit Margins

Return on Equity

1 Over the past decade the Nifty median PE has been18.43 with the maximum touching 28.29

2 Since January 2012 on 68 days the Nifty PE has beenbelow the median compared to 76 days in 2011

1 The Nifty operating profit margins have been risingand is back to FY2007 and FY2008 levels. However, theNet Profit Margins is yet to catch up

1 The return on equity of Nifty is yet to pick up but thecash and bank reserves, the Nifty companies have acollective reserve of `2,82,758 crore

Attractive Valuation


MARKET C MPASS

MARKET C MPASS

Inflating Interest Impact

When the RBI retained the existing inter-est rates in its mid-quarter policy reviewin June, the reactions varied across seg-ments. The markets did not react

favourably, corporate India was unhappy as werethose serving home loans. However, investors lookingfor high guaranteed interests on deposits were glad,as were mutual funds launching FMPs. Despite theindustry expectations, the RBI has made it clear afterthe April rate cut that there was no room for furthercuts. The reason for not cutting rates is being attrib-

uted to inflationary pressures. Too much money chas-ing too few goods is a standard explanation for thecause of inflation, which economists refer to asdemand-pull theory. Inflation is the natural by productof a robust, growing economy. No inflation is a muchworse economic indicator, which we do not face thank-fully. Typically, in a healthy economy, wages rise at thesame rate as prices; however, that has not been the case,because of the overcautious moves of corporate Indiawhich is cutting both direct and indirect costs.

The impact of high interest rates is borne by the driv-ers of the economy. High interest rates, coupled with aslowing economy, have dented debt-laden corporate bal-ance sheets and bottom line. However, the RBI is notyielding to pressures to cut interest rates in an alreadyhigh inflation environment. Higher interest rates dis-courage borrowing and encourage savings and tend toslow the economy. However, they are also influenced bypolicymakers to curb inflation.

After all, monetary policy aims to influence the over-all level of monetary demand in the economy so that itgrows broadly in line with the economy’s ability to pro-duce goods and services. From time to time, the RBIdoes intervene to control the economy with changes ininterest rates. For those who can recollect, in 2008 afterthe Lehman Brother’s crisis, the RBI had intervened tocut the repo rate from 9 per cent to 8 per cent in October2008 and then delivered a rate cut every month tillJanuary 2009 and further cuts in March and April. Butsince February 2010, in order to curb rising inflation,the RBI raised key rates 13 times till December 2011, butit did not manage to control inflation as much as itwould have wanted. A lot of the factors that wentagainst the RBI were to do with falling rupee and a ris-ing crude price. Corporate India, at its end has beenadvocating lowering of rates because higher borrowingcost is impacting their margins.

In theory, curbing inflation by controlling demandlooks easy, but in reality India’s supply side bottleneckshave played a big spoiler. Further, service and excisetaxes have been raised along with freight chargeswhich has pushed food prices. Add up the dollar rupeetussle, delayed monsoon and El Nino for a complete pic-ture on how much more things can get worse. As longas inflation remains sticky, RBI cannot afford to cutrates and using monetary policy to tackle food pricesdoes not seem to be working. Going by the politicalwill, it does look like interest rates could remain highfor a long time. WI

Steady Inflation

No Rate Cuts

1 Economic talkingheads claim theRBI cannotreduce inflationwith interest ratecuts alone

1 To curb Inflation,the RBI raisedinterest rates 13times from 2010 to2011 but is yet tocurtail it


The Indian Government hasplayed its hand badly over the past four years. For exam-ple, with regards to coal scarcity, most of the damage wasself-inflicted as the Environment Minister dithered onthe “go/no go” areas and then instituted an overzealousprocess of checking emissions in the vicinity of CoalIndia mines. The totality of these measures has probablyset back Coal India’s production by 5-7 per cent perannum. Another example of self-defeating interventionis the hasty introduction of GAAR in the Union Budget.

However, is the Indian Government so influentialthat its blunders have bought our economy to its knees?I don’t think so. Three other factorshave played a powerful role inIndia’s humbling.

Firstly, a range of problems whichprima facie appear to be caused bythe government’s “policy paralysis”are arguably linked to the globalseizure in risk appetite. The “under-the-table” model was used in the“noughties” to lubricate our politi-cal system as promoters sought tobuild construction, infrastructure,real estate and mining empires. Nowmany of these promoters do nothave the means to use this model onsuch a scale (partly because theQIP/IPO market is shut – the mostobvious route for financing such transactions).

Whilst promoters are quick to blame “policy paraly-sis” for their inability to get projects off the ground, mynumber crunching suggests that in many instancesthese power, infrastructure, real estate and miningcompanies are throttling their projects’ back becausethey do not have the availability of equity that isrequired.

The second reason for not joining the “fright club”is that a number of regulatory institutions which

have come to the fore over the past two years that willhelp the Indian economy going forward, though themerits of such institutions may not be clearly visibleas of now.

Regulatory activismIn the natural resources sector, for example, almost allour titanic promoters seem to have hit a brick wall inNew Delhi as they run into: (a) The CAG which is pub-lishing report after report on different aspects ofmalfeasance in this sector; (b) The EnvironmentMinistry which is no longer willing to give clearances

to projects; (c) The Supreme Courtwhich is unwilling to let illegalmining continue and which hasadvocated the use of auctions forall natural resource allocationshenceforth; and (d) The relevantMinistry (be it coal, petroleum,mining or steel) which is unwillingto play ball. It is hard to imaginethat our enfeebled executive isbehind such a coordinated blockingof a range of powerful companies.

If the Competition Commissionof India continues its crusadeagainst abuse of dominant posi-tions by market leaders and by car-tels, it should help improve our eco-

nomic efficiency. If the CAG continues its practice ofscrutinising public spending and regulatory decisions,it could revolutionise the way the Indian Governmentworks. Without such interventions from regulators anda powerful judiciary, India could go the way of numer-ous “banana republics” in Latin America and Africa.

The final reason for not joining the fright club is thatour GDP data is so compromised that drawing any con-clusions about the state of the economy based on thisdata could result in poor investment decisions. Firstly,

MAINSTREET

Not just government’s doingThree major factors that have hindered the Indian economic growth

Without these regulatoryinstitutions and apowerful judiciary Indiacould go the way ofnumerous “bananarepublics” in LatinAmerica and Africa


India’s GDP data is subject to inexplicable retrospec-tive revisions of a material magnitude. For instance,investment demand growth numbers have been revisedupwards from 5 per cent y-o-y and -4 per cent y-o-y inQ1FY12 and Q2FY12, respectively, to 15 per cent y-o-yand 5 per cent y-o-y, respectively. Secondly, there is lim-ited synchronisation between trade data as shown bythe national accounts data and the same variables cap-tured by the RBI. Thirdly, the share of ‘discrepancies’in the Central Statistical Organisation’s GDP growthdata have risen by 50 per cent from FY05-FY08 to FY12(from -9 per cent of the change in GDP to 42 per cent ofthe change in GDP!).

Investment implicationsAlso, a significant part of the blame for the dramaticslowdown of the Indian economy lies not with domes-

tic factors but withthe freezing of riskappetite globally inthe wake of theEuropean crisis. Mycolleague, RitikaMankar, estimatesthat at least a thirdof the collapse inIndia’s growth canbe attributed to theslowdown in invest-ment growth whichin turn is most pro-foundly affected bythe global risk envi-ronment.

This “blame attribution” is important. If investorspull out of equities believing that there is something“systemically” or structurally wrong with the country,they will lose a great opportunity to participate in theIndian recovery which will come when global riskappetite recovers. This is main reason why I refuse tojoin the “fright club” of commentators who are sound-ing dire warnings about what will happen to India ifthe Government does not do X, Y or Z. WICAG: Comptroller and Auditor Genreal of India/ GDP:Gross Domestic Product /y-o-y: Year on Year/ GAAR:General Anti Avoidance Rules/ QIP: QualifiedInstitutional Placement / IPO: Initial Public Offering

SAURABH MUKHERJEA

The writer is Head of Equities at Ambit Capital. The viewsexpressed here are his own and not Ambit Capital’s.

A significant reasonof dramaticslowdown of theIndian economy isthe freezing of riskappetite in the wake of European crisis


A recent report by KotakInstitutional research serves to remind us of the needfor growth. Basing his numbers on average incomegrowth rates, the analyst concludes that 100mn addition-al households (i.e. half billion people) will remain in the“survivor” category by 2025 if GDP grows at 5% ratherthan at 9%. In other words, a growthrate slower by 4% per annum willconsign approximately 7% of theworld’s population to poverty overthe next 13 years. Poverty that couldhave been avoided! High growth isincontrovertibly a desirable objec-tive for any government.

Is democracy a hurdle?Our erudite prime minister includ-ed, the current political class and“chatterati” blame India’s democracy for slower eco-nomic growth compared to China. This is without basis.

Yasheng Huang, a professor of Political economy atMIT delivered an excellent lecture at TED last yearwhich I strongly urge the reader to listen to (http://www.ted.com/talks/yasheng_huang.html). Huang compares India’s growth with China andconcludes that the growth differential arises less out ofpolitical structure and more out of differences in edu-cation and health parameters.

One of the interesting points that Huang makes isthat India, during the period 1961-1991, had a dominantsingle party rule (less democracy, more autocracy – theEmergency being a case in point). During this period,the economy averaged a growth rate of 1.8%. Post 1991,with the first “minority” government, and under sub-sequent coalition governments, average growth for thenext two decades has exceeded 5%. In itself, this shouldsilence those who blame “fractious democracy” forslower growth as the data suggests exactly the opposite.

Data given in table on the next page is worth thinkingabout. In 1981, India had better rail coverage (a proxy for

infrastructure) than China. However, India lagged signif-icantly when it came to human indicators. Literacy inChina (1985) was significantly higher – with women lit-eracy more than two times that of Indian women.Perhaps that explains the higher life expectancy of theChinese by more than a decade. Indian women had a life

expectancy lower than that of men –in itself an unnatural situation. Postthis decade, the difference in growthrate of China and India diverged sig-nificantly. If no other data is pre-sented, would it not be logical to con-clude that growth rate differentialsare driven more by human capital,and less by the ability to set up infra-structure? Huang, in fact, concludesthat infrastructure development is aresult of economic development and

not its cause. As the economy develops and generates sav-ings, infrastructure improves.

Does “reform” only equal “FDI in retail”?Indian “reform” started in the decade of the 90s withlower licensing requirements – allowing the Indianentrepreneur to use his talents as he sees fit. Trade bar-riers were lowered with lower import tariffs, forcingIndian industry to become more competitive.

Capital restrictions were reduced. This led to anincrease in foreign inflows within the country – and, oflate, overseas investments by Indian corporations.Another factor of production, i.e. “capital”, wasunshackled.

Two other economic factors of production – “land”(which, in economic terms, includes all naturalresources) and “labour”, have, however, escaped anysignificant “reform”. We therefore have a situation-where, though consumption demand in India remainsstrong, supply is restricted. In fact, the country has torely on imports to meet its demand. Supply increase,which should act as automatic stabiliser to increased

STRAIGHT TALK

Seeking visionary leadershipIt is wrong to blame democracy for slow growth

During 1961-91, Indiagrew at an average of1.8%. Post-1991,despite coalition govts,the average was 5%


demand and fuel growth, is restricted by land andlabour laws that are cumbersome and archaic.

Despite this, calls for economic reform restrict them-selves to allowing “FDI in retail” as a magic formula toerase all ills that afflict the economy. This can partiallybe put down to vested interests of analysts – mostemployed by “sell side” brokerages – who mouth whattheir clients want them to – i.e., greater market access.However, one wonders about the compulsions of thewriters of the Economic Survey, who also repeatedlydish out the same formula, while remaining silent onthe market destroying features of the proposed “land

reform” bill, or the lack of clear policy in handling outnatural resources for use by industry.

Needed: A focus on factors other than capitalRunning a government is complex. More so, in a large,diversified country like India. Any leader can get over-whelmed by the enormity of the task. But, as I stated inthe beginning, slow growth destroys opportunities for7% of the humanity. A visionary leader would focus onone or two issues in a term of 5 years – issues that canunleash the potential of millions of his countrymenand women. Education and health are two such issues.Natural resource is another.

True reform would be to provide a policy framework,and create a transparent environment where theIndian entrepreneur can use these factors of produc-tion to further the goal of economic growth – and gen-erate employment. Providing “entitlements” to peoplewithout empowering them to reach their own potentialis the hallmark of bureaucracy, not leadership. WI

STRAIGHT TALK

ANAND TANDON

The author is CEO, JRG Securities Ltd.

