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Value Research
September 2016
Volume X, Number 3 30 COVER STORY
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4 Wealth Insight September 2016

Columns
7 24 37 44 48 50
EDIT THE MAINSTREET STRAIGHT GENERALLY OFFBEAT
CHARTIST TALK SPEAKING
by DHIRENDRA by DEVANGSHU by SAURABH by ANAND by VIVEK by SANJEEV

KUMAR DATTA MUKHERJEA TANDON KAUL PANDIYA
Coping with The telecom Great Indian Fundamental Indias job Why the dol-
business tragedy companies investing in 3 challenge lar wont die
change Though the Of some 1,500 steps With around 1.2 In spite of many
telecom sector is companies in India crore people gloomy prophecies
Digital revolution indispensable to Essentially, entering the
means that that have a market fundamental about the US dollar,
the nation, yet it cap of over workforce yearly, it has only
traditional suffers from many investing is about the need to create
businesses are at Rs 100 crore, only assessing cash strengthened over
overhangs which 16 have reliable more jobs, time and is also
greater and greater will keep its flows, especially low-
risk of being financial reexamining likely to do well in
growth in check performance skilled ones, has future
threatened and torn assumptions and got more pressing
apart staying updated
8 WORDS WORTH WISDOM Kumar 56 COMPANIES WITH MOAT

Mangalam The watch list
10 MARKET COMPASS Birla,
Chairman,
Index watch
Aditya Birla
58 STOCK IDEAS
Big moves Group Quality stocks available

Giants fall as well cheap
Fall of pharma Attractive blue chips
Decoding the SBI merger 46 INTERVIEW High dividend-yield stocks
Expensive duds Mega merger in the Aditya Discount to book value
Birla Group Reasonably priced growth
20 ANALYSTS DIARY
52 BOOK REVIEW
stocks
What not to invest in
How to spot a bargain
How unequal 66 WORDS WORTH NOW
Going beyond the EPS 53 STOCK ANALYSTS CHOICE
Is your bank efficient? Our scorecard

DISCLAIMER
The 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 investment
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of Delhi courts only. ALL RIGHTS RESERVED
September 2016 Wealth Insight 5

EDIT
Coping with business change

Digital revolution means that traditional businesses are at greater and
greater risk of being threatened and torn apart
DHIRENDRA KUMAR
because once the app had been released, the legacy
The pace of business change has airline business would have been doomed.
increased in recent decades. This is something that one The thing about the future is that some of it is clearly
hears about very often. Is this really true? I dont know, ridiculous, some of it is difficult and some of it is
but it probably doesnt matter. Its possible that in the obvious. Its often not possible to figure out which is
period from 1950 to 1980, things changed slowly for which. Here are some of the things that seem possible
Indian businesses. However, from the perspective of and can have an impact large enough on businesses that
todays investor, how does it make a difference whether you may be investing in today: (1) Self-driving electric
this is true or not? cabs will be the dominant form of automobiles. (2) Most
Whether the change is faster or slower than earlier, people in urban areas will not be interested in owning
the fact is that now it is fast-paced. More importantly, it cars because you will be able to summon one anytime.
is a lot less predictable. Imagine two investors having a (3) Businesses will be able to survive on funding rather
conversation back in 1985. One of them has a knack for than actual profits. (4) Mass-produced robotic doctors
being able to see the future clearly. The future seer says will transform medical services.
that by year 2000 India will be a world leader in Oh, wait! It seems that number 3 has already come
providing software services to the whole world, and true. Jokes apart, digital revolution means that
some of the most-profitable companies and fastest- traditional businesses are at greater and greater risk of
growing companies in India will be software companies. being threatened and torn apart. This can happen with
At this point, the other investor gets up and leaves great rapidity, regardless of whether the replacement is
because it is self-evident that the future seer is mad. The making money yet or not. Almost the entire business of
non-future-seer has neither heard of the word travel agents has disappeared. The business of retailing
software, nor does he know anyone who has heard it. mobile phones in shops has appeared and has started
His best guess is that it must be a term for the softer disappearing in barely 15 years.
things sold at a hardware shop. The upshot is that the coming decade is going to be a
Today, what are the ideas that look as ridiculous as period of great upheaval for businesses and obviously
what IT-services exports looked like in 1985. Self-driving for investors. Almost any company in your investment
cars? Widespread use of robots in daily life? Pervasive portfolio can become more valuable or less valuable
and cheap solar power? There are hardly any. We take all rapidly. Investment opportunities can open up or close
these things very seriously. In fact, the biggest thing that down when least expected. At the same time, too much
has changed since 1985 is that we take the whole idea of excitement about change can make investors oblivious
Future, with a capital F, very seriously. If I wrote on this to businesses that will grow steadily despite all the
page that Value Research had developed a smartphone change around them.
app that converted your phone into a self-piloting Its frightening, and yet its a great opportunity. Its an
aeroplane, at least some people would have believed it. opportunity that we at Value Research have been
All they would have asked is whether it would be helping you exploit for the last two decades. Change or
available only on Android or on iPhone also. Its even no change, faster change or slower, were here to provide
possible that the share prices of airlines would have the right perspective.

WORDS WORTH
WISDOM
The silver lining

Take heart from these quotes amidst turbulent economic times
You get reces- Recession is opportu- The recession

sions; you have nity in wolfs clothing. wont be over
stock-market ROBIN SHARMA till we raise a
declines. If you generation that
dont understand knows how
thats going to hap- A financial to live on what
pen, then youre crisis is a great theyve got.
not ready, you ANONYMOUS
wont do well in time for pro-

the markets.
PETER LYNCH
fessional The global finan-
investors and cial crisis
a horrible time missed by most
Do not make analysts shows
recession your
for average that most fore-
obsession. Just re- ones. casters are poor
ROBERT KIYOSAKI at pricing in eco-
member to forget it
and youll be okay. nomic/financial
MINA TADROS
The Chinese use two risks, let alone
brush strokes to write geopolitical ones.
NOURIEL ROUBINI
the word crisis. One
As sure as the brush stroke stands for
spring will follow danger; the other for You cannot
the winter, pros- opportunity. In a crisis, spend your way
perity and economic be aware of the danger out of recession
growth will follow but recognize the or borrow your
recession. opportunity. way out of debt.
BO BENNETT JOHN F KENNEDY DANIEL HANNAN

MARKET MARKET
C MPASS C MPASS
Index watch: Nifty IT

18.58
Price to earnings
5.02
Price to book
2.33
Dividend yield (%)
11.41 Market cap
(` lakh crore)
Dynamics of the Nifty IT Top gainers/losers

Company name Price (`) 1-year change (%)
Nifty IT is 11.74% lower than its all-time high level.
TCS 2738.45 2.50
250
Nifty IT Nifty 50 Info Edge (India) 845.70 1.58
200 Wipro 543.75 -5.88
150 Cyient 496.80 -6.08
Infosys 1062.55 -7.15

100
Oracle Fin 3715.20 -11.51
50 Tech Mahindra 493.35 -11.51
Price/earnings is at 7.47% discount to its five-year median of 20.08. HCL Technologies 814.20 -16.13
26 Mindtree 579.80 -17.12
Just Dial 475.05 -52.84
22
18
Valuations
14 Price to Price to Dividend
Company name earnings book yield (%)
10
Cyient 27.32 3.25 1.41
Price/book value is at a 14.15% discount to the five-year average of 5.85.
8.0 HCL Technologies 17.54 4.92 2.71
Info Edge (India) 64.93 5.65 0.36

6.5
Infosys 15.20 4.05 2.28
5.0
Just Dial 23.29 4.92 0.42
3.5
Mindtree 15.89 3.72 2.76
2.0
Oracle Financial Ser. 32.99 9.60 2.69
Dividend yield is 57 basis points higher than the five-year median of 1.76%. TCS 23.32 8.33 1.59
3.1
Tech Mahindra 15.52 3.46 2.44
2.5
Wipro 16.55 3.14 1.10
1.9 All data as on August 12, 2016
1.3
0.7
August 2011 August 2016

MARKET
C MPASS BIG MOVES: LARGE CAPS
Our large-cap universe has 88 large companies, making the top 70 per cent of the
total market capitalisation. The list mentions the stocks that have fluctuated most
wildly in the last three months.
Price to earnings Net profit (` crore)
3M returns (%) 3Y avg RoE (%) 3Y earnings growth (%) 3M price (`) movement
154
71.71 40.59 794

Hindalco Inds.
Metal stocks rebounded after a steep decline.
Hindalcos good Q4FY16 numbers helped, too. 5.0 -23.1 90
69.67 -6,693
170
Vedanta
Metal stocks rebounded after a steep decline. The
merger with Cairn India is positive for Vedanta. -2.5 -318.1 100
47.32
2,747
Bajaj Finserv 22.64 2,914
Q1 profit grew 15% YoY. The company may also buy
out Allianz in Bajaj Allianz Life. 23.7 7.7
1,865
46.96
273
Adani Ports and Special Economic Zone 18.51 3,016
Robust Q4FY16 and Q1FY17 numbers fuelled a rally in
the stock. 23.6 24.5 186
45.97
1,220
HPCL 8.43 3,863
Since crude remains at low levels, HPCL stands to
gain from it. 7.6 62.2 836
45.59
200
Cairn India 786
The company is going to be merged with Vedanta,
which has made the merger proposal more attractive. 4.6 -46.6 137
246
39.08 22.5 8,757

State Bank of India
The proposed merger with its associates is positive
for the company. 9.8 -20.9 177
545
33.15 11.94 10,399

Indian Oil Corp.
Low crude-oil prices are going to improve the
companys bottom line. 7.9 27.6 409
10,199
31.46 38.51 1,427

Bajaj Finance
The dream run in the stock continues. The companys
profits havent disappointed the Street either. 20.4 31.4 7,758
228
30.84 4.91 6,250

Power Finance Corp.
Having been ignored for long despite its attractive
valuations, PFC saw a spurt in its stock price. 19.8 10.4 174
Data as on August 16, 2016

MARKET
BIG MOVES: MID CAPS C MPASS
Our mid-cap universe has 221 mid-sized companies, making the next 20 per cent of
the total market capitalisation. The list mentions the stocks that have fluctuated most
wildly in the last three months.
125.26 12.48 803

205
Indian Bank
After receiving a severe beating, public-sector banks
bounced back strongly. 8.0 -17.6 91
82.81 16.11 457 87

Manappuram Finance
Q4FY16 and Q1FY17 profits went up 85% and 171%,
respectively. 13.6 64.0 48
1,476
69.72 69.96 265

Dalmia Bharat
Improving prospects for cement companies took
Dalmias stock upward. -0.1 23.7 870
68.98 31.52 63
Motilal Oswal Financial 486
The recent rally in NBFC stocks lifted Motilals stock
price. Q1 profits also went up 181%. 9.0 16.5 287
67.15 18.09 379

98
Edelweiss Financial Services
The company benefitted from the rally in NBFCs.
Q4FY16 and Q1FY17 profits showed a healthy rise. 9.2 27.8 59
66.66 21.61 235

Birla Corporation 632
The stock went up along with other cement stocks.
The sector is on the cusp of a turnaround. 6.0 0.6 379
366
66.07 16.07 897

Muthoot Finance
Increase in gold prices is positive for gold-loan
companies. 21.4 -2.0
220
63.95 -4,389
123
Punjab National Bank
After a steep correction, public-sector banks bounced
back, as the NPA clean-up reaches its culmination. 3.2 -197.2
75
50.90
67
JM Financial 12.81 40
A rally in NBFC stocks, especially those with brokerage
arms, led to an increase in JMs stock price. 14.1 -3.3
45
501
31.02 63.56 213

Max Financial Services
The company is going to be merged with Max Life. Its
insurance business will then be merged with HDFC Life. 16.8 19.2 382

MARKET
C MPASS BIG MOVES: SMALL CAPS
Our small-cap universe (minimum market capitalisation `400 crore) has 654 small-
cap companies, making the last 10 per cent of the total market capitalisation. The list
mentions the stocks that have fluctuated most wildly in the last three months.
414
253.42 8.11 131

Tata Metaliks
The calling-off of the merger with Tata Steel is
positive for the company. 102.4 47.5 117
329
171.97 28.91 85
Sudarshan Chemical Inds.
Q4FY16 profit of the company went up almost six times
and took the stock upwards. 21.1 59.5
121
150.46
597
Stylam Industries 30.72 14
The companys Q4FY16 profit grew from `2.19 crore
to `3.85 crore. Q1FY17 numbers were good as well. 20.5 54.4
238
105.60 16.93 64
112
Pricol
The company turned around in Q4FY16. It posted a
profit of `22 crore against a loss of `2.4 crore. 0.2 4.1 54
91.93
300
Mahamaya Steel Inds. -15
Wild speculation in the stock has led to manifold
increase in the stock price. -4.1 -521.6 156
70.54 -3,221
Jai Prakash Associates 11
The company is selling its assets to cut its debt. It
will sell its cement business to Ultratech. -4.1 -285.9
6
58.65 -843
Castex Technologies 11
A recovery in Amtek Group stocks lifted the stock
price of Castex also. 11.1 -284.5
7
133
50.20 -
Adhunik Industries
Wild speculation in the stock has led to a spurt in the
stock price. 7.0 -43.5 89
22.02 4.07 105

40
Ugar Sugar Works
The entire sugar pack is witnessing a rally due to a
recovery in sugar prices. -5.7 121.0
33
-33.33 1.36 405

Lycos Internet 11
The stock hit the lower circuit in many sessions on
rumours about the promoters exiting the company. 17.0 99.5 16

MARKET
C MPASS
Giants fall as well

Belonging to the market index is no guarantee that a stock will continue to
beat the market and remain an outperformer
C
ommon investing wisdom tells us that the pricing pressure and moderating volumes. North
companies which comprise the market index, America revenues contracted 16 per cent (YoY);
such as BSE Sensex, are stalwarts in their revenues from emerging countries shrank 26 per cent;
respective industries. Theyre considered by many to be and Europe revenues were down 16 per cent. In
safe investments that will lead the market in earnings November last year, the company received a warning
and growth. The problem with this hypothesis is that it is letter from the USFDA for three of its manufacturing
wrong. In the last one year, five index companies have facilities, located in Srikakulam (Andhra Pradesh)
reported a fall in net earnings, aggregating to 33 per cent. Miryalguda (Telangana) and Duvvada
To be fair, the remaining index companies did report (Vishakhapatnam). This has had a bearing on the stock
earnings growth that aggregated 11.5 per cent. This story, performance, too. In the last one year, Dr. Reddys has
however, looks at those companies that saw their net reported a bottom-line decline of 34.5 per cent. Its stock
earnings decline. The table below lists out the five has lost close to 30 per cent in the same period.
companies that make it to this list. We discuss the top
three with the biggest fall in earnings. GAIL (India): The countrys largest gas-transmission
company has seen its bottom line evaporate by 32 per
State Bank of India: The countrys largest banker has cent. In the last couple of months, GAIL has suffered
been struggling with higher provisioning after the RBI from an unfavourable petrochemical business, lower
governor, Raghuram Rajan, initiated asset-quality gas-transmission volumes and tariff issues.
reviews for banks. Traditionally, lenders had been lax Things are improving. The company has guided
about non-performing assets (NPAs). Asset-quality petrochemical volumes to move up. The piped-and-
reviews forced the industry to create provisioning to natural-gas regulator, the Petroleum and Natural Gas
address potential NPAs. They also turned the markets Regulatory Board (PNGRB), raised tariff on GAILs
against the sector. After plunging 28 per cent late K.G. Basin pipeline from `5.56 per MMBtu (million
February this year, the S&P Bankex has returned 4 per British thermal unit) to `45.32 per MMBtu with effect
cent in the last one year. During the same period, SBI, from April 1, 2016. This order is expected to result in a
which saw its bottom line shrink by 51 per cent, is down non-recurring post-tax impact of `170 crore or `1.4 per
7 per cent in the market. share for FY17 (IDFC estimates). The GAIL stock is up
10 per cent in the last one year.
Dr. Reddys Laboratories: Dr Reddys, which was once The above cases illustrate that belonging to the
the market favourite, has seen its fortunes tumble in market index is no guarantee that a stock will continue
recent times. In the most recent quarter, its revenues to beat the market and remain an outperformer. The
declined across geographies as well as verticals. Its next time you think large companies are immune to
products faced increased competition in the US, higher downside risks, think of these instances. WI
Falling profits
Normalised Normalised PAT 1Y stock
Company name Market cap (` cr) PAT (` cr) one year ago (` cr) PAT growth (%) Revenue growth (%) TTM P/E Current price (`) return (%)
State Bank of India 1,92,672 8,757 17,783 -50.76 5.66 22.52 259 -7.03
Dr. Reddys Laboratories 51,680 1,504 2,296 -34.49 -0.75 33.80 3,011 -28.84
GAIL (India) 46,376 2,048 3,027 -32.35 -9.04 20.60 364 10.13
Cipla 44,327 1,283 1,583 -18.93 9.16 36.32 556 -20.17
Tata Motors 147,810 12,592 14,189 -11.26 4.71 13.41 510 45.26
Normalised PAT is PAT minus exceptional items. Data as on August 19, 2016.

