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Manish Chokhani September 2004 1
The Mind of a Business Analyst
Applied Lessons for Investment Bankers and Research Analysts
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Agenda
Components of an average recommendation
What requires to be validated
First Principles of Financial Analysis
Valuation Principles
Valuation Shortcuts and Market Cycles
Business Analysis – Circle of Competence Approach
Macro Economic, Political and Social Factors
Buyer Characteristics and Compulsions
Slotting the Recommendation
Recap the Valuation
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An Average Recommendation
Here are the financials Past two years, next two years
Current business trajectory is good
This is the P/E , this is the EPS or something similarly cheap sounding
Here are some comparable valuations
Local, regional, global
Occasionally:
Chance to buy a good business…
Unique Promoter …
Great Shareholders/ Funds/Pvt Equity… Backing it
So Buy It
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What Needs to be Validated?
Validity of business financials Forecast Validity
Key Business Drivers
Any hidden liabilities/ subsidiaries / etc
Business Competitiveness
Macro factors at play Appropriate Valuation Tool
Relative validity
What else is attractive Decompose by Country / Sector / Mktcap / Promoter
What is driving the deal?
Why the deal? Why Now?
Who is the intermediary?
Whats in it for me?
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Understand the Business Drivers
VOLUME Most loved Consumer focussed UVG stories: eg CellPhones, Retail, Hosing Loans, Media or large
addressable markets globally like ITand pharma (buzz on BPO, Textiles…)
PRICE
Most loved Pricing Power stories: Brands, Oligopolies
Excitable Commodity swings: Cement, Metals…
EFFICIENCY
IMPROVING ASSET UTILISATION Usually Cyclicals – Autos, Engineering due to operating leverage
IMPROVING COST STRUCTURE/ ECONOMIES OF TECHNOLOGY Usually Engineering, PSUs, Conglomerates…
RESTRUCTURING
Catalysts such as Privatisation, M&A, Divestitures, Buybacks…
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Case Studies
Lets Examine Sustainable Valuations for
Cement
Autos
IT
Pharma
FMCG
Use 5 key measures that define peak valuations… Sales / G Block
W Cap / Sales
Sustainable or desirable OPM%
Capex requirements
Volume Growth Assumptions
Help us to decide what we lay out and what we get back…
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Now Lets Attempt a DCF
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Markets continuously discount all of the above…
Value multiple- Predictable- Sustainable- Scaleable
Use Bond YieldReciprocal(100/8)=12.5xas benchmark
V a l u e
Time
ROE :25%
ROE :
15%
8%Bonds
Cash
P/E=20x
P/E=12x
P/E=12x
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“Virility” Symbols (Towers, diversification/ M&A) Bad qlty of IPOs
Capex > near-future reqments
Interest rates spike. Huge Credit expansion
Retail euphoria
Shock/ Leaders in trouble
Understand Market Cycles – I
Ignored, stagnant Cheap valuations Negative press
SevereUndervaluation
Important commodities take off (Steel, Gold, etc.) Catalyst/ Regulatory (eg Privatisation, LT Cap
gains exemption) Easy Liquidity
Undervaluation
Capex/ IPO/ Credit cyclerevives
Asset & Cost inflation Tourism/ Media attention “Themes” emerge, New
Valuation “Paradigms”
Fair to Over valuation
Bubble
Sharp fall followed bypull back
“Left outers” jump in
Leadership narrows
Correction
Bear Phase
Bust
Symptoms of each hump deceptively similar -- It is theQUALITY which differs:
Eg high quality IPOs & Capex at “Reasonable”Valuation stage vs flood of bad IPOs & far-out-Capex
at Bubble stage
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Resulting in a Swing in Valuation Approaches
• Payback
• EV/EBIDTA• P/E• DCF
• Technical Charts
• Reflexivity• PE/G• Option Value
MomentumGARPValue
• Dividend Yield
• Price/BV• Replacement Cost
BEAR MARKET BULL MARKET BUBBLE MARKET
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Valuation Measures – CASH FLOW IS THE ONLY REALITY
DCF helps to make assumptions explicit;gives a good RANGE Use probability – don’t fudge the discount rate! Factor in uncertainties and risks Terminal Value is the key – Is all the value residing there? Wider the Optimistic-Pessimistic range – lower the valuation!