Human Development vs Infrastructure DevelopmentIndia China

INFRASTRUCTURE

Railways (1981) Km 61,240 53,900

Electrified Railways (1981) Km 5,345 1,700

HUMAN CAPITAL

Adult Literacy Rate(1991) 48.20% 77.80%

Women Literacy (1991) 33.70% 68%

Life Expectancy Men (1985) (yrs) 57 68

Life Expectancy Women (1985) (yrs) 56 70

Source: Presentation of Y Huang


The past five years have seenseveral crank “anti-currency” cults surfacing. For exam-ple, a group called the Zeitgeist Movement, which is abreak-away from a similar group called the VenusProject, makes a lot of noise while propagating its cranktheories online as well as releasing propaganda films.

Zeitgeist means “spirit of the times” in German. Themovement is supposedly in response to a popular feelingthat the world’s natural resources are inequitably divid-ed and exploited in an unsustainable fashion. The move-ment aims to change this.

The “solution” is unreal. The Zeitgeist movement pro-motes a science-fictional, communis-tic “resource-based economy”(RBE). Currency will be abolished inthe RBE. Global banks of computerswill track all natural resources andallocate them according to respec-tive needs. There will be an averagedallocation of food calories, fuel sup-plies, electricity, etc. This will bedone in sustainable fashion so thatnobody suffers and the ecologicalbalance remains stable.

It can’t be done of course. To startwith, there is no way to redistributeresources without violence. The top 50 per cent of globalpopulation controls close to 80 per cent of resources andof course, there are national divisions. Ergo, you’d haveto kill a lot of people before you can redistribute.

Even if resources were somehow redistributed peace-fully, the computer programmers would possessimmense undemocratic powers. Even if the computerprogrammers were all deeply altruistic, such a systemcould still be gamed for profit by citizens.

Somebody may choose to have lots of children (or per-haps, keep lots of pets) so as to control resources allocat-ed to minors. This can only be prevented by curtailingbasic human rights.

Even if everybody voluntarily accepted family plan-ning, simple transactions would still be impossibly cum-bersome without currency. Suppose one person, A, hateschocolates and is willing to forego his allocated chocolateration. But A wants a haircut every fortnight, whereasthe RBE allocates a haircut once every month. Supposeanother person, B, is a hairdresser, who wants to own aracing bicycle. In a currency-based economy, neither A orB have problems. A doesn’t buy chocolates and has asmany haircuts as he likes and can afford. B charges forhaircuts, and saves up to buy the cycle he wants. In anRBE, A has to trade his chocolate ration for haircuts; B

has to trade hair-cuts for a bike.Setting exchange rate for suchbarters is difficult.

This is a simple example of whycurrency was invented. It is a com-mon denominator between dissimi-lar goods and services. A currencydoesn’t need intrinsic value. It is use-ful only because people use it as amedium of exchange.

No nation backs its currency withbullion anymore. The printed text ona currency note contains a promiseto redeem it for a given value. As an

economy gets more complex, the need for a commondenominator (currency) increases because there are awider array of dissimilar goods and services available.While the cultists claim to represent the spirit of thetimes, they are actually a very fringe minority. The realspirit of the times is a proliferation of new currencies.

Virtual transactionsIn the past five years, many virtual currencies have comeinto existence on the Internet. As the online economy hasgrown in size and popularity, so have the number of vir-tual currencies. Think of it this way. You pay your localshopkeeper in rupees for goods produced by a Chinese

THE CHARTIST

Currency indispensabilityInequitable distribution of natural resources is a problem but doing away

with the currency system itself will not help solve the problem either

No nation backs itscurrency with bullionanymore. Printed text ona currency note containsa promise to redeem itfor a given value


subsidiary of an American company because it’s mostconvenient for both of you. In theory, you could pay indollars or Yuan, but it would be more cumbersome.

Similarly, in online economies, it makes sense to use alocal, virtual currency rather than convert each transac-tion from various national currencies. For example, thesocial networking giant, Facebook uses a virtual curren-cy called the FB Credit on its site. This trades at arounda current rate of 10 FBC =1USD$. Facebook has over 900million users spread across the world. They could all, intheory, use FB credits. It also has affiliate sites, whichaccept FB credits. Many websites use other currenciessuch as the open-source Bitcoin or ducats, etc.

These currencies are exchanged online for real goodsand services with quantifiable costs. A very commontransaction for instance, involves paying for movies andmusic downloads in a virtual cur-rency. Advertisers and online mar-ket researchers also offer virtualcredits to people who click throughads, or fill up surveys. Quite a fewreal-world services such as bed-sitterrentals, car-maintenance services,etc, can also be paid for in virtualcurrency if you’re hooked into theright online circuits.

Virtual currencies are also direct-ly, formally, convertible (both ways)into national currencies such as thedollar, yen, euro, won, etc. Assetsdenominated in virtual currency can be auctioned onwebsites like eBay for national currencies. Exchangeslike Singapore’s First-meta Exchange specialise in this.

The number of goods and services that can be boughtusing virtual currencies is increasing. The complexity oftransactions is growing as well. But there are, as yet, novirtual central banks managing virtual interest rates, orcontrolling virtual money supply.

Obviously a real world currency and economy needsmore “management” since the real world is far morecomplex than the online world with a much larger inven-tory of goods, services and trading interactions.

But virtual economies are already quite complex andat the same time provide a useful model. As onlineeconomies have evolved, it has become apparent that themeasure of control required for maintaining a successfulcurrency is less than most central bankers would have usbelieve.

In the real world as well, central bankers also have lesscontrol than they used to, due to the increasing integra-tion of the world economy. In an open economy, it’simpossible to simultaneously control exchange rates,money supply and interest rates – this is sometimes

called the Impossible Trinity. If a central bank wishes to manage its interest rate, or

money supply, it must accept fluctuations in theexchange rate. Unless it’s an absolutely closed economylike North Korea, the exchange rate will change to reflectcentral bank action. The price of domestic goods andservices will also change. Excessive controls may lead todeveloping of black market currency rates.

Monetary policy is a powerful tool. But it is not a cure-all. Economies with big policy issues and structuralimbalances cannot solve their problems by just changinginterest rates or money supply. India has run into thissituation over past three years.

GDP growth has slipped slower while inflation hasremained high and the rupee has also gotten weaker asthe trade balance has gotten worse. This has placed the

RBI in a bind. If it drops rates, infla-tion will certainly rise. But growthmay not rise even if rates are cutbecause growth depends to a largeextent on fiscal policy. The govern-ment has been absolutely paralysedon the policy front in recent years.

So the RBI has decided not totouch either money supply or policyrates in the latest credit policy. At thesame time, the Chinese have cutrates, the Europeans have easedmoney supply with a big bailout forSpain’s banks, and the US has eased

money supply. This comparative situation is probably bad for India’s

economic growth, which means it could be bad for equi-ty investors. It is bad for debt investors too. It means thatin the short run at least, expectations of returns from thestock market drop. There is one possible situation whereholding rates unchanged could turn out to be beneficial.It leaves room for cuts in an emergency if there’s a sud-den currency collapse in Europe.

Over the next six months, if growth slows even further,there will be a point where inflation will start comingdown. The economy will then stage some sort of recov-ery. Before that, we’re likely to see quite a lot more pain.It will also be interesting to see the direction in whichexchange rates go. I suspect that the USD will get quite abit stronger versus the rupee before the exchange ratetrends play out. WI

THE CHARTIST

DEVANGSHU DATTA

The writer is an independent financial analyst

Over the next six monthsif growth slows evenfurther, the inflation willstart coming down. Theeconomy will then stagea sort of recovery

Build your wealthwith every issue

Value Research

Smart stock ideasWealth Insight is published by Value Research, India’s leading research firm. Anindependent magazine, we offer unbiased opinions on stocks. But our readers arealso expected to make up their own minds. Read Wealth Insight for making smartstock investment decisions

GO ONLINEwww.wealthinsight.inwww.valueresearchonline.com

CALL+91-0120-4250112/115+91-9868891830

FAX+91-0120-4250113

MAILD-49, IInd Floor, Sector-63,Noida-201301, [email protected]

Name

Address

Pin Code State

Phone

E-mail

Cheque Number Date

Bank & BranchPayable to Wealth Insight, New Delhi * Add `30/- for non Delhi cheques

Credit card Master Card VisaPlease note, debit cards are not accepted for payment of subscription

Credit Card No.

Expiry Signature

V.P.P.

MFI-0

6/12

Period Cover Price Delivery You Pay Only

3-Years (36 issues) at 25% off `1,800 By Book Post `1,3503-Years (36 issues) at 25% off `1,800 By Courier `(1,350+790) = `21401-Year (12 issues) at 10% off `600 By Book Post `5401-Year (12 issues) at 10% off `600 By Courier `(540+260) = `800

SUBSCRIBE TODAY AND SAVE!

Smarter investment picks

Professional portfolioadvice

Tips to boost yourinvestments

Comprehensive list ofStock Ideas

Value Research

Your mutual fund guide Since 1991, Value Research has been tracking the Indianmutual fund industry. Over the years our aim has been to helpretail investors make smart investment decisions. Subscribe to Mutual Fund Insight, a Value Research publication.

Build your wealthwith every issue

Smarter fund picks

Professional portfolioadvice

GO ONLINEwww.valueresearchonline.com

CALL+91-0120-4250112/115+91-9868891830

FAX+91-0120-4250113

MAILD-49, IInd Floor, Sector-63,Noida-201301, [email protected]

Period Cover Price Delivery You Pay Only

3-Years (36 issues) at 35% off `3,600 By Courier `2,3401-Year (12 issues) at 20% off `1,200 By Courier `960

SUBSCRIBE TODAY AND SAVE!

Name

Address

Pin Code State

Phone

E-mail

Cheque Number Date

Bank & BranchPayable to Mutual Fund Insight, New Delhi * Add `30/- for non Delhi cheques

Credit card Master Card VisaPlease note, debit cards are not accepted for payment of subscription

Credit Card No.

Expiry Signature

V.P.P.

MFI-0

6/12

Tips to boost yourinvestments

Comprehensive scorecardon all MF schemes


The Indian equity market isplagued by low interest by retail investors. So, it is goodto note that the government now is clearly concernedabout its perceived apathy towards the equity markets.The measures taken in Union Budget 2012 to channelisesavings in financial assets is a testimony to this.Currently, there are around 20 million demat accountsand 38.5 million folios of mutual funds in India, suggest-ing 5 per cent equity penetration. With one of the largestpools of domestic savings, the equity penetration isabysmally low. Retirement and pension money has notfound its place in equity markets. I am a firm believerthat equity markets provide unparallel opportunity tocreate widespread prosperity in thecountry. However, the measurestaken by the government are insuffi-cient and do not appreciate the prob-lems faced by retail investors whileinvesting in equities.

The key reasons for Indian equityto remain underappreciated bydomestic investors are: 1) Assetclasses of choice: gold and realestate have given superlative returnswith much lower volatility in com-parison to equity markets over thepast few years; 2) Investors have torely on the kindness of strangers(brokers, advisors) to scan profitableinvesting opportunity/stock while in case of the othertwo asset classes, it can be evaluated individually. 3)Corporate governance issues in India have been over-weighing in the mind of retail investors while investingin the domestic equities. This concentrated controlling,shareholders coalition creates agency issues such asreluctance to distribute cash flows, excessive investing ingrowth projects empire, complex structures /tunneling,and voluminous, yet opaque information; while otherminority shareholders or independent board members

are disinclined or unable to challenge them.If we intend to foster equity culture in India, the above

mentioned problems require a radical solution: provid-ing an incentive to equity shareholders in form ofAllowance of Corporate Equity (ACE), a form of allow-ing nominal interest on equity capital tax deductible.This should be coupled with a compulsory dividend pay-out policy, around 25 per cent or more by corporates. ACEallows deduction on shareholder funds (long term bondrates of government securities) from corporate taxabili-ty. The compulsory payout of the profits will ensure thataccounting profits are aligned with the cash generated bythe company. To me, this is the best way to separate the

wheat from the chaff in corporateIndia, encouraging long term invest-ment in Indian equities and chan-nelising domestic saving in the pro-ductive financial assets.

