Wi 201301

Value Research
January 2013
Volume VI, Number 7
Editorial Policy
The goal of Wealth Insight, as with all publications from Value Research, is not just limited to generating profitable ideas for its readers; but to also help them in generating a few of their own. We aim to bring independent, unbiased and meticulouslyresearched stories that will help you in taking better-informed investment decisions, encouraging you to indulge in a bit of research on your own as well. All our stories are backed by quantitative data. To this, we add rigorous qualitative research obtained by speaking to a wide variety of stakeholders. We firmly stick to our belief of fundamental research and value-oriented approach as the best way to earn wealth in the stock market. Equally important to us is our unwaveringly focus on long term planning. Simplicity is the hallmark of our style. Our writing style is simple and so is the presentation of ideas, but that should not be construed to mean that we over-simplify. Read, learn and earn and lets grow and evolve as we undertake this voyage together.
Editor Dhirendra Kumar Special Correspondent Mohammed Ekramul Haque Research & Editorial Naman Sachdev, Varun Chabba, Vikas Vardhan & Vivek Malik Design Mukul Ojha, Kiran Sindhwal, Manish Shukla Production Hira Lal
Data source for stocks: AceEquity
33
COVER STORY
10 stocks whose bright prospects will last not just in 2013 but years beyond too
2012 Value Research India Pvt. Ltd.

Wealth Insight is owned by Value Research India Pvt. Ltd., 5, Commercial Complex, Chitra Vihar, Delhi 110 092. Editor: Dhirendra Kumar. Printed and published by Dhirendra Kumar on behalf of Value Research India Pvt. Ltd. Published at 5, Commercial Complex, Chitra Vihar, Delhi 110 092. Printed at Option Printofast, 46, Patparganj Industrial Area, Delhi-110092
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Mumbai: 22838665 / 22838198 Delhi: 22457916 / 22457918 Manuel Fernandes +91-98212-10948 Biswa Ranjan Palo +91-96640-75875
Total pages 62, including cover
January 2013 Wealth Insight 3
31
INTERVIEW
Wealth Insight Advisory
Get the big picture

Dhimant Shah, Fund Manager, Principal Mutual Fund, tells Varun Chabba how his fund has delivered spectacular performance in 2012
18 20 21
ANALYSTS DIARY
Pharma Stock Insight-2012

STOCK ADVISORY IPO WATCH
STOCK IDEAS
49 Ideas to delve deeper
Discount to book value Reasonable priced growth stocks High dividend yield Attractive bluechips Update on companies with moat
MARKET COMPASS
Big moves Index watch 2012 in nutshell
NBFC Bank Research and development
Miscellaneous
60
WORD OF MOUTH
Columns
EDIT
23
MAINSTREET
IPOs and merchant bankers

BY DHIRENDRA KUMAR
It is difficult for retail investors to value IPOs accurately in the light of several hype-building campaigns
DISCLAIMER
Man the doors

BY SAURABH MUKHERJEA
Data shows once a large-cap stock enters the Nifty, its performance falters while it again moves up after the exit
25
STRAIGHT TALK
27
THE CHARTIST
Welcome the New Year

BY ANAND TANDON
Markets can go either way in the coming year position yourself for the scenario that you wish to see!
Getting it wrong...always
BY DEVANGSHU DATTA
An exhaustive study reveals that due to several behavioral biases, Indian retail investors lose money even when odds are stacked in their favour
29
OFFBEAT
Build your own pension plan