P/e = d/e / (k-g) P =d/(k-g)
d = dividend per share k = shareholder return expectation k = i + r + rp (inflation+real int+risk premium)
g = growth in dividend per share
Hence Importance of payouts and cash flows for better valuation
Close approximation of P/E to ROE
Other Methods are all variants for validation EVA – Economic Value Added - Excess return over WACC quantified EVA = ROIC – (IC x WACC) CFROI – Another smart way to do a DCF
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MARGIN OF SAFETY
Cash flow v/s Bond Valuations
Growth prospects
Gap between Perception and Reality
Knowledge v/s Popularity
Limited downside/ lots of upside
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UNDERSTAND “GOOD BUSINESSES”
THE CIRCLE OF COMPETENCE APPROACH
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BUSINESSES APPRAISAL
Think long and hard about cycles
Life cycles
Business cycles
Think about sustainability and sources of advantage
Think about external pressures on profitability
Where does this business fit on a profitability distribution?
The financial litmus tests
Think about management and the majority partner
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Think of Cycles!
Nature is cyclical, not linear!
Life Cycles
Business Cycles / Boom-Bust
Seasonality
Innovation / Schumpeter
Market Cycles
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LIFE CYCLE ANALYSIS
TIMETIME
S A
L E S
S A
L E S
SOFTWARESOFTWARE
JUTEJUTE
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BUSINESS CYCLES
INTERMEDIATESINTERMEDIATES
FMCG, SERVICESFMCG, SERVICES
CAPITAL GOODSCAPITAL GOODSCONSUMER DURABLESCONSUMER DURABLES
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COMMODITYCOMMODITY
EMERGING/EMERGING/SMALL SCALESMALL SCALE
SPECIALISED/SPECIALISED/OLIGOPOLIESOLIGOPOLIES
MONOPOLY/MONOPOLY/
CONSUMER FRANCHISECONSUMER FRANCHISE
SUSTABILITY OF ADVANTAGESUSTABILITY OF ADVANTAGE
MANYMANY
HIGHHIGHLOWLOWFEWFEW
S O U R C E S
O F A D V A N T A
G E
S O U R C E S
O F A D V A N T A
G E
BOSTON CONSULTING GROUP MATRIX
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PORTER’S 5 FORCE ANALYSIS
SUBSTITUTE PRODUCTSSUBSTITUTE PRODUCTS
NEW ENTRANTS/ IMPORTSNEW ENTRANTS/ IMPORTS
SUPPLIERSSUPPLIERS BUYERSBUYERSINTRA INDUSTRYINTRA INDUSTRY
RIVALRYRIVALRY
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PROFITABILITY DISTRIBUTION
ROIROI
BANKBANK
RATERATE
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THE FINANCIAL LITMUS
Superior BUSINESSES Low asset requirements
Low credit / inventory
Many clients/ economic goodwill
Defensible margins
Pricing power ( inflation + )
Sustainable growth
Free cash flows
Most other businesses
Capital intensive
Working capital intensive
Want premium valuation, do not deserve it
Likely to be cyclical valuations and themes
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Now lets talk Micro Focus
Costs
Capital Efficiency
People Issues
“Slack”
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Costs
Are you aware of implications of:
Inappropriate Amortisation
R&D
Technology
Marketing Requirements
Training ; Leadership!
UNIT COSTS/ measures
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0
100
200
300
400
1995 2003
0
3
6
9
12
Revenue (LHS) Labour Force (LHS)
Revenue/Person (RHS)
(%) (Rs.m)
Corporates have right-sized
Company Staff shed Period (Yrs) % of Labour Force
BHEL 20,000 7 30
Tata Motors 10,000 5 29
Mahindra & Mahindra 6,500 5 34
Bajaj Auto 7,800 6 37
Tisco 30,000 8 40
ACC 6,000 8 38
Right-sizing across sectors
Source: ENAM Research
Restructuring by Top 10 Corporates
1995 2003
Revenue (Rs bn) 900 2,750
Labour Force (nos) 420,000 335,000Revenue/Person (Rs m) 2.1 8.2
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Capital Efficiency
Are you well focussed on:
Asset Turns: Gross Block, Working Capital?