Where ACE comes into playA closer look at the last fiscal resultsof the constituents of BSE 500 Index(excluding 59 government compa-nies), throws an interesting factabout the dividend policy of India.We have not included government-owned companies as the govern-ment plays a dual role of being thepolicy maker on taxation related to

dividends and is also a majority shareholder in thesecompanies. The study shows that average pay out isaround 25 per cent but this data is skewed by a few com-panies having very high dividend payouts. On aggregate,companies accounting for 50 per cent of the total profit,of above mentioned universe, pay just around 10 per centof their profit as dividends while keeping the balance 90per cent at disposal of controlling shareholders.Investors have witnessed huge volatility in the profitabil-ity of the companies over a business cycle, partly

GUEST COLUMN

Equity to the rescueEncouraging long term investment in equities and channelising domestic

savings in the financial assets can help create widespread wealth

The measures taken bythe government areinsufficient and do notappreciate the problemsfaced by the retailinvestor while investingin equities


explained by the cycle itself and partly due to corporatemisgovernance.

In a layman’s term, there is a possibility of an over-statement and understatement of the profit by the corpo-rate, whichever suites their business and capital struc-ture need. Minority investor has to steer through the lay-ers of financial statements which usually results in volu-minous annual report, meager payouts and, in few cases,nothing. Last but not the least, in absence of compulsorydividend and allowance policy, investors are subjected tothe vagaries of the capital markets and price action as asole measure of wealth creation. This may not be the bestpossible solution for the long term investing. ACE, cou-pled with compulsory dividend, is a strong self-fulfillingmechanism which combines strong enforcement andincentivises the corporate towards fair accounting andeliminates debt bias, thereby also progressing towardsmuch safer banking system in the country.

The international experience of ACE or its variantshas been very encouraging. Countries such as Belgium,Chile, Greece, Columbia, Venezuela and Latvia havesome variants of ACE or compulsory dividend systemworking. Brazil has successfully implemented ACE cou-pled with compulsory dividend since 1996, a model thatshould inspire India. Each countryhas drawn its inspiration from theuniqueness of the problem it hasfaced and adopted systems whichbest suited the circumstances.Recently, Chinese SecurityRegulatory Commission (CSRC)expressed strong opinion about lowdividend payout by the listed entitiesand framed rules for dividend pay-out for listed companies as well asIPOs. In one of its recent workingpapers, IMF has indicated that vari-ous governments across Europe arediscussing to adopt some form ofACE in order to reduce the debt biasthat has led to meltdown of the global financial markets.

Let me preempt some potential issues which may fol-low on issues of compulsory dividends. First, itreduces the ability to reinvest, especially for Indianmid-and small-size firms, where the cost of risingequity is quite high. A study in Brazil, where compul-sory dividend policy is in place, has suggested that thishad no impact on long term reinvestment capabilitiesof the firm. Moreover, cost of equity improves dramat-ically when inflows from institutional investors spreadacross market, thereby, increasing the investible uni-verse, which is usually concentrated in large capstocks. Secondly, this would result in lower tax collec-

tions. Following measures have been taken by the gov-ernment: Raising the effective tax rate by at least 10per cent by reducing the tax sops available under vari-ous schemes, increasing Minimum Alternative Tax(MAT) and improving tax compliances. A strong incen-tive system in the form of allowance for equity is acredit due to the corporate India and the shareholders.

Statistics of the BSE 500 companiesshow the total profit after tax ataround $43.5 billion, tax collectionof $15 billion and dividend pay-ments of $8.5 billion for FY11. Aback of envelop calculation wouldsuggest that cost of implementingACE with compulsory dividends, topublic revenue, in terms of lowertax collection can be close to $3 bil-lion per annum, a small number,considering the economic benefitthe superior corporate governancecan bring for all the stakeholders.In the short run, this can bereduced further, by granting

allowance to new or incremental equity investmentsonly. This implementation will bring economic bene-fits, increased investments, higher wages and highereconomic growth which are urgently needed. Indianauthorities have to wake up before the competitionamong nations intensifies to attract global long termcapital for financing the country’s need. WI

GUEST COLUMN

MANISH BHANDARI

CIIA, Managing Partner & CEO,Vallum Capital Advisors

Each country has drawnits inspiration from theuniqueness of theproblem it has facedand adopted systemswhich best suited thecircumstances

A different approach was conceptualised by IFSCapital Taxes Group in 1991 to equalise the treatmentof interest on debt and the way the notional intereston equity should be treated. The interest on debt isdeductible from the taxable income before paying tax.Whereas dividend, the only compensation paid forusing the equity, is not allowed as deduction; in facttaxed further as corporate dividend tax. The idea of anAllowance for Corporate Equity (ACE) is to address thisdifference in the treatment of debt and equity byallowing firms to deduct a notional interest rate (otherthan dividend) on their equity as well. The effect willable to remove the normal return on equity-financedinvestment from the corporate tax base.

What is ACE?


COVER STORY

Take your pick: Timelessinvesting principles

This anniversary issue we decided to dispense with the usual gloomy stuff we are hammered witheveryday — be it through newspapers, television or online forums. We are not going there. We willnot be looking at the Indian economy (isn’t that passé by now or wait...it should be!), will PranabMukherjee’s exit as the FM be good for India Inc. (or not) or how long till we see even a shadow of

Corporate India’s stupendous performance of the 2003-07 kind?Having ruled out everything that matters, what do we look at then? We decided to take on the strategies

of stellar stock pickers and the stocks that would pass their stringent conditions. In the following pages, we look at five stock picking Gurus — Benjamin Graham, Walter Schloss, Joel

Greenblatt, Peter Lynch and John Neff. Among Graham’s numerous stock picking techniques, we look at what is called “Graham’s Simplest Way

to select bargain stock” — an astonishingly simple technique that dispenses with rigorous stock research.(Blasphemy, some would say!).

Walter Schloss, Graham’s student and later colleague, developed his own search strategy — belowbook and low debt. This apparently simple (yet ingeniously complicated) technique served him well over his40 year career and even helped him earn the moniker “Super Investor” by none other than Warren Buffetthimself.

Joel Greenblatt of “You can be a stock market genius” fame developed Graham’s techniques into amoney-making stock picking venture. You can profit from his easy techniques too!

Peter Lynch, the growth investor, was known for picking winners early on. We attempt to find some forourselves.

And finally, we finish with Mr. Au contraire — John Neff who made it a habit of making money by betting onwhat the market saw as a bad investment. His is contrarian investing at its finest.

Follow the lives and the stock search strategies of these greats and they’ll certainly improve your invest-ing style and performance. Read on.

Benjamin Graham Joel Greenblatt John Neff Peter Lynch Walter Schloss


COVER STORY Benjamin Graham

Graham’s filterThe simple criteria that he

used in his studies included onethat involved using an EarningsYield (inverse of PE ratio) and theratio of stockholders equity

Earnings Yield, the first criteriaGraham put forward, was to be atleast twice that of what AAA ratedcorporate bonds yielded.According to him, for an investorto venture into stocks, thatshould be the minimum rate ofreturn

The other criterion was basedon the assumption that a compa-ny should own at least twice ofwhat it owes. In other words, theratio of shareholder equity tototal assets should be a mini-mum of 50%

This mechanical stock selec-tion called for holding a portfolioof 30 such stocks for a period ofthree years or till a 50% gain,whichever occurred first

How much could an investorapplying this technique expect togain? Using both these fields,and on the basis of extensiveback-testing, dating back 50years, Graham suggested that aninvestor following this strategycould have netted twice as muchas the Dow and could, going for-ward, expect annualised gains ofat least 15%

Additionally, all stocks had tohave a maximum PE of 10.Graham was against buyingstocks above that premium

The father of value investing was the first stock analyst to institutionalise fundamental research. Hisfocus was on value stocks – companies with assets that far outweighed their stock price. Analysingbalance sheets, income statements and financial ratios were what got Graham excited or not.

‘Graham says investors should analyse a company’s financials and come upwith an intrinsic value and buy only when the stock is trading at a discount tothis intrinsic value. The best Margin of Safety stocks are those that trade at2/3rds of their net current assets. He also introduced the concept of Mr Marketwhose basic premise is that investors should not base the value of companiesbased on their prevailing market prices’


COVER STORY

The main idea behind the screen is to buy a sig-nificant number of low priced and sufficientlyfinanced companies. Not all companies in thisportfolio are expected to be winners. Further,

this screen will not work out for short-term trades. Aholding period of three years gives sufficient time tothese underdogs to deliver positive returns.

We started with AAA rated bonds currently yielding9.4%. Twice the bond yield of 18.8% was the cut-offEarnings Yield and only stocks above this limit wereconsidered

Next, we eliminated all companies with a shareholderequity to total assets ratio of less than 50%

We made some adjustments to the screen because dueto fluctuating earnings consistency we had to eliminatepure commodity plays like Sterlite Industries andPrakash Industries. A down-year in their commoditycycles (which no one can predict with any surety inadvance) can mess up their earnings badly. Also, compa-nies with issues regarding insufficient management dis-closures like Geodesic were removed

Companies with one-time gain that inflated the latestTTM earnings per share were booted out: FinancialTechnologies fell on this count

From the BSE 500 list only 8 stocks made the cut The stocks that remain on this list are not at all glam-orous – not one of them. None of them are growth stocksand are not likely to feature high on anyone’s buy list.Yet, all of these companies are consistent profit makers.Basic industries like cement, fertilizer and oil dominatehere. Many of these stocks are facing various issues –some temporary, some more fundamental because ofwhich the prices are down. But the most important thing

that Graham’s screen could be telling us about Indianmarkets today is that there isn’t a lot of value left on thetable. This flies in the face of what we would like to think– especially given a depressing market for more than ayear now. This screen is an excellent indicator of wherethe markets stand with respect to value. GGNNFFCC:: Entire FY12, GNFC reported a revenue growth of36% (y-o-y). Ebitda was higher by 46%. While higher fer-tilizer revenues boosted topline, lower chemical marginsdragged profitability. At the CMP, GNFC trades at 50%discount to its book value.GGSSFFCC:: FY12 saw topline growth of 13% (y-o-y) while bot-tomline was up 5%. Chemical margins like in GNFCdragged margins down. Around 55% of the current mar-ket price is in cash and cash equivalents. The stocktrades at its book value.OOiill IInnddiiaa:: The only debt-free company in the screen, OilIndia faced the government’s arbitrary subsidy axewhich resulted in higher burden in FY12. Net realisationas a result fell 26% in the March quarter. At the CMP,cash and its equivalents accounted for 40% of the com-pany’s stock price.OOrriieenntt PPaappeerr:: The March quarter saw overall revenuesgo up 21% on strong cement numbers. Lower paperprices and high costs saw the paper segment remain inred. The demerger of the cement business into a separatelisted entity is on track and, as per reports, is slated forlisting around October 2012. The cement business saw50% improvement in its Ebitda/ton and an EPS of `12.SSRRFF aanndd UUfflleexx bbootthh ssaaww aa ttoouugghh yyeeaarr:: While revenues areup 17% and 30% respectively, both saw their bottomlinesdecline by 22% and 63% on poor business environments.The immediate outlook is depressed.

GNFC

GSFC

Oil India

Orient Paper & Industries

SRF

Uflex

Zylog Systems

Fertilizers

Fertilizers

Oil Exploration

Cement & Construction Material

Textile - Manmade Fibres

Packaging

IT - Software

Company Name Market TTM Price Earning Networth Total assets Networth/total Debt- DividendIndustry cap (` cr) EPS (`) (`) yield (%) (` cr) (` cr) equity (` cr) equity yield (%)

Graham’s simplest way to select bargain stocks

1,260 18 81 22.53 2,507 3,758 66.72 0.50 3.96

3,423 95 430 22.13 3,184 3,511 90.68 0.10 1.75

27,265 143 454 31.61 17,740 17,753 99.92 - 8.00

1,105 10 54 19.20 1,119 1,504 74.36 0.34 3.71

1,207 66 209 31.49 1,852 2,942 62.93 0.59 6.69

762 35 106 33.27 2,066 3,879 53.26 0.88 7.11

1,031 125 627 19.91 805 1,478 54.48 0.84 1.28

COVER STORY Walter Schloss

Schloss’ filterBelow book and little debt are

just starting points. Schlosswould be interested only in com-panies that engaged in manufac-turing of some sort. He was notcomfortable with service indus-tries and would even ignore suc-cessful franchises such asMcDonalds restaurants. He wasinterested in companies in basicindustries

Buying assets at a discount isa better deal than buying futureearnings which may or may notturn out as expected. That wasWalter’s motto. While earningscould change rapidly, asset val-ues change more slowly. Thisfocus on assets led him to buystocks at or below their bookvalue

New listings would never exciteWalter. No, he liked his compa-nies with a track record of 20 oreven 30 years. That kind of beingaround just gives a better picture,more visibility, more understand-ing and more comfort

The lesser the debt, the morethe margin of safety. Whether itwas the effect of the GreatDepression which he livedthrough or prudent investing phi-losophy, Walter avoided compa-nies with debt like a plague

He looked at the balance sheetand the income statement butnever met managements

A super investor, anointed thus by none other than the world’s greatest investor himself, WarrenBuffett. Schloss’ life is a fine example of how deep value can survive amidst all the noise of thesmart money, the fast money, the quants and the chartists.