BY SANJEEV PANDIYA
You can stop working for money when your money works for you
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 decisions made or taken by the readers of this Magazine based on its contents thereof. You are strongly advised to verify the contents before taking any investment or other decision based on the contents of this Magazine. The Magazine is meant for general reading purposes only and is not meant to serve as a professional guide for investors. The readers of this Magazine should exercise due caution and/or seek independent professional advice before entering into any commercial or business relationship or making any investment decision or entering into any financial obligation based on any information, statement or opinion which is contained, provided or expressed in this Magazine. The Magazine contains information, statements, opinions, statistics and materials that have been obtained from sources believed to be reliable and the publishers of the Magazine have made best efforts to avoid any errors and omissions, however the publishers of this Magazine make no guarantees and warranties whatsoever, express or implied, regarding the timeliness, completeness, accuracy, adequacy, fullness, functionality and/or reliability of the information, statistics, statements, opinions and materials contained and/or expressed in this Magazine or of the results obtained, direct or consequential, from the use of such information, statistics, statements, opinions and materials. The publishers of this Magazine do not certify and/or endorse any opinions contained, provided, published or expressed in this Magazine.Reproduction of this publication in any form or by any means whatsoever without prior written permission of the publishers of this Magazine is strictly prohibited. All disputes shall be subject to the jurisdiction of Delhi courts only. ALL RIGHTS RESERVED
4 Wealth Insight January 2013
EDIT
IPOs and merchant bankers
of merchant bankers brings forward some complex issues. Last month, at an investment banking conference in Mumbai, Sebi Chief UK Sinha spoke about the role played by merchant bankers in the poor state of the primary markets in the country. While Sinha has touched upon this topic earlier, his latest speech was his strongest on the shortcomings of the merchant banking community . He detailed a number of areas where he felt that merchant bankers had fallen well-short of what was needed. If one takes the Sebi Chairmans views as reflective of the official view of where the culpability lies-and theres no reason not to then Indias merchant bankers should consider themselves on notice for some serious whip-cracking. The two major issues that he brought up were due diligence and IPO pricing. On IPO pricing, he pointed out that that from 2008 to 2012, there were 117 IPOs, and of those, 45 were trading at a level that was commensurate with the general decline of the market during the period. However, somewhere around two-thirds of these IPOs were trading not only below the issue price but also below the price one would expect after adjusting for the general decline. On due diligence, he said that there were a number of instances of this being done inadequately . Sinha likened the role of the merchant banker to a matchmaker between the investor and the promoter, the role of being a fair mediator being the obvious necessity . I would assume that as equity investors, most Wealth Insight readers would instinctively agree with what the Sebi Chairman has said. Yes, IPOs have been priced aggressively and investors have, by and large, found them to be a losing proposition. Investors would like nothing better than to be able to make money automatically from IPOs. In fact, Sebi has floated the idea of a safety net price below which investors (perhaps only retail investors) will be recompensed by the issuer. However, there are some home-truths that everyone should realise. The first is that equity is risk capital and
IPOs are specifically unsuitable for retail investors given the difficulty to value them accurately in the light of hype-building campaigns
he Sebi chiefs criticism
everyone buying stocks whether in an IPO or the open market should understand that. If an IPO is based on some specific misleading or wrong information, then thats something that Sebi should catch and prosecute, but high pricing is not a crime. Its the investors job to ignore IPOs that are mispriced. Secondly, he who pays the piper calls the tune. Merchant bankers are effectively not matchmakers. They are hired by promoters to get them money from the markets the most amount of money for the least dilution of equity possible. Merchant bankers are chosen by promoters on this basis alone. Any merchant banker who tries to be fair would quickly go out of business. This is unlikely to change. I believe the whole thing boils down to a misunderstanding that is embedded in Indias investment culture. In the decades leading up to the nineties, Indian IPOs were severely underpriced for regulatory reasons. They were basically lotteries, if you got an allotment, you would get a bonanza. Those days are long gone. Todays IPO is specially unsuitable for retail investors. Characteristically , an IPO is from a business that is not easy to value accurately for a retail investor, particularly because it has been the subject of an intensive public relations and hype-building campaign. Retail investors tend to get taken in by the smoke and mirrors that is generated by all this. As an investor, you have a finite amount of money . Its better to use it for well-researched and well-understood stocks that have been in the market for long. Thats where Wealth Insight gives you an advantage. Except for the rare exception (which we will tell you about), leave these trickily-priced IPOs to institutional investors.
DHIRENDRA KUMAR
The author is editor, Wealth Insight. dhirendra@valueresearch.in
MARKET C MPASS
BIG MOVES: LARGE CAPS

Adani Enterprises
Price: `292
Sterlite Industries
Price: `120
The largest thermal coal importer in India saw a 30 per cent jump in the last month, continuing its rise after it had declared a three-fold increase in PAT in its Q2 reults. The price took a dip towards the end though as the promoters declared an offer for sale for 2.3 crore equity shares.
29.48%
Shares of this metal and mining company rose by 24 per cent during the month to `120 on anticipation that the company will likely acquire the governments residual stake in Hindustan Zinc. Sterlite currently holds close to 65 per cent in Hindustan Zinc and this acquisition will add to the valuations of the company.
24.02%
Universe of 73 large companies accounting for top 70% of the total market. Trend lines indicate rebased price of the stock (scrip) with Sensex for the mentioned period.
Mkt Cap ` 32,070 cr TTM Sales ` 7,768 cr
TTM Profit `784.35 cr P/E 35.96
TTM Profit `1,120.86 cr P/E 34.24
Jindal Steel & Power
Price: `460
STFC
Price: `766
United Breweries
Price: `948
After a Q2FY13 profit jump of 47 per cent and talks of the company acquiring more mines in South Africa and Mozambique, Jindal Steel and Power ended up with a 24 per cent increase. The company also plans to start supplying coal from its existing mines in Mozambique.
23.87%
The stock of this company had been rising continuously since May 2012, but took a sudden sharp turn upwards when it introduced its 11th Shriram Automall near Hyderabad which is spread across 15 acres and will be offering new value added services. The stock was up 23 per cent during the month.
22.90%
UBs shares jumped when it reported a 75 per cent increase in net profit in Q2FY13 and then jumped again when the company announced the transfer of its CFO and the nomination of Mr Henricus Petrus van Zon by Heineken, which had indirectly acquired a 37.5 per cent stake in 2008, as the new successor effective from January 1, 2013.
22.55%
TTM Profit `1,839.33 cr P/E 22.78
TTM Profit `1,270.16 cr P/E 18.31
Bank of India
Price: `328
Jaiprakash Associates
Price: `103
Canara Bank
Price: `476
The banks shares fell in November after a 39 per cent fall in Q2 net profit but rallied with talks of a stake sale in United Brewries Holdings, the group company of Kingfisher Airline to which the bank had extended a `575 crore loan. However, with the passing of the Banking Bill, its shares grew 20 per cent during the month.
20.23%
The company saw a fall in Q2 net profit by 49 per cent but the price of its shares increased close to 16 per cent on speculation that UltraTech Cement was to acquire Gujrat Cement unit of Jaiprakash Associates which had been hived off to its wholly-owned subsidary Jaypee Cement in early 2012.
15.82%
Even after a 22 per cent fall in Q2 net profit the banks shares rose with the expectation of the Banking Bill. The banks shares fell slightly after Moodys downgrade of its credit outlook to negative, but rallied with the passing of the Banking Bill a 12 per cent growth during the month.
11.97%
TTM Profit `2,858.18 cr P/E 6.81
TTM Profit `3,140.86 cr P/E 6.68
MARKET C MPASS
BIG MOVES: MID CAPS