Lean Assets: Owned v/s Rented
Flexible Structures: Outsourcing
Impact of M&A, Restructuring?
People…
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P l I
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People Issues
How is the company managed?
Lifetime Employment?
How does it Hire? Train? Retain? Fire?
How does it build skills? LEADERS?
Are they Commandos? Soldiers? Mercenaries?
Succession Plans?
Empowerment?
F Mi C ifi f t
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Focus on Micro, Company specific factors
How is Product or Service Quality?
Germany/Japan/China v/s India, v/s competition
How is Cost & Capital Efficiency?
Frugality as a mindset v/s “professionally managed”
What are their Value Systems?
Sugar in the milk
How is their Service to the Customer ?
The “goodwill” earned
W t h O t f Hidd B b
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Watch Out for Hidden Bombs
Conflict of Interest Structures
Pvt Businesses
Inter Party relationships
Split Ownerships
Loans & Advances
Off balance Sheet Libailities
Unfunded Pensions
Litigations
Family Settlements
… and many more creative reasons why CAVEAT EMPTOR
CHOOSING “BUSINESS PARTNERS”
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CHOOSING “BUSINESS PARTNERS”
Integrity / track record
Ability (not just lucky)
Understanding of key issues
Ambition tempered by reality
Commonality of objectives
Orientation towards minority
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MACRO FACTORS TO BEAR IN MIND
Do you have Macro Pointers in Mind?
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Do you have Macro Pointers in Mind?
Do you have a point of view about:
Politics as it affects the business
Economics as it affects the business
Demographic Trends
What are Capital Markets Signalling?
Each powerful trend can have disruptive or tidal wave effects on any business
Politics
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Politics
Geo Politics affects addressable markets, terms of trade, cost of doingbusiness…
Effect of SAFTA, ASEAN, WTO/GATT
Risk Premium/Opportunity of Pakistan
Emerging US-India axis ; NAM, ML
Opportunities in “emerging” economies
Outcry against/trends favouring outsourcing
Outsourcing to India : Brewing Trouble
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Outsourcing to India : Brewing Trouble
Company Outsourcing for
IT Services
Infosys Goldman Sachs, Aetna, Northwestern Mutual, Am Ex, DHL, Verizon
Tata Consultancy GE, Honda, UBS, HSBC
Wipro Transco, HP- Compacq, Nortel, General Motors, Cisco, Sony
ITES
Mphasis BFL Citi Group, Acenture, Auto Zone, Capital One
Spectramind Dell, American Express, Capital One
Pharmaceuticals
Cipla Ivax, Watson Pharma, Eon Labs
Shashun Chemicals Eli Lily, GSK Pharma
Lupin Laboratories Apotex, APP, Watson Pharma
EngineeringBharat Forge Meritor, Caterpillar, Toyota, Ford, FAW (China)
Tata Motors Rover
Moser Baer Imation, BASF
Essel Propack P&G, Unilever, Colgate
Increasing FDI reflects “openness”
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Increasing FDI reflects openness
Early entrants
Cost Savings(Production Hubs)
GE, Citi IT, State Farm Amex, Bank Am
IBM, HP
Research Services Texas Instruments, GE
Recent entrants
JP Morgan, HSBC, Prudential Accenture, CGE&Y
Delphi Teva
Microsoft, Sun, Intel GSK, Pfizer, Eli Lily COVANCE
Likely entrants
BPOs in throngs Deloitte Consulting
Generic Pharma Cos
A number of CROs
Domestic MarketOpportunity
Coke, Pepsi Ford, Hyundai LG, Samsung Lafarge
Port of Singapore, P&O Morgan Stanley,
Templeton
McDonalds, Pizza Hut Honda, Toyota Nokia Michelin
Dubai Port, Maersk HSBC MF, Duestche MF Fidelity MF, ABN MF
Source: ENAM Research
Confident Indians going global
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Confident Indians going global
Large Groups
Tata -Tetley, Daewoo , Rover tie-up
RIL - FLAG undersea cable,Trevira (Polyester
firm in Germany)
Birlas - AV Cell (Canada), Copper mines (Aus),
Carbon Black (China) etc
Sterlite - Copper Mines in Australia, Listing on
LSE
ONGC - Stake in: Sakhalin oil fields (Russia),
GNOOC oil fields (Sudan)
Auto Parts Sundaram Fasteners - Gear casting business of
Dana Spicer (UK), Plant in China
Bharat Forge – Dana Corp Forging business
(UK), Forging business of CDP (Germany)