‘Schloss says the lows of the stock price over the last couple of years give agood idea of where the stock can land in case of a weakness. Conversely, thehighs of the past can indicate the level of fall the stock has seen. And it isalways better if the management owns a lot of stocks; not to forget that themanagement’s reputation is a deal breaker. Holding period should rangebetween four to five years as depressed stocks can take time to turn around’



COVER STORY

Schloss would invest in nondescript names andoften in smaller companies. For the purpose ofthis screen, we have expanded our screen to thetop 1,000 traded companies at BSE.

Non-manufacturing and service companies were thefirst ones to be booted out. Banks and financial institu-tions were the next to go. Since debt was an importantfactor, we decided to take this one head on. A maximumdebt-equity ratio of 0.3 was allowed.

Next, Schloss’ preferred book value filter came in.Only those companies trading at or below their tangiblebook values were considered. Promoter ownership of atleast 51% was fixed. And only companies with at least 10years of operations were allowed.

To take into account profitability, only those compa-nies that had a positive net profit and earnings per sharein each of the last 10 years were taken into consideration.

Finally, only those companies that were trading at adiscount to their 52-week highs and all time highs wereconsidered. This left us with only 12 names (out of a 1,000we began with). Now the real work started.

Screen observationsFour companies, Anant Raj Industries, Jindal Poly films,Maharaja Shree Umaid Mills and Kirloskar Industries,,

trade at below 50% of their tangible book value.On an average, these stocks are only 26% above their

52-week lows. Also, the average PE for this group of com-panies has declined from 117 times to a more reasonable16 times (half of them trade in single PE digits).

A number of these companies are currently goingthrough a rough patch – and could continue to do so forsome time. Kirloskar Ferrous, DIC and Tinplate are allfacing issues. That is why their stock prices aredepressed. After all, if they were doing well, there wouldbe no reason for them to trade at these levels.

The additional filters like long period of existence andsteady stream of profits, high management ownershipand reputation of the management are all attempted toweed out fly-by-night operators. To the best of our knowl-edge we have removed known cases of dishonesty orshady managements. This factor should remain a para-mount consideration in your stock selection.

Also, the stocks that feature here are not buy-and-hold-forever stocks. Time to sell is typically when they reachtheir book value with a maximum waiting period of 4-5years or even earlier if their is a better opportunity.

There is money to be made in this segment of the mar-ket. Only like everything else, there is no easy money. Youwould still have to do a diligent background research.

Anant Raj Inds

Jindal Poly Films

Maharaja Shree Umaid Mills

Kirloskar Industries

JB Chemicals & Pharma

Piramal Healthcare

Tinplate

DIC India

Kirloskar Ferrous Ind

Maharashtra Seamless

Numeric Power Systems

Construction - Real Estate

Packaging

Textile

Diesel Engines

Pharmaceuticals & Drugs


Packaging

Printing & Stationery

Castings/Forgings

Steel & Iron Products

Electronics - Components

Company Name Promoter’s Debt- MCAP Book Price Disc to Current Highest 52 Wk 52 Wk All time 5Y LowIndustry holding (%) equity (` cr) value (`) (`) BV (%) PE PE high price low price high price price

Stocks Walter Schloss could look at

61.93 0.26 1,394 122 47 61 11.68 888 90 35 395 35

72.10 0.25 737 406 171 58 5.63 34 350 143 700 52

74.83 0.15 327 272 126 54 45.61 50 203 111 203 10

64.28 0.00 279 612 288 53 4.14 88 374 226 651 30

55.87 0.07 535 113 63 44 0.79 21 154 58 185 27

53.07 0.16 7,557 651 438 33 67.78 68 563 340 600 164

60.96 0.17 415 58 40 32 25.07 83 66 32 179 15

71.75 0.09 230 290 251 13 8.67 20 322 181 469 95

58.95 0.14 332 28 24 13 8.96 112 31 19 102 9

55.37 0.06 2,504 379 355 6 7.89 20 402 290 675 112

65.12 0.14 253 254 250 2 7.16 21 308 152 600 65

High/Low prices are in `


COVER STORY Joel Greenblatt

Magic Formula filterGreenblatt’s Magic FormulaInvesting is a modification ofGraham’s Simplest Way to selectbargain stocks. He combinescompanies with high earningsyield with high return on capital tocome up with a list of high qualitycompanies trading cheaply.Greenblatt made some of his ownadjustments to how to come upwith his screenFrom the Value Research uni-verse, we eliminated banks,financial institutions and utilitiesEarnings Yield was calculated bydividing Ebit by Enterprise value

Earnings yield = EBIT/enter-prise value

These were then ranked. Thehighest EY was ranked 1 and soon

Next came the ROCE whichwas derived by dividing Ebit withthe sum of net fixed assets andworking capital

Return on capital = ebit / (netfixed assets + working capital)

Again these were ranked. Thehighest ROCE was ranked 1 andso on

The two ranks were combinedwith the lowest ranks coming first

The top 30 stocks were select-ed. After due research into eachof them, these stocks should beheld for a period of three to fiveyears

A professor at the Columbia University, he is also the founder of hedge fund Gotham Capital which heset up in 1985. In India, Greenblatt is known for his two books: You Can Be a Stock Market Genius:Uncover the Secret Hiding Places of Stock Market Profits and The Little Book That Beats the Market.

‘Greenblatt’s research on value investing techniques is his most famous claimto fame. His Magic Formula investing technique his most acclaimedachievement. Also, Greenblatt is quite open about how he searches for value.He also teaches his techniques. Why should you learn about Greenblatt’stechniques? His Gotham Capital returned 40 percent annually for 20 years!’

COVER STORY

Running the screen for Indian stocks pro-duces companies from diverse sectors –from engineering to IT and pharma to tex-tiles. In the capital goods space, BHEL and

Engineers India make the cut. Almost all stocks in thesector have faced decelerating growth from the highyears of pre-2008 performance. Investor apathytowards these stocks have made them attractive. Boththese stocks now trade at an EY of above 17.

Though BHEL saw a topline growth of 7.5% in theMarch quarter, the industry’s slowdown was reflectedin its working capital cycle – up from 25 days in FY11to 86 days in FY12. BHEL’s working capital cycle isnow one of the worst in the industry. BHEL has beenparticularly impacted by cheap Chinese imports.

Engineers India saw a topline growth of 29% inMarch quarter. Ebitda margins were down 5.5 per centon increase of low margin projects.

Small cap IT companies such as Polaris, Zylog andNIIT Tech made the cut. While Polaris reported nega-tive numbers for the latest quarter, Zylog’s Middle-East and African operations helped it post a good setof numbers.

Polaris saw a 25% decline in product revenues in theMarch quarter leading to overall revenues decliningby 8%(q-o-q). Ebitda margins declined nearly 6 percent on the back of lower product sales and rupeeappreciation during the quarter.

Zylog’s products division on the other hand saw an18% growth (q-o-q) with the addition of new clients innew regions of South Africa, Middle East and theCaribbean.

NIIT Tech saw a flattish March quarter which sawvolumes go up by 2% (q-o-q). Incremental order bookgrowth also did not add significant growth.

Lakshmi Machine Works (LMW), India’s largest tex-tile equipment manufacturer saw net sales decline by5.4% (q-o-q) on the back of lower sales in the textile

machinery division. Ebitda margin declined by 246bp(y-o-y) to 9.7% on account of higher other expenditure.

Coal India which meets 80% of the country’sdemand saw topline growth of 30% (y-o-y) on the backof higher realisations which were up 20% (y-o-y).Although higher employee costs saw the company’sbottomline dip by 5% compared to the previous year.

MOIL supplies about 40% of India’s annual man-ganese requirement of which 90% is used by steel pro-ducers. Topline and Ebitda for FY12 declined by 21.1%and 43.5% (y-o-y), respectively, on account of a steepdecline in manganese ore prices. Ebitda margin wasdown a whopping 19 per cent (y-o-y) to 48.2% as thecompany slashed its prices by 5-12% during the year.On the back of oversupply in global markets, realisa-tions could continue to remain under pressure.

FDC, the maker of Electral the well-known ORSpowder is a conservatively managed company likeLMW. Though FY12 numbers were flat, the companycaught the attention of the market after it announceda `50 crore buyback at a price of `110 (CMP `77). Alsodoing the rounds were unsubstantiated reports thatthe management maybe looking at a stake sale or sell-out to a MNC pharma company.

Upstream oil company ONGC also makes the cut.ONGC saw revenues go up 20% (y-o-y) while Ebitdawas higher by 45%. Net realisations at $44.32 per bar-rel were up 14.4% (y-o-y). What also helped wasONGC’s reduced share in the subsidy sharing burden– 78.3% in Q4FY12 against 82.2% in Q3FY12.

Peer upstream company OIL India reported con-trasting numbers – revenue was down 27% whileEbitda declined by 57%. Net realisations at $38.9/bar-rel were down 26.4% (y-o-y) on the back of higherupstream sharing, higher staff costs and other expen-diture which saw Ebitda margin contract 2,180 bps.However, OIL’s strong balance sheet, enviable cashpositions and negligible debt are added attractions.

Tata Motors

Eicher Motors

eClerx Services

Gujarat Fluorochemicals

Jaypee Infratech

17,348 81,664 21.24 39,400 44.03 12 18 30 11

712 5,277 13.50 1,520 46.86 25 13 38 26

199 1,623 12.27 203 97.95 29 3 32 15

1,126 5,251 21.44 2,099 53.62 11 8 19 4

1,661 10,419 15.94 3,705 44.82 19 16 35 21

Automobiles-Trucks/Lcv

Automobiles-Trucks/Lcv

BPO/ITeS

Chemicals

Construction - Real Estate

Company Name Enterprise Earning yeild Tangible inv Combined CompositeIndustry EBIT (` cr) value (` cr) =EBIT/EV (%) cap (` cr) ROIC (%) EY rank ROIC rank rank rank

Greenblatt’s magic formula


Company Name Enterprise Earning yeild Tangible inv Combined CompositeIndustry EBIT (` cr) value (` cr) =EBIT/EV (%) cap (` cr) ROIC (%) EY rank ROIC rank rank rank

Balmer Lawrie

Bharat Heavy Electricals

Alstom Projects

Engineers India

Thermax

Gujarat State Fert. & Chem.