Jet Airways
Price: `623
Adani Power
Price: `68
The stock price of the airline company was up 56 per cent during the month from `399 to `623 on growing expectations that Abu Dhabis Etihad Airways will buy a stake in the carrier. Etihad is expected to finalise the deal soon. The other contender whom Etihad might consider is Kingfisher Airlines.
The power company witnessed a 44 per cent rise in its stock price during the month to close at `68 primarily on speculations that the National Investment Board will come through and new project clearances will be awarded to companies. Moreover, the reduction in the prices of coal has also been welcomed by investors.
44.11%
56.15%
Universe of 195 mid-sized companies with capitalisation of next 20% of the total market cap. Trend lines indicate rebased price of the stock (scrip) with BSE-Mid cap for the mentioned period.
Price: `130
TTM Loss `474.31 cr P/E
TTM Loss `1,666.65 cr P/E
Sun Pharma
State Bank of Mysore
Price: `691
Videocon Industries
Price: `221
The company recently announced its plans to acquire USAs Takeda Pharmaceuticals URL Pharma. This acquisition could add significant value to Sun Pharma as many products of URL Pharma have not been commercialised optimally. Shares of the company were up 41 per cent during the month to touch `130.
41.16%
Shares of SBIs associate banks have been on fire with two of them hitting their new 52-week highs. All the three associate banks witnessed huge trading volume in the light of expected amendments to banking regulations. The biggest gainer has been State Bank of Mysore whose stock rose 37 per cent, also touching its 52-week high of `734.
36.94%
Shares of the company have been continuously gaining momentum over the month. In the same period, Videocons shares were up 31 per cent from `169 a month ago to `221 as on December 19, 2012. It has recently been in the news after its subsidiary, Petroleo Brasileiro, made discovery of hydrocarbons in Sergipe-Alagoas basin.
30.99%
Mkt Cap ` 3,081 cr TTM Sales ` 20 cr
Unitech
Price: `35
Karnataka Bank
Price: `175
Hindustan Copper
Price: `141
Despite posting a poor second quarter performance where it reported 46 per cent fall in its net profit at `50 crore as compared to `92 crore for the same period a year ago, Unitech continues to be investors favourite. Share price of the real estate company witnessed a growth of 28 per cent during the month to close at `35.
27.99%
The banks share price have been on a bull run on speculations of its acquisition and merger with ICICI Bank. Banking sector stocks have been in focus for the past few weeks on account of Banking Bill that seeks to make mergers and acquisitions for existing banks easier. The banks stock rose 24 per cent to close at `175.
23.53%
The governments first disinvestment issue in the financial year has been losing steam on a regular basis. The company had managed to sail through the support of LIC, SBI and PNB. However, its prices fell by 44 per cent over the month and investors who had put money at the government set auction price of `155, are already staring at a huge loss.
44.23%
TTM Loss `355.83 cr P/E 7.90
MARKET C MPASS
BIG MOVES: SMALL CAPS

Visesh Infotecnics
Price: `27
MARKET C MPASS
Kolte Patil Developers
Price: `126
This small-cap IT company operates in three segments, namely, IT solutions and products, IT enabled services and telecommunications. Stock price of the company was up 79 per cent during the month from `15 on November 19, 2012 to `27 as on December 19, 2012.
79.40%
Its shares have been on a rising spree since the past 2 months owing to the Land Acquisition Bill. The Bill makes it mandatory for developers to gain consent of 80 per cent of people whose land is taken for private projects and 70 per cent of people whose land is taken for public-private projects before they can force the remaining holdouts to sell.
68.85%
2,677 small-cap companies accounting for last 10% of the market cap. Trend lines indicate rebased price of the stock (scrip) with BSE small-cap for the mentioned period.
Price: `110
Mkt Cap ` 926 cr TTM Sales ` 160 cr
Brigade Enterprises
SKS Microfinance
Price: `168
SREI Infrastructure
Price: `46
The real estate developer witnessed a 62 per cent rise in its stock price to close at `110. Apart from the fact that various real estate companies have been under the limelight due to the Land Acquisition Bill, the company has also entered in a couple of partnerships; Age Venture and Sporting Edge that added to the positive sentiments.
62.13%
The non banking finance company has been gaining momentum after foreign institutional investors raised their stake in the company to 37.77 per cent in the September quarter. Shares of the company were up 40 per cent during the month to `168 as on December 19, 2012. it also hit its 52-week high of `198 on December 13.
39.67%
Shares of the infrastructure financing company were up 28 per cent during the month to `46 on the back of reports that SREIs in-house merchant banking team is working with a foreign bank to raise fund through equity investment in its road projects and also in its construction equipment financing joint venture Srei BNP Paribas.
28.65%
TTM Loss `1,058.31 cr P/E
PVR
Price: `284
Reliance Mediaworks
Price: `80
GTL Infrastructure
Price: `4
L&T Finances 11.41 per cent stake in the cinema exhibitor and speculations that PVR is in talks with the promoters of Cinemax for a possible takeover have added to the positive sentiments. This merger will bring PVR close to its target of 500 screens across India. Share price of the company were up 22 per cent during the month to `284.
21.56%
It announced a deal with Chinas Dalian Wanda Group to build integrated township projects in India covering an area of about 20 million square feet in two projects. Wanda Group is the worlds biggest movie theater owner, that recently acquired US multiplex operator AMC Entertainment for $2.6 billion. Its shares were up 12 per cent to touch `80.
12.31%
Bad news has been hovering around the company for quite some time. Shares of the company were down 48 per cent during the month to `4 after its promoter stake was down to 20.45 per cent. With its low promoter stake and market capital, GTL has become an easy takeover target and yet fails to find any takers.
48.22%
MARKET C MPASS
2012 in numbers
How global indices, oil, metals and other important indicators fared in the year
Global indices
The Sensex posted 25.5 per cent return in 2012, the highest among all major global indices, while Hang Seng stood second by giving away a return of close to 20 per cent. Reflecting the tough economic climate that the European markets endured, Londons FTSE 100 rose by just 4.5 per cent in 2012.
FII net inflows in India