MARKET
C MPASS
Fall of pharma TTM sales growth (%)

Sun
Lupin
Dr. Reddys
Current year Previous year
The pharma sector, which once Aurobindo

Cipla
used to be the star of the Street, Cadila
Divis Labs
has been witnessing bad times GSK
Torrent
Glenmark
I
ts tough being a pharma company these days. 0 10 20 30 40 50 60 70
Gone are the days of extra-normal growth,
high profits and an easy USFDA. Many top TTM EBITDA growth (%)
Sun
companies are struggling to maintain even sales
Lupin
momentum. Here are a couple of things that have Dr. Reddys
gone wrong for the sector in recent months. Aurobindo
Stagnating revenue: For a long time, pharma was Cipla
Cadila
considered an evergreen industry. There was no Divis Labs
way for pharma stocks to go but up. Medicines, it GSK
was surmised, were an essential requirement for Torrent
billions. Today, the top ten pharma companies in Glenmark
-20 -10 0 10 20 30 40 50 60
the country (by market cap) are seeing revenue
growth stagnate from 14.7 per cent a year ago to Price to earnings
14.5 per cent in the last 12 months. Dr. Reddys, Sun
Aurobindo Pharma, Cadila Healthcare and Lupin
Torrent Pharma have seen revenue growth fall Dr. Reddys
Aurobindo
particularly hard in the last 12 months as
Cipla
compared to the previous year. Cadila
Losing money: Declining sales growth is just a Divis Labs
harbinger of other problems. Five of the top ten GSK
Torrent
pharma companies have seen their EBITDA Glenmark
growth decline. Top names like Dr. Reddys, Cipla, 0 12 24 36 48 60 72 84
Cadila and Torrent face this problem.
Declining FII interest: The not-so-attractive business One-year change in FII holding (% pt)
environment has seen FIIs dump the sector. In 3
companies where FIIs pruned their share, the
0
aggregate holding declined by 2.3 per cent. Cipla,
Aurobindo, Dr. Reddys and Lupin are the top -3
companies where FIIs drew their holdings down.
-6
Falling returns: With market sentiment against the
sector, it was inevitable that the sector would drag in -9
terms of returns as well. The BSE Healthcare index Sun Lupin Dr. Auro- Cipla Cadila Divis GSK Torrent Glen-
Reddys bindo Labs mark
has lost 10 per cent in the last one year. This
aggregate hides greater losses made by the
shareholders in Dr. Reddys and Cipla, who have
One-year stock return (%)
10
seen their investments shrink by close to 30 per cent.
Glenmark shareholders have lost 21 per cent. 0
Cooling valuations: Perhaps the only positive fallout of
this morass is that valuations of the sector have -10
started cooling down. The BSE Healthcare index has -20
seen its valuation fall from 42 times a year ago to 33
times today. If valuations cool down further, the -30
Sun Lupin Dr. Auro- Cipla Cadila Divis GSK Torrent Glen-
sector will throw up compelling investment Reddys bindo Labs mark
opportunities. WI TTM: Trailing twelve months. All data as on August 11, 2016

MARKET
C MPASS
Decoding the SBI merger

State Bank of India is going to merge its five associate banks and Bharatiya
Mahila Bank with itself. With this, SBI will be join the league of worlds top
50 banks. Here is a quick look at the dynamics of the merger.
What it means for SBI and the associates in a lot of efficiency and help SBI cut costs. It
The associate banks are much smaller than should lead to an increase of around `1,200
SBI. Hence, the impact on SBI is not going crore in the profits for the merged entity.
to be significant. What is important is
the synergy that SBI can generate. Job losses
For the associates, the merger means Arundhati Bhattacharya,
better efficiencies. The merger chairwoman of SBI, has said that
accomplishes the governments aim there will be no job losses. Hence,
of fusing small banks with large employee costs, which remain the
ones to create solid banking biggest operating cost to the bank,
institutions. are likely to remain unchanged.
However, SBI has to be very careful
Number of branches with its HR policy. When SBI merged
SBI plans to reduce the number of State Bank of Indore with itself, it led to
branches in the merged entity by 30 per a lot of dissatisfaction among the staff of
cent. Currently, the consolidated entity has State Bank of Indore because they were given
24,000 branches. A 30 per cent reduction will bring junior positions in the merged entity. WI
SBIs stake in associate banks Swap ratio Non-performing assets

State Bank of Bikaner and Jaipur (SBBJ) 2.80% 10 Gross NPAs (%) Net NPAs (%)
75%
2.20% 2.20% 8
State Bank of Hyderabad (SBH)
6
100%
State Bank of Mysore (SBM) 4
90% 2
State Bank of Patiala (SBP) 0
100% State State State State State State
State Bank of State Bank State Bank Bank of Bank of Bank of Bank of Bank of Bank of
State Bank of Travancore (SBT) Bikaner & Hyderabad India Mysore Patiala Travancore
Bikaner and of Mysore of Travancore
79% Jaipur Jaipur
SBI has five associate banks. Of these, The shareholders of SBBJ will Here is how the NPAs of SBI and the associates
three are publicly listed: SBBJ, SBM and get 28 shares of SBI for every stand (as of FY16). SBI and its associates had
and SBT. The other two, SBH and SBP, ten shares. SBM and SBT share- different ways of accounting for NPAs. The asso-
are unlisted and SBI holds the entire holders will get 22 shares of SBI ciate banks have been told to align their loan-
100 per cent stake in them. for every ten shares they hold. classification system with that of SBI.
The Group will have the benefit of all synergies. Also, the associate banks
have fixed assets of around `4,000 crore, which will add to the capital.
ARUNDHATI BHATTACHARYA

MARKET MARKET
C MPASS C MPASS
Expensive duds
Always check whether the stock you are interested in has the numbers to
back the premiums it is commanding
I
ts been a great year for mid caps. The BSE MidCap CIEs operating profit grew by 1.3 per cent in the last 12
index has surged 33 per cent in the last six months. months. Both India and Europe revenues were down in
Its not uncommon now to find stocks with valuations the latest quarter results (March 2016). The company is
hitting triple digits. Not all of these high-flyers though undergoing a turnaround, definitive results of which
are backed by sound earnings growth. Lets take a look at could take some time to be visible. The market seems to
some of them. be betting that Mahindra CIE will quickly turn its
Linde India: Linde India, an industrial-gas supplier, is business around and turn into a high-quality business in
trading at a princely 308 times earnings. Over the last 12 the near term. That optimism still doesnt justify the
months, it has seen its operating profit contract by 2 per expensive valuations.
cent, while revenue growth stood at close to 10 per cent. Mcleod Russel: Mcleod Russel, Indias largest tea producer,
Linde is not a fast-money-earner either. Its operating trades at 101 times. The companys operating profit
profit compounded by 6.7 per cent in the five years ending actually declined in the last one year. Performance in the
2015. Its investment in the Kalinganagar plant for Tata latest quarter (Q1FY17) was not inspiring either. Revenue
Steel is expected to improve performance going ahead. was up sub-3 per cent. Volumes were marginally up,
However, that does not justify its premium valuations. while the selling price was flat. Higher tea workers
Hindustan Copper: Another low-float stock, Hindustan wages and higher interest costs actually led to a net loss.
Copper trades at close to 150 times its earnings. The With Kenyan tea supply up this year, price improvement
companys fortunes depend upon international copper could remain subdued hereon, making it difficult to see
prices, which have risen slightly this year but not why Mcleod should trade at triple-digit valuations.
enough to justify its valuations. Hindustan Copper has The above examples illustrate the folly of chasing
also in recent months announced a new project in market favourites. Without fundamentals backing them,
Chhattisgarh. In the last year, both revenue and most, if not all, stocks with lofty valuations eventually
operating profit declined by around 5 per cent and by 14 lose their steam. What then follows is painful experience
per cent, respectively. for investors. Check whether a stock you are interested in
Mahindra CIE Automotive: This automotive-component has the numbers to back the premiums it is commanding
manufacturer trades at 144 times earnings. Mahindra and you should be safe. WI
Mid caps with ultra-high valuations

Top mid caps with P/Es of over 50 but without fundamentals backing them
Market Revenue EBITDA EPS
Company name Sector cap (` cr) P/E growth (%) growth (%) growth (%) ROCE (%) Debt/equity
Linde India Industrial Gases 3,349 308.36 9.76 -1.95 -58.09 3.16 1.00
Hindustan Copper Non-Ferrous Metals 6,486 148.89 -5.30 -13.83 -35.56 4.40 0.00
Mahindra CIE Automotive Auto Ancillaries 5,938 144.12 -0.43 1.28 -45.41 4.81 0.54
Orient Cement Const Materials 3,449 128.76 6.35 -43.31 -85.81 5.22 1.27
GE T&D India Capital Goods 8,351 107.74 -7.85 -16.64 -35.71 11.69 0.38
Mcleod Russel India Agri 2,066 101.03 3.68 -1.61 -68.67 7.65 0.54
EIH Hospitality 6,442 92.86 2.84 -1.93 -37.71 8.52 0.18
Jubilant FoodWorks FMCG 8,074 77.03 16.50 7.91 -5.97 22.50 0.00
Cox & Kings (India) Hospitality 3,271 60.64 -8.66 -15.77 -41.23 8.14 1.49
Gateway Distriparks Logistics 3,081 56.97 -11.31 -23.47 -54.78 17.64 0.15
Hitachi Home Consumer Durables 3,966 54.72 7.47 0.53 -10.82 16.27 0.45
Ipca Laboratories Healthcare 6,485 53.98 -1.18 -9.50 -14.37 4.81 0.35

ANALYSTS
DIARY
What not to invest in

The movie Other Peoples Money teaches us the
importance of investing in a thriving industry
O
ne of my favourite movies is Other Peoples (given below) at the shareholders meeting, which marks
Money (1991). The movie is about the protago- the climax of the movie, he calls on shareholders to side
nists (Garfield, played by Danny DeVito) with him, reminding them that they became sharehold-
attempt to take over and liquidate New England Wire ers in order to make money, but that the companys busi-
and Cable, a company which is valued at a market price ness is dead.
that is less than its liquidation value. Though one may not agree with all of Garfields views,
You might think that Garfield is some monster chas- one takeaway from the speech is that one should invest in
ing profits over people, but that is not so. Garfield industries that have a promising future. You cant make
believes in capitalism, which makes America great and money investing in a dying industry. Even if a company
differentiates it from communism. He vehemently is a leader in an industry thats fast becoming obsolete,
makes the case that a corporation belongs to the share- its wise to exit from it. WI
holders, not to the workers or management. In a speech Kashyap Sriram kashyap@valueresearch.in
This company time there must have I got two words for that: Ill tell you.
is dead. been dozens of compa- who cares? Me.
I didnt kill it. nies making buggy Care about them? Why?
whips. And Ill bet the Im not your best friend.
Dont blame me. They didnt care about Im your only friend.
last company around you. They sucked you
It was dead when I got was the one that made I dont make anything?
here. Its too late for dry. You have no
the best goddamn buggy responsibility to them. Im making you money.
prayers. For even if whip you ever saw.
the prayers were For the last ten years, And lest we forget, thats
answered and a mira- Now, how would you this company bled your the only reason any of
cle occurred . . . and have liked to have been a money. you became stockhold-
the yen did this and stockholder in that Did this community ers in the first place. You
the dollar did that . . . company? ever say, We know want to make money.
and the infrastructure You invested in a busi- times are tough. Well You dont care if they
did the other thing, weness, and this business lower taxes, reduce manufacture wire and
would still be dead. is dead. Lets have the water and sewer? cable, fried chicken, or
intelligence, lets have Check it out. Youre pay- grow tangerines! You
You know why? wanna make money!
the decency to sign the ing twice what you did
Fiber optics. New tech- death certificate, collect ten years ago. Im the only friend
nologies. Obsolescence. the insurance, and youve got. Im making
And our devoted
Were dead, all right. invest in something with employees who have you money.
Were just not broke. a future. taken no increases for Take the money. Invest it
And do you know the But we cant, goes the somewhere else. Maybe
the past three years . . .
surest way to go broke? prayer. We cant, are still making twice ... maybe youll get lucky,
Keep getting an because we have a what they made ten and itll be used produc-
increasing share of a responsibility, a respon- years ago. tively. And if it is, youll
shrinking market. sibility to our employ- And our stock, one-sixth create new jobs and pro-
Down the tubes. Slow ees, to our community. what it was ten years vide a service for the
but sure. What will happen to ago. economy and, God for-
them? bid, even make a few
You know, at one Who cares? bucks for yourselves.

ANALYSTS
DIARY
How to spot a bargain

Here is a method from Benjamin Graham that can
help you pick stocks at throwaway prices
Companies with positive free cash flows
P
eople usually invest in the shares of companies
that they expect will grow. Benjamin Graham, M-cap FCF yield (%)
Company name Sector (` cr) P/B 3-yr avg 5-yr avg
the legendary value investor of yore, came up
with a method to pick companies which had obvious RS Software (India) IT 198 0.88 19.8 16.2
growth prospects. In 1949, Graham wrote a book The IL&FS Investment Managers Finance 466 1.17 16.3 14.6
Intelligent Investor, which introduced this method, Jindal Drilling & Industries Crude Oil 495 0.59 10.5 11.5
called the net-net ratio. It helped Graham select stocks MOIL Mining 4070 1.18 5.3 7.3
which were trading close to their liquidation value Voith Paper Fabrics India Textile 250 1.55 0.5 1.2
the market thought they were more likely to go bank-
rupt than reach the proverbial commanding heights. Companies with negative free cash flows
There are two components of the net-net ratio: M-cap FCF yield (%)
Company name Sector (` cr) P/B 3-yr avg 5-yr avg
1. Net current asset value (NCAV) = Current assets
Allied Digital Services IT 155 0.35 -2.6 -19.3
Total liabilities
Smartlink Network Systems IT 267 0.65 -28.1 -14.3
2. Net net working capital (NNWC) = Cash + Short-
term investments + (0.75 Debtors) + (0.50 Inventory) Balaji Telefilms Media 697 1.33 -5.0 -6.1
Total liabilities OMDC Mining 1301 1.56 -4.1 -4.6
Grahams method picked companies that were trad- Seamec Logistics 237 0.48 -4.1 -4.1
ing below 66 per cent of their NCAV or NNWC. Nucleus Software Exports IT 592 1.27 0.1 -0.2
Danger ahead? their NNWC or their NCAV.

The market is thought to be efficient. There are usual- 2. Look for the reasons responsible for the wreckage.
ly good reasons for a stock to trade at rock-bottom 3. Determine if the reasons are fully priced in. Can it
prices. These could range from the loss of a major cus- get much worse?
tomer to technological obsolescence to management 4. Gauge the promoters ability and willingness to
troubles and much else. Graham proposed that even in revive the business.
case of bankruptcy, stocks would earn a positive return We have put together a list of stocks selected on the
for the buyers following the net-net method. This is basis of the net-net ratio. However, we have used a
because the entry price gives an investor the compa- less stringent 30 per cent discount to NNWC and
nys fixed assets and future profits (if any) for free. NCAV. This still gives buyers a substantial safety net
in case of bankruptcy. In order to further refine the
Sifting through the wreckage results and eliminate any bad surprises, we focused
An investor following this method needs to ascertain on cash flows.
the reasons for the stocks fall from grace and deter- The first table lists the companies which have a
mine if its position is likely to worsen significantly. positive free-cash-flow yield (which is obtained by
He also needs to keep a close eye on the promoter a dividing free cash flow by market cap). These compa-
key determinant of the companys future direction. nies have sound cash flows and are likely to be more
Also, bankruptcy in India is a slow, time-consuming promising. The second table lists the companies
and costly process (though the passage of the bank- which have negative free-cash-flow yields.
ruptcy code is likely to smoothen it). Heres a four The lists above are based on quantitative filters
point roadmap for the bargain hunter: and dont consist of our recommendations. WI
1. Filter the stocks that are trading 66 per cent below Mohit Khanna mohit@valueresearch.in

ANALYSTS
DIARY
Going beyond the EPS

Tracking the cash EPS of a company is better than
looking at just the EPS
Wide variation in EPS and cash EPS
M
any investors feel that looking at a
companys basic financial statements Difference between
suffices. However, what is easily available Company name Cash EPS (`) EPS (`) EPS and cash EPS (%)
to us may not be the perfect information. Tata Communications 72.42 -7.43 110%
Sometimes we have to remove the veil of reported
Tata Power Company 9.55 0.62 94%
numbers to see the real picture.
Consider the companies charging high PVR 30.93 3.07 90%
depreciation, amortisation, impairment or other Reliance Communications 17.83 2.87 84%

non-cash expenses in their profit-and-loss accounts. Narayana Hrudayalaya 5.66 0.94 83%
As depreciation or other non-cash expenses go up,
Bharti Airtel 67.04 11.15 83%
the resulting net profit decreases and the stocks
price-to-earnings (P/E) ratio looks high. At times, Hindalco Industries 17.79 4.14 77%
this can be misleading and investors might JK Cement 35.74 9.06 75%
overlook a good investment opportunity due to an
CESC 95.73 27.64 71%
artificially high P/E ratio.
Depreciation is one of the most frequent non- Phoenix Mills 18.13 5.33 71%
cash charges seen in companies accounts. Shree Cement 391.31 130.57 67%
Companies involved in heavy engineering or
Ipca Laboratories 21.31 7.39 65%
construction activities have to spend huge sums of
money upfront on their projects, which start Idea Cellular 23.62 8.87 62%
generating revenues only after a few years. This HPCL 117.70 44.25 62%
initial expenditure is transferred to the companys
Tata Motors 82.82 32.46 61%
balance sheet under fixed assets and every year a
depreciation expense is charged in the profit-and- DLF 7.35 3.08 58%
loss account till the useful life of the project/asset. EIH 5.10 2.16 58%
However, it is the managements discretion to
IRB Infrastructure Developers 35.55 15.45 57%
decide the useful life of an asset. Hence, the
depreciation expense can also be changed, inflating Jubilant FoodWorks 35.42 15.93 55%
or deflating the reported profit numbers. Thus, it ACC 65.95 31.30 53%
makes sense to add back all non-cash expenses to
Power Grid Corporation 19.53 9.65 51%
the net profit of a company and calculate the cash
EPS. An easy way to calculate cash EPS is using Torrent Power 36.30 18.01 50%
the cash flow from operations. Shriram Pistons & Rings 83.05 41.44 50%
Cash EPS = (Net profit + Depreciation)/Number
Aditya Birla Nuvo 288.74 144.81 50%
of shares outstanding
Bharti Infratel 24.52 12.56 49%
The table lists the companies where the difference
between the cash EPS and the EPS is huge. That is, Great Eastern Shipping 124.34 67.39 46%
depreciation is more than 50 per cent of the profit United Breweries 17.69 9.74 45%
before taxes. These companies have earned more cash
Jubilant Life Sciences 48.81 27.09 45%
than what appears in their net-profit numbers. WI
Mohit Khanna mohit@valueresearch.in EPS and cash EPS numbers are as per the year-end data

ANALYSTS
DIARY
Is your bank efficient?