GAIL

Bajaj Corp

Petronet LNG

Indraprastha Gas

Polaris Financial Technology

Zylog Systems

NIIT Technologies

Coal India

MOIL

Oil India

ONGC

Wyeth

FDC

Techno Electric & Engineering

MRPL

Grasim Industries

Lakshmi Machine Works

SRF

Jyoti Structures

Diversified

Electric Equipment

Electric Equipment

Engineering

Engineering

Fertilizers

Gas Transmission/Marketing

Household & Personal Products

Industrial Gases & Fuels

Industrial Gases & Fuels

IT - Software

IT - Software

IT - Software

Mining & Minerals

Mining & Minerals

Oil Exploration

Oil Exploration



Power Generation/Distribution

Refineries

Textile

Textile - Machinery

Textile - Manmade Fibres

Transmission Towers / Equipments

225 805 27.97 794 28.37 7 27 34 18

10,420 41,156 25.32 16,042 64.95 8 5 13 2

251 1,534 16.35 501 50.03 18 10 28 7

928 5,324 17.44 779 119.16 16 2 18 3

607 4,442 13.68 1,268 47.92 24 12 36 22

1,162 3,174 36.60 2,679 43.37 3 19 22 5

6,721 46,642 14.41 18,507 36.32 21 21 42 29

151 1,322 11.45 46 329.17 30 1 31 12

1,730 12,475 13.87 2,877 60.14 23 6 29 9

499 3,895 12.81 1,124 44.41 27 17 44 30

286 561 51.02 582 49.20 1 11 12 1

364 1,299 28.02 1,221 29.82 6 25 31 13

262 1,586 16.50 561 46.68 17 15 32 16

21,235 158,669 13.38 32,366 65.61 26 4 30 10

607 2,666 22.76 2,099 28.90 10 26 36 25

5,133 15,703 32.69 15,729 32.64 5 23 28 8

40,098 210,177 19.08 112,855 35.53 14 22 36 24

206 1,668 12.34 377 54.67 28 7 35 20

174 1,243 13.97 371 46.76 22 14 36 23

191 1,238 15.39 456 41.81 20 20 40 27

1,529 8,527 17.93 2,871 53.26 15 9 24 6

5,166 24,689 20.92 18,378 28.11 13 28 41 28

239 990 24.12 749 31.89 9 24 33 17

679 1,978 34.33 2,612 25.99 4 30 34 19

280 724 38.61 1,046 26.74 2 29 31 14

COVER STORY



COVER STORY John Neff

Neff’s filterNeff’s portfolios were a diversifiedset. His typical allocation was 1%to each stock, though in somecases he would go as high as 5%Low PPE sstocks: According to Neff,low PE stocks (in their single digits)always existed because “the mar-ket’s boundless capacity for poorjudgment ensures a steady supplyof out-of-favour candidates”Earnings ggrowth: Companies with arespectable earnings growth butnot too excessive. EPS growth ratewas thus taken between 7% and25%Sales ggrowth: Sales growth deter-mines whether the cash registerwould keep on ringing. Salesgrowth rate was also takenbetween 7% and 25% Free ccash fflow: Companies shouldhave enough cash available attheir disposal to buy back stock orpay dividends or invest profitablywhere the management sees fit.Consequently, companies with positive free cash flow in the pre-ceding two years are taken intoconsiderationOperating mmargins. Companieswith operating margins better thantheir respective industry medians,again for the preceding two years,are consideredTotal rreturn rratio. Here, only stockswith total return ratio that is twicethe market’s return ratio are con-sidered

A “professional’s professional”. That is how the 81-year-old John Neff is often referred to as. Why?Because other fund managers give Neff their money to invest in the markets! A contrarian investorto the core, Neff specialises in buying quality companies that are out of favour.

‘Neff calls himself a ‘low price-earnings investor’. He searches for stocks thatare cheap in relation to their total return (which is defined as the ratio of thesum of their earnings growth plus their dividend yield to the PE ratio). Absenceof stunning growth rates and low P/E can capture the wonders of P/Eexpansion with less risk than skittish growth stocks. Value stock or growthstock, Neff invests only when they offer him good value’

COVER STORY

The first thing we did was to remove banks andfinancial institutions from our universe.Next, companies whose 5-year earningsgrowth data was not available were removed.

Companies with negative earnings growth were alsoremoved.

Neff ’s low PE filter was next applied. Stocks with PEof more than 10 went out.

Similarly, only companies with a sales growthbetween 7 and 25% passed the test. Then, companieswith current operating margins greater than theirrespective industry average of last two years were con-sidered.

Finally, we came to the total return ratio calculation.This is the ratio of earnings growth plus dividend yielddivided by current PE ratio. For the purpose of marketand on account of availability of data, we took Nifty 50as the universe for calculating total return ratio.

ObservationsWe ended up with only 12 stocks. Notwithstanding theless number of stocks, they are a diversified lot. We hada cable company, one from consumer foods, an electri-cal equipment maker and those from power, IT, sani-

tary ware, steel and textiles. There were two fertilizerstocks: Tata Chemicals and GSFC, two from the powersector: Nava Bharat Ventures and Neyveli Lignite andtwo from textiles: SRF and Grasim.

In terms of earnings growth, inspite of slowdown intheir sectors, the following stocks came on top: BHEL,GSFC, HSIL and Neyveli Lignite. This could be becauseof the better earnings momentum in the beginning ofthe five year period.

Again, despite a weak operating environment, GSFC(margins at 24%) comes up with the largest positivedeviation from the industry median (13%). Closely fol-lowing GSFC is KRBL (14%) as against industry medi-an of 7.79. Total return ratios were highest for GSFC(5.6), SRF (5.05) and BHEL (3.58).

Stocks thrown up by the above filter provide a pool tosearch for winners. Among other considerations tolook into include the fundamentals – balance sheet,profit and loss Statement, cash flow statements andmanagement reputation. Neff is not a buy-and-hold-for-ever investor. He sells his stocks either at the end ofthree to four years by which he low PE stock is expect-ed to see some kind or re-rating or a PE expansion orwhen they reach their fair value. Happy hunting.

GSFC

SRF

BHEL

HSIL

Neyveli Lignite

Ratnamani Metals

Nava Bharat Ventures

Grasim Ind

Finolex Cables

Tata Chem

KRBL

Persistent Systems

Fertilizers

Textile

Electric Equipment

Sanitaryware

Power

Steel

Power

Textile

Cable

Fertilizers

Consumer Food

IT - Software

Company Name Market TTM Price Sales CAGR- EPS CAGR- Dividend Total return TTM Ind medianIndustry cap (` cr) PE (`) 5Y (%) 5Y (%) yield (%) ratio PBITDM% (PE) 2 yrs

A contrarian’s list

3,377 4.46 424 8.56 23.20 1.77 5.60 24.46 12.87

1,196 3.16 208 14.22 9.19 6.75 5.05 21.54 13.79

52,954 7.47 216 20.97 23.86 2.88 3.58 22.16 16.05

908 9.69 138 24.08 22.90 1.82 2.55 16.27 13.23

13,514 9.58 81 18.21 20.02 2.86 2.39 51.07 32.03

472 5.00 102 14.73 7.34 2.95 2.06 17.26 16.86

1,575 5.54 176 9.80 7.27 3.40 1.92 34.61 32.03

21,420 8.09 2,335 9.78 12.40 0.86 1.64 25.04 15.26

574 5.85 38 11.44 7.31 2.13 1.61 10.18 8.76

8,069 9.63 317 19.08 11.55 3.16 1.53 17.60 12.87

470 6.44 19 12.30 8.08 1.55 1.50 14.43 7.79

1,396 9.85 349 21.01 12.30 1.72 1.42 25.79 25.53


COVER STORY Peter Lynch

The Lynch filterSlow GGrowers: These are large

and mature companies notexpected to grow faster than theeconomy but at the same timeare regular dividend payers. InIndia, basic industries roughlytrail the GDP growth rate. Theseare not the type of stocks thatLynch liked

Stalwarts: These are largecompanies that are still com-pounding their earnings by atleast 13-12%. These firms pro-vide downward protection in badmarkets

Fast GGrowers: These are small-er, more aggressive companieswith annual earnings growth of20 to 25% a year. Lynch preferredthese companies to be in sectorsthat are not fast moving. This category was his favourite and hebet the biggest gains could bemade of these types of stocks butthey also carry along consider-able risk

Cyclicals: These we know.Steel, cement, aluminium, etc.The fortunes of companies likeSterlite, SAIL, Sesa Goa alldepend on how the global pricesfluctuate. Difficult to time whenthe cycle will turn.

Asset oopportunities:Companies that are essentiallywhat we call asset plays – withassets that outweigh their marketcapitalisation. (See WalterSchloss’ screen for more suchcompanies).

A return of 28 times in 13 years. That defines Peter Lynch’s achievement as the portfolio managerof the Fidelity Magellan Fund between 1977 and 1990. In India, he is known for his two verypopular books on investing: ‘One Up on Wall Street’ and ‘Beating the Street’.

‘Invest in what you know, says Peter Lynch. He believes an individual investoris more capable of making money from stocks than a fund manager because heis able to spot good investments in his day-to-day life before Wall Street. Sincemost people tend to become experts in certain fields, applying this basicprinciple helps individual investors find good undervalued stocks. His isessentially a bottom-up approach. Buy what you know is what he recommends’



COVER STORY

It is difficult to mechanise Lynch’s investingstrategies. Yet, from those lessons put in hisbooks his followers have put up a set of filtersthat provide a list of companies that fall under

what he looks out for. The following set of filters is provided by Harry

Domash, an MSN Money columnist.First, financials and service companies are elimi-

nated as they are not applicable here.GGrroowwtthh:: Companies with a high earnings growth butnot too high so that long term sustainability is a ques-tion (Jubilant Foodworks high growth momentum willcontinue how long is anybody’s guess). Therefore,annual EPS growth of between 20 and 30% is taken. DDeebbtt:: Too much debt is a bummer – any company willtell you today. So will Lynch. We eliminate companieswith too much debt. According to Lynch a D/E ratio of0.3 is normal. Anything above 1 is eliminated. Out gocompanies like L&T, Bharti and Ranbaxy.PPrriiccee:: Reasonably priced stocks are based on theirprice to earnings growth ratio. The stocks must havetheir current PE ratio (TTM) less than 1.75 times theircompounded annual earnings growth rate. Companieslike Nestle india, Prestige Estates get the boot.RReettuurrnnss:: Here we are looking for consistency in mar-gins. Only companies with a 5-year average pretaxmargin greater than 50% of their current margins areconsidered. Out go Aptech and Allcargo.OOvveerrllooookkeedd:: Now for companies that are not alreadyover-invested by large institutions: banks, FIIs andother domestic funds. According to Lynch, a low insti-tutional ownership may provide clues to findingundiscovered gems. Companies with institutionalownership greater than 35% are eliminated. ICRA,Lupin and Hero MotoCorp go.RReedd FFllaaggss:: Early warning signs like the accumulationof inventory are weeded out. Find companies withoutred flags. Lynch mentions one red flag in the accumu-lation of inventory. Companies that saw inventoryincrease beyond 10% were removed. A number ofpharma companies got eliminated on this count. Also,GSK Healthcare, Colgate, Emami and Marico – all pre-mium FMCG companies — all get booted out. Is thistelling us that things may not be as hunky-dory inFMCG land as we may believe them to be?

The screen resultsThe screen results in a list of companies that are rea-sonably priced with a high earnings growth rate.Sector-wise, pharmaceuticals, auto ancillaries andelectrical equipment come on top with more than onehits. Other boring industries that filter in includeglass, fertilizers, compressors and industries gas.

Among the highest earnings growth companies andthe ones that are non-cyclical include Bata India (30%),Sun Pharma and Godrej Consumer (29%) and Borosil(28%).

Surprisingly, a number of debt free companies makethe cut to the final screen. These include: Borosil, TataSponge Iron, NMDC, Honda Siel, Elgi Equipments, SunPharma, Divi’s and Bata India

Valuation wise, half the companies in this screentrade in their single digits trailing PE’s. Those withthe lowest trading multiples include Ganesh Housing,Munjal Showa, Jindal Polyfilms and Banco Products.Other debt free companies trading at single PE multi-ples include NMDC, Tata Sponge Iron and Honda Siel.

Sun Pharma and Divi’s Laboratories have beenamong some of the most consistent margin earnerswith 5-year average margins of 40 and 37%, respectively.

Institutional ownership is where things get interest-ing. Roughly half of the companies have institutionalownership in single digits. These include Honda Siel,Jamna Auto, Munjal Showa, Banco Products andBorosil.

Finally, screening for red flags as in inventoryturnover threw up a number of observations. Borosildoubled its inventory turnover compared to its previ-ous year. Banco Products was next with a 68%improvement in its turnover while Gujarat Gas andNMDC improved their ratios both by more than 50%.

So, while Peter Lynch’s philosophy may be tough toquantify, yet, weeding out companies on the basis ofcharacteristics he likes and those he doesn’t, producesan interesting starting point to further research. Morethan anything, following Lynch’s mental processeswill improve anybody’s investing results. For those ofyou who haven’t already read Lynch’s books, dropeverything and get yourself an education on investingfrom one of the best stock pickers ever. WI


Gujarat Gas Company

NMDC

Munjal Showa

Borosil Glass Works

Mangalore Chem & Fertilizers

Jindal Poly Films

Tata Sponge Iron

Banco Products

Jamna Auto Inds.

Godrej Consumer Products

Honda Siel Power Products

Elgi Equipments

Carborundum Universal

Sun Pharmaceutical Inds.

HSIL

Ramco Industries

Bata India

Cadila Healthcare

DiviS Laboratories

Bharat Heavy Electricals

Ganesh Housing Corpn.

Insecticides

Neyveli Lignite Corpn.