Pharma Wochardt-Esparma (Germany)
Ranbaxy- RPG Aventis (France)
Dr. Reddy’s - Meridian Healthcare
(UK),Trigenesis Therapeutics (USA)
Cadila – French operations of Alpharma (USA)
IT Wipro - Nervewire, Utilities consulting division
of AMS (USA)
HCL Tech - BT’s call centre (Ireland)
Others Asian Paints - Berger International (Singapore)
Essel Propack - Propack Holdings
(Switzerland),Arista Tubes (UK)
Moser Baer - Mmore International (Holland)
Atlas Cycle, Ajanta Clocks - Plants in China
Macro Economic Indicators
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Macro Economic Indicators
Global and local economic cycles
Capital costs
Interest rates, Currency rates, Inflation
Cost pressures: RMC, Tarriffs, etc
Social Costs / development
Competition is a given
Eg: Complete Reversal in India
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Eg: Complete Reversal in India
Forex reserves
Re. depreciation
Interest rates
External debt
External debt
Forex reserves
Source: RBI, CMIE
Interest rates & Re. depreciation
-6
-3
0
3
6
9
12
15
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
J u l - 0 4
10
11
12
13
14
15
16
17
Rupee/ US$ (LHS) Prime Lending Rate (RHS)
(%) (%)
0
20
40
60
80
100
96-97 97-98 98-99 99-00 00-01 2-Jan 3-Feb 0̀3-04
Foreign Exchange Reserves as % of external debt
External Debt (% of GDP)
(%)
-40
-20
0
20
40
60
9 4 - 9 5
9 5 - 9 6
9 6 - 9 7
9 7 - 9 8
9 8 - 9 9
9 9 - 0 0
0 0 - 0 1
0 1 - 0 2
0 2 - 0 3
0 3 - 0 4
020
40
60
80
100
120
Trade Balance (LHS) Invisibles (LHS)
Capital Receipts (LHS) Total Reserve (RHS)
(US$ bn) (US$ bn)
Soft interest rate bias nearing an end..
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Soft interest rate bias nearing an end..
Forex reserves at a peak
Source: Blloomberg, RBI, CMIE
Inflation making a comeback?Room to grow advances vs investments
Investment Deposit Ratio
35
40
45
50
J a n - 9 9
J u l - 9 9
J a n - 0 0
J u l - 0 0
J a n - 0 1
J u l - 0 1
J a n - 0 2
J u l - 0 2
J a n - 0 3
J u l - 0 3
J a n - 0 4
J u l - 0 4
Rupee volatility on the cards
-6
-3
0
3
6
9
12
15
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
J u l - 0 4
10
11
12
13
14
15
16
17
Rupee/ US$ (LHS) Prime Lending Rate (RHS)
(%) (%)
0
3
6
9
12
15
J a n - 9 5
J u l - 9 5
J a n - 9 6
J u l - 9 6
J a n - 9 7
J u l - 9 7
J a n - 9 8
J u l - 9 8
J a n - 9 9
J u l - 9 9
J a n - 0 0
J u l - 0 0
J a n - 0 1
J u l - 0 1
J a n - 0 2
J u l - 0 2
J a n - 0 3
J u l - 0 3
J a n - 0 4
J u l - 0 4
(%)
0
20,000
40,000
60,000
80,000
100,000
120,000
9 3 - 9 4
9 4 - 9 5
9 5 - 9 6
9 6 - 9 7
9 7 - 9 8
9 8 - 9 9
9 9 - 0 0
0 0 - 0 1
0 1 - 0 2
0 2 - 0 3
0 3 - 0 4
(US$m)
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US Interest Rates through cycles
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g y
Rising commodity prices reflect USD weakness
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g y p
Non-ferrous Metals Aluminium Aluminium Primary OP SPTLondon Metals Exchange Index
All Commodities
CRB All Commodity Index
Source: Bloomberg
Gold
Gold AM Fix Prices
Steel
MB HR Steel Prices
Alumina
Europe Alumina Spot Price
250
300
350
400
450
Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04
(USD/ troy ounce)
200
220
240
260
280
300
320
Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04
150
250
350
450
550
Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04
1,000
1,200
1,400
1,600
1,800
2,000
Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04
(USD)
1,000
1,200
1,400
1,600
1,800
2,000
Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04
0
100
200
300
400
500
Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04
(USD)
Consumption trends across Asia
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p
Government P&L A/c AS IT REALLY IS
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ENAM Securities 46 August 2004Deficit of 5-6% of GDP misleading! Receipts only 11%
Centre’s P&L (2004-05E)
Source: Government of India Interim Budget, ENAM Research
Particulars % of GDP
Total Receipts 11
-- Revenue Receipts 10
-- Capital Receipts 1
Total Expenditure 15
-- Interest 4
-- Defence & Subsidies 4
-- Transfer to States 3-- Infrastructure & Capital Expenditure 1
-- Administrative, etc. 3
Deficit 4
Total debt (Internal + External) 64
States have joined the party!