The cost-to-income ratio helps judge how efficiently
a bank is being run
T
he cost-to-income (CI) ratio is probably one of In the figures, the three-year stock-price returns
the most important ratios in the banking of the banks have also been given. As one can
sector, yet it is not much talked about. It is observe, inefficency is often coupled with a fall in
also called the efficiency ratio as it indicates how stock prices.
efficiently a bank carries out its operations. It is So, the takeaway for the stock investor is to focus
calculated as follows: on efficiency of operations, especially in the
Cost-to-income ratio = Operating expenses/(Net banking sector. While the market is optimistic about
interest income + Other income) peaking NPAs and sees good times ahead, they can
The important thing to note here is that this ratio stay elusive forever. WI
does not take provisions into account. Hence, even if Ashish Jain ashish@valueresearch.in
a bank is facing non-performing-asset (NPA)
problems because of a bad economic environment, Banks with improving CI ratios
this ratio is not impacted. Therefore, banks have no %
excuse for an increasing CI ratio, which clearly
-3.36
3-year stock return (%)
shows poor management.
In the accompanying figures, banks whose CI
ratios have improved and worsened over three years
are given (the lower the ratio the better it is). Most
banks whose CI ratios have worsened are public- 37.42 12.35
sector banks. This means that their NPA problem 26.83
40.28
runs even deeper. More than being an NPA issue, it
actually is a problem of efficiency. Public-sector
banks, being government controlled, have run into
their current problems because of mismanagement
by the government.
Banks with deteriorating CI ratios

%
19.80 -7.30 3-year stock return (%)
-13.54 -13.01
1.34
-7.00 10.34 24.36 1.45
1.14 12.68 2.91 -15.21
13.06 42.72 -7.23
-9.89 -14.24
4.91 -9.99

COMPANY TALE
Hero group: Making

sense of whats going on
The departure of Sunil Munjal from Hero MotoCorp is just the tip of
the iceberg of the more complex issues that lie under
O
n a rainy evening in the last two-wheeler maker, at its the realignment of businesses
week of July, Hero headquarters on 1 Nelson Mandela between the Munjal brothers.
MotoCorp Ltd chief Pawan Marg, making the building one of Putting his goodwill to use,
Munjal, 61, and his younger the most high-profile corporate SBM (as Sunil Mittal is fondly
brother Sunil, 55, met up with a offices in New Delhi (the building called) facilitated the recent round
common family friend for dinner. also houses Indias largest car of realignment within the Hero
The friend was Sunil Bharti maker Maruti Suzuki India Ltd.) Group, said a person familiar
Mittal, chairman of Indias largest The meeting, originally planned with the matter who asked not to
telco Bharti Airtel Ltd, a company for a couple of hours, continued be identified.
that has also leased out office well past midnight, not surprising Both the brothers were
space to Hero, the worlds largest given the subject of discussion uncomfortable talking to each

COMPANY TALE
other about the entire process. So sold 5.28% of his 6.21% stake in the seems to have intensified Sunil
they brought in Mittal as a company in two tranches. He had Munjals desire to diversify. He
facilitator, this person said. received the shares as part of a continues to look for acquisitions
Mittals relationship with the family settlement in 2010, according and joint ventures in the defence
Munjals goes back several to which the late Brijmohan equipment manufacturing space,
decades, to the time when both Munjal, Renu Munjal (wife of the said a member of the Munjal
families were into the business of late Raman Munjal), Pawan family.
making bicycle and bicycle parts Munjal, Suman Kant Munjal and Sunil Munjals personal
in Ludhiana. Sunil Munjal were each given a businesses are a small part of the
Mittals father Sat Paul Mittal 6.21% stake in the company. $6 billion Hero group founded by
was a local politician and he A family trust, Bahadur Chand Brijmohan Munjal. Through Hero
himself started off as a supplier Investments Pvt. Ltd, also owned Corporate Services Pvt. Ltd, Sunil
to Hero Cycles. Brijmohan Lall Munjal and his family run
Munjal, the Munjal family businesses spanning insurance
patriarch, always accessible to any distribution, real estate
young person seeking his advice, development (Hero Realty Ltd),
played mentor to Sunil Mittal. steel (Hero Steels Ltd), business
Days after the meeting, on 28 process outsourcing and skill
July, Sunil Munjal decided to step development (Hero Mindmine).
down from his position as Hero As other Munjals from the
MotoCorps joint managing familys next generation started
director to pursue his own tapping new opportunities, Sunil
interests in the defence and Munjal might have felt left out,
power sectors. said a supplier with long-standing
The announcementit came ties to the Hero group and the
barely nine months after the death Heros flagship founding family.
of Brijmohan Munjal at the age of
92was a surprise to most people.
company was run by For instance, Rahul Munjal, son
of the late Raman Kant Munjal,
It was careful not to use the word Brijmohan Munjal founded Hero Future Energies
division, instead stressing
realignment.
and his elder son Pvt. Ltd, a renewable energy firm,
in 2013 with the target of
But members of the Munjal Raman Munjal in the producing 1 gigawatt of power by
family, senior executives, and
suppliers to the group reveal that
beginning. After 2016-17. Rahuls younger brother,
Abhimanyu, founded the groups
the realignment or the division Raman Munjals financial services business, Hero
had been brewing for almost 18
months, spurred, in one part, by
death in 1991, FinCorp Ltd, which expects to
build a 5,000 crore loan book by
emerging business opportunities, Pawan Munjal, 2016-17. Akshay Munjalson of
and in another, by Sunil Munjals
desire to find a clear role for
stepped up and, Suman Kant Munjal, managing
director of Rockman Industries
himself in the group. eventually, started Ltdhas entered the education
The desire to diversify running the show. business by opening a university

in Manesar, Haryana. His brother
Sunil Munjal wanted to diversify Ujjwal runs Hero Electronix,
into the manufacturing of defence which designs and develops semi-
equipment. With 60% of Indias 8.67% in Hero MotoCorp. conductors.
defence requirements met through Sunil Munjal raised `2,810 crore So essentially, if you have
imports, local defence production and entered into talks to acquire noticed, all the other family
has emerged at the heart of the Pipavav Defence and Offshore members have started to put
Narendra Modi governments Engineering Co. Ltd. The talks building blocks for
Make In India programme. failed and Pipavav was eventually diversification and somehow
Munjal sensed an opportunity, acquired by Anil Ambanis Sunil Munjal, who was one of the
and on 18 and 19 February 2015, Reliance Group, but that only first ones in the family to look at

COMPANY TALE
diversification, was left behind, That remained the case even between several arms of the
added the supplier. after the split with Honda and extended Munjal family as an
And it wasnt as if he had a lot Sunil Munjals promotion. Pawan exercise in amicability.
to do at Hero MotoCorp. Munjal oversaw Heros entry into Back then, the Munjals
global markets, the creation of disentangled their cross-holdings
A role for Sunil Munjal its first overseas manufacturing in more than 20 group companies
Sunil Munjal, the joint managing facility, the formation of a new in a manner that each faction of
director of Hero MotoCorp globally diverse team and the family received ownership of
between 17 August 2011 (when he building of a research and the businesses they managed.
was named to the post) and 16 development centre. Hero Honda Motors (now Hero
August 2016 (when he stepped It remains unclear if fissures MotoCorp), the groups flagship,
down), was barely involved in the had developed between the two is owned and managed by the
firms day-to-day operations. None brothers but people familiar with Brijmohan Lall Munjal family.
of the company functions reported the matter said that Hero Om Prakash Munjal and family
to him. He was rarely seen at press MotoCorp could not have now control and manage Hero
conferences organized by Hero. Cycles. The sons of Brijmohan
However, he was present (as was Lall Munjals brother Satyanand
the entire Munjal family) at Munjal have Majestic Auto,
important milestones reached by Highway Cycle, Munjal Auto and
Hero MotoCorp such as the Munjal Showa. Ashok Munjal,
unveiling of the companys brand the son of late Dayanand Munjal,
in 2011 or during the inauguration the eldest of the first generation,
of Heros research and got Sunbeam Auto while his
development centre in March. brother Vijay received Hero
Between 2011-12 and 2014-15, he Exports.
received 131.08 crore as The latest realignment isnt as
remuneration as the companys much about untangling cross
joint managing director, according holdings as it is about meeting
to companys annual reports. At aspirations and tapping
least 60% of the total opportunities. Can Sunil Munjal
remuneration came between 2013- deliver?
14 and 2014-15. It is not too late to begin with.
Sunil Munjals elevation as joint It is a very, very good time, said
managing director of Hero Gita Piramal, a business
MotoCorp came eight months historian and post-doctoral fellow
after the company and its joint at Oxford University.
venture partner of 26 years, Their reputation in two
Honda Motor Co. Ltd decided to go wheelers is excellent. More
their separate ways. importantly, the Modi government
The move was expected to open accommodated two strong may be struggling to put its house
up global opportunities for the personalities. in order but a lot of small changes
Indian company (its agreement And so, the brothers chose to do are being made and that will help
with Honda had crimped global their separate things. improve the business environment
expansion) as well as management in the country. So, if we give Sunil
opportunities for members of the The realignment and after one-two years for getting the
Munjal family. The Munjals do not like messy project started, the time will be apt.
Heros flagship company was and noisy splits. Please do not This is exactly how growth
run by Brijmohan Munjal and his see this development as a family happens in large business
elder son Raman Munjal in the feud or something. Munjals will families. This is how Indian
beginning. After Raman Munjals never wash their dirty linen in business families foster growth,
death in 1991, Pawan Munjal, public, said one person Mint she said. WI
stepped up and, eventually, started spoke to, citing the 2010 By Amrit Raj. In arrangement
running the show. restructuring of holdings with HT Syndication | Mint

THE CHARTIST
The telecom tragedy

Though the telecom sector is indispensable to the nation, yet it suffers from
many overhangs which will keep its growth in check
DEVANGSHU DATTA
I travel quite a lot across India, But voice calls are hardly the reason for SIM
visiting both urban and semi-rural destinations in overkill on my part. I need some level of data
several states, both for work and personal reasons. I use connectivity wherever I go and no service provider
three SIM cards from three different telecom service seems to offer seamless pan-India data connectivity
providers, loaded across two smartphones and a tablet. at anything like reasonable speed.
This plethora of SIMs may seem absurd. But the fact of Sadly, this fragmented low-quality type of service
the matter is that no telecom service provider offers hasnt got any better in the past five years. In fact,
decent all-India coverage. Hence, at any given point, its got worse. Its got so bad in fact that the telecom
only one SIM is actually providing a decent connection. regulator, Telecom Regulatory Authority of India
Two of these SIMs are 4G capable, while the third (TRAI), attempted to impose penalties for call drops,
is 3G. But the connections vary between zero, EDGE, though the Supreme Court struck down that
HSDPA, 3G and 4G, and they are usually at the lower proposal. TRAI should also, in my opinion, have been
end of the scale in terms of speed. One SIM works looking to find carrot-and-stick methods to push
reasonably well in Delhi (my homebase) and it does operators to improve the speed and reliability of
seem to connect in most of North India. Another SIM data networks.
works reasonably well in the West and in some parts How has the telecom industry arrived at this
of the East. The third SIM works reasonably well in messy and unsatisfactory situation? Theres no lack
the East and down South. of demand for services (see figure 1). A mobile
Im not referring solely to voice by the way. Voice connection is considered indispensable for any
calls are pretty bad in terms of quality everywhere. modern society and at almost every income level.
Fig 1: The rise of telecom industry Fig 2: User statistics

195K Revenue growth Subscriber growth 1000 As of December 2015
332
312
180K 900 253
Millions
165K 800
Millions
` crore
120
150K 700
135K 600
Internet users Wireless Smartphone Mobile

120K 500 users users broadband
FY12 FY13 FY14 FY15 FY16 (3G/4G)

THE CHARTIST
There are close to 950 million There arent enough towers to boost
connections (many people, like me, signals, and putting up more towers
have two or three). Urban teledensity is HIGH PRICES can often be difficult because residents
nearly 150 per cent, which means three The next spectrum object due to generic fears of
connections for every two city-
dwellers. Rural teledensity is about 50
auction, scheduled for radiation. The regulations governing
spectrum sharing and trading are also
per cent. late September, has arcane, difficult to understand and
Roughly 250 million people have very high base prices. hard to negotiate.
smartphones (though only about 125 After the famous 2G scam, where
million have 3G/4G connections) and
Given its revenues, the licences were handed out to
data usage has climbed (see figure 2). telecom industry incumbents practically for free,
Data now contributes around 20 per would become pricing for licenses and spectrum
cent of mobile revenues and the
contribution is likely to continue
unsustainable if prices moved to the other extreme. The more
recent auctions have charged very high
rising. Subscribers like watching are at these levels. prices for spectrum and for licenses.
videos; they like buying online and Operators have been forced to take on
making comparisons; they use mobile massive amounts of debt to buy that
wallets to transfer cash and they use apps to do many spectrum and set up infrastructure.
things, ranging from ordering food to hiring The next spectrum auction, scheduled for late
transport. This is all in addition to social-media September (after postponements) has very high base
activity, instant messaging and making VoIP calls prices (see Table 1). If all the spectrum is sold at the
using WhatsApp and Skype. base prices, the auction will realise `5.6 lakh crore (or
However, the telecom market is very competitive `5.6 trillion) and after the spectrum has been bought,
and price-sensitive. There are far too many operators operators will, of course, have to invest more in rolling
scrambling for market share at the moment. Each out networks. Now the industrys total revenues in
player controls very small slices of spectrum, which 201516 was around `1.9 trillion, i.e., the spectrum
makes it hard for them to deliver decent signals. costs roughly three times as much as total revenues.

THE CHARTIST
Table 1: Spectrum auctions Fig 3: Market share

Total spectrum
Others
Date deployed/auctioned (MHz) Cost (` cr) Airtel
12.0% 26.2%
20102016 115.5 2,78,000
Tata
Auctions in Sep 2016 310 5,66,000 5.2%
As of
March 2016
This is unrealistic. The industry would become Aircel Idea
6.8% 19.6%
unsustainable if prices are at these levels.
To add to the fears of incumbent operators,
Reliance Jio is waiting in the wings. It is said to be on RCom Vodafone
the verge of a launch of its 4G offerings, where the 9.8% 20.4%
rumours say it will bundle handsets and data plans.
RJio already has worked out a deal with RCom and the
other operators are now accusing TRAI of favouring areas are being hotly debated and not clearly
RJio. One way or another, if another price war starts, resolved. There are outstanding tax issues.
all incumbent operators will get hurt. The current In the midst of all this, growth projections have to
market shares (see figure 3) will change for sure. be taken with a pinch of salt. Obviously, rural
To make matters worse, the policy connectivity will rise because
regarding spectrum trading and teledensity is still low. Equally true,
sharing is opaque and anyway trading JIO JITTERS the 325 million Internet users of today
and sharing have been banned until
the September auction is done with.
To add to the fears of will probably turn into the 750 million
net users someday. But the pace of
Mergers and acquisitions have started incumbent operators, growth will probably be slower than
happening in this space. RCom has Reliance Jio is waiting anybody is bargaining for and
merged with MTS and it is considering
merging with Aircel. Bharti Airtel has
in the wings. It is said subscribers will remain dissatisfied.
Telecom is an industry with very
bought spectrum from Videocon and to be on the verge of a strong positive externalities because
Aircel and hopes to use it for 4G launch of its 4G good networks can enable all sorts of
services. Sharing of towers is a
common practice and indeed, of the
offerings, where it will businesses and
transactions. But the quality of
commercial
tower majors, Bharti Infratel has a 42 bundle handsets and networks will remain low until at least
per cent stake in Indus Towers (where data plans. some of these issues are resolved. In
Idea Cellular also holds a stake). the absence of quality networks,
More deals are likely but the businesses will struggle along. But
ministry and the regulator will have to be productivity and efficiency will be low.
comfortable with the consolidation pattern. One What will this do to players in this space? Every
major player, Vodafone is still faced with that operator will struggle to generate enough cash flow
infamous retroactive tax demand and its plans to to service debts and earn reasonable returns in this
raise money via an IPO will probably be on hold crowded space. I think there will be shakeouts with
until theres clarity in this area. Other operators will the weaker telecom operators going out of business
have to take on more debt; theres no help for it. and being taken over. This could lead to bubbly
So, the scenario is quite grim. There are networks valuations. As the process of consolidation occurs,
overwhelmed by the rising demand for connectivity. the ministry and the regulator will have to take
Operators are reluctant to invest more. The sensible policy decisions. Its anyones guess if they
government has set very high base prices for an will do so. In the meantime, massive churn will
admittedly scarce resource, spectrum. Subscribers continue and people who travel a lot will continue to
are, by and large, unwilling to pay more and also carry several SIMs. WI
unhappy at the quality of service. Several policy The writer is an independent financial analyst.

COVER STORY
PROMISING
PSUs
While most PSUs have sunk into darkness over time, there are five
that stand out and are likely to do well

COVER STORY
Vikas Vardhan Singh

hen it comes to equity investments, public-sector undertakings (PSUs) have generally
W
been wealth destroyers in the last decade. Their poor performance reflects the fact that
they have some structural problems. We generally dislike PSUs. Because they are gov-
ernment-controlled, they tend to lack long-term orientation due to changing political
regimes. Owing to the absence of a goal-oriented capitalist owner, PSUs are generally
not focused on maximising shareholders return.
Moreover, in many businesses, they have a natural conflict of interest when it comes to choosing
between social welfare and business. Their motive is not to make money. As an investor, you want your
company to have a strong drive for earnings.
Post liberalisation, many PSUs have lost ground to their private counterparts due to sheer inefficien-
cies. For example, erstwhile market leaders MTNL, BSNL and Air India are struggling to keep up opera-
tionally. Out of 468 PSUs, 163 companies were loss-making in the last financial year.
But it is amidst gloomy scenarios that ideal investment opportunities often arise. Among PSUs, there
are a few which are still high-quality businesses and have stood the test of time. In this issue of Wealth
Insight, we look at a handful of such state enterprises. These PSUs have strong moats thanks to their
unique positioning and scale. They operate with pricing power, run a tight ship and, most importantly,
generate excess cash. They have the highest margins and efficiencies in their respective sectors. In short,
these PSUs perform like non-PSUs. Read on.