in ` crore
After three months of negative inflows, November witnessed the maximum net investments in 2012 at `25,212 crore Data upto December 21, 2012
MARKET C MPASS
Crude prices
$/barrel
Despite the mid-y year dip, crude ended 2012 at the same level from where it started
Silver
`/kg
Silver remained subdued most of the year but touched its year high in November
Gold price
`/10g
Rupee vs dollar
Gold smashed all previous records but could not sustain the momentum by year end
Except for a brief spell in February, Rupee hovered around 55 levels most of the year
MARKET C MPASS
The market moods and the Sensex

February 21
The Sensex touched 18,428 on news of the European finance ministers reaching an agreement on the $170 billion bailout package for Greece to shield from sovereign debt crisis
April 25
S&P lowers Indias outlook from stable to negative, further dimming the mood of the market. Another agency, Fitch, downgraded Indias outlook two months later
March 22
Insipid Budget, Congress loss in State elections resulted in the 5 per cent stake sale by the government in ONGC where it struggled to garner the `12,000 crore target, adding to the slide
June 22
The rupee hit its all time low of `57.37 against the dollar and a week later Barclays admitted to manipulating the LIBOR
MARKET C MPASS
We are ending the year much stronger. On January 2, 2012 the Sensex was at 15,535 points and on December 24, as this issue goes to print, the Sensex has touched 19,242, a clear gain of 24 per cent. The mood of the market was sombre in the first half, but gained momentum following several reformist announcements made by the government.
October
Kingfisher Airlines faces suspension by the DGCA on back of the `8,000 crore debt burden and failure to make payments to creditors and employees
August 16
Markets go up with Sebis mutual fund and IPOs regulations, which mentioned higher minimum investment and a minimum guaranteed allocation to retail investors
November
Gold prices hit an all time high of `32,950 per 10 gram. Sebi directs the Sahara group to furnish all documents relating to refund `24,000 crore to investors
December 7
The government allows 51% FDI in multi brand retail and opens the country to global retailers. The year-end also witnessed high FII inflows which crossed ` $22.22 billion
July 26
The Sensex loses heavily on weak monsoon predications, though the corporate mood is revived with Pranab Mukherjees elevation as President
September 13-14
Markets cheer the government announcement on increase FDI in Airlines, Pension and Insurance sector to 49%
MARKET C MPASS
RBI to issue new banking licences

Owing to a solid show in 2012, NBFCs have a strong claim
ith the Lok Sabha clearing the Banking Laws (Amendment) Bill, RBI looks set to issue new banking licences to corporates and NBFCs. And as things stand, NBFCs appear to be best placed to get their hands on such licences owing to the fact that they have fared well despite rising costs and rigorous regulations in the past one year. Profit after tax in the last 12 months for NBFCs witnessed a 36 per cent growth compared to the 23 per cent growth in the case of banks. Loan books too witnessed a robust jump of 35 per cent as compared to the modest 18 per cent for banks in the same period. A host of reasons can be attributed for this marked improvement in performance despite low industrial take off last year. One is the fact that consumer loan demand has remained intact all this while and NBFCs have looked to match the banking sectors mass scale through mergers and acquisitions. For instance, companies such as Dewan Housing and Shriram Transport Finance through acquisitions in the past three years got access to newer clients which helped them further enhance their share in their respective fields. Moreover, a few also diversified into new areas through buyouts: Magma Fincorp recently bought a housing finance company from GE Capital while L&T Finance Holdings acquired an auto financing arm of Societe Generale Consumer Finance. Also, many of the NBFCs
have a strong rural presence and diversified lending book. They will either have a choice to convert into a bank or transfer a part of their asset book to a newly set up bank. The RBI is also planning to allow conversion of rural branches of NBFCs into bank branches. This would also reduce the capital required for setting up new branches. But there seem a few challenges too. The RBI is aware of the growth in loans/advance books in the sector. As a result, it may increase the tier-1 capital requirement of NBFCs to 12 per cent from 10 per cent to reduce credit risk. Loans overdue for 90 days might also be treated as non-performing assets, compared to 180 days as of now. Gold loan companies already have stricter tier-1 capital requirement and loan-to-value has also been reduced by the RBI. NBFCs are facing stiff competition on the assets side as well. In the corporate loan segment, banks are looking towards retail loans to maintain loan book growth. This has led to aggressive pricing of retail loans products which NBFCs may not be able to match. However, the NBFC sector may enjoy further improvement in valuations once interest rates decline, which the market is hopeful will happen in the last quarter of the current fiscal. This would lead to a decline in the borrowing costs and NBFCs will be able to access debt markets to prop up their loan book growth. WI
Diversification pays off