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Source: RBI
Aggregate fiscal deficit of states
0
200400
600
800
1,000
1,2001,400
F Y 9 1
F Y 9 2
F Y 9 3
F Y 9 4
F Y 9 5
F Y 9 6
F Y 9 7
F Y 9 8
F Y 9 9
F Y 0 0
F Y 0 1
F Y 0 2
F Y 0 3
F Y 0 4 E
2.0
2.53.0
3.5
4.0
4.5
5.05.5
Fiscal Deficit (LHS) % of GDP (RHS)
(Rs.bn) (%)
Power subsidies (% of state fiscal deficit)
State (%)
Madhya Pradesh 74
Andhra Pradesh 51Gujarat 65
Karnataka 65
Maharashtra 28
Tamil Nadu 40
Source: World Bank
Profligate Governments…weaken us all
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Crowds out private sector
Upward pressure on interest rates
Rupee depreciation
Making us “poorer”, costlier, less competitive> poorer!
40%
50%
60%
70%
80%
1 9 8 0 - 8 1
1 9 8 2 - 8 3
1 9 8 4 - 8 5
1 9 8 6 - 8 7
1 9 8 8 - 8 9
1 9 9 0 - 9 1
1 9 9 2 - 9 3
1 9 9 4 - 9 5
1 9 9 6 - 9 7
1 9 9 8 - 9 9
2 0 0 0 - 0 1
2 0 0 2 - 0 3 R E
Debt/GDP
Total Central & State debt as a percentage of GDP
Source: RBI
Demographics
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Income Shifts
Age Group Shifts
Social Shifts
Affordability has risen dramatically
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Source: ENAM Research
Falling prices and low interest rates have made products easily affordable
1994 2003 Increase in affordability (x)
Housing (Ratio of Hsng Price/Annual Inc.) (x) 6 3 2.0
Housing EMI (Rs.) 1,690 1,250 1.4
10-year repayment / Rs.100,000 / month
Cost of (in Rs.)