COVER STORY
BHARAT ELECTRONICS LIMITED
Defending India
Promoted by the Ministry of Defence, BEL is the default choice for defence requirements
and is a good play on the Indian defence theme
Revenues and operating margins
B
harat Electronics Limited (BEL) operates under
the Ministry of Defence. It was established in Revenue (` cr) Operating margin (%)
1954. BEL currently manufactures technology- 7,500 30
driven products for military use, like defence-commu-
nication equipment, sonar systems, radars, naval sys- 6,000 24
tems, electronic-warfare systems, simulators, etc., and

4,500 18
many other non-defence products.
3,000 12
Why we like it
Since the majority of BELs revenues (89 per cent) 1,500 6
come from the defence sector, it is a play on Indias

0 0
defence story. Since it is promoted by the Ministry of FY11 FY12 FY13 FY14 FY15 FY16
Defence, it becomes the default choice for defence
requirements. BEL also has a track record of on-time
work execution and timely delivery. munication system. BEL is poised to explore the inter-
Secondly, the defence sector is technology-driven national market as well. Going by the current defence-
and requires huge investment in R&D, along with time expenditure trend worldwide, the company has a
and patience. Only a PSU can fulfil these requirements promising future.
without worrying about profits for a long period. BEL
has a strong R&D base, a lot of experience and is the Watch out!
biggest partner of Defence Research and Development The defence sector is highly policy-driven.
Organisationn (DRDO). Bureaucratic hurdles, government changes, etc., can
Till recently, BEL had a monopoly in the defence sec- hurt BEL. Entry of foreign player in the long term
tor, but now the sector has been opened up for pri- can pose some problems, especially in the high-
vate and foreign players as well. However, this is end-product segment.
not likely to be a threat for BEL as it will take
much effort and time for the new entrants to catch Our take
up with BEL. Moreover, many projects of the armed BEL has been the most rewarding stock
forces in India are highly secret, and hence BEL amongst PSUs in the last three years. Healthy
becomes the obvious choice for them. orders and its commitment for
R&D make it a good long-term
Whats more? play on the defence sector. WI
BELs revenues have picked up recently and
it is expected to continue to do well
in the coming times. It has a very
healthy order book. In FY16, the
company has received
orders worth `17,094
crore. The company
is expected to
receive even big-
ger orders in the
current financial
year, which include
Akash missile sys-
tem and cellular com-

COVER STORY
CONTAINER CORPORATION OF INDIA
Container-transport giant
With a strategic command over Indian Railways network, Concor has 75 per cent market
share in container movement
C
ontainer Corporation of India (Concor) is a rel-
atively newer PSU. It started its business in Revenue (` cr) Operating margin (%)
1988 by taking over the container-logistics busi- 7,000 35
ness of Indian Railways. The company provides mul- 6,000 30
timodal transport solutions such as container trans-
5,000 25
portation through railways, storage services, air
4,000 20
cargo and supply-chain management. It operates
under the Ministry of Railways. 3,000 15
2,000 10
Why we like it 1,000 5
Since Concor operates under the Ministry of Railways,
0 0
it has strategic command over Indian Railways routes FY11 FY12 FY13 FY14 FY15 FY16
and hence it operates on a very large scale, with a 75 per
cent market share in container movement. This scale of
operation gives it an edge over others as it becomes the rising costs to customers and should continue to enjoy
preferred choice for large-scale export-import operation, this strategic advantage in the near future as well.
which translates into a net margin unmatchable in the
industry. Of the total revenues generated by listed logis- Whats more?
tics companies, Concors share is 25 per cent. It corners The company is planning to set up 15 multimodal logis-
41 per cent of the total operating profits. tics parks alongside the dedicated freight corridor and is
The company has a network of 63 container- working closely with various state industrial corpora-
freight stations and is planning to add 15 tions. It is poised to become a complete logistics-solution
multimodal parks to enhance the capac- provider. It is scaling up its air-cargo services and cold-
ity. With this kind of capacity, it storage chains. The company will be able to enhance its
will take much time and effort capacity with its healthy free-cash-flow streams.
for its nearest rival to match The logistics sector also has very strong long-term
Concors capacity. Thus, growth prospects. The existing low integration of modal
Concor has also been transport and growing manufacturing units in India
able to pass on makes a strong case for Concor.
Watch out!
Concors competitors are growing very fast. If the
company fails to keep up with private counterparts,
it can feel the heat in five years or so.
Our take
Currently, the company is trading at its
peak valuation. Keep it in your
watch list. WI

COVER STORY
LIC HOUSING FINANCE
A roof over head

LIC Housing, with its brand name, network and existing relationships, is one of the best
candidates to exploit the housing opportunity in India
Revenues and net interest margins
L
IC Housing Finance is one of the largest Indian
mortgage-based finance companies mainly Revenue (` cr) Net interest margins (%)
focused on retail home loans. It is an indirect 12,500 3.75
PSU as it is promoted by another PSU, Life Insurance
Corporation of India (LIC). Since there is no direct 10,000 3.00
intervention of the government, thats one point where
7,500 2.25
it scores over other PSUs.
5,000 1.50
Why we like it
LIC Housing has a good loan portfolio. Retail cus- 2,500 0.75
tomers comprise 97 per cent of it and the rest is com-
0 0
prised of real-estate companies. High retail exposure FY11 FY12 FY13 FY14 FY15 FY16
insulates it from economic cyclicality and ensures reg-
ular payments, which are otherwise a problem with
corporate loans. Amongst its retail customers, 88 per many years to come. LIC Housing, with its brand
cent are salaried. This translates into higher pre- name, network and existing relationships, is one of the
dictability in loan servicing. Timely loan servicing is best candidates to exploit this opportunity. The nature
also reflected in its asset quality. The company has low of its loan book will also ensure that the asset quality
gross NPAs of 0.6 per cent and net NPAs of 0.3 per remains good.
cent (as of June 2016). These numbers are even better
than those of its larger peer HDFC. Watch out!
The company has one of the finest retail-customer The company needs to manage its liability side more
base thanks to its LIC parentage. LIC has replicated its efficiently to improve its net interest margin (NIM),
expertise in managing agent-customer relationships at which is around 2.60 per cent. Though the NIM has
LIC Housing as well. Almost 60 per cent of LIC improved over one year, it has declined from the 3 per
Housings business is generated by LIC agents. In cent levels five years back.
smaller cites, people trust the name LIC and easily
extend their insurance relationship to a home-loan Our take
one. The companys loan book has grown at a healthy The stock is trading at price to book of 2.89. This is
annualised rate of 20 per cent in the past five years. lower than most of its peers. Given the asset quality,
parentage and growth opportunities,
Whats more? LIC Housing makes a good investment
The need for housing has been grow- opportunity. WI
ing at a healthy pace in India, espe-
cially in tier II and tier III cities. It is
likely to remain so for

COVER STORY
NBCC (INDIA)
The thriving realty player

Unlike other real-estate companies which have been nightmarish to investors, NBCC has
only become stronger with time and is also likely to do well in the future
Revenues and operating margins ment colonies and commercial areas like Kidwai
Revenue (` cr) Operating margin (%) Nagar and Vasant Kunj in New Delhi.
6,000 12 The company has huge land parcels, acquired many
years ago, in major cities. The company can exploit
5,000 10
these lands for commercial purposes. In fact, it has
4,000 8 already started doing so.
3,000 6
NBCC is financially strong. It has a clean balance
sheet, zero debt and abundance of cash; its a rare
2,000 4 breed in the real-estate sector. The company has a good
1,000 2 float its working-capital requirement is negative. It
thus doesnt have to raise funds at high interest rates,
0 0
FY11 FY12 FY13 FY14 FY15 FY16 a practice which is quite common in the sector. The
reason for its float is that it receives most of its funds
in advance from the government.
N
BCC (India) (formerly called National Buildings
Construction Corporation) operates under the Whats more?
Ministry of Urban Development and under- Apart from low-margin project management, it is
takes mostly governments civil-engineering and con- focusing on the real-estate segment, which is a high-
struction projects. Operating since 1960, the company margin business. Since its a government establish-
has built capacity to execute large-scale construction ment, this lends a trust factor to its residential projects
projects. The majority of its business comes from proj- and it witnesses a huge rush for its projects. Its lands
ect-management consultancy, wherein it provides con- are at prime locations. Its order book currently stands
sultation on and outsourcing of the construction of at around `31,000 crore, which will ensure regular
residential property, offices, commercial property, edu- income in the near future.
cational institutions, roads, water supply and storage
solutions under a fee-based model. The real-estate divi- Watch out!
sion develops commercial and residential projects. It Sometimes NBCC faces delays in the redevelopment
has land reserve of around 145 acres in many cities, projects in Delhi and other metro cities due to
including major metros. bureaucratic hurdles and the slow pace of govern-
ment decision-making.
Why we like it
The real-estate sector has been struggling, but NBCC Our take
has thrived in the past decade. Since its major cus- NBCC is an expensive stock because of its income
tomer is the government, it gets a plethora of projects visibility and growth story. Accumulate it at
and timely payments. Thus, it is somewhat insulated lower valuations. WI
from economic downturns and sectoral cycles. It has
many projects in the pipeline and hence a bulging
order book. The major ones include various rede-
velopment projects of old govern-

COVER STORY
POWER GRID CORPORATION OF INDIA
Indias electricity postman

Power Grid has monopoly over long-distance inter-state power transmission and has
cornered almost half of the transmission share in the country
P
ower Grid Corporation of India, one of the largest
PSUs, was formed in 1992. This was the time when Revenue (` cr) Operating margin (%)
India was witnessing a transition to liberalisation 25,000 92
from the licence raj. Since then, it has grown at an
extraordinary pace to quench Indias power thirst. 20,000 90
Power Grid is a central-transmission utility. It operates
15,000 88
under the Ministry of Power. The company acts as a con-
necting factor between power-generating companies, 10,000 86
like NTPC, and power-trading companies by carrying
electricity through its nationwide grid network. 5,000 84
0 82
Why we like it FY11 FY12 FY13 FY14 FY15 FY16
The power sector is one of the most capital-
extensive sectors. Especially, creating a
nationwide grid to carry very-high power is insulated from competition for the foreseeable future.
not an easy task. The kind of capital that is Changes in the methods of power generation and distri-
required in this business can only be pro- bution are not likely to affect the company.
vided by the sovereign, and this
makes Power Grid a monopoly Whats more?
player. It has monopoly over Despite operating for the last 24 years, Power Grid is still
long-distance inter-state going through massive capacity expansion and this
power transmission and has should continue for the next decade. Once its capital
cornered almost half of the expenditure cools down, it will start generating large
transmission share in the free cash flows with minimum recurring expenses.
country. It operates about The company is also implementing projects under the
1,30,020 circuit km of Rajiv Gandhi Grameen Vidyutikaran Yojana, which will
transmission lines, with speed up its net-worth strength.
210 substations and trans- Power Grid has used its infrastructure capabilities to
formation capacity of develop an optic-fibre network of about 36,563 km. Since
about 2,59,163 MVA (as on internet connectivity is going to be the next big necessi-
May 31, 2016). Given the ty, its room for growth is susbstantial. Power Girds long-
scale, Power Grid has term plans include extension of this network to the
also maintained neighbouring SAARC countries.
healthy efficiency,
which is comparable Watch out!
to its global peers. Power Grid has a total debt of around `1 lakh crore,
Its business is which is about 2.5 times the equity. But the companys
cash flows are strong enough to service it uninterrupted-
ly. Secondly, to maintain the debt-to-equity level the com-
pany has also issued equity from time to time. Thus,
equity dilution for existing investors may occur in the
future as well.
Our take
The stock is available at reasonable valuations. At a PEG
ratio of 0.43, it makes a compelling investment case. WI

MAINSTREET
Great Indian companies

Of some 1,500 companies in India that have a market cap of over
`100 crore, only 16 have reliable financial performance
SAURABH MUKHERJEA
Greatness is not a function of circumstance. Greatness, it turns out, is a largely a

matter of conscious choice. Jim Collins, Good to Great, 2001
I moved to India in 2008 to work in profitability, in my view, are sufficient to assess the
the Indian stock market. Whilst I have captured my success of a franchise. Thus, my stock-selection filters
journey to understand India in my book Gurus of are companies that deliver revenue growth of 10 per
Chaos: Modern Indias Money Masters, my new book cent and return on capital employed (RoCE) of 15 per
The Unusual Billionaires delves into the issue of why cent every year for the past ten years.
there are so few Indian companies which deliver Why revenue growth of 10 per cent every year?
reliable financial performance over meaningful Indias nominal GDP growth rate has averaged 14.5 per
periods of time. Let me begin by being precise about cent over the past ten years. However, very few listed
what I define as reliable financial performance over companies have managed to achieve this! Therefore, I
meaningful periods of time. reduce this filter rate modestly to 10 per cent.
Step 1: Define long periods: A decade in India usually Why return on capital employed (RoCE)? A
accommodates both the up and down cycles in the company uses capital to invest in assets, which in turn
economy. For example, the decade from generate cash flows and earnings. This
FY06 (i.e., the financial year ending capital invested consists of equity and
March 31, 2006) to FY15 (i.e., the SHAREHOLDER debt, and the sum of the cost of equity
financial year ending March 31, 2015) and the cost of debt (weighted in
coincides with six years of strong
VALUE proportion to their share in total
economic growth (FY06 to FY11, where The excess of RoCE capital) is known more popularly as the
average nominal GDP growth was 15.7
per cent) and four years of weak
over WACC is a weighted average cost of capital or
WACC. A measure of a companys
economic growth (FY12 to FY15, where measure of the excess effectiveness in investing its capital is
average nominal GDP growth was 12.8 returns to an investor. to compare its WACC with the quantum
per cent). Hence, measuring greatness
over a decadal period should not
If a company grows of cash flows or earnings generated by
the investment. The latter is known as
unfairly penalise cyclical companies, without excess returns, the return on capital employed.
nor unfairly advantage companies in it creates no value for Companies with low RoCEs keep
more stable, steady sectors.
Step 2: Define superior financial
equity investors. requiring external infusions of capital
to fund their growth. Therefore, this
performance: At the very basic level, a company doing excess of RoCE over WACC is a measure of the excess
well would mean that it is profitable and it is growing returns to an investor in the company. It follows,
(by successfully reinvesting its profits). Over very long therefore, that if a company grows without excess
periods of time, the twin filters of growth and returns, it creates no value for equity investors. In

MAINSTREET
general, I have found RoCE is the single biggest factor Marico: Over the last 25 years, Marico has built a strong
affecting a companys stock price. consumer franchise by (a) focusing on its core
Why minimum RoCE of 15 per cent? The minimum categories hair oil and edible oils; (b) building a work
return that one would rationally expect from equities culture based on values such as empowerment,
is the risk-free return that you would earn if you meritocracy, innovation, openness and integrity; and (c)
invested in the safest investment in India, namely, prudent capital allocation, which balances deepening of
government bonds. In early 2016, the Government of competitive moats in India for example through
Indias ten-year bonds were giving a return of around installing best-in-class inventory management systems
8 per cent. Given that equities carry an element of risk for its dealers, with expansion overseas.
that government bonds dont, an equity investor would Asian Paints: Asian Paints is a rare example of a large
want a premium return for this extra risk. This is the Indian company, held by multiple promoters and yet
equity-risk premium the extra return an investor run by a high-calibre, professional management team.
expects over and above the risk-free rate for Over the last fifty years, no Indian company has
investing in equities. The equity-risk premium, been able to match Asian Paints consistent
in turn, is calculated as 4 per cent (the long- delivery of growth in revenues, earnings and
term US equity risk premium) plus 250 bps to returns on capital employed. With over 50 per
account for Indias rating (BBB- cent share of the Indian paints
as per S&P). Hence, adding the market, in my framework,
risk-free rate (8 per cent) and Asian Paints stands out as
an equity-risk premium of the best amongst the best.
6.57 per cent gives cost of Berger Paints: In post-1991
capital of broadly 15 per India, Berger Paints has
cent. Note further that over cemented its position as
the past 20 years and 30 years, Indias second-largest paint
the Sensex has delivered firm. Its current promoter and
returns of around 15 per cent management team are
per annum, thus validating nurturing the key factors
my point of view that 15 that have defined its
per cent is a sensible success since 1970s,
measure of the cost of around quality of talent, a
capital for an Indian refreshingly enlightened
company. Therefore, if a employee work culture and
company is to be deemed to be prudent capital allocation.
great, it has to deliver an ROCE in excess of 15 Page Industries: Leveraging on their experience
per cent per annum over long periods of time. of successfully operating Jockeys master
There are around 1,500 companies in India with franchise in Philippines, Pages promoters have
a market cap of `1 billion (`100 crore) or more. So, if delivered a unique product proposition in Indias fast-
we look at the period of FY0615, how many of these growing innerwear segment comfort and durability,
companies passed the twin filters of over 10 per cent with an aspirational brand at an affordable price a
revenue growth and 15 per cent ROCE? The answer is combination that nobody else has been able to replicate.
16 or 1 per cent of our population of the 1,500 largest Astral Poly: In the last decade and a half, Astral has
listed companies in India. Amongst these 16, the crme emerged as Indias strongest chlorinated-poly-vinyl-
de la crme includes the following: chloride (CPVC) pipes franchise, despite facing stiff
ITC: For over a century now, ITC has had market share competition from much larger peers such as Supreme
in the Indian cigarette market in excess of 70 per cent. and Finolex. The company maintained focus on
It has used the free cashflow arising from its dominant prudent capital allocation, which manifested in strong
position in cigarettes to pay hefty dividends to its earnings growth (41 per cent CAGR) and average RoCE
shareholders (over the past decade, ITCs dividend of 23 per cent over FY0515.
payout ratio has been in excess of 50 per cent) and to HDFC Bank: Right from its inception in 1994, HDFC
build a formidable FMCG franchise (the second- Bank has delivered clockwork-like execution, with a
largest in India after HUL). high focus on low-cost funds, conservative lending and

MAINSTREET
technology-driven solutions. Thus, HDFC Banks slowdown? Slowdown is in the mind! If you create new
stable financial performance has been driven by a product segments, if you create leadership, if you
balanced set of underlying drivers: net interest create brand, growth will be strong and ahead of
margins, operational efficiency and super asset industry. The challenge for most successful Indian
quality. companies is that once the first-generation promoter
There are three reasons for the small number of exits the business, his progeny rarely have the
reliable Indian companies: stomach for the amount of work required to further
1. Focus on the long term (more than ten years) without being deepen the competitive moats. As a result, second-
distracted by short-term gambles: For 99 per cent of Indian generation promoters usually oversee the slide to
promoters, the opportunistic gene is so deeply mediocrity of what their ancestors built.
embedded that as soon as they spot a new sector they 3. Sensibly allocate capital whilst studiously avoiding
can venture into, they go off-strategy. As the leading betting the balance sheet on expensive and unrelated
market-strategy consultant Rama Bijapurkar says, forays: As successful companies grow, they throw off
Most companies tend to focus on short-term results ever-increasing amounts of cash. The challenge then
and hence that makes them frequently becomes to allocate this cash in such a
do things that deviate away from their way that ROCE does not suffer. Beyond
articulated strategy these diversions
OFF THE TRACK a point, the best way to protect ROCE
take them away from the path they have For 99 per cent of is to return large amounts of money to
to travel on to achieve their long-term Indian promoters, the shareholders, something that most
goals the willingness to resist the promoters find hard to stomach. ITC
temptation of short-term off-strategy opportunistic gene is stands out as an example of a firm
profits for long-term sustainable gain is so deeply embedded that has always returned large
not there in most Indian companies. that as soon as they amounts of money to shareholders
2. Constantly deepen the moat around the whilst making modest (by the
core franchise using the IBAS (innovation, spot a new sector they standards of its large balance sheet)
brands, architecture and strategic assets) can venture into, they investments in new businesses.
framework: The IBAS framework was go off-strategy. Similarly, Asian Paints has forayed
created by the legendary British overseas but never stretched its
economist John Kay and captures balance sheet for this purpose. In a
neatly how great companies strive over many decades chat with me in November 2015, KBS Anand, MD and
to create sustainable competitive advantages (which, CEO of Asian Paints, had this to say on the impact of
in turn, allow them to pull away from their the home improvements business on RoCE: At the
competitors). Examples of this theme include Asian moment, the home-improvements business is too
Paints use of IT as early as the 1970s to help forecast small to have any significant impact on the overall
sales patterns. Similarly, Astral Poly Technik has firms RoCE. But if you are talking about building
innovated with its CPVC pipes and fittings by long-term strength with your channel partners, then
launching products that are lead-free, soundproof, whatever RoCE we lose in the new business will be
bendable, etc. As Mr Sandeep Engineer, Promoter of more than offset by increase in RoCE of the paints
Astral PolyTechnik, told me, We grew at 40 per cent business. WI
plus CAGR for more than seven-eight years up to 2014 Saurabh Mukherjea is CEO - Institutional Equities at Ambit Capital and
while the economy wasnt that strong; where was the the author of Gurus of Chaos: Modern Indias Money Masters.