Company PAT TTM (` cr) 2012-09 2011-09 Growth (%) Loans and advances (` cr) 2012-03 2011-03 Growth (%) Market Cap (` cr) 2012-03 2011-03
Muthoot Finance Shriram Transport Finance Manappuram Finance Shriram City Union Finance Mahindra & Mahindra Financial SREI Infrastructure Finance Sundaram Finance Reliance Capital Indiabulls Financial Services L&T Finance Holdings Bajaj Finance PTC India Financial Services Cholamandalam Investment & Finance NBFC SECTOR
1,000 1,270 614 392 731 75 396 900 766 84 496 173 234 6,293
701 1,289 419 297 510 81 335 264 679 (1) 326 44 98 4,523
42.69 -1.44 46.33 31.99 43.30 -6.49 18.11 241.05 12.82 6,764.41 52.24 289.41 139.65
21,764 11,458 9,658 8,794 8,139 6,473 5,577 5,394 3,634 299 222 147 142 83,637
11,939 10,214 6,391 5,222 6,010 3,010 4,858 4,286 3,947 0 120 76 134 60,699
82.29 12.18 51.11 68.42 35.44 115.03 14.80 25.85 -7.93 65791 84.80 91.82 6.25
4,700 13,544 2,557 3,326 6,868 1,306 3,667 9,600 6,476 8,291 3,370 897 2,453 71,706
18,000 5,519 2,569 7,989 2,236 2,705 14,243 4,799 2,559 1,383 2,059 70,310
MARKET C MPASS
MARKET C MPASS
Research gets a leg up