Industrial Gas

Mining

Auto Ancillary

Glass

Fertilizers

Packaging

Steel

Auto Ancillary

Auto Ancillary

FMCG

Electric Equipment

Compressors

Abrasives

Pharma

Sanitaryware

Cement

Leather

Pharma

Pharma

Electric Equipment

Construction

Pesticides

Power

Company Name Market cap Price Institutional Debt- 5Y Avg pre- Inventory EPS CAGR-Industry (` cr) (`) TTM PE holdings (%) equity tax margin (%) increase (%) 5Y (%) PEG

Employing Lynch’s bottom-up approach

COVER STORY

3,884 303 14.58 23.85 0.32 17.29 57.63 21.97 0.66

65,735 166 9.05 9.02 - 87.90 53.49 25.65 0.35

325 81 4.84 1.99 0.16 3.88 13.54 20.90 0.23

338 881 10.40 9.75 - 132.21 97.37 27.66 0.38

523 44 7.63 4.63 0.93 3.35 19.87 20.05 0.38

733 170 5.60 7.46 0.25 15.78 19.19 21.41 0.26

460 297 6.08 14.59 - 23.05 19.88 28.94 0.21

459 64 6.00 7.46 0.44 15.67 68.72 22.07 0.27

562 142 12.43 0.10 0.85 2.84 16.80 26.41 0.47

19,200 564 26.42 27.08 0.56 16.72 9.77 28.50 0.93

454 447 8.79 0.04 0.01 10.01 13.33 24.36 0.36

1,246 79 16.49 13.54 0.02 11.78 8.19 20.64 0.80

2,796 149 12.75 30.24 0.36 15.41 10.65 28.72 0.44

59,991 579 23.19 25.49 0.02 40.46 14.10 28.76 0.81

929 141 9.91 22.69 0.83 8.22 10.28 22.90 0.43

416 48 5.42 6.60 0.41 11.02 11.26 22.49 0.24

5,276 818 34.60 31.14 0.03 12.37 14.59 29.98 1.15

14,870 726 22.79 16.75 0.80 14.95 8.79 21.60 1.06

12,355 931 23.17 26.95 0.03 37.38 19.86 22.78 1.02

53,688 219 7.58 26.33 0.31 19.45 7.28 23.86 0.32

219 67 4.82 23.61 0.52 54.85 27.87 25.68 0.19

515 403 15.60 5.92 0.85 8.08 5.88 23.54 0.66

13,531 81 9.59 4.83 0.48 39.90 0.09 20.02 0.48


ICreating Wealth

nvesting in stocks can be emotionally difficult, because it means one has tobe actively involved to generate high returns, earn profits and get an egoboost out of the same. When the markets are on the rise, investing in stockscan be easy, because nine out of ten turn out winners. The real challengeone faces over market cycles is in selecting stocks that can turn into win-ners. Wealth Insight magazine is for thinking investors. It is not for thoseseeking stock tip or recommendations. It is for those investors who look forreason behind the method, which is demonstrated and articulated.In every issue, we run stock screens based on different investment crite-

ria which suit the needs of different investors. For instance, bluechips arelarge cap companies that are steady, discount to book value stocks are rela-tively undervalued, stocks with growth at reasonable price work in allkinds of markets and high dividend yield stocks cushion against volatilitybesides generating regular tax free income.Like in life, even in stock markets a lot happens over a year. In the past

one year, the Sensex is down 3 per cent. FIIs have invested `41,000 crore anddomestic institutions have withdrawn `8,700 crores. In the same period wehave witnessed fears posed in the Eurozone, a marginal recovery in theglobal equity markets and now India facing a ratings downgrade. What hasnot changed through all of this noise is our persistence to relentlessly worktowards making this magazine a product that stands the test of times tak-ing into account the changing scenarios.Since our last anniversary issuewe have featured 46 stocks, which include

16 large- andmid-cap stocks each and 14 small-cap stocks. These stocksmakethe cut only after passing through our stock screen filter. To check anddemonstrate our stock picking skills, we evaluated the performance of these46 stocks. If one had invested `10,000 in each of these 46 stocks, a net invest-ment of `4.6 lakh; it would be worth `4.88 lakh today which is an IRR of 9.17per cent. Compare the performance of this set with the Sensex and theresults are stark. Investing a similar sum in the Sensex would have resultedin capital erosion to `4.56 lakh with a negative IRR of 0.97 per cent.Did all the 46 stocks suggestion work? No. It did not and it cannot. Stock

markets factor in several factors, which need to be reviewed continuously.It is for this reason that you will not find 46 stocks but 39 of them in the fol-lowing pages. Some, no more pass our tests and filters like BrigadeEnterprises, Peninsula Land, Graphite India, Transformers & Rectifier,Gabriel India, Rural Electrification Corporation and Gujarat State PetronetLtd which is facing tariff related regulatory problems. What you can gainby investing in these stocks is the insight we bring to build wealth.

OURPICKS


OURPICKS

Asian Paints has the top spot in deco-rative paints and also comes a closesecond in industrial coatings. Thebiggest network of dealers and aclever advertising campaign over theyears have led to the highest recall forAsian Paints’ brands. Technologysupport from PPG Industries andacquisition of Berger Internationalin 2002 has given it a seamless accessto international market, translatinginto strong volume growth.

� Given its dominance and growing capacity, the stockis still poised to go a long way despite expensivevaluations. Accumulate on dips and corrections

Current Growth* Average#

15.4%

9.5%

46.9%

35.6%

21.3%

29.2%

37,288

9,632

1,021

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 37.7Median P/E 28.1

17.3As on Jun 20, 2012

39.1

Key FinancialsRecommended in July’ 11 issue

Recommended in July’ 11 issue


Valuations (5-year snapshot)

*CAGR FY07-12 #Avg FY08-12

Paints Recommended `2,950

PEG 1.29

`3,887 31.8Price today Gain (%)

(`cr)

Bosch is the leading supplier oftechnology and services to automo-tive and industrial sector. It has astrong, diversified and near monop-olistic product portfolio and hasannounced an investment of `2,200crore for expansion plans at itsNashik, Jaipur and Ahmedabadfacilities. It expects the overall auto-motive industry to post strongergrowth in the first half of CY12 ascompared to the second half.

� The company is likely to benefit from the growingdemand for commercial vehicles and tractors


21.9%

12.4%

23.1%

14%

15.8%

23%

28,078

8,213

1,184

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 23.7

Median P/E 22.4

13.5As on Jun 20, 2012

36.5

Key Financials



Auto Ancillary Recommended `6,927

PEG 1.03


(`cr)

Colgate-Palmolive rules the Indianoral care segment with more than 50per cent of market share. Going for-ward, there is still a huge scope forgrowth as only 64 per cent of thepopulation in India uses toothpaste.CCoonncceerrnn:: Domestic competitors aregiving Colgate a run for its money inrural areas with their low-pricedvariants. Higher advertising costshave also put pressure on the prof-itability margins.

� With distribution reach of 94% in rural areas and97% in urban areas and the consumer loyalty to thebrand, the company will enjoy a dominant position


21.4%

16.3%

117.1%

25.2%

15.2%

22.8%

15,141

2,624

446

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 33.9

Median P/E 26.1

19.4As on Jun 20, 2012

38.5

Key Financials



Household & Personal Products Recommended `914

PEG 1.49


(`cr)

Asian Paints

Bosch

Colgate-Palmolive


OUR PICKS

CRISIL will be acquiring 100 per centstake in Coalition, a high-end analyt-ics company headquartered in UK.The acquisition is expected toimprove the overall return on equityof the company. The company hasbeen doing buyback in the last twoyears aided by healthy cash position.However, due to significant cash out-flow to materialise the aforemen-tioned deal, likelihood of any buy-back in CY12 or CY13 looks grim.

� CRISIL’s strong and highly profitable positions inestablished and growing businesses, and plans toleverage these will deliver further growth


39%

27.2%

44.3%

25.2%

21.6%

25.6%

7,543

859

217

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 34.7

Median P/E 23.3

10.3As on Jun 20, 2012 ^Adjusted for Stock Split

42.6

Key Financials



Ratings Recommended `683

PEG 1.36


(`cr)

This manufacturer of medium-to-high HP range of diesel engines isplanning to set up six facilities inMaharashtra to cater to its growingbusiness demands. The companyexpects to increase its market sharepost emission norm changes as mostof the competitors will have to pro-cure majority of their componentsfrom outside the country and success-fully integrate them, unlikeCummins, giving it a cost advantage.

� The company expects to benefit from its Phaltanexpansion which should cater to its growingbusiness demands from FY12


18.7%

12.6%

31.1%

12.9%

16.8%

19.6%

11,656

4,052

591

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 19.7

Median P/E 21.2

7.6As on Jun 20, 2012 ^Adjusted for BonusSplit

34.9

Key Financials



Diesel Engines Recommended `471

PEG 1.01

`421 -10.8Price today Loss (%)

(`cr)

Excide Industry’s competitiveadvantage arises from its strongbrand, wide distribution reach andin-housing sourcing of key inputlead. The company plans to increaseits capacity for two-wheeler batter-ies from 10 million in FY11 to 21 mil-lion by the end of this financial year.CCoonncceerrnn:: Slower growth in industri-al battery segment, rising raw mate-rial costs and losses in life insurancebusiness through ING Vysya.

� The pricing power due to its brand loyalty and theability to build custom designed batteriescommands its growth


15.7%

8.8%

35.4%

26.8%

19.4%

24.1%

11,411

5,319

465

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 25.6

Median P/E 26.9

14.0As on Jun 20, 2012

100.8

Key Financials



Auto Ancillary Recommended `149

PEG 1.06


(`cr)




Exide Industries

Cummins

CRISIL


OUR PICKS

In this era of fierce competition, ITCstands tall with over 85 per cent market share and has the most pow-erful distribution network coveringmore than 20 lakh retail outlets. Itsmoat gets further enhanced due togovernment’s reluctance to allowforeign players from setting up man-ufacturing plants in India. It is fair-ly diversified too with leadingbrands in FMCG, paper and hotelssegments.

� ITC is foraying into sub-65mm cigarette categoryto take advantage of tax differential of 40%between the 64-mm and the 69-mm cigarettes


25.2%

15.6%

30.3%

27%

15.6%

17.9%

1,92,529

26,180

6,322

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 30.8

Median P/E 27.8

17.8As on Jun 20, 2012

35.3

Key Financials



Cigarettes/Tobacco Recommended `185

PEG 1.72

`246 33.1Price today Gain (%)

(`cr)

Larsen & Toubro’s sheer scale andtechnological prowess endows itwith a moat that rivals find hard tobreach. A well-diversified orderbook of `1.46 trillion which is nearlythree times its FY12 revenue givesboth visibility and room for revenuegrowth in the next 18-24 months.Having weathered many storms,today L&T is a force to reckon within the engineering and infrastruc-ture space.

� Rate cycle reversal, pick-up in infrastructurespending and revival in power sector are all bound tosupport growth


17.9%

9.2%

27.9%

7.4%

25.7%

15.6%

82,226

64,313

4,682

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 17.5

Median P/E 23.3

13.1As on Jun 20, 2012

58.6

Key Financials



Engineering - Construction Recommended `1,653

PEG 1.13

`1,342 -18.8Price today Loss (%)

(`cr)

Nestle’s flagship brand, Maggi, has 88per cent market share in the instantnoodles category and other productssuch as Milkmaid, Cerelac, Milk,Curd, Lactogen, Everyday, MaggiSauce and Nescafe, too have carved aniche for themselves and are all cate-gory leaders. The company’s babyproducts control 85 per cent marketshare while Nescafe has a 41 per centshare in India. RoE in the past fiveyears has averaged at 110 per cent.

� With a planned capex of `2,000 crore, themanagement expects to double the capacity,boost R&D and drive growth further


19.7%

12.2%

110.2%

31.1%

20.8%

23.9%

44,226

7,728

982

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 45.1

Median P/E 37.9

23.8As on Jun 20, 2012

53.2

Key Financials



Consumer Food Recommended `3,914

PEG 1.88


(`cr)




Nestle

ITC

Larsen & Toubro


OUR PICKS

NMDC aims to ramp up its produc-tion capacity to 40 million tonnes byFY14–15 through increased explo-ration of its existing mines and devel-opment of new ones. It also intends todiversify its operations by movingdownstream through establishingsteel and pellet plants. Strong balancesheet, presence in sellers market(iron ore), low cost production, high-grade mines, long mine life and com-pelling valuations are many plusses.