INTERVIEW DUVVURI SUBBARAO, Former governor, Reserve Bank of India
Behind closed doors

of the RBI
In his book Who Moved My Interest Rate, Duvvuri Subbarao makes disclosures
about the travails of being the RBI governor, especially when it comes to
coordination with the government. Edited excerpts from an interview with him.

INTERVIEW
came from the government, so did it And that different point of view emerges
Duvvuri Subbarao, 67 really surprise you? from a difference in priorities?
Subbarao was the governor of To some extent, I expected it. I may Yes. I think some of these differ-
the Reserve Bank of India have been a greenhorn governor ences are inherent due to the
between 5 September 2008 but I was not a greenhorn to the growth-inflation tension. But that
and 4 September 2013. Prior to system. So I was privy to the way is the very rationale for giving the
that, Subbarao was finance the system works. But the precise central bank autonomy.
secretary in the central govern- form in which this pressure was The point is that the central bank
ment. He holds a BSc (Hons) in exerted was unexpected and was a should take a long-term view dis-
Physics from IIT Kharagpur, and function of the circumstances in tinct from a government which
an MSc in Physics from IIT which we were operating. views issues over a shorter time
Kanpur. He has a PhD in frame due to democratic compul-
economics; he wrote his thesis You have written specifically about sions such as election cycles.
on fiscal reforms at the the pressure from both Pranab This is the case even though some
sub-national level. Now retired Mukherjee and P. Chidambaram. In elections have been won and lost on
from public service, he is a Chidambarams case you recall the issues like onion prices.
distinguished visiting fellow at very public rebuke of the RBI when he But, increasingly, we are seeing
the National University of said the government would walk that growth is becoming the plank
Singapore. alone to support growth after the on which politicians are betting on
RBI did not cut interest rates in partly because of the demographics.
2012. What was the reaction from There are so many young people in
Chidambaram to your book? the country and you have to try and
Why did you decide to write this book? He has been very generous and has fulfil their aspirations.
Past RBI governors have written about endorsed my book. Of course he
the economy, sure, but no one has has his own point of view, but he Your book gives the impression that
chosen to do a tell-all book. So why? said in an interview that he autonomy for the RBI is not a given but
One reason is precisely that no one believes in freedom of speech. almost a daily struggle. Is that the case?
has written about their experience at This is me telling my story. It is not a daily struggle, but yes, cer-
the RBI, so I thought a book like this tainly, autonomy is an issue. The RBI
would add value to the public under- You speak fondly of Manmohan Singh has to assert its autonomy because
standing of the Reserve Bank. in the book. Were you not that is critical to the credibility of
Second, I was at the RBI through a disappointed that a government led the Reserve Bank on monetary and
crisis period. There was both com- by him was not more sensitive to the regulatory policies. The RBI should
mendation and criticism for what I RBIs concerns? not only assert its autonomy but
did while at the helm but I thought I It is difficult for me to make a judg- should also be seen to be asserting
should communicate the challenges ment on that. But the prime minis- its autonomy.
that a governor confronts. The book ter perhaps has his own compul-
is not intended to defend my record sions which I cannot presume to You write in your book that the
or to establish my legacy or to understand. friction between central banks and
reshape the narrative, but to give my governments is not unique to India.
perspective on the decisions I took. What drove you to stay the course In fact, you quote an example from
I also want to demystify the despite all the pressure? the US and write: In India, in
Reserve Bank. So I thought making You go with your best professional particular, it is inconceivable that
people understand what the RBI judgment and what you believe is any politician would attack the RBI
does and why it does what it does in the best interest of the country. so sharply... What did you then
would enhance understanding of the As I say right at the end of the make of the attack on Raghuram
central bank. book, you have to perform your Rajan by Subramanian Swamy?
dharma as the governor of the I wrote that before the recent
One theme that comes out through the Reserve Bank of India. Therefore episode. If I was writing it today, I
book is the friction between the you have to do what you think is would not have written that. The
government and the RBI. Very early in correct even if different stake- entire episode dismayed me. The
the book you talk about this and say that holders like the government have political establishment, not just this
it is decidedly unhelpful. But you a different point of view. government, needs to make a state-

INTERVIEW
ment through their actions that they known that then, monetary policy Most certainly. Managing the
respect the autonomy of democratic would have been tighter. So data does exchange rate towards the end of
institutions and public policy insti- wrong-foot the Reserve Bank and my tenure was certainly the most
tutions in the country. continues to do so. challenging episode of my tenure.
It was the Reserve Banks decision
Moving on to some of the other Speaking of data, your book says that to use monetary policy tools as an
challenges you faced. One of them was there was pressure on the RBI to project exchange rate defence. We had mar-
the quality of economic data. How much growth rates higher than what they were ket intelligence that a lot of specu-
tougher did that make it for you to comfortable with... lation was going on, including by
decide on policy actions? Yes that did enter the discourse of big corporates in the country, on
We had data but we were aware that conversation between the RBI and the exchange rate. This speculation
the data was flawed. But you still the government. was being facilitated by the amount
have to work with what you have. That is counterproductive. You of liquidity available. So tightening
What this meant was that in some want a higher growth forecast but liquidity was important to arrest
instances, policy can end up being you want the RBI to maintain easy that speculation, which, in times of
wrongfooted. For instance, in 2009- monetary policy, which is logically crisis, can be self-reinforcing.
10, data was showing us that growth inconsistent.
was still fragile and that is why we Did it go wrong partly because of
were raising rates in baby steps even Another challenge you faced was in communication? You use an
though inflation had picked up. We managing the exchange rate. You interesting analogy in the book where
now know that growth was almost a acknowledge that there were errors you say that the central bank is
percentage point higher than what made, particularly during the taper expected to be alpha male in its
we thought and India was actually tantrum. Was this one of the most communication and that you may not
seeing a V-shaped recovery. If we had challenging aspects of your tenure? have been strong enough?
I still agonize about why it went
wrong. It was partly because of
communication and also partly
because the market was not expect-
ing it. My thinking was that the
market would see this as resolve on
the part of the Reserve Bank of
India to defend the currency. But
because of the communication
afterwards, they saw it as panic
which added to the pressure.
Alpha male was not my phrase,
but yes, some people believed that I
should have been more confident
both in my oral language and my
body language.
But you also have to recognize
that there was pressure on the
rupee due to weakening domestic
fundamentals. There was massive
adjustment needed on the rupee
and the taper tantrum just became
the excuse for that correction.
We were aware that the data was What was needed on the part of
the RBI and the government was to
flawed. But you still have to work with manage the trajectory of that
what you have... In some instances, adjustment. Looking back on that,

I think I could have done things
policy can end up being wrongfooted. differently.

INTERVIEW
You also highlight that the RBIs stated

policy on foreign exchange, where it says
it intervenes only to manage volatility,
needs to re-examined. Since reserve
accumulation is not part of the stated
goals, you did not absorb excess inflows
in previous years, you wrote.
Yes, I believe that the stated policy
needs to be adjusted. If reserve accu-
mulation is part of the policy, you
should say that.
I would certainly advise that the
Reserve Bank policy be re-enunciat-
ed to build in the various objectives
and also to be more specific. For
instance, you should probably say
that your exchange rate policy is not
only to manage volatility but also to
build self-insurance. Also, you
should define volatility.
The argument by my staff was
always that you should not tie your-
self down, and in times of crisis, you
will regret having done it. But I
You have to perform your dharma...
think you owe it to the market to be you have to do what you think is cor-
as specific as possible.
rect even if different stakeholders,
One issue that is not spoken of in like the government, have a different
your book is whether there was
pressure on lending decisions of point of view.
banks from the government.
I have no first-hand experience of ning of that was made during my fiscal consolidation. But it could
that. I only read what is written and tenure and completed during also, in some cases, become difficult
speculated in the press. Raghuram Rajans tenure. to deliver on the inflation target if
you have to be sensitive to growth
But given the surge in bad loans that we Coming to some of the changes we are or financial stability concerns.
have seen, do you think these bad loans seeing now, you say that you are
were being hidden under the carpet? comfortable with the inflation Are you comfortable with the monetary
I dont think anything was being hid- targeting framework. policy committee (MPC) framework?
den under the carpet. Yes, but I also said that it has not I am quite comfortable with that.
The Reserve Banks supervision is been fully tested and I also said that MPC was actually one of the top-
very strong. And we would constant- it would be challenging for the ics I was quizzed on when I was
ly advise banks on what they should Reserve Bank to deliver on the target being considered for the gover-
do based on the supervision reports. all the time. But yes, thats the way to nors post. However, I think that
go forward. there should have been a transi-
Should you have withdrawn regulatory tion period where the governor
forbearance for restructured assets Will friction between the government was given veto power. But if the
sooner? and the RBI worsen in the current government has decided, presum-
We did do that. The regulatory for- framework since fiscal policy will be key ably after discussing with the RBI,
bearance given was not consistent to meeting the target? that a transition period is not
with international standards. We You could look at it either way. needed, then so be it. WI
were aware that we have to roll Having an inflation target could give By Ira Dugal. In arrangement
back that forbearance. The begin- the RBI more room in pushing for with HT Syndication | Mint

STRAIGHT TALK
Fundamental investing in 3 steps

Essentially, fundamental investing is about assessing cash flows, reexamining
assumptions and staying updated on new developments
ANAND TANDON
Early in August, the SEBI invited revolves around earnings and earnings growth.
public comments on ways to introduce limits on algo However, it is well known that what drives value in a
trading. Traders were disappointed at the attempt of company is not its profits (which can be increased by
the regulator to impose restrictions in ways that financial engineering) but its ability to generate an
would reduce their ability to benefit from high- economic return over the cost of capital. Companies
powered computers, co-located with exchange servers that consistently generate a rate of return higher than
to provide that nanosecond advantage before prices the cost of capital are likely to be doing something that
are available to all. Interestingly, the thrust of the is difficult to replicate and this requires
SEBIs approach seems to be to reduce the advantage understanding the competitive position of the company.
of high-frequency traders only slow-moving Fundamental investing is about estimating the present
algorithms are unlikely to be affected. value of future cash flows and that
While the debate rages on about the requires understanding the magnitude
need and trade-offs for imposing and timing of free cash flows over time.
restrictions, Mark Mouboussin of
CASH FLOWS Besides its competitive position, it is
Credit Suisse put out a note on traits Fundamental investing also important to understand unit-cost
that make for great fundamental
is about estimating the economics what really drives the cash
investing. In an era dominated by high flow of companies. For example, is each
computing power, it is instructive to re- present value of future transaction with a client making money
look at the principles and requirements cash flows and that or is it based on multiple transactions
that drive investment performance.
requires understanding with the client before the company
makes money, i.e., is the cost of
Ten attributes in three the magnitude and acquisition of clients high or low? This
Mouboussins note makes a list of ten timing of free cash flows will determine how easy it will be for
attributes. Now, most such lists end in
over time. new entrants to chip away at the
ten not because of any intrinsic feature business of incumbents and
of the subject in hand but because it consequently how much you should pay
appears to be a reasonable length an adequate trade- for this forecast cash flow
off between too long and two short. I will summarise The most-important aspect of this analysis is to
this into a list of three my favoured length beyond understand that these are forecasts and therefore
which, dear reader, I will likely lose your attention. prone to errors. It is necessary to think
probabilistically the expected value of future cash
Know the business: Cash is fact; profit is an flows needs to exceed the expected value of cost of
opinion Al Rappaport capital for the investment to work. And almost as a
Financial statements are the starting point of corollary, it is important to update expectations as
investing. They present an investor with a snapshot of fresh information comes in that changes future
financial position of a company. Most investing estimates, which bring up the next point

STRAIGHT TALK
Know yourself: Beliefs are hypotheses to be

tested, not treasures to be protected
The famous quote When facts change, I change
my mind what do you do? has been variously
attributed to Samuelson, Keynes and some
others. This effectively sums up the need to
constantly re-examine the assumptions made
when making an investment. The confirmation
bias is a well-analysed human behaviour,
where we seek out opinions that support our
own and disregard those that are opposed. Good
investment requires being actively open-
minded a term coined by Jonathan Baron
(professor of psychology at university of
Pennslyvania) indicating a willingness to
actively search for evidence against ones
beliefs and to weigh such evidence fairly when
it is available. This constant evaluation of ones
position can be unsettling, but it remains a
hallmark of a good investor.
Behavioural finance has made large strides
in recent years, pointing out how humans use
heuristics and anchoring to make quick
decisions. While these are useful traits, they
also lead to judgements that can be erroneous
and need to be guarded against.
One key distinction to be made is between
the information content conveyed by stock-
price movement, and the effect of influence.
While prices are determined by equilibrium
between demand and supply and often provide
information about the market, they do tend to move a position is going in your favour is a key learning.
to extremes, leading to bubbles and depressions. With larger bets comes the need to understand
This has been modelled in various ways, including where the danger may come from. Also, to get ideas
through a threshold model where despite not before they become mainstream, its important to
agreeing with the price information, investors are have a world view that is constantly updated.
forced to participate along with the price movement. Reading about everything is the easiest form of
A crowd is often right, but when it is wrong, keeping abreast of new ideas and constantly
psychological fortitude is needed to go against the updating oneself. Without this constantly updated
grain. viewpoint, stagnation is inevitable.
Many of these statements sound like homilies but
Know when to hold em, know when to fold em, implementing these can lead to consistent and
know when to walk away profitable portfolio performance. That said, its easier
A large part of portfolio performance comes from said than done and requires regular practice. At a time
position sizing. While most investors focus on trying when asset markets seem to be making new rules, it
to find a stock where they have an edge, unless may be useful to remember that this time it is
backed by a bet size that is significant, it is unlikely to different is the one statement that has proven
significantly change performance of the portfolio. A consistently wrong when it comes to investment
1 per cent allocation can only increase performance by performance over decades. Some things dont change
1 per cent on an overall basis if it doubles. Knowing and it is useful to remember that. WI
when to take a large bet or increase the bet size when Anand Tandon is an independent analyst.