MNCs setting up their R&D centres in India on account of government incentives
lass maker Saint Gobain last month set up its R&D centre in Chennai, coming close on the heels of Nestle setting up its own in Manesar, Haryana. While India is not known as a research hub (Apples expenditure on R&D was more than the total expenditure on the same incurred by all the BSE 500 companies combined), slowly and steadily the perception is changing. The government too has taken a lead in this regard by providing direct and indirect incentives to the companies. Stand alone research entities, though, dont enjoy such incentives. Some of the incentives extended by the government are: z 100 per cent deduction for both revenue and capital expenditure on scientific research carried out dur-
z z
ing the course of business (with the exception of acquisition of land). Weighted deduction of 200 per cent on qualifying R&D expenditure on scientific research incurred in an in-house R&D facility approved by the DSIR. This is applicable in the business of bio technology and for the manufacture of an article or a thing. Accelerated depreciation of 40 per cent is allowed on the plant and machinery used for manufacturing. Income Tax exemption from 125-200 per cent on donation made to Universities, Research associations etc which are undertaking research activities. Indirect incentives include obtaining capital goods at concessional rates, customs exemptions for certain sectors, and excise duty exemptions. WI
Leaders of innovation
Company Name R&D Expenditure (`crore) % of Net sales
Industry-wise break up
1,549 1,199 989 824 660 624 594 470 468 400 370 355 330 324 201 0.93 2.49 0.28 1.39 1.96 6.36 8.39 4.63 7.92 7.61 1.02 2.67 0.22 4.61 2.50
Tata Motors Bharat Heavy Electricals Reliance Industries Mahindra & Mahindra Infosys Dr Reddys Laboratories Lupin Ranbaxy Laboratories Bharat Electronics Cadila Healthcare Maruti Suzuki India Ashok Leyland ONGC Cipla Sun Pharmaceutical
Not surprisingly, of the total amount spent on R&D by Indian companies in 2012, pharma companies have the largest share
ANALYSTS DIARY
With the government expected to come out with a new Drug Price Control Order this month, revenues of top pharma companies are likely to take a hit. Tying up all the loose ends of National Pharmaceutical Pricing Policy 2012, the government intends to fix the price for 348 life saving drugs on the basis of a simple average of the current market prices of all drug brands meant for the treatment of a particular disease. The policy is expected to lower the buying cost of several medicines by 50 to 70 per cent, and could also reduce profitability of the industry by around 25 per cent. The initiative also seeks to stop the malpractice of pharma companies selling their drugs at high prices compared to other brands by luring doctors and pharmacists especially in tier II and III cities. However, the new policy, unlike the current cost-based price control mechanism, is also applicable to imported drugs if they fall in the list of essential medicines. The policy also covers
Current price (`)
216.85 158.90 5.24 1,075.55 46.80 149.75 1,584.75 36.65 3.57 31.75 21.60 20.25 168.90 1,095.70 279.85 199.65 186.90 10.53 340.70 879.75
Cheaper medicines
Company
Claris Lifesciences Shasun Pharmaceuticals Sterling Biotech Strides Arcolab Ind-Swift Laboratories Neuland Laboratories Wockhardt Bliss GVS Pharma Morepen Laboratories Suven Life Sciences Kopran Nectar Lifesciences Granules India DiviS Laboratories Venus Remedies Aarti Drugs Unichem Laboratories Parabolic Drugs Ahlcon Parenterals (India) Wyeth
15 day 1 mnth
-23.14 -11.62 -11.34 -9.98 -9.21 -9.05 -8.17 -8.03 -7.51 -7.30 -7.30 -7.11 -6.81 -6.52 -6.33 -6.18 -5.56 -4.62 -4.57 -3.69 -11.71 1.31 1.16 13.84 -3.60 -5.28 -7.36 -10.72 9.17 23.54 -1.59 0.75 1.75 -5.92 1.49 -6.25 5.03 -9.22 -2.93 -0.23
Change (%)
Data as on December 19, 2012
drugs which do not have any competition in the market provided they fall in the life savings drug category. With this, pharma companies will be mandated to come out with new price tags from April 2013. There will be a sharp reduction in prices of medicines such as Omeprazole (Dr Reddys and Zydus Cadila), Augmentin (Glaxo), Atorvastatin (Zydus Cadila), Folic Acid (Wyeth), Betadine ointment (Win-Medicare), Taxim (Alkem), MT Pill (Cipla). Acute therapies will also witness a higher value erosion of around 13-14 per cent, while the cost of chronic medication will fall by 11 per cent. Among therapies, dermatology medicines will witness the highest reduction of 27 per cent, while anti-infective, cardiac, gastro-intestinal drugs will fall by 12 per cent, gynecology medicines by 13 per cent and vaccines by 10 per cent. During the last fiscal year, Indias pharma exports grew by 23 per cent. Total exports during the past five years have grown by 16 per cent CAGR. The Indian pharmaceutical industry is currently valued at $22 billion and is third-largest in terms of volume and 13th in terms of value. With the introduction of this new policy, pharma companies might lose around `4,000 crore as profits. To make up for the loss these companies would have to increase sales volume. Analysts say it would take atleast another 2-3 years for companies to get back to their usual positions. MNCs like Cipla, GSK, Dr Reddys, Zydus Cadila, Wyeth and Astra Zeneca will be impacted. But the hardest hit will be mid-rung companies that operate in the domestic space. WI Varun Chabba varun@valueresearch.in
ANALYSTS DIARY
Wealth Insight is a magazine for thinking investors. It is not for those seeking stock tips or recommendations. It is for those investors who look for reason behind the method, which is demonstrated and articulated. A lot of rigour goes into picking this list. We run stock screen based on different investment criteria with different investors in mind. This filtered universe is further analysed and explored to bring it down to 2-3 stocks that according to us make the cut to be part of the Stock Insight section. The stocks are analysed threadbare with their financials, strengths, opportunities and threats. In 2012, 28 stocks made the cut into the section. These were stocks across market capitalisation and sectors. As we believe in the stocks that we recommend we decided to maintain a record. If one would have invested `10,000 in each of the stocks we suggested at the time of the recommendation; a total of `2,80,000 invested would be worth `3,22,329 now. A gain of `42,329. Remember, not all the stocks have completed one year of recommendation. Also, not all the companies we suggested turned profitable, which is part of the learning process. What we are immensely proud of, though, is the 75 per cent strike rate that we achieved and that some of the stocks that lost out also featured on our radar of exits. WI