� With a cash and bank balance of `17,228 crore(FY11), the company could acquire more miningassets overseas and diversify its reach


86.6%

56.5%

40.7%

18.9%

21.9%

25.6%

68,966

11,261

7,265

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 9.5

Median P/E 23.7

7.4As on Jun 20, 2012

84.9

Key Financials



Mining & Minerals Recommended `257

PEG 0.37


(`cr)

Pidilite Industries is a leading man-ufacturer of speciality chemicals,producing adhesives, sealants, con-struction and paint chemicals, auto-motive chemicals, art materials andorganic pigments. The company’smajor brands such as Fevicol,Fevikwik and Dr. Fixit have becomehousehold names now. Strong pric-ing power, innovative products andno near competitor has created amoat for it.

� The company is well placed to tap the opportunitycreated with growing demand for fast movingconsumer goods on account of rising income levels


15.1%

9.1%

27.8%

21.3%

20.1%

23.7%

8,138

3,110

323

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 25.1

Median P/E 24.3

11.6As on Jun 20, 2012

46.5

Key Financials



Chemicals Recommended `157

PEG 1.06


(`cr)

A strong brand recall and an attrac-tive positioning in India’s consump-tion story cement the moat carvedby Titan Industries. Its brandTanishq is the market leader inbranded jewellery segment with anestimated size of `90,000 crore inFY10. It is also the leading watch-maker in India through brands likeTitan, Sonata and Fastrack with 45per cent value share in the watchmarket.

� Rising sales of diamonds under the brand Zoyaand entry into eye wear will be the significantgrowth drivers for the company


8.7%

5.2%

39.9%

29.8%

33.4%

40.1%

19,598

8,848

602

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 32.6

Median P/E 40.5

19.6As on Jun 20, 2012

78.0

Key Financials



Watches & Accessories Recommended `214

PEG 0.81


(`cr)




Titan Industries

Pidilite Industries

NMDC


OUR PICKS

Ashiana Housing Ltd. follows a dif-ferentiated business model which isbased on profit-sharing with landowners – and it has paid off well. Itsfocus on non-metros, in both grouphousing as well as niche segment ofretirement homes, has contributedto the excellent growth. Return onequity has averaged 41 per cent dur-ing FY07-11 and revenue visibilitycomes from its estimated saleablearea of 79.20 lakh sq ft.

� Ashiana is a paradox in otherwise debt-laden andslowing Indian real estate industry


35.8%

29%

41.5%

25.4%

35.7%

49.1%

312

235

70

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 4.5

Median P/E 5.7

1.0As on Jun 20, 2012

41.3

Key Financials



Construction - Real Estate Recommended `149

PEG 0.09


(`cr)

The company has significant marketshare in the fields of cardiovascular,diabetology, asthma, pediatrics andother similar therapy segments. In abid to tap the vast patent expiries,Lupin plans to launch around 120products in US over the next threeyears. These launches will be in thearea of oral contraceptives, opthal-mology, controlled release etc. It isalso looking for larger acquisitions inBrazil, Mexico and Turkey.

� The company has strong earnings momentumdriven by strong product flows for the US marketand steady scale-up in other geographies

Lupin


21.1%

14.2%

36.4%

33.5%

28.2%

23.5%

23,482

6,960

888

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 27.1

Median P/E 20.5

8.6As on Jun 20, 2012

29.1

Key Financials



Pharmaceuticals & Drugs Recommended `462

PEG 1.15


(`cr)

By virtue of operating and capitalleverage and strong recoveries, Bankof Baroda has been able to improveits RoE from an average of around 14per cent in FY05-09 to 20 per cent plusin FY09-11. It expects a strong recov-ery and fee-based income with agrowth of 20-21 per cent next year.CCoonncceerrnn:: BoB’s rating, along with itsNew Zealand subsidiary, has been cutto negative by Fitch. This could makeoverseas borrowings costlier.

� The bank’s well capitalised balance sheet androbust business model would help sustain itsconsistent performance in the coming years


2.39%

1.47%

20%

23.2%

26.7%

37.4%

27,954

30,488

5,216

Market cap

Sales

Net Profit

NIM

NPA

ROE

Current 5.3

Median P/E 7.6

3.5As on Jun 20, 2012

15.8

Key Financials



Bank - Public Recommended `757

PEG 0.14


(`cr)

Recommended in August’ 11 issue

Recommended in August’ 11 issue

Recommended in September’ 11 issue

Bank of Baroda

Ashiana Housing


OUR PICKS

Castrol India Ltd (CIL), the second-largest player in the Indian lubrica-tion industry, has made its way froma modest 6 per cent market share in1993 to a commanding 20 per centnow. With majority stake held by BP,CIL has held its own despite fiercepressure from PSUs such as HPCL,BPCL and IOCL.CCoonncceerrnn:: Competitive nature of theindustry and new generation truckswhich need less-frequent refills.

� A six-year sponsorship of FIFA World Cup and risingFII’s stake signifies its global recognition. The stockis trading at par with the industry average


20%

12.5%

72.9%

29.7%

10.6%

23.3%

12,485

3,013

467

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 26.7

Median P/E 20.0

11.0As on Jun 20, 2012

29.3

Key Financials



Lubricants Recommended `488

PEG 1.15


(`cr)

Tata Coffee has presence throughoutthe value chain of coffee making. Itssubsidiary Eight O’ Clock is the mar-ket leader and accounts for 67 percent of the total volume in the USretail coffee market. It markets coffeedirectly under brands like ‘Tata Cafe’and ‘Tata Kapi’ and also markets thetea brand ‘Coorg Tea’. Exports formmore than 85 per cent of the consoli-dated revenue which stands to benefitfrom depreciating rupee.

� Tata coffee supplies coffee beans to Starbucks inAsian markets and Barista for its entire range ofofferings


17.9%

5.2%

14.8%

25.8%

15.4%

20.9%

1,736

1,529

84

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 21.4

Median P/E 19.5

9.1As on Jun 20, 2012

39.1

Key Financials



Tea/Coffee Recommended `731

PEG 1.02


(`cr)

Zee Entertainment has a bouquet of12 channels beaming into Indianhomes. Enjoying a market share of17 per cent, Zee Ent. looks promisingas strong growth in subscriptionrevenue is expected to continue withmandatory digitisation. It is alsorenegotiating DTH contracts withDish TV starting Q1FY13. Currently,the company has a clean debt-freebalance sheet with cash and invest-ments of over `1,128 crore.

� Despite weakness in ad spend environment, thecompany’s buy-back programme is expected toprovide support


31.6%

22.3%

15.5%

0.3%

14.9%

19.4%

12,872

3,041

591

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 21.8

Median P/E 21.2

7.6As on Jun 20, 2012

58.3

Key Financials



TV Broadcasting Recommended `123

PEG 1.13


(`cr)




Zee Entertainment

Tata coffee

Castrol


OUR PICKS

Torrent Power is an integrated play-er that both produces and distrib-utes power. India’s per capita con-sumption of electricity is onlyaround 715 units against global aver-age of 2,600 units and the expecta-tion that India will add about 55,000MW capacity in the 12th five-yearplan are the key growth drivers.CCoonncceerrnnss:: Dire financial conditionof state electricity boards and risingcoal prices.

� With power as India’s infrastructure priority, the stockis a good long term bet. It can potentially leverageupon the increasing privatisation of the power sector


23.1%

10.2%

14.2%

23%

39.8%

76.7%

8,728

7,446

1,237

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 7.0

Median P/E 16.5

6.9As on Jun 20, 2012

164.9

Key Financials



Power generation/distribution Recommended `212

PEG 0.09


(`cr)

Power Grid has a monopoly overlong-distance high voltage powertransmission in the country. With acapacity of over 80,000 km (length ofcircuits in km), the company carriesaround 55 per cent of India’s powersupply. It is mandated to earn a fixedRoE of 15.5 per cent and thus affordsearning visibilty. Verticals like tele-com and consulting, whose returnsare not regulated, help enhance itsreturns.

� A planned capex of `1 lakh crore for the 12th fiveyear plan (`20,000 crore for FY13) fortransmission jobs will drive growth further

Power Grid


100.2%

30.4%

12.8%

-

22.8%

21.5%

50,302

10,035

3,255

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 15.2

Median P/E 21.6

14.4As on Jun 20, 2012

55.4

Key Financials



Power generation/distribution Recommended `102

PEG 0.71


(`cr)

Formerly a PSU, acquired by TCS in2001, CMC is an IT company thatleverages TCS’ brand, sales capa-bilit, and IT expertise to win proj-ects. It has now gradually moved onfrom the low margin business ofhardware to the high margin valueadded business.CCoonncceerrnn:: With 50 per cent revenuecoming from the international mar-ket, these are testing times for it dueto the gloomy economic scenario.

� Already in control of projects like Aadhar UID, StateWAN and education & training the company expectsto fetch more such state government projects


17.3%

12.9%

29.8%

8.5%

6.4%

17%

2,589

1,469

152

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 17.1

Median P/E 15.5

3.8As on Jun 20, 2012

28.9

Key Financials



IT - Hardware Recommended `863

PEG 1.00


(`cr)



Recommended in October’ 11 issue

CMC

Torrent Power


OUR PICKS

Zylog Systems is expected to main-tain its focus on the BFSI and telecomverticals (accounting for 46 per centrevenue in FY12) as these segmentsare likely to sustain their growthmomentum over the medium term.CCoonncceerrnn::Key concerns lie in subdueddemand recovery in the target mar-kets and continued trend in vendorconsolidation, exerting pressure onnew business generation for mid-tierservice providers.

� Acquisition of Brainhunter in Canada has enabledthe company to de-couple its high dependence onUS markets


17.1%

11.2%

24.2%

-

41%

30.2%

1,027

2,273

205

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 5.0

Median P/E 5.0

1.3As on Jun 20, 2012

14.8

Key Financials



IT - Software Recommended `431

PEG 0.17


(`cr)

The company continues to gain andenjoy market leadership across allthree formats of coils, aerosols andelectrics. Its efforts to take the opera-tions overseas has resulted in severalacquisitions of late. The consolidateddebt to equity ratio reduced to 0.6times in FY12 from 1.2 times in FY11. CCoonncceerrnn:: The stock is a bit overpricedand trades at a premium of around 15per cent to its median PE (consolidat-ed) of 22.5.

� Acquisitions of 51% stake in Darling Group Holdingand 60% stake in Cosmetica Nacional are expectedto strengthen the company’s position


19.3%

14%

76.1%

44.2%

38.5%

39.1%

18,924

4,851

751

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 26.0

Median P/E 22.5

14.6As on Jun 20, 2012

37.8

Key Financials



Household & Personal care Recommended `396

PEG 0.67


(`cr)

TCS has exhibited a much better rev-enue growth profile over the past fewquarters and topline growth has beenaccompanied by improved profitabili-ty. The company has partnered withseveral global companies to drive out-sourcing of life sciences and health-care services. Its focus towards non-linear revenues is expected to drivegrowth but currently the stock’s highprice-earnings to growth ratio of 1.2could prove to be an expensive deal.

� Growth will be led by information technologyinfrastructure services, business process outsourcingand assurance services


28.9%

22.2%

42%

16.9%

21.2%

19.9%

2,45,054

48,894

10,523

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 23.5

Median P/E 21.7

8.4As on Jun 20, 2012

28.9

Key Financials



IT - Software Recommended `1,049

PEG 1.19


(`cr)

Recommended in October’ 11 issue

Recommended in November’ 11 issue

Recommended in November’ 11 issue

TCS

Godrej Consumer

Zylog Systems


OUR PICKS

As the NCR has grown, so have thenumber of vehicles (17,000 vehiclesper day in year 2000 to 1,02,394 vehi-cles per day now) on the DND flyway.A guaranteed IRR of 20 per cent isalso encouraging. The recent toll hikeof 10 per cent will also be reflected inthis FY13 earnings; it is also expectedto become debt free by the end of it,boosting EPS further. A dividend ofRe 1 in FY12, which translates into ayield of 4 per cent, looks promising.

� With the opening of Yamuna-expresswayconnecting Delhi-Agra, the traffic on DND flyway isbound to increase


75.4%

36.6%

7.9%

-1.3%

15%

32.7%

480

95

46

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 10.6

Median P/E 20.3

9.4As on Jun 20, 2012

137.0

Key Financials



Engineering - Construction Recommended `23

PEG 0.32


(`cr)

Over the past eight months, shareprice of the company rose around 71per cent driven by the optimism sur-rounding the strong performance ofJaguar Land Rover. Sales for JLRmodels remain strong in China anddealers command a significant mar-gin, which is expected to continue.CCoonncceerrnn:: Commercial vehicle makerssuch as Eicher Motors and AsiaMotor Works have gained significantmarket share in the past few years.