INTERVIEW KUMAR MANGALAM BIRLA, Chairman, Aditya Birla Group
Mega merger in the

Aditya Birla Group
Though the market has given a thumbs down to the proposed merger of Aditya
Birla Nuvo and Grasim Industries by thrashing the stocks of the two companies, it
is going to be one of the most significant mergers in Indian corporate history

INTERVIEW
The merger-and-acquisition space etc. Now no more spin-offs. make them understand this
is buzz with a new deal. The complex restructuring.
Aditya Birla Group is merging two How do you see this merger working
of its main companies, Aditya out in terms of synergies? Are you open to having an investor in
Birla Nuvo and Grasim Industries. We have strong businesses that are Aditya Birla Financial Services?
The reasons cited for the merger throwing up cash. If you look at Yes. We are open to having
are creating a stronger entity and the portfolio, VSF (viscose staple financial investors.
unlocking shareholder value. fibre) and chemicals are cash-gen-
Also, the group wants to focus erating businesses. Both have a Which unit needs funds under Aditya
more on its financial-services presence in similar spaces. Both Birla Financial Services?
business and hence Aditya Birla come under the broad umbrella of The lending business may need
Financial Services, which is cur- textiles. Both have holdings in more funds at this point of time.
rently a subsidiary of Aditya Birla some of our operating companies
Nuvo, will be spun off and like Hindalco, ABFRL (Aditya Any plans to apply for a bank
listed as an independent unit. Birla Fashion and Retail Ltd). It licence?
The merger will create an entity makes sense to merge them. No. We are now focusing on (being
with yearly revenue of `59,766 a) non-banking financial company.
crore and net profit of `4,245 crore. Minority shareholders are not very
Meanwhile, on the announcement happy about the transaction... Are you happy with the government's
of the merger, Aditya Birla Nuvos It is a complex deal. Whatever the initiatives?
stock dived around 20 per cent. media has reported is speculative. I am very optimistic. The govern-
Clearly, the market didnt like the That was not the correct structure. ment is doing all the right things.
idea. Here are the edited excerpts It will take some time to commu- India has considerably improved on
from an interview conducted with nicate to them. You cannot jump the ease of doing business index.
Kumar Mangalam Birla, the gun. Goods and services tax is a shot
Chairman of Aditya Birla Group. in the arm. There are green shoots
How will you convince the seen in the demand for alumini-
Why did you opt for such a complex shareholders? um. Cement demand has also
structure instead of demerging only It's a very interesting mix of busi- started seeing some sprouts.
Aditya Birla Financial Services from nesses, some manufacturing, some
Aditya Birla Nuvo? financial services. Some throwing Which of your businesses will be
We wanted Aditya Birla Financial up cash, others little more stable growth drivers?
Services to have a strong parent- in their growth outlook. Some that Cement, fibre, chemicals, finan-
age that can fuel growth. are fast growing. It's a very inter- cial services. Some of these are
esting mix between manufactur- the fastest growing sectors in
Is Idea Cellular part of this ing and services. Essentially, to the company.
restructuring? put it succinctly, it's a play on the
Telecommunications was never India growth story. What is the capex planned for this year?
part of this construct. Idea This transaction has just been We have just come off a huge
Cellular has been investing announced. What has been put out capex cycle. We have just spent
around `10,000 crore in the last 10 in the press has been speculative. `20,000 crore on purchase of
years without any support. What minority shareholders have Jaiprakash Associates Ltd's
reacted to was based on specula- cement assets. We have come off a
What is the trigger for the exercise? tion. A complex transaction like capex of `30,000 crore on Hindalco
The financial services company this takes time to understand. over the last 3-4 years. So you have
has come of age. It has reached a to see what part of the cycle we are
critical mass. So we thought it had Grasim shareholders have not asked in. We are in a phase where sever-
to be spun off. We have been delib- for a such transaction. Are you al of our businesses have just
erating this for some time. imposing such a transaction come off a large capex. Now is the
on them? time to see returns come from that
Are more spin-offs expected? Management has to run the com- capex. WI
No. We have already spun off pany and convince (shareholders) By Ira Dugal. In arrangement
Carbon Black, Fashion and Retail, about the growth plans. We need to with HT Syndication | Mint

GENERALLY
SPEAKING
Indias job challenge

With around 1.2 crore people entering the workforce yearly, the need
to create more jobs, especially low-skilled ones, has got more pressing
VIVEK KAUL
Some time back I got talking to an labour laws, education, ease of doing business and
economist close to the current Narendra Modi land acquisition.
government. My question to him was very simple: does Indias convoluted labour laws have not allowed
the current government realise what it is staring at? many a firm to grow bigger than it currently is. There
It took him a while to realise what I was asking. My is enough evidence going around to show that. Indias
point was fairly straightforward. There are various education standards have fallen after the Right to
estimates which suggest that nearly one million Education came to force from April 1, 2010. The
Indians are entering the workforce every month. That learning outcomes have come down dramatically. The
makes it 1.2 crore a year. And this is likely to continue ability of children to read basic text and do basic
over the next two decades. maths has come down. This is something that needs
Over and above this, there is huge disguised to be addressed urgently.
unemployment in agriculture, where nearly 50 per Almost no manufacturing entrepreneurship is
cent of the countrys workforce produces only around possible without land. The land-acquisition process
18 per cent of its gross domestic continues to remain in a mess. If India
product (GDP). Hence, it is clear that has to create jobs, these basic things
people need to be moved from THE SOLUTION need to be set right. And in order to set
agriculture into more productive The only solution is to these basic things right, India needs
enterprises. The only way this can be big-bang economic reforms. This isnt
handled is by creating more and more
create an environment exactly rocket science.
low-skilled jobs because that is where where entrepreneurship While the Narendra Modi
Indias competitive advantage lies. flourishes and Indias government has done a lot of good
Over the years, it has become more things on several fronts, it has largely
or less clear that the government
small and medium stayed away from any economic reform
cannot offer jobs beyond a point. It enterprises grow bigger which would get it into a confrontation
simply doesnt have enough money and, in the process, with the existing order. Any labour-law
going around to do that. And more than reforms would involve a run-in with
that it remains a very inefficient way
create more jobs trade unions. Any education reform
of employing people. Government would involve a run-in with the
employment of various forms (state governments, teachers unions all over the country and state
union government, central public-sector enterprises, governments as well. Any ease-of-doing-business
etc.) has either stagnated or come down. reform would involve a run-in with the lower-level
So, the only solution is to create an environment bureaucracy, which is responsible for delivering
where entrepreneurship flourishes and Indias small much of what any government has to offer.
and medium enterprises grow bigger and, in the This was my basic point to the economist close to the
process, create more jobs. For that to happen, the Modi government, when we got talking. He responded
government needs to carry out big-bang reforms in nonchalantly and said, The so-called big-bang reforms

GENERALLY
SPEAKING
only happen when a country is facing an economic are being created. And those that are being created
crisis. He further told me that there was enough are in the informal sector, which has its own set of
research in economics going around to back his claim. problems. As the Economic Survey of 2015-2016 points
He offered this as a justification for the Modi out: The informal sector shouldbe credited with
government not attempting big-bang economic reforms. creating jobs and keeping unemployment low. Yet, by
And what he was saying is true. As Ruchir Sharma most measures informal sector jobs are much worse
writes in The Rise and Fall of Nations: Ten Rules of than formal sector oneswages are, on average, more
Change in the Post-Crisis World, Nations are most than 20 times higher in the formal sector.
likely to change for the better when they are Formal jobs also allow workers to build an
struggling to recover from a crisis. When the employment history, which among other things,
countrys back is against the wall, the general public allows them access to cheaper credit. Hence, what
and the political elites are most likely to accept India needs is formal-sector jobs. As the Economic
economic reform A good crisis raises the Survey points out, Thus the challenge of creating
probability that a nation will embrace change. good jobs in India could be seen as the challenge of
An excellent example of this is the first wave of creating more formal sector jobs.
economic reforms that India initiated in 1991, when it Make in India envisages the creation of ten crore
was on the brink of an economic crisis or probably additional jobs in manufacturing by 2022. In order to
was even facing one. The first wave of economic get anywhere near this number, the Modi government
reforms happened only because India was facing an needs to initiate big-bang economic reforms. And
economic crisis and not because the political leaders time is clearly running out on that front.
of the day suddenly had a change of heart after all the As Sharma writes, The political honeymoon
years of batting for socialism. phasethe early years of an administrationis the
If we look at things from this perspective, then there period when an emerging-world leader is most likely
clearly is a reason for the Modi government in not to push through reform with a positive impact on the
pursuing big-bang economic reforms. But can this economy. Half of the governments term of five
reason become a justification for the Modi government years is more or less over.
not pursuing economic reforms? Not really. And that is something worth thinking about. WI
India needs jobs and it needs way too many of Vivek Kaul is the author of the Easy Money trilogy. He can be reached
them. The fact of the matter is that not enough jobs at vivek.kaul@gmail.com.

OFFBEAT
Why the dollar wont die

In spite of many gloomy prophecies about the US dollar, it has only
strengthened over time and is also likely to do well in future
SANJEEV PANDIYA
I read an article which was written against the current consensus, then that increases the
some five years ago. It talked about the end of the probability of being right, rather than reducing it.
dollar/euro. With the benefit of hindsight, we can look z The US turned out to be the most innovative nation
back at this prophecy and see what worked and what on Earth over the last five years. There was nothing new
didnt and why. about this; it has always been and it looks likely that it
At that time, one dollar was equal to `45. Now it gets will always be, at least over the foreseeable future.
`67. The euro was at $1.45. Now it is at $1.10. Hence, the That means that it will always benefit from wealth
euro has dropped 30 per cent against the dollar, but it is transfers that come from its intellectual property. Apple
still up against the rupee. The rupee is a whopping 60 is a good example. If you look at Apples current-
per cent down against the dollar. What went wrong? account balance with individual countries, it runs a
Nothing, actually. Such articles are typical at the surplus with every country. India, for example, buys a
turning points of the market. They meet all the rules of lot of Apple phones and sells very little to Apple by way
bad thinking. For one, they are linear, of components. China, on the other hand,
projecting a long trend forward, buys a lot of iPhones and sells a lot of
expecting it to continue to infinity. REPLACEABLE components back to Apple, so its current-
Second, they are popular, picked up by the Inelastic dollar account balance would be lower, one
masses simply because they are linear. would think. But the surplus generated
They believe that current prices explain
demand follows would be very different: China makes
future phenomena, i.e., the crowd is innovation, while peanuts from its sales of components,
always right. This, we know to be mostly commodity while Apple mostly gets to keep all the
untrue, i.e., the crowd is mostly wrong,
and current prices often misrepresent
currencies can always money it gets from selling iPhones to
China. The probability that Apple needs
future phenomena. be replaced, as BRICS anything more from China is low, while
The funny thing is that this article is countries are realising the probability that China needs more
still doing the rounds without its iPhones from Apple is high, so dollar
dateline. That is, it is still holding out its buying is assured, while yuan buying is
prophecy, except that the timeline has shifted another not. So where do you think the respective currencies are
five years. Lets understand why its logic is flawed and headed?
will remain so over the next five years my prophecy! The point I am making is that inelastic dollar demand
My logic tries to get around many of the rules of bad follows innovation, while commodity currencies can
thinking. It is not linear and does not justify itself always be replaced, as the other BRICS are realising.
simply on the ground that everybody is saying it or z While Europe has weak demographics, China has its
believing it. It looks at the other side of the argument, own demographic problems following from the single-
particularly at the other paths that offer themselves, child policy. Even India has not decided whether it is
given current reality. And if the resultant logic goes sitting on a demographic time bomb or a demographic

OFFBEAT
dividend. Only one country has the right mix of programmes of their respective central banks.
quantity and quality, and that too forever. The US will So stories of the death of the US dollar are
always have the worlds best people and it will have them premature, to say the least. The euro may decline,
forever. If anybody anywhere in the world is any good, mostly against the dollar, so also the yen, but declines
there is a 70 per cent chance he will somehow find against the rupee are far away. Any suggestion that the
himself in the US (our own Raghuram Rajan is a great rupee/yuan will appreciate against the dollar/euro (as
example. He couldnt survive in India because that is the they lose preeminence) is dangerous because it ignores
way India is). Just project these individual anecdotal the supply side of the equation. While demand for the
examples, project them into major macro trends, and yuan/rupee combination will rise with real economic
you have the long-term currency view. So it is very clear growth (which sets them apart from the developed
that the demographics part of the equation supports the countries), their supply is structurally set in stone by
dollar hands down. their respective government philosophies. In case of
Temporarily, it looks like the US deficit, which comes India, you have the further government philosophy that
from the decline of the baby-boomer generation and the the current-account deficit (CAD) will be kept slightly
Greenspan sins, will drag it down, but it is probably just above 1 per cent, but in no case will it be allowed to drop
temporary, not a permanent decline in pre-eminence below 1 per cent. Tariff barriers will be dropped if our
that we see in Europe, Japan and the UK. In fact, this CAD drops below a threshold because we have enough
temporary blip in US fortunes is a good buying pent-up demand for investment goods/capex, and we
opportunity. All dollar declines should be will forever remain a savings-deficit
bought against all currencies, including country. Chinas savings surplus has been
the rupee. exported to the US, leaving them
z This brings me to this big hype we
TALENT HUB beholden to the US monetary policy (and
have about India and, consequently, the If anybody anywhere in debt-management policy).
z Admittedly, the rise of gold is assured,
rupee. The best way to deal with this
the world is any good,
euphoria about India is to sell the rupee at least in the short run, especially if it
and buy the dollar. What you are really there is a 70 per cent rises against the dollar, albeit slowly in
doing through this is that you are buying chance he will somehow tandem with the QE programmes of the
structural Indian inflation, which is
find himself in the US US and the deterioration of its public-
dependent on two things: one, debt ratio. The bond/currency markets
Indian misgovernance (a permanent (our own Raghuram have already decided that the US will
phenomenon) which misallocates Rajan is a great example) monetise its debt because it has the least
government expenditure/investment and motivation to pay back its debt in real
a continuous supply shortage, which terms. Its debt is mostly held by
comes from inadequate productivity (growth). Only foreigners, who dont vote. So real interest rates will be
when this structural inflation is less than that of other kept negative for a very long period, giving borrowers
developed economies is there anything to worry about no motive to deleverage. And since now a large part of
(when you buy the dollar). But this will be well above the this debt has the government on one side and the central
inflation levels of even deflationary Europe/UK, let bank on the other, a Nash equilibrium is emerging that
alone the more dynamic US. And we have to keep a does not allow anyone to change the stance without
watch on this. A 5 per cent inflation in the US will raise disturbing the equilibrium. So like the Hindi film
a hue and cry about hyperinflation, something we will herovillain locked in arms while they go over the
see very far away. Two, demand is red hot, and it is still waterfall, this equilibrium will not unlock itself unless
elastic to income growth. India is at a very low level of there is a sudden collapse in public confidence in the
(basic) consumption and has to see many structural central bank or in the governments ability to pay its
changes as productivity grows and the real cost of debts. This is much more likely to happen to Europe,
consumer goods drops. India still has a big element of Japan or the UK, which have limited pools of savers to
good inflation, i.e., inflation driven by incremental repress (through induced inflation) and are more likely
demand rather than just incremental money supply. to be dependent on external, more fickle savers. Even
This sets it apart from developed countries, which face China is better off, but the US has the worlds savers (and
sluggish or no demand growth and are seeing induced central bankers) to back it, with nowhere else to go. WI
inflation coming from helicopter money from the QE The author teaches, trades and writes at spandiya.blogspot.com.

BOOK REVIEW
How unequal
Branko Milanovics book Global Inequality analyses both inequality
between countries and within countries
In his book Global Inequality, Branko Milanovic, and hence the effects of prices have been stripped
following in the footsteps of the celebrated economist out. A point to note for someone considering an
Thomas Piketty, highlights two well-established trends expensive engineering degree abroad.
in global inequality:
1. Inequality between countries has fallen with the Marrying money? Have some first yourself
growth of China and India Traditionally, men tended to marry women with incomes
2. Inequality within countries has risen somewhat lower than those of their own. The typical
Left-wing politicians in India often rue the fact the family also placed the man in the position of the
growth in India has not been inclusive. Insofar as it has breadwinner and the woman in the position of the
benefitted the rich, disproportionately more than the homemaker. However, increased labour participation
poor, they are correct. among women has replaced the traditional marriage
with a marriage among equals.
The citizenship premium Women increasingly tend to marry
Milanovic examines the gains that men with similar levels of income
immigrants receive from their assortative mating. This has played
crossing of borders. Using Congo as a major role in widening inequality.
the base country, he calculates that
a Congolese could multiply his or The rich mazdoor
her income 92 times by moving to Milanovic writes that in the new
the USA. At the same time, capitalism, the rich capitalist and
Milanovic notes that the gap rich workers are the same people.
between the Western and Asian The old model of the idle rich has
middle classes has rapidly increasingly been replaced by
narrowed due to fast growth in Asia superstar CEOs who earn both fat
and near stagnation in the West. pay packets and hefty dividends
The relative gains from from stock holdings. The chance
globalisation have been highest at that a person in the top 1 per cent by
the 50th percentile of the global labour income is also in the top 10
income distribution the middle `895 per cent by capital income
classes of Asia. In short, staying put increased from 50 to 63 per cent
has also yielded its dividends. between 1980 and 2010. Inequality of
worker-capitalists is politically much harder to tackle
Little income gains at the top than the inequality between capitalists and workers.
The income gains from emigration at the top are much
smaller than the average premium that Milanovic Taxation
calculated. The generosity of the recipient state in terms Milanovic advocates taxation of endowments rather
of welfare to the poor versus tax cuts for the rich are also than income. This means the imposition of
a big factor in the gains you make. inheritance taxes rather than increased income taxes.
Milanovic looks at three occupations of increasing He also suggests corporate-tax policies that stimulate
skill construction worker, industrial worker and the distribution of shares to workers and that
engineer in five cities, viz., New York, London, encourage the poor to hold financial assets. At
Beijing, Lagos and New Delhi. He calculates a real present, India has none of the first and very little of
hourly wage gap of 11 to one for the construction the second and the third. Its time policymakers sat up
worker, six to one for the skilled worker and three to and noticed. WI
one for the engineer. Remember these are real wages Neil Borate neil@valueresearch.in

STOCK ANALYSTS
CHOICE
Our scorecard
O Performance
ver the years we have analysed and recommended sever-
al stocks. The table below shows our performance since
July 2011. Yes, we have a few failures, but we also have Total returns* since July 2011
25.8% 12.6%
many successful picks. A portfolio comprising the stocks below
has delivered an IRR of 25.77 per cent, including dividends,
assuming one had invested `10,000 in each of the stocks at the
time of the recommendation. In all one would have invested
`10,10,000. The current value comes to `24,34,528 (including divi-
dends) on Aug 17, 2016, whereas investing the same amount in Stock Analysts Choice Nifty 50 Index
the Nifty would have generated `15,86,386 (including dividends),
yielding 12.56 per cent, as per the total returns index. WI *As on August 17, 2016
Recommended Current Value of `10K

Recommendation date price (`) price (`) invested (`) Total return (% per annum)
Jul-11 Asian Paints 295.15 1113.75 37,733.85 30.46

Bosch 6,916.90 23875.6 34,516.95 28.02
Castrol India 244.45 412.5 16,874.55 12.68
Colgate-Palmolive 458 969.15 21,160.42 17.58
CRISIL 692.89 2143.05 42,861.00 26.23
Cummins India 480.86 895.15 18,615.18 15.42
Exide Industries 149.45 175.5 11,743.06 4.41
ITC 123.23 254.1 20,619.43 17.43
Larsen & Toubro 1,095.03 1496.9 13,669.69 7.29
Nestle India 3,887.90 6703.45 17,241.27 12.42
NMDC 257.65 102.8 4,009.20 -11.79
Pidilite Industries 159.35 708.4 44,454.93 34.73
Titan Company 228.94 402.35 17,574.65 11.86
Aug-11 Lupin 460.55 1591 34,545.38 28.34
Opto Circuits 213.04 10.6 497.56 -44.08
Sep-11 Bank of Baroda 151.62 151 9,959.21 0.66
Castrol India 254.4 412.5 16,214.55 12.19
Power Grid Corporation 102.65 175 17,048.15 13.28
Rural Electrification 173.2 232.1 13,400.53 11.65
Tata Coffee 70.46 122.5 17,383.98 12.29
Torrent Power 211.3 177.45 8,398.00 -1.93
Zee Entertainment Ent. 123.45 500.95 40,578.95 33.29
Oct-11 CMC# 858.4 2032.25 23,673.68 25.67
Graphite India 77.5 73 9,419.34 2.74
Zylog Systems 196.65 3.12 158.65 -55.55
Returns for less than one year are absolute. Total returns include dividend income. Returns as on August 17, 2016. Transactional fees not taken into account.
#
CMC merged with TCS with effect from September 29, 2015. Its current price is the last traded price.