21" Color TV 18,000 11,000 1.6Washing Machine 18,000 13,000 1.4
Refrigerator (165 Ltr) 12,000 8,000 1.5
Cordless Telephone 4,000 2,500 1.6
Cellular Phone 25,000 4,000 6.3
All this has led to a boom in retail lending and consumption
Wealth effect adds to consumer power
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-6
-3
0
3
6
9
12
15
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
J u l - 0 4
10
11
12
13
14
15
16
17
Rupee/ US$ (LHS) Prime Lending Rate (RHS)
(%) (%)
Market Cap gain = $75bn
Strong rupee and low interest rates
Gold: 20,000 tonnes = $100bn gain
250
300
350
400
450
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
(USD/troy ounce)
2,000
3,000
4,000
5,000
6,000
7,000
2002 2003 2004
Source: Bloomberg
Income demographics = Secular consumption growth
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1001000
20003000
4000>5000
1998
2003
20070
100
200
300
400
500
600
P o p u l a t i o n ( m )
Annual income (US$)
1998 2003 2007
Cars: 1998 - 3m, 2003 - 6m, 2007 - 9m
Home Mortgage Outstanding: 1998 – Rs145bn,
2003 – Rs478bn, 2007 – Rs1367bn
Cellular Subscriber: 1998 - 1mn, 2003 - 14m, 2007 - 95m
Tax Payers: 1998 - 10mn, 2003 - 40m, 2007 - 80m
Source: ENAM Research
Volumes Value
Two Wheelers 12% 20%
Cars 13% 20%
CAGR (1994 – 2003)
Value growth far exceedsvolume growth
TV: 1998 - 70m, 2003 -98m, 2007 - 130m
2 Wheelers: 1998 - 28m, 2003 - 46m, 2007 - 80m
Cable TV Sub.: 1998 - 25m, 2003 - 48mn, 2007 - 80m
Basic Telephone: 1998 – 22m, 2003 – 44m, 2007 - 65m
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Age profile points to secular growth in demand
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Increasing consuming/producing age group
0
400
800
1,200
2001 2013
0 to 19 20 to 34 35 to 60 & above
Total 1,012.4m
Total 1,211.6m
Overallgrowth19.7%
Growth
34.4%
The risingconsumer class246.8m 331.6m
Source: Census 1991
World Age Population Projected To Decline
BRICs : The growth engine of the world
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Source: Goldman Sachs BRICs Report
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Political Contradictions reflect Social flux
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MuslimLeague
CPM CONGRESS
NationalConference
BJP
RJD
BSP
SP
DMK
NCP
JD
Samta party
Telgu Desam
AIADMK
BJD
Shiv Sena
Capital Markets
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Be aware of shifts
In sectors
In Leadership
In Valuations?
Where we are in the cycle?
Flat markets cloud sectoral shifts!
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Sectors (% of Nifty)
Source: CMIE
Share of corporate profit / GDP
Share of sector profit % v/s Share of market cap
Should always be at the back of the mind !
1998 1999 2000 2001 2002 2003 (July) 2004
Banking 8 6 5 7 8 10 12
Commodities 42 32 22 23 25 34 37
Cyclicals 19 15 8 7 9 9 15
FMCG 19 27 16 19 21 15 9
Pharma 4 5 7 6 8 7 6
TMT 8 15 43 38 29 25 21
Total 100 100 100 100 100 100 100
Similarly, be aware of relative country valuations
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P/E (x) Interest RoE (%) EPS Growth (%)
2002 2003 2004 rates (%) 2002 2003 2004 2002 2003 2004
China 15 14 13 NA 12 14 15 14 11 6India 18 15 13 4.5 18 21 24 34 13 16*
Indonesia 8 9 8 9.0 27 25 27 53 (7) 10
Korea 11 12 9 3.9 15 14 18 (5) (7) 33
Malaysia 20 16 15 3.1 10 12 13 14 20 9
Phillipines 26 17 13 7.8 6 9 11 (23) 50 30
Singapore 25 18 16 0.8 7 9 10 (19) 37 12
Taiwan 43 20 15 1.1 5 11 15 (9) 124 29
Thailand 16 12 11 1.3 16 21 23 86 35 9
Source: The Economist, Citi group. * Currently witnessing upgradation and growth to be sustained in 2005
High and Stable RoE (EVA +ve), Size and Scalability, Variety and Growth
Churn in Top 20 reflects underlying reality shifts
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Source CMIE
Note: Names in red indicate exits, in blue indicate new entrants
1998 As ofJune2004
Company Name Mkt Cap (Rs. bn) Company Name Mkt Cap (Rs. bn)
Oil & Natural Gas Corpn. Ltd. 402 Oil & Natural Gas Corpn. Ltd. 927Hindustan Lever Ltd. 278 Reliance Industries Ltd. 625Indian Oil Corpn. Ltd. 272 Indian Oil Corpn. Ltd. 464Mahanagar Telephone Nigam Ltd 163 Infosys Technologies Ltd. 354
Reliance Industries Ltd. 158 Wipro Ltd 354I T C Ltd. 153 Hindustan Lever Ltd. 286State Bank Of India 129 Bharti Tele-Ventures Ltd. 278Hindustan Petroleum Corpn. Ltd. 110 State Bank Of India 253G A I L (India) Ltd. 106 I T C Ltd. 222Bharat Heavy Electricals Ltd. 86 I C I C I Bank Ltd 194Tata Motors Ltd. 77 Ranbaxy Laboratories Ltd 187
Bajaj Auto Ltd 73 Housing Development Finance Corpn. Ltd 151Bharat Petroleum Corpn. Ltd. 63 G A I L (India) Ltd. 144Industrial Development Bank of India 63 Tata Motors Ltd. 141Hindalco Industries 56 Bharat Petroleum Corpn. Ltd. 131Larsen & Toubro 51 Steel Authority Of India Ltd. 122Tata Iron & Steel Co. Ltd. 50 Hindustan Petroleum Corpn. Ltd. 121Castrol India 46 Maruti Udyog Ltd 119Steel Authority Of India Ltd. 43 Bharat Heavy Electricals Ltd. 113National Aluminium Co 39 Tata Iron & Steel Co. Ltd. 110
Total Market Cap 2,418 Total Market Cap 5,270
… and the Index hides more than it shows!