Recommended Current Value of investment (`) Gain/Loss (%)
17,977 16,916 16,014 13,738 13,584 13,402 13,072 12,655 12,409 12,403 12,100 12,004 11,444 10,825 10,715 10,619 10,509 10,485 10,350 10,257
-1.36 -4.13 -7.5 -8.68 -9.72 -10.68 -51.76 79.77 69.16 60.14 37.38 35.84 34.02 30.72 26.55 24.09 24.03 21 20.04 14.44 8.25 7.15 6.19 5.09 4.85 3.5 2.57 2.34
How our picks fare
Company
MRF Mahindra Lifespace Developers Bajaj Finance Ajanta Pharma TTK Prestige Amara Raja Redington
price date
21-Dec-11 17-Feb-12
21-Dec-11
price (`)
6,879 245 806
price (`)
12,366 1,291 3,753 414
Glaxosmithkline Consumer Healthcare Shriram Transport Finance Supreme Industries Swaraj Engines Gabriel India Mcleod Russel Lupin
19-Mar-12 21-Aug-12 20-Jul-12
16-Apr-12
17-May-12
2,763
284*
390
19-Mar-12
2,644 195* 581
3,544 248
760
16-Apr-12 25-Oct-12 18-Sep-12 20-Jul-12 17-Feb-12
21-Aug-12
237 72
294 89
395
VST Industries Bata India
1,694 845 53 568
306
22*
478
1,834 897 55 609
350
27
City Union Bank
Grindwell Norton Mindtree
Kirloskar Pneumatic Petronet LNG Wockhardt
25-Oct-12
21-Nov-12
16-Apr-12
18-Sep-12
17-May-12 21-Nov-12
260
Solar Industries (India) KPIT Cummins Infosystems Elecon Engineering Hero Moto Corp GAIL Opto Circuits
18-Sep-12 25-Oct-12
158
690
470
273
21-Nov-12
1,653 53
985 120
162 1,585
708
487
972 111 48
10,234
9,864 9,587 9,250 9,132 9,028 8,932 4,824
20-Jul-12
17-May-12
21-Dec-11 17-Feb-12
2,084
221*
389
1,882
347
107
Current price as on December 18, 2012; *Adjusted recommended price
STOCK ADVISORY
Moat constituents
Companies with moat, the expression as popularised by Warren Buffett, are basically companies that are durable in the long run. Economic moats, are competitive advantages that enable a few firms to sustain their above-average profitability for years, and sometimes for decades. These are companies with competitive advantage derived from their scale, brand or some other reason and show the ability to translate their advantage into growing the business and profits, and staying ahead of the competition. Just the way a moat protects a castle from invaders, economic moat is competitive advantage that a company has over other companies in the same industry. The moat puts entry barrier through one or more of the following factors: technology; branding; low cost; high switching cost for customers; or high entry barriers for rivals. Superior technology: When a company launches a product based on a new proprietary technology, it commands the first mover premium. Till the time the competitors develop something better than that, it will continue to earn super normal profits. Branding: A lasting source of economic moat is differentiation based on branding. If a firm consistently produces products or services that are perceived to have better quality, then over time it becomes a trusted brand that customers prefer over rivals and hence are willing to pay premium for the product. Low cost: If a company can offer a product at low cost but with similar features as that of the rival it enjoys a powerful economic advantage. Firms 20 Wealth Insight January 2013
I want to know what are companies with moat as mentioned in your magazine. What is the ideal time frame for investing in such companies?
Sangram Dash, Rajgangpur, Odisha become cost leaders either because of the processes they employ or due to economies of scale. Having gained the low-cost advantage once, market leaders can develop a stranglehold on the market by using their profits to lower costs further, spend more on advertising, offer greater commissions to distributors, and so on. For rivals, it becomes progressively more difficult to break the leader's stranglehold. High entry barrier: Another source of competitive advantage for firms arises from making it difficult for rivals to enter the market. Such entry barriers often arise from regulations, say, via licences or patents. High switching cost. Firms also create economic moats by creating high switching costs for customers, which make the latter reluctant to shift to another product or service provider unless the benefits are very high. The high cost of switching could be in terms of money, but it could also be in terms of time. Warren Buffett would hold onto a company with moat forever. But as an investor we look for growth and profits from investments. You can hold to a company with moat as long as the moat stays and you do not feel the need to book profits. However, as and when you see the company losing the moat cushion, you should consider exiting the same. You could also exit when you feel you have achieved the desired value from your investment in such a stock.Wide moat businesses may not be available at cheap prices. WI Renu Yadav renu@valueresearch.in
IPO UPDATE
PRIMARY MARKET
he primary market witnessed a revival in 2012 with 24 companies that got listed raising ` 6,750.5 crore. Though the first half of the year was sluggish with just 8 issues hitting the markets, the second half made up with 16 more joining the fray. Of these 24 companies, 16 companies are trading above their listing price, with just 4 companies listing below their issue price. Bharti Infratel was the biggest IPO of the year, mopping up ` 4,118 crore in December. The year also witnessed the setting up of two small and medium enterprise (SME) exchanges at BSE and NSE. In March 2012, BSE launched the SME platform with the listing of BCB finance. In September, NSE followed suit with its EMERGE platform to aid SME listing. Two IPOs; Thejo Engineering and Veto Switchgears & Cables were listed on EMERGE. Both these platforms were created to facilitate and promote the listing of SMEs and allow retail investors willing to take risks to invest in these exclusively. The BSE IPO index, devised in
Three cheers for IPOs in 2012 T

Late flourish
BSE-IPO Index almost doubled its lead over BSE Sensex
2009 to track the performance of IPOs, mostly played a second fiddle to the Sensex. However, this year, the IPO index outperformed the Sensex. While the IPO index posted 45 per cent return; the Sensex managed just 24 per cent. The success of the IPOs had to do with a shift in investor sentiment in recent months with several initiatives and announcements by the Government that has fostered interest in the capital markets. Further, the implementation of
the IPO regulations mooted by the market regulator Sebi in October, was a catalyst that helped the IPO market. The Sebi introduced several norms favouring the retail investor such as an increase in the minimum investment in IPOs from ` 5,000-7,000 to ` 10,000-15,000. the new regulation also insured allotment of a minimum number of shares to all retail investors. These measures aimed to increase the quality of IPOs and make them safe for the retail investor, which have so far worked well. WI
IPOs listed in 2012

Company Subscription ratio Rating Issue size (` cr) Issue price (`) Listing date Listing Current price (`) price (`)* Gain/Loss(%) Since Issue Sensex
Bharti Infratel PC Jeweller Credit Analysis And Research Veto Switchgears & Cables Tara Jewels Bronze Infra-Tech RCL Retail Anshus Clothing
1.30 6.85 40.98 1.56 1.98
4 3 4 3
4,118.0 609.0 504 - 540 26.0 156.8 8.6 5.8 5.1
220 125-135 700-750 50 230 15 10 27
Dec 12 Dec 12 Nov 12 Oct 12 Oct 12
50.00 242.00 16.70 10.10 26.85
50.30 227.80 15.85 9.85 28.50
0.60
1.28
-5.87 -0.06 -5.09 -2.48 6.15 3.03 4.84 4.29
PRIMARY MARKET
Subscription ratio Rating Issue size (` cr) Issue price (`) Listing Current price (`) price (`)* Gain/Loss(%) Since Issue Sensex
Company
Listing date
Comfort Commotrade Thejo Engineering SRG Housing Finance Jointeca Education Solutions Jupiter Infomedia Sangam Advisors VKS Projects Max Alert Systems Speciality Restaurants Monarch Health Services Tribhovandas Bhimji Zaveri MT Educare National Buildings Construction Corpn. Olympic Cards BCB Finance Multi Commodity Exchange Of India
1.53 1.03 2.54 1.15 4.80 4.93 0.00 54.13
5 1 4 3 4 4 1 5
6.0 19.0 7.0 5.4 4.1 5.1 55.0 8.0 149.7 12.0 200.0 87.9 120.8 24.8 8.9 567.7
10 402 20 15 20 22 55 20 150 40 120 80 101 30 25 1,032
Sep 12 Sep 12 Sep 12 Sep 12 Aug 12 Aug 12 Jul 12 Jul 12 May 12 May 12 May 12 Apr 12 Apr 12 Mar 12 Mar 12 Mar 12
10.30 402.00 20.30 15.20 22.00 22.10 55.80 51.50 153.00 42.00 115.00 86.05 100.00 29.95 27.00
16.00 376.00 21.75 15.00 24.15 23.00 222.00 70.90 175.65 86.55 248.80 126.70 166.60 64.25 27.00
55.34 -6.47 7.14
4.30 5.30 9.09
-1.32 11.67 9.77 10.30 4.07 10.91 297.85 13.33 37.67 13.14 14.80 19.40 106.07 19.40 116.35 18.18 47.24 12.37 66.60 12.37 114.52 13.75 0.00 9.33
1,387.00 1,492.95
7.64 11.27
Thejo Engineering and Veto Switchgears and Cables were launched on Emerge
Data as on December 19, 2012
MAINSTREET
Man the doors
Data shows once a large-cap stock enters the Nifty, its performance falters while it again moves up after the exit
he mean reverting tendencies
of stockmarkets and economies are well-known and now, thanks to behavioural finance specialists, the human minds inability to factor in mean reversion is also well understood. For example, all of us know that one day even the deepest of economic downturns will turn into an economic recovery and then climax in an economic boom. In spite of that most of us find it very hard to factor such well-established cycles into our investment decisions. Recognising this frailty of the human mind, my colleague, Gaurav Mehta, and I looked at the Indian markets behaviour since 1995 (the year the Nifty was created) and sought to understand the key mean reverting features of our market. What we found was at one level deeply intuitive and at another level very helpful in framing our thumb rules regarding investment decisions in large-cap stocks. Presented below are our four laws of investing in large-cap Indian cap stocks. 1a) Almost all the outperformance in a stock (vis a vis the Nifty) comes in the years preceding its entry into the Nifty . Typically, the outperformance in the three years running upto Nifty entry is 30 per cent on a CAGR basis. Once a stock enters the Nifty, its outperformance almost disappears in the first year postentry . Furthermore, by the second year, entrants usually start underperforming the Nifty . 1b) Almost all the underperformance in a stock which is a Nifty constituent comes in the years preceding its Nifty exit. Typically, the underperformance in the three years running upto the Nifty exit is 20 per cent on a CAGR basis. Once a stock exits the Nifty, its underperformance tails off in the first year post exit. By the second year, the stock actually starts outperforming the Nifty . 2) Every ten years the Nifty churns by around 45 per cent, i.e. of the 50 stocks that make up the Nifty at the beginning of the decade, only 28 are still in the Nifty a
These laws tell us that we need to focus our time and effort disproportionately in identifying these Nifty entrants and exits because that is where the heavy out/underperformance lies
decade hence (with 22 having exited over the course of the decade). Interestingly, such churn is comparable to other emerging markets such as Brazil and Hong Kong but much higher than that prevailing in a developed market such as the US (which has churn of around 30 per cent). Note that since around 22 stocks exit the Nifty every ten years, by definition the same number has to enter the Nifty. Note further that law 1 tells us that we need to focus our time and effort disproportionately in identifying these Nifty entrants and exits because that is where the heavy out/underperformance lies. So how does one identify these critical stocks? 3a) Almost 65 per cent of the stocks exiting the Nifty over a 10-year period come from the bottom 20 stocks in the Nifty. So, of the 22 exits that take place every decade or so, 14 come from the bottom 20 stocks in the Nifty (suggesting a 70 per cent attrition rate for the bottom 20 stocks in the Nifty). 3b) Of the top-10 stocks in the Nifty at the beginning of a decade, 1 stock is thrown out of the Nifty by the end of the decade. Obviously this stock underperforms the Nifty in a major way over the course of the decade (usually with a CAGR of 15-20 per cent). 4a) Almost 80 per cent of the stocks entering the Nifty over a 10-year period come from the 50 stocks just below the Nifty at the beginning of the decade. The January 2013 Wealth Insight 23
MAINSTREET
NSE calls these 50 stocks the Nifty junior. So, of the 22 entries that take place every decade or so, 18 come from the 50 stocks in the Nifty junior. As mentioned in law 1a, typically, the underperformance in the three years running upto Nifty exit is 20 per cent on a CAGR basis. 4b) Around 20 per cent of the stocks entering the Nifty over a 10-year period come from the world below the Nifty junior. Since these