STOCK ANALYSTS
CHOICE
Nov-11 Godrej Consumer Products 396.5 1517.5 38,272.87 32.96

Tata Consultancy Services 1,086.60 2629.3 24,197.45 23.34
Transformers & Rectifiers 197.01 291.05 14,773.06 8.54
Dec-11 Gujarat State Petronet 92.15 142.5 15,463.82 10.46
Noida Toll Bridge 23.3 22.6 9,699.56 7.06
Tata Motors 179.51 508.25 30,860.43 26.61
Jan-12 GAIL 388.3 368.1 9,479.68 0.98
Mahindra Lifespace 245.1 430.95 17,582.33 15.53
MRF 6,859.00 36510 53,195.07 43.54
Mar-12 Bajaj Finance 828.17 10198 136,683.79 77.56
Gabriel India 22.75 109.3 48,043.91 43.49
Opto Circuits 220.92 10.6 479.79 -48.89
Apr-12 Shriram Transport Finance 581.45 1270.4 21,848.34 20.54
TTK Prestige 2,646.60 4903 18,523.53 15.70
May-12 Bata India 422.7 543.8 12,864.13 6.80
GSK Consumer Healthcare 2,770.20 6368.95 22,991.91 22.43
Swaraj Engines 394.9 1146 29,020.16 34.23
Jun-12 Ajanta Pharma 75.4 1933 256,359.29 115.79
Elecon Engineering 53.25 57.65 10,826.27 4.53
Kirloskar Pneumatic 469.95 859 18,277.80 17.38
Aug-12 Hero Motocorp 2,082.00 3372.65 16,198.84 15.53
Supreme Industries 236.65 954.8 40,346.03 43.62
VST Industries 1,694.75 2027.95 11,966.93 8.19
Sep-12 Amara Raja Batteries 195.1 923 47,307.44 48.63
Redington India 71.45 104 14,555.63 11.40
Oct-12 Lupin 567.35 1591 28,042.65 30.92
MindTree 171.91 563.45 32,774.76 38.30
Solar Industries 196.73 602.35 30,629.50 34.26
Nov-12 Grindwell Norton 129.98 333 25,619.69 30.05
KPIT Technologies 120.05 125.25 10,433.07 2.25
Mcleod Russel 305.95 184.35 6,025.48 -10.61
Dec-12 City Union Bank 53.06 128.05 26,062.27 28.28
Petronet LNG 157.5 319.35 20,276.17 21.81
Wockhardt 1,646.55 792.65 4,814.00 -17.12
Feb-13 Balkrishna Industries 290.3 741 25,525.23 30.77
KEC International 63.75 136.85 21,466.56 24.89
Torrent Pharmaceuticals 365.38 1496 40,942.53 52.01
Mar-13 Emami 410.23 1186 28,910.53 36.91
Gruh Finance 107.83 307.05 28,476.43 36.48

STOCK ANALYSTS
CHOICE
Apr-13 Berger Paints India 68.68 238.55 34,734.22 44.92

Innoventive Industries 103.15 4.2 407.17 -62.83
May-13 Kaveri Seed Company 251.7 376.4 14,952.49 13.81
Navneet Education 57.3 100 17,452.10 22.14
V-Guard Industries 485.05 1681.95 34,675.08 46.31
Aug-13 Cairn India 295.7 197.4 6,675.67 -9.41
Indraprastha Gas 308.85 680.3 22,026.75 30.92
Nesco 729.9 1627.55 22,299.06 30.54
Nov-13 Bajaj Corp 237.45 397.5 16,740.32 24.11
HCL Technologies 580.58 784.85 13,518.26 14.24
Dec-13 Voltas 89.35 365.55 40,911.99 68.60
Feb-14 J&K Bank 135.19 69.6 5,147.62 -21.11
Tata Consultancy Services 2,213.05 2629.3 11,879.18 9.58
Mar-14 Cummins India 433.45 895.15 20,652.01 37.64
Swaraj Engines 621.55 1146 18,436.85 33.96
Apr-14 AIA Engineering 559.9 1237.15 22,095.50 40.56
Godrej Consumer Products 763.8 1517.5 19,867.11 33.61
May-14 Rallis India 167.1 223.55 13,378.13 14.86
Titan Company 255.65 402.35 15,737.92 22.47
Jun-14 Finolex Cables 164 426.35 25,996.69 53.97
NBCC 59.4 231.25 38,930.94 84.84
Aug-14 Gateway Distriparks 231.5 273.95 11,833.54 11.31
GMDC 153.9 85 5,523.05 -22.94
V-Guard Industries 656.9 1681.95 25,604.32 57.90
Sep-14 Finolex Industries 296.75 459.5 15,484.23 27.63
Hindustan Media Ventures 155.05 269 17,349.16 32.62
Oct-14 Mahindra Holidays & Resorts 298.55 416.45 13,948.99 20.40
Tata Coffee 93.38 122.5 13,129.55 16.57
Nov-14 Infosys 966.33 1035.75 10,717.94 6.05
Tata Motors 482.24 508.25 11,013.27 2.95
Jan-15 Apollo Tyres 207.9 175.15 8,424.72 -8.59
Mar-15 Ipca Laboratories 680.85 522.9 7,679.83 -15.95
Voltas 256.25 365.55 14,265.22 27.81
Apr-15 Astral Poly Technik 448.95 485 10,802.89 5.69
VST Tillers Tractors 1,379.80 1830 13,262.01 23.66
May-15 Just Dial 1,253.40 477.3 3,807.90 -51.21
Shriram Transport Finance 1,099.30 1270.4 11,556.83 12.50
PORTFOLIO TOTAL 23,53,088 25.77


COMPANIES
WITH MOAT
The watch list

Being near-monopolies, these companies have high chances
of delivering consistent returns
In the last anniversary issue of Wealth Insight, we
T
he concept of moats was popularised by Warren
Buffett. In business, a moat means a competitive had presented the latest list of moat companies in
advantage or a barrier to entry. Companies that India. The following watch list gives moat companies
enjoy moats have a near-monopoly. They ensure with their updated numbers. Many of these companies
consistency of returns. Hence, moat investing is a have high valuations, which may not make them an
sophisticated form of fundamental investing. ideal buy currently. WI
Companies with moats

Company name Industry ROE (%) Price to book Price to earnings 5Y median P/E Price 52 week high-low
AIA Engineering Engineering 19.43 4.79 26.63 18.35 1,215 1225-700
Amara Raja Batteries Batteries 25.75 6.91 30.97 18.06 903 1132-773
Asian Paints Paints 34.39 17.63 59.98 41.71 1,129 1160-779
Bajaj Auto Automobiles 29.51 6.27 23.01 18.80 2,876 2917-2133
Bajaj Corp FMCG 40.51 10.75 28.54 22.57 392 522-356
Bajaj Finance NBFC 21.09 7.09 38.51 11.97 10,199 11760-4678
Bayer CropScience Agrochemicals 15.88 7.71 44.72 22.72 4,114 4315-3115
Bharat Electronics Engineering 15.19 3.38 22.14 15.59 1,236 1417-984
Blue Dart Express Courier Services 53.50 29.29 69.21 58.62 5,495 7900-5275
Bosch Engineering 15.05 8.69 58.95 33.59 23,975 25900-15753
Britannia Industries Food 53.47 19.74 46.97 34.21 3,271 3346-2507
Castrol India Lubricants 114.75 29.81 30.87 33.11 414 495-360
Colgate-Palmolive FMCG 64.42 22.66 44.15 37.31 954 1033-788
Container Corp of India Logistics 14.70 3.29 35.96 15.66 1,400 1655-1051
CRISIL Ratings 33.47 15.76 49.04 34.59 2,149 2307-1750
Cummins India Diesel Engines 22.23 7.43 34.51 22.55 899 1201-747
Dabur India FMCG 34.06 12.04 40.91 35.39 298 320-231
Divis Laboratories Pharma 28.57 7.20 28.71 23.98 1,261 1280-918
Emami Pharma 27.23 18.06 80.37 32.12 1,161 1338-901

COMPANIES
WITH MOAT
Company name Industry ROE (%) Price to book Price to earnings 5Y median P/E Price 52-week high-low
Essel Propack Plastic Products 20.98 3.47 18.41 12.26 213 224-133
Exide Industries Batteries 17.72 3.23 22.40 22.77 175 184-116
FAG Bearings India Bearings 16.51 4.91 34.68 22.23 4,060 4750-3707
GSK Consumer Healthcare Foods 30.14 10.35 38.96 36.95 6,415 6800-5367
HCL Technologies Software 34.52 3.82 14.52 16.26 795 997-707
HDFC Bank Banking 18.65 4.08 24.24 24.08 1,226 1259-929
Hero MotoCorp Automobiles 38.62 7.45 20.15 19.52 3,295 3554-2259
Hindustan Unilever FMCG 103.50 41.41 47.52 35.38 922 949-765
HDFC Housing Finance 16.64 4.05 19.95 19.90 1,360 1410-1012
Indraprastha Gas Gas Distribution 22.67 3.91 22.69 13.33 675 691-433
Infosys Software 25.21 3.94 17.37 18.88 1,051 1278-1012
ITC Cigarettes 30.68 8.65 30.95 30.42 255 262-179
Marico FMCG 37.67 16.19 50.82 36.00 296 307-190
Maruti Suzuki India Automobiles 17.79 5.15 30.19 23.89 4,862 5038-3202
MRF Tyres 41.53 2.10 8.93 9.05 36,116 44644-30464
Navneet Education Publishing 22.06 3.23 16.77 15.52 101 108-76
NBCC Construction 22.45 9.29 44.92 39.53 233 267-162
Nestle India Foods 19.92 20.61 81.90 45.99 6,772 7390-4990
Oracle Fin Services Software Software 32.92 7.83 26.38 23.75 3,674 4447-3106
Pidilite Industries Chemicals 29.96 11.96 45.50 33.17 712 770-508
Power Grid Corporation Power Distribution 13.80 2.09 14.37 14.25 178 183-121
P&G Hygiene & Health Care FMCG 31.02 14.30 52.42 45.99 6,797 6936-5171
Siemens Electric Equipment 24.74 8.32 72.05 52.23 1,296 1474-969
SKF India Bearings 17.23 4.56 33.79 22.38 1,408 1455-1040
Sun Pharmaceutical Pharma 24.89 5.60 30.05 33.76 783 965-706
Sundaram Finance NBFC 14.73 4.79 34.79 15.56 1,467 1616-1106
Tata Consultancy Services Software 42.03 7.40 21.30 22.81 2,691 2769-2119
Titan Company Jewellery 20.98 9.86 52.66 37.49 404 435-303
Zee Entertainment Media 26.57 10.96 48.58 31.09 506 517-347

STOCK
IDEAS
Ideas to delve deeper

S
ound investment methods outlast cycles and them to your portfolio. Each stock idea explains the
fads and generate profits over the long run. reason behind the stock and its suitability to investors,
Value Research presents stock ideas based on which over time will help you develop your own
time-tested principles that have been validated investing rules. As we will be evolving such models and
for every type of investor. implementing changes to the methodology to be in line
In each issue, we share a listing of attractive stocks with economic and market cycles, the list will be
based on the objective principles of sound investment. dynamic and updated periodically.
We apply stock filters carefully crafted by Value In the following pages of Stock Ideas, we present
Research analysts on the universe of Indian stocks to five stock ideas that collectively list 64 unique stocks
identify these attractive stocks. The filters are devised that have strong reasons to find a way into your
to identify stocks of the following kind: portfolio. With these, you will be well-equipped to
Quality stocks available cheap select stocks to build your own portfolio. If you think
Attractive blue chips that this is a lot of hard work, you can get started with
Stocks available at a steep discount to book value the stock ideas and with time understand the way the
High dividend-yield stocks ideas are shaping to make your own judgement on
Growth stocks available at reasonable prices stock selection. Great investments are not easy to
We believe that stocks listed in this section are a good find, but practice, patience and sound principles are
starting point to start a close scrutiny before adding all that you need.
Glossary
Current ratio It is the ratio of a companys current assets (the most liquid assets, implies that it can service more than twice its current interest charges.
such as cash and cash equivalents, account receivables, etc.) to its current liabil- Debt-equity ratio (DE Ratio) The debt-equity ratio is calculated as the ratio of
ities (liabilities that are closest to maturity and hence need to be paid back first). total outstanding borrowings of the company to its total equity capital. The DE ratio
By comparing the latter with the former, an investor can get an idea of how liquid essentially tells which companies use excessive leverage to achieve growth.
a companys assets are. Conventionally, the DE ratio of less than two is considered safe.
However, in certain circumstances, a high current ratio could be due to the fact Return on equity (RoE) This is measured by taking profit after tax as a per-
that the company is facing problems in recovering its receivables. Alternatively, it centage of net worth of the company. It indicates how efficiently the company has
could be facing a problem in selling its inventory, which is why the current ratio may been able to utilise investors money.
be unusually high. Net worth Net worth is the net value of the company that shareholders can claim
Universe companies (867) We have revised our universe. We checked if the in case of a bankruptcy. It is composed of broadly the equity capital and the
companies traded on all the days for the last two quarters. We considered the com- reserves held by a company. One risk in using this indicator is that companies
panies with a market capitalisation of more than `400 crore. could potentially inflate this figure by issuing more equity at regular intervals.
Price to book value (P/BV) Price to book value is the ratio of the price of a Stock return (stk return) Stock return is calculated by taking the percentage
stock to the book value per share of the company. It shows how much premium change in the price of the stock adjusted for bonus or split.
investors are willing to pay for the underlying net assets of the company. Dividend yield (yield) This is defined as the percentage of the dividend paid per
Price to earnings (P/E) The price-to-earnings ratio, or the P/E ratio, is simply share to the current market price of the stock. Since the denominator in this ratio
the ratio of the price of a stock to its earnings per share. It shows in multiples how is the market price, a stocks dividend yield changes every day.
much investors are willing to pay for the earnings. The thumb rule of valuing a stock Price-earnings to growth (PEG) This ratio demonstrates how high a price we are
is that a high-growth stock will have a high P/E ratio, while a value stock will have paying for the growth that we are purchasing. It is the ratio of price to eanings to EPS
a relatively lower P/E ratio. growth of the stock. In all our analyses, we have taken five-year historic EPS growth.
Earnings per share (EPS) Earnings per share, or EPS, is calculated by dividing Dividend payout ratio (DPR) This is the total dividend paid to the sharehold-
the companys net profit with the total number of outstanding shares. ers as a percentage of net profit
Earnings yield EBIT divided by enterprise value. Enterprise value is market cap Operating profit margin (OPM) OPM is operating profit as a percentage of net
added to total debt and less cash and equivalents. sales.
Net sales This is simply the income that a company derives by Net profit margin (NPM) NPM is the net profit as a percentage of total
selling the goods and services that it produces. income (sales plus other income)
The downside of taking sales as an indicator of growth is that it may not be
Growth Value
Stock style It indicates the style of the
matched by a similarly scintillating bottom-line performance. A company may be
earning revenue at a high rate. But if it is doing so by incurring a very high cost,
stock. It is derived from a combination of Large
the stocks valuation growth or value
the bottom line may not grow in proportion to the growth in the top line.
Interest coverage ratio (ICR) This indicator is generally used to gauge whether a
and its market capitalisation large, mid Mid
and small. For example, on the right we
company has the ability to service its debt. The interest coverage ratio is calculated as have shown the stock style of a large-cap
the ratio of operating profit to interest outgo. A company with ICR of more than two growth stock.
Small

STOCK
IDEAS
Quality stocks available cheap

I
n the stock market while The list given below has been
generating returns is indeed obtained by applying the four
the ultimate goal, prudent filters listed above. Banking and
investors first ensure that their finance companies were removed
principal is not at risk. For that,
you can use the essential-checks
from this analysis as the metrics
dont apply to them.
REASONS TO INVEST
feature available on the stock pages In order to understand how the
Safety
on Value Research Online. four metrics work, visit Value Soundness
The feature has the following Research Online stock pages. WI Good performance
underlying metrics:
Altman Z-Score: Predicts the
Reasonable valuations
likelihood of financial distress THE FILTERS
Modified C-Score: Tells the Z-Score greater than 2.99
probability of creative accounting F-Score greater than or equal to 8
Piotroski F-Score: Highlights C-Score less than 4
financial performance as compared PEG less than 1
to the previous year P/E to median P/E less than 1.5
Reasonable valuations: Valuation Earnings yield greater than 5%
filters are listed in the adjacent box.
Companies that clear all the essential checks

For updated numbers, visit: www.ValueResearchOnline.com
Stock Altman Piotroski Modified Earnings Market Share 52-week
Company style Z-Score F-Score C-Score yield (%) P/E PEG cap (` cr) price (`) high/low (`)
Alembic Pharma
Pharmaceuticals & Drugs
12.43 9 0 8.32 16.18 0.27 12,189 647 747-514
Apar Industries
Electric Equipment
3.38 9 2 14.77 11.92 0.57 2,083 541 634-351
Cadila Healthcare
7.44 9 1 5.37 24.43 0.94 37,264 364 454-296
Ceat
Tyres & Allied
3.75 8 3 16.81 8.27 0.06 3,554 879 1318-731
Dredging Corporation
Shipping
3.89 8 2 5.06 14.07 0.53 1,121 400 463-290
Fiem Industries
Electric Equipment 5.83 9 2 7.65 20.15 0.29 1,191 996 1062-475
Firstsource Solutions
BPO/ITeS 4.83 8 1 9.96 10.68 0.32 3,012 45 54-25
Force Motors
Automobiles-Trucks/Lcv 6.67 9 0 7.04 21.02 0.49 4,101 3113 3785-1911
Geometric
IT - Software 12.63 8 0 13.75 13.33 0.62 1,517 232 250-109

STOCK
IDEAS
For updated numbers, visit www.ValueResearchOnline.com
Stock Altman Piotroski Modified Earnings Market Share 52-week
Company style Z-Score F-Score C-Score yield (%) P/E PEG cap (` cr) price (`) high/low (`)
Heritage Foods
Consumer Food
8.01 9 1 6.92 24.16 0.11 1,479 638 678-340
Honda Siel Power

Electric Equipment
4.93 8 0 7.42 23.78 0.80 1,249 1232 1422-1053
KPIT Technologies
IT - Software 8.44 9 2 16.01 8.61 0.20 2,515 127 197-98
Minda Corporation
Auto Ancillary 4.21 8 1 6.61 20.72 0.16 2,318 111 144-69
Nocil
Chemicals 4.35 8 1 13.98 11.21 0.30 944 59 65-36
SJVN
Power Generation/Distribution 5.97 8 3 18.70 8.20 0.51 11,500 28 34-22
Great Eastern Shipping
Shipping 3.64 9 1 18.40 5.38 0.20 5,112 339 420-275
Torrent Pharmaceuticals
Pharmaceuticals & Drugs 5.05 8 0 8.46 14.87 0.19 25,285 1494 1720-1190
TVS Srichakra
Tyres & Allied 4.96 8 1 8.11 9.85 0.20 1,834 2395 3249-1945
UFO Moviez India
Film Production 7.54 8 2 7.30 23.46 0.21 1,409 510 640-380
VRL Logistics
Logistics 5.65 9 3 5.53 27.85 0.31 2,601 285 479-253
Welspun
Textile 3.69 8 1 9.95 14.19 0.13 10,524 105 120-67
Data as on August 16, 2016. Indicates new entrants.
Attractive blue chips

B
lue-chip stocks are shares in smaller stocks. This is true to a
the largest, consistently certain extent as the intrinsic risk
profitable and the most- with blue chips is low; many of these
prestigious companies. have large market shares and strong REASONS TO INVEST
These stocks command a valuation balance sheets. Liquidity
premium because of their Our stock selection is based on
consistency in performance and stocks that have over a 20 per cent
Large companies in
because of the fact that these stocks CAGR on EPS over the past five
respective businesses
have already been discovered. years, debt-equity ratio of less than Strong balance sheets
There is a belief that such stocks two and interest-coverage ratio of Liked by institutions
are less risky as compared to more than two.

STOCK
IDEAS
However, blindly buying a blue

chip irrespective of the valuations
may cause more harm than good. It is
THE FILTERS Interest coverage ratio should be
more than two
Companies with a capitalisation of
for this reason that we have included
above `3,200 crore Five-year average return on equity
stocks with five-year average return above 20 per cent
on equity of more than 20 per cent. Annualised earnings growth of more
The return should not have declined
than 20 per cent over the past five Average ROE should not have fallen
years more than 20 per cent in any year
by more than 10 per cent in a year.
The price-to-earnings growth (PEG) Debt-equity ratio of less than two PEG of less than 1.5
should be less than 1.5. WI
Attractive blue chips

Stock Debt-equity Int coverage RoE avg EPS growth Mkt cap Share 52-week
Company style P/E PEG ratio ratio 5Y (%) 5Y (%) (` cr) price (`) high/low (`)
Adani Ports and SEZ

Port
18.47 0.86 1.73 3.9 24.65 21.57 56,547 273 375-170
Ajanta Pharma
39.29 0.74 0.08 112.9 36.15 52.83 17,173 1,951 1956-1103
Amara Raja Batteries

Batteries
30.97 1.15 0.04 1490.1 27.92 26.90 15,424 903 1132-773
Apollo Tyres
Tyres & Allied
7.86 0.39 0.24 16.7 20.13 20.08 8,786 173 206-128
Atul
Chemicals 20.25 0.76 0.24 15.5 23.18 26.65 5,844 1,970 2299-1150
Divis Laboratories
Pharmaceuticals & Drugs 28.71 1.38 0.01 421.4 27.05 20.87 33,485 1,261 1280-918
Eicher Motors
Automobile 49.36 1.29 0.02 233.1 33.24 38.26 61,061 22,451 22945-14818
HCL Technologies
IT - Software 14.52 0.41 0.03 100.9 31.71 35.58 112,155 795 997-707
Kajaria Ceramics
Ceramics/Marble/Granite 40.62 1.41 0.32 10.7 31.24 28.88 10,010 1,260 1280-607
Mindtree
IT - Software 16.28 0.45 0.02 2592.3 26.18 36.17 9,582 571 804-549
Motherson Sumi
Auto Ancillary 32.44 1.21 1.50 9.6 32.48 26.72 42,517 321 359-206
Relaxo Footwears
Household & Personal Products 46.30 1.40 0.49 8.8 26.36 33.16 5,581 465 566-360
Sun Pharmaceutical
Pharmaceuticals & Drugs 30.05 1.22 0.35 12.1 23.63 24.59 188,437 783 965-706

STOCK
IDEAS
Stock Debt-equity Int coverage RoE avg EPS growth Mkt cap Share 52-week
Company style P/E PEG ratio ratio 5Y (%) 5Y (%) (` cr) price (`) high/low (`)
Syngene International
Miscellaneous 34.83 0.76 0.86 31.7 22.48 46.06 8,269 413 458-297
TCS
IT - Software 21.30 1.02 0.00 1598.4 41.62 20.90 530,331 2,691 2769-2119
Torrent Pharmaceuticals
Pharmaceuticals 14.87 0.36 0.70 13.7 36.83 41.48 25,285 1,494 1720-1190
Tube Investments
Cycles 13.96 0.42 0.43 2.4 30.26 33.08 10,532 562 575-352
Vakrangee
BPO/ITeS 23.96 0.49 0.44 7.5 22.41 49.02 9,459 179 229-87
Data as on August 16, 2016. EPS growth rates are annualised. Indicates new entrants.
High dividend-yield stocks

F
alling markets give little that a very high dividend-payout
room for capital ratio (dividend paid as per cent of
appreciation. However, total profits) can put the future
investors can benefit by growth of the company at risk as it
investing in companies that pay is left with less funds to reinvest in
dividends. High-dividend-paying the future. This makes dividends REASONS TO INVEST
stocks with solid fundamentals are also unsustainable. Cushion against volatility
a safe way to generate a solid We have shortlisted companies Higher total return
return in the market. (listed below) with sustained per
But picking a stock that boasts of share dividend, keeping in mind Generate regular
the highest dividend yield does not the fact that yield shoots up when tax-free income
always help. You need to go deeper the share price drops. We have also
and examine the reasons behind the factored in a dividend yield
high dividend payout. Many times a (dividend per share as per cent of
company that pays healthy share price) of 3 per cent and the
dividends can have weak companys payout ratio before
fundamentals, which will keep the making the final list. WI
stock price down. For instance, the
company could have been
distributing the profits because of
an extraordinary income or because
THE FILTERS
Stocks with sustained per share
there is dearth of profitable
dividend and amount over the past
opportunities to invest in.
five years
Blindly chasing the current yield
could be a recipe for disaster. When Dividend payout ratio of less than
looking for high-dividend-yield 40 per cent
stocks, look for companies with a Stocks with a current dividend yield
sustained dividend payout. of more than 3 per cent
Another potential minefield is

STOCK
IDEAS
High dividend yield

Stock Dividend Dividend Dividend pay- Avg div Mkt cap Share 52-week
Company style P/E PEG per share (`) yield (%) out ratio (%) 5Y (%) (` cr) price (`) high/low (`)
Hinduja Global 7.95 1.48 20.00 3.81 25.11 200.00 1,087 524 549-365
BPO/ITeS
PFC 4.81 0.26 13.90 6.10 29.67 90.00 30,071 228 257-140
Finance Term Lending
PTC India 9.51 1.04 2.20 3.22 25.41 17.60 2,301 78 84-50
Power Generation/Distribution
REC 4.05 0.25 10.70 7.49 19.77 86.90 22,539 228 297-153
Finance Term Lending
SJVN 8.20 0.90 1.05 3.78 25.90 9.46 11,500 28 34-22

Power Generation/Distribution
Great Eastern Shipping 5.38 0.34 13.50 3.98 20.03 95.00 5,112 339 420-275
Shipping
Karnataka Bank 6.32 0.41 5.00 3.49 22.69 43.00 2,702 143 159-85
Bank - Private
Data as on August 16, 2016. Indicates new entrants.
Discount to book value

E REASONS TO INVEST
veryone loves a good A stock trading near or below
bargain. Value investors book value is of most interest,
hunting for inexpensive since such a company can be Really cheap
stocks often face a bought for close to or, better yet, Relatively undervalued
daunting challenge in bull markets, less than what it is worth. WI
Companies with assets
since the market has already run up.
The idea of value can differ
from person to person. One
parameter for judging value is the THE FILTERS
book value of a stock. Book value is Price at least 10 per cent below the book value
a measure of shareholder equity Return on net worth of more than 10 per cent in the most recent year
and is derived by subtracting debt
and other liabilities from assets. In Debt-equity ratio of less than 1.5 per cent
other words, book value is the Companies must have a five-year earnings growth of more than 10 per cent
share price in the companys books.
Discount to book value

Stock Dividend Debt-equity Mkt cap Share 52-week
Company style P/B P/E PEG yield (%) ratio (%) RoE (%) (` cr) price (`) high/low (`)
Gujarat Alkalies & Chem 0.86 7.84 0.59 1.60 0.08 11.11 2,068 282 298-130
Chemicals

STOCK
IDEAS
Stock Dividend Debt-equity Mkt cap Share 52-week
Company style P/B P/E PEG yield (%) ratio (%) RoE (%) (` cr) price (`) high/low (`)
Noida Toll Bridge

Engineering - Construction 0.81 5.09 0.30 13.30 0.04 16.14 420 23 28-22
Great Eastern Shipping

Shipping 0.60 5.38 0.34 3.98 0.70 13.23 5,112 339 420-275
Karnataka Bank
Bank - Private 0.71 6.32 0.41 3.49 0.29 11.74 2,702 143 159-85
Data as on August
April 14,16,
2016.
2016.
Growth rates are all annualised. Indicates new entrants.
Reasonably priced growth stocks

G
rowth at a reasonable positive projections.
price (GARP) is a A solid benchmark to spot a
combination of both GARP stock is the PEG ratio or the
growth and
investing. This strategy was
value price/earnings growth ratio. PEG
shows the ratio between a
REASONS TO INVEST
All-weather style
popularised by Peter Lynch. While companys P/E ratio (valuation)
a growth strategy is more focused and its expected earnings growth Companies with strong
on a companys earnings growth rate over the next several years. A fundamentals
and value investing seeks GARP investor would seek out Greater stability vis-a-vis
companies having their prices stocks that have a PEG of one or value or growth
below their intrinsic value, growth less, which helps find reasonably
at a reasonable price, as a strategy, priced stocks. WI
hunts for stocks that have both
growth potential and are also
trading at a reasonable price. A THE FILTERS At least 20 per cent in the trailing 12
Earnings growth of: months YoY
typical GARP investor seeks to
At least 20 per cent in the past At least 20 per cent in latest quarter YoY
invest in companies that have had a
positive performance over the past five years Stocks with a P/E of less than 15
few years and which also have
Reasonably priced growth stocks

Stock Industry Quarterly EPS TTM EPS EPS growth Mrkt cap Share 52-week
Company style P/E P/E PEG growth (%) growth (%) 5Y (%) (` cr) price (`) high/low (`)
Ashiana Housing
Construction - Real Estate 13.44 26.03 0.62 269.3 178.2 21.8 1,739 170 204-117
Bodal Chemicals
Dyes & Pigments 11.52 16.43 0.31 59.8 63.9 37.5 1,137 104 115-26
DCM Shriram
Diversified 10.26 27.78 0.14 34.3 116.4 75.1 3,507 216 245-100
Deep Industries
Oil Exploration 10.97 13.46 0.40 142.3 127.7 27.6 554 190 216-107

STOCK
IDEAS
Stock Industry Quarterly EPS TTM EPS EPS growth Mrkt cap Share 52-week
Company style P/E P/E PEG growth (%) growth (%) 5Y (%) (` cr) price (`) high/low (`)
Deepak Nitrite
Chemicals 9.77 25.30 0.30 356.7 88.3 32.8 1,169 101 109-55
Indo Count
Textile 13.28 22.49 0.15 135.4 81.8 86.4 3,517 891 1248-720
Inox Wind
Engineering 8.93 31.11 0.07 77.5 45.2 119.3 4,037 182 412-182
Kalyani Steels
Steel & Iron Products 9.60 9.72 0.37 62.0 35.7 26.3 1,262 289 303-117
KEI Industries
Cable 13.04 19.57 0.35 44.7 59.0 37.5 879 114 129-86
KNR Construction
Engineering - Construction 10.22 22.75 0.42 86.7 154.1 24.5 1,802 641 652-408
KPIT Technologies
IT - Software 8.61 18.73 0.38 30.3 28.1 22.5 2,515 127 197-98
Meghmani Organics
Pesticides & Agrochemicals 11.61 26.73 0.57 273.8 110.3 20.5 1,005 40 50-17
Minda Industries
Auto Ancillary 14.35 36.64 0.47 98.7 88.6 30.3 1,788 1,127 1249-475
Nocil
Chemicals 11.21 25.30 0.54 38.6 32.8 20.9 944 59 65-36
Sasken Communication
IT - Software
2.90 18.73 0.08 90.9 111.1 38.1 615 347 431-225
Srikalahasthi Pipes
Castings/Forgings
7.73 11.88 0.25 55.7 91.4 30.5 1,227 309 356-184
Sunteck Realty
Construction - Real Estate
8.87 26.03 0.07 296.6 138.8 126.6 1,444 229 273-173
Tamil Nadu Newsprint
Paper & Paper Products
7.45 11.14 0.34 33.0 41.0 21.7 2,026 293 308-174
Technocraft Industries
Steel & Iron Products
10.24 9.72 0.39 66.8 43.9 26.5 925 293 331-149
Trident
Textile - Spinning
9.61 9.78 0.21 26.0 66.3 45.2 2,364 46 62-30
Tube Investments
Cycles
13.96 13.96 0.42 135.2 529.2 33.1 10,532 562 575-352
TVS Srichakra
Tyres & Allied
9.85 9.40 0.27 52.0 86.9 36.6 1,834 2,395 3249-1945
Vikas EcoTech
Chemicals
9.75 25.30 0.16 962.3 838.9 60.4 329 13 24-11
Data as on August 16, 2016. EPS growth rates are annualised. Indicates new entrants.

WORDS WORTH
NOW
I have tried to adopt the strategy of reform, perform

and transform; tried to avoid populism.
There was a time when the government was
surrounded by allegations, but now the government
is surrounded by expectations.
NARENDRA MODI Prime Minister, Business Standard, August 16, 2016
University gives you a pretty thick skin. There are lots of attacks.
I dont even pay any attention to it. However, obviously in this job
there are legitimate criticisms and those you can address and
those I have tried to address in various speeches because it is
important to convince the public in this country about the
RAGHURAM RAJAN RBI Governor,
way you are going and why you are doing it. Because
Business Standard, August 11, 2016 ultimately only with conviction will there be durability.
Finding the correct We know that in the NCR, the

solution to any problem major cause of pollution is dust,
requires that the root cause and PM 2.5 is the most danger-
of the problem is correctly ous. In the West, dust has never
diagnosed... Yet, going by been a pollutant of significance,
what has been happening, but NOx is the main concern.
cars and especially diesel However, we seem to be apply-
cars, are being treated as ing the western remedies for
the main villain for our pollution to our problem, though R C BHARGAVA Chairman, Maruti
polluted air. the cause is entirely different. Suzuki, Mint, August 12, 2016
We had said that the The IKEA store is planned

worst is behind us with to open in autumn of 2017,
the last quarter, but giving access to affordable,
obviously it will not good quality home furnishing
get shut off like a tap, products. IKEA will hire 500
it will slowly recede. direct co-workers and another
The improvement will 1,500 engaged in providing
happen gradually. services around the store.
ARUNDHATI BHATTACHARYA JUVENCIO MAEZTU CEO, IKEA India,
Chair, SBI, The Economic Times, Financial Chronicle, August 12, 2016
August 17, 2016


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Subscription copy of [mushtaq85@gmail.com]. Redistribution prohibited.

Subscription copy of [mushtaq85@gmail.com]. Redistribution prohibited.

2016 Value Research India Pvt. Ltd.

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by DHIRENDRA by DEVANGSHU by SAURABH by ANAND by VIVEK by SANJEEV

8 WORDS WORTH WISDOM Kumar 56 COMPANIES WITH MOAT

Big moves Group Quality stocks available

Going beyond the EPS 53 STOCK ANALYSTS CHOICE

Is your bank efficient? Our scorecard

September 2016 Wealth Insight 5

Subscription copy of [mushtaq85@gmail.com]. Redistribution prohibited.

Coping with business change

September 2016 Wealth Insight 7

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The silver lining

You get reces- Recession is opportu- The recession

wont do well in time for pro-

8 Wealth Insight September 2016

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Index watch: Nifty IT

Dynamics of the Nifty IT Top gainers/losers

150 Cyient 496.80 -6.08

Infosys 1062.55 -7.15

Info Edge (India) 64.93 5.65 0.36

1.9 All data as on August 12, 2016

10 Wealth Insight September 2016

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71.71 40.59 794

39.08 22.5 8,757

33.15 11.94 10,399

31.46 38.51 1,427

30.84 4.91 6,250

12 Wealth Insight September 2016

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125.26 12.48 803

82.81 16.11 457 87

69.72 69.96 265

67.15 18.09 379

66.66 21.61 235

66.07 16.07 897

31.02 63.56 213

September 2016 Wealth Insight 13

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253.42 8.11 131

22.02 4.07 105

-33.33 1.36 405

Data as on August 16, 2016

14 Wealth Insight September 2016

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Giants fall as well

Cipla 44,327 1,283 1,583 -18.93 9.16 36.32 556 -20.17

16 Wealth Insight September 2016

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Fall of pharma TTM sales growth (%)

The pharma sector, which once Aurobindo

September 2016 Wealth Insight 17

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Decoding the SBI merger

SBIs stake in associate banks Swap ratio Non-performing assets

18 Wealth Insight September 2016

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Mid caps with ultra-high valuations

September 2016 Wealth Insight 19