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0
5,000
10,000
15,000
20,000
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
Infosys Wipro Satyam
0
400
800
1,200
1,600
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
Ranbaxy Dr Reddy's
Cipla Sun Pharma
0
200400
600
800
1,000
1,200
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
HDFC HDFC Bank
0
2,000
4,000
6,000
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
Zee Hero Honda
IT Pharmaceuticals Banking Media & Auto
0204060
80100120140160180200
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
1,5002,0002,5003,000
3,5004,0004,5005,0005,5006,0006,500
Indexed Sensex (LHS) Sensex (RHS)
All Figures indexed 100= price in 1994
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PSS companies outperform markets over time!
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Infosys Vs Sensex HDFC Vs Sensex
HLL Vs Sensex MICO Vs Sensex
RIL Vs Sensex
0
100
200
300
400
500
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
Reliance Industries (LHS) Sensex (RHS)
0
10,000
20,000
30,000
40,000
50,000
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
Infosys Sensex (RHS)
0100
200
300
400
500
600
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
HDFC Sensex (RHS)
0
100200
300
400
500
600
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
HLL Sensex (RHS)
0
100
200
300
400
500
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
MICO Sensex (RHS)
Multibaggers of the last 10 years
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Price as on 14/7/94 Price on 15/7/04 CAGR (%)
Satyam Computers 3 326 62
Infosys Technologies 13 1443 60
Wipro 6 525 56
Sun Pharmaceuticals 21 351 33
Hero Honda 33 460 30
Cipla 41 231 19
Ranbaxy 214 976 16
Zee Telefilms 30 126 15
HDFC 161 550 13
Dr Reddy's 248 749 12
Source: Bloomberg; Adjusted for bonuses and stock splits; NIFTY constituents only
Multibaggers since 9/11 : The REAL BSE-30!
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Company Price as on Price on CAGR
15/7/04 11/9/01 (%)
Oriental Bank 240 34 92
Mahindra & Mahindra 476 68 91
SAIL 33 5 87
Tata Motors 407 75 76
ONGC 654 136 69
Shipping Corp Of India Ltd 117 24 68
Tata Iron & Steel Co Ltd 327 84 57
BHEL 527 135 57
IPCL 157 40 57
Grasim 952 274 51
GAIL 182 53 51
Reliance Energy 571 176 48
ABB 730 225 48
Bajaj Auto 841 266 47
Tata Chemicals Limited 121 39 45
Company Price as on Price on CAGR
15/7/04 11/9/01 (%)
National Aluminium Co Ltd 139 48 43
HPCL 288 111 38
Tata Tea 386 150 37
Hero Honda 460 183 36
Tata Power 254 101 36
Sun Pharma 351 141 35
Ranbaxy 976 415 33
ICICI Bank 238 103 32
SBI Bank 431 187 32
Glaxo 603 282 29
Indian Hotels 370 175 28
BPCL 314 159 26
Satyam Computers 326 175 23
ACC 232 128 22
Gujarat Ambuja 275 155 21
Source: Bloomberg; Adjusted for bonuses and stock splits; NIFTY constituents only
AOL, Time Warner merger – A lesson to remember
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0
20
40
60
80
100
1 9
9 6
1 9
9 7
1 9
9 8
1 9
9 9
2 0
0 0
2 0
0 1
2 0
0 2
2 0
0 3
2 0
0 4
Announcement of Merger
Stock Price of Time Warner: now AOL Time Warner
(US$)
Lets Summarise TILL THIS POINT
V l i d h h i l f
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Value is created through an interplay of:
Macro Trends
Micro Focus
Subtler Nuances
Business Leaders must constantly be on top of these ; good leaders and investors
continuously value these.
Real winners understand this and play to create enduring value.
May run out of luck, never out of wisdom !
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Manish Chokhani September 2004 69
NOW: BUYER BEHAVIOUR
Understand Fund Manager Behaviour!
Approaches to Portfolio Construction
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Approaches to Portfolio Construction
Top Down v/s Bottom Up
Value v/s Growth
Think of Where we are in the Market Cycle!
Client Requirements
Match Needs, Requirements and Abilities
Your OWN Portfolio?
Elements of Valuation
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Top Down
Bottom Up
MomentumValue Growth
KYC and Thyself!
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Asset Allocation
Country Allocation
Sector Allocation
Large Cap
Small
Cap
Pvt. Banks / Pension Funds /
Macro Funds/ Fund of Funds
Regional Funds
Country Funds/ Mutual Funds
HNW / PMS / Absolute Return
Funds/ “Hedge” Funds
Relative
Absolute
Key Success Factors : Match Your Pitch!
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Pvt. Bankers / Pension Funds / Macro Funds
Regional Funds
Country Funds
Absolute
Return
Funds
• Institutional Marketing
• Deployment of Large Pools
• Capital Preservation
• Marketing Scale & Scope
• Economist
• Fund Manager • Technician
• Stock Picker
CAPITAL
UBS, GAM
GSIC, ADIA
PICTET
JANUS
GMO
LLYOD GEORGE
HSBC, , CIBC, JFICICI, HDFC, UTI
SLOANE
ABERDEENARISAIG
EMIC
OPPENHEIMER
Decomposing Approaches
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Sector CountryAsset Class
Top Down
• Equities
• Bonds• Currencies• Property• Commodities
– Oil – Precious metals
– Natural Resources
• Developed Markets
• Emerging Markets• Regional markets
• FMCG
• Pharma• Services• TMT• Manufacturing
• Cyclicals
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Some Lessons from History
Japan V/s UK in 1944
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Japan V/s UK in 1944
Korea V/s India in 1950
Singapore!
Hero Honda V/s Kinetic Honda
Bharti V/s IDEA
Infosys V/s HCL
HDFC Bank V/s SBI
There is NO trade-off between Top- Down and Bottom up
Valuation Approaches based on Sentiment Swings
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• Illiquid
• Misunderstood
• Hated/Uncovered
• Appraised value
• Institutional Favorites
• UVG Stories
• Imagine it!
• DCF or Option value
• Max Volume
• News Flow
• Volatile
• Technicals
Value Growth Momentum
In Reality, there is no distinction. Growth and Momentum are
LongTerm/Short Term Value catalysts
Think Client Management
WHO is the CLIENT?
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WHAT does he want from you?
HOW are you shaping his expectations & mindset?
WHY should he stick to you?
“Most clients would rather have their fund manager fail
conventionally than succeed unconventionally.”
— Marc Faber
Decompose | Decompose | Decompose
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Sectors Large Cap Medium Cap Small Cap Total
FMCG
Pharma
Banks
IT
Telecom
Media
Engg
Autos
Commodities
Total
SUMMARY
UNDERSTAND YOURSELF OBJECTIVELY
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Everybody is not Schumacher or Tendulkar: TAKE HELP, BE SELF AWARE
UNDERSTAND THE INVESTMENT LANDSCAPE A grip of Macro, Micro, Accounting and Street Smartness is REQUIRED
UNDERSTAND THE UNDERLYING INVESTMENT What will make it tick or explode?
UNDERSTAND THE MARKET PARTICIPANTS Who are you playing against and how does he play?
FOLLOW BASIC PRINCIPLES AND STICK TO THEM!
BE HAPPY !
How is your Portfolio Tilted?
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BUILD A CONSCIOUS LIFESTYLE !
WORK
COLLEAGUES
PROFESSIONAL
COLLEGUES
OWN
INTERESTS
FAMILY
CLIENT TIME
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