� JLR’s performance will continue to drive thecompany’s stock as it contributes around 65% ofits revenues and nearly 95% of its profits

Tata Motors


10.2%

3.6%

26%

20.2%

38.7%

43.8%

66,496

1,64,855

13,574

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 4.9

Median P/E 7.2

0.0As on Jun 20, 2012

60.2

Key Financials



Automobiles-Trucks/LCVs Recommended `173

PEG 0.11


(`cr)

The company plans to almost doubleits transmission capacity in the nexttwo years for a capex of `30,000crore. The substantial capex slatedahead for transmission pipelinescould see maximum capitalisationon incremental gas productiondomestically.CCoonncceerrnn:: Stagnant production at theKG basin and higher LNG prices. Acap on the gas marketing marginscould prove risky for the company.

� Cooking fuel reforms and increase intransportation volumes through Dabhol terminalcould act as a key growth driver for the company


22%

12.6%

20.8%

11.2%

21.6%

11.7%

43,001

44,058

4,401

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 9.7

Median P/E 13.7

8.4As on Jun 20, 2012

20.1

Key Financials



Gas Transmission/Marketing Recommended `389

PEG 0.82


(`cr)

Recommended in December’ 11 issue

Recommended in December’ 11 issue

Recommended in January’ 12 issue

GAIL

Noida Toll


OUR PICKS

Mahindra Lifespaces has recentlystarted getting a few clearances forits forthcoming projects and a cou-ple of new launches are expected inthe near term.CCoonncceerrnn:: Impact on demand due todirect tax code (DTC) has been anoverhang on Mahindra World City’sportfolio, comprising 53 per cent ofinvested capital, since DTC seeks toremove some of the existing incen-tives benefiting the SEZ occupants.

� Focus on upper-middle and middle class housingand plans to enter affordable housing should result instrong pent-up demand over the next few quarters


33%

19.4%

8.1%

-10.1%

26.5%

47.7%

1,271

701

129

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 10.7

Median P/E 21.1

5.2As on Jun 20, 2012

194.7

Key Financials



Construction - Real Estate Recommended `245

PEG 0.22


(`cr)

MRF enjoys its position as the mar-ket leader with a 25 per cent marketshare. It recorded a turnover of over`12,000 crore in FY12 and expectsthat replacement demand will con-tinue to keep its drive smooth even ifOEM moderates. Also, expected pickup in radialisation in commercialtyres is likely to boost margins.CCoonncceerrnn:: Valuations have alreadyfactored in the key positives. Waitfor a correction.

� MRF’s seventh plant spread over 200 acres becameoperational in April’12 with an investment of `900crore. All existing six plants function at full capacity


9.4%

4%

21.5%

21.6%

21.4%

50.8%

4,320

11,053

690

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 6.3

Median P/E 8.8

4.4As on Jun 20, 2012

25.8

Key Financials



Tyres & Allied `6,879

PEG 0.12


(`cr)

The clear giveaway of a finance com-pany’s health are its assets undermanagement which, in BajajFinance’s case, stand at `13,107 crore,while net NPAs are at 0.25 per cent.Moreover, a low-cost diversified bor-rowing, currently at 9.5 per cent, isjust the right ingredient for healthyNIMs. BFL is also adequately capi-talised with tier-II capital standing at17.3 per cent, compared to the man-dated 12 per cent by the RBI.

� Nine product lines from 2&3 wheeler to mortgagefinancing provides the desired diversification and a4000+ strong dealer network distribution


46.9%

11.2%

11.4%

22%

43.7%

53.5%

3,560

2,163

406

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 8.8

Median P/E 15.4

5.8As on Jun 20, 2012

59.2

Key Financials



Finance - NBFC Recommended `806

PEG 0.16


(`cr)



Recommended in March’ 12 issue

Recommended

Bajaj Finance

MRF

Mahindra Lifespace


OUR PICKS

The company manufactures auto-mated external defibrillator (AED)and equipments for peripheral arte-rial disease. Its subsidiary, CSC, hasa 27 per cent market share in the USin the AED segment, which trans-lates into a 10 per cent market shareglobally. Its diversified product mix(with over 168 patents and 53 pend-ing patent applications in over 100countries) is spread across invasiveand non-invasive segments.

� With business interest in developed markets as wellas emerging markets such as Brazil, Russia, Indiaand China, the company has a wide global reach


33.1%

26.2%

43.5%

11.2%

57.1%

50.9%

3,556

2,357

573

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 6.2

Median P/E 15.4

6.1As on Jun 20, 2012 ^Adjusted for BonusSplit

49.3

Key Financials



Medical accessories Recommended `221

PEG 0.12


(`cr)

Shriram Transport FinanceCompany Ltd. is a market leaderwith `40,213 crore of assets undermanagement and a stable asset quali-ty of 2.8 per cent Gross NPA and 0.4per cent Net NPA. Access to low costfunds has helped it to clock an NIM of7.51 per cent in FY12. Moreover, 75 percent of promoter’s stake is transferedto the employee trust.CCoonncceerrnn:: Fear of rising NPAs andcontracting net margins.

� Available at mouth-watering levels, STFC is amust have for your portfolio and is one the bestbet among NBFCs

Shriram Transport


78.6%

19.3%

27.6%

31.4%

33.4%

45.9%

11,389

5,889

1,257

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 8.7

Median P/E 13.5

6.1As on Jun 20, 2012

30.9

Key Financials



Finance - NBFC Recommended `581

PEG 0.19


(`cr)

Capacity expansion in its Vadodaraplant will be over by the end of 2012.As a result, not more than 25 per centof products sold in FY13 are expectedto be imported from China. This willalso reduce working capital cycle forthe company since imported productsfrom China have a working capitalcycle of around 60 days compared to30 days for manufactured products. Ithas targetted overall sales growth of30 per cent in FY13.

� The company expects significant expansion of itsdistribution network in North India with the openingof 110 new PSK franchise stores during the year


12.4%

8.5%

43.6%

88.2%

31.5%

57.3%

3,419

1,103

113

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 30.2

Median P/E 12.8

4.6As on Jun 20, 2012

39.8

Key Financials



Consumer Durables Recommended `2,644

PEG 0.53


(`cr)

Recommended in March’ 12 issue

Recommended in April’ 12 issue

Recommended in April’ 12 issue

TTK Prestige

Opto Circuits


OUR PICKS

Over the past five years, Bata Indiahas completely repositioned itself byopening large format stores, renovat-ing the existing ones and closingdown which were small and unviable. The company has decided to move upthe value chain and give priority topremium products in each categorythan focus on volume growth. CCoonncceerrnn:: Its aggressive plans exertpressure on working capital and freecash flows.

� With the launch of Footin, a brand that offersfashionable footwear and accessories for youngadults, Bata expects to attract more customers


13.9%

7.9%

30.7%

37.5%

15.8%

30%

5,267

1,636

152

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 34.5

Median P/E 19.8

7.8As on Jun 20, 2012

38.9

Key Financials



Leather Recommended `845

PEG 1.15


(`cr)

GSK Consumer’s stock is trading at apremium of around 17 per cent to its5-year median PE of 24.9. Its dividendpayout ratio has averaged around 40per cent over ten years and it is one ofthe strongest cash generating compa-nies in the FMCG space with 10-yearCAGR of 28.3 per cent. The gapbetween the current and the medianPE has reduced since we had recom-mended but buy only when these val-uations reach a comfortable level.

� Focus on MFD portfolio premiumisation, enhanceddistribution capabilities and new launches shouldcontinue to foster healthy sales and earnings growth


20.3%

11.8%

29.6%

36.9%

19.1%

22.8%

10,944

2,789

377

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 29.1

Median P/E 24.9

11.2As on Jun 20, 2012

35.9

Key Financials



Consumer Food Recommended `2,763

PEG 1.27

`2,602 -5.8Price today Loss (%)

(`cr)

Swaraj Engines’ parent company,M&M, commands a market share of42 per cent in the farm equipment sec-tor which has brought to it the pric-ing power and brand equity. It is notonly debt free but also has cash andinvestments of over `100 per share. Itexpects to almost double its manufac-turing capacity this financial yearand the entire capex is being met withinternal accruals. Low productioncosts make its margins fairly healthy.

� Capacity addition to be significant growth driver forthe next two years. The stock offers growth potentialwith limited downside and a dividend yield of 2.5%


17.8%

10.4%

25.9%

18.6%

28.1%

28.9%

497

445

53

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 9.4

Median P/E 12.8

5.0As on Jun 20, 2012

33.3

Key Financials



Diesel Engines Recommended `395

PEG 0.33


(`cr)

Recommended in May’ 12 issue



GSK Consumer

Swaraj Engines

Bata India


OUR PICKS

Focus on select generics has rewardedAjanta Pharma with healthy marginswhereas entry into the regulated mar-kets of US and EU is likely to be thekey growth driver for the company.Ajanta also operates a US FDAapproved manufacturing facility atAurangabad. A debt equity ratio of 0.6will support its ambitious capex plansof `390 crore in the next two years andthe management expects to add `1,000crore to its topline by FY15.

� Owing to its entry into regulated markets, thestock has come into FII’s radar and the same isreflected as a steep rise in its share price


19.3%

8.8%

21.8%

45.3%

21.3%

39.3%

790

677

77

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 10.2

Median P/E 6.8

2.4As on Jun 20, 2012

11.3

Key Financials



Pharmaceuticals & Drugs Recommended `567

PEG 0.26


(`cr)

A leader in industrial gears with amarket share of 25 per cent, EleconEngineering Company’s currentorder backlog stands at `1,522 crorewhich provides a strong visibilityfor FY13. The company has strongtechnical tie ups with CKITConveyor Engineers, South Africaand Renk AG, Germany, to designand manufacture gearboxes for ver-tical rolling mills to be used incement and coal industry.

� The company is likely to benefit from increasedinvestments or revival of the industrial capex cycle insectors such as power, cement, mining and steel


15.8%

6.4%

27.8%

-19.8%

12.2%

4.9%

504

1,320

70

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 8.2

Median P/E 11.6

3.6As on Jun 20, 2012

49.6

Key Financials



Industrial Equipments Recommended `53

PEG 1.70


(`cr)

KPCL is into twin lines of manufac-turing and selling business whichincludes compression systems andtransmission products. The companyis venturing into roadrailer businessand is already the largest player inpackaging and distribution of CNGin India. CCoonncceerrnn:: Since its business nature isdirectly related to the performance ofthe economy, the current uncertaintymight not fade away anytime soon.

� With major clients from power and gas sector, thecompany has growth opportunities as this sector ison a growing spree in India


14.4%

8.7%

39.4%

-2.8%

13.5%

7.4%

565

667

62

Market cap

Sales

Net Profit

OPM

NPM

ROE

Current 9.1

Median P/E 12.6

4.0As on Jun 20, 2012

33.3

Key Financials



Engineering equipment Recommended `470

PEG 1.23


(`cr)

Recommended in June’ 12 issue



Kirloskar Pneumatic

Elecon Engineering

Ajanta Pharma

WORD OFMOUTH

I think thesemeasures will bring in

capital flows, though it maytake time. Companies take sometime utilising new provisions asthey have been just announced,

but these measures will haveimpact in the short-term and

flows will start coming in.C RANGARAJAN, Chairman, PMEAC, on the $5

billion G-Sec limit rise by the RBI.The Economic Times, June 26, 2012

A nationalsalvation governmentmust bring economicgrowth and reassure

Greeks the worst is over.ANTONIS SAMARAS, Conservative New

Democracy leaderReuters, June 17, 2012

Spain has notbeen rescued because itdoes need to be rescued.

Spain has the support of itsEuropean partners andEuropean institutions.

CRISTOBAL MONTORO, Minister of Finance andPublic Administrations, Spain.The Economic Times, June 20, 2012

While the rupeedepreciated in the August-

December period of last yeardue to global factors, the

depreciation from March till date isdue to both global as well as

domestic factors. The RBI’s policyintervention is only to smooth

volatility and steep movements andthis has worked for us till nowand we will continue with that.

DUVVURI SUBBARAO, RBI GovernorThe Economic Times, June 19, 2012

Partial decontrolhas to be done very

intelligently... so what I amhopeful for is that we will do

our professional partialdecontrol which is going to

shelter the consumers partly butalso allow a float to take place

from now on.KAUSHIK BASU, Chief economic advisor, Ministry

of Finance.Times of India, June 21, 2012


WI July2012

Documents

Transcript of WI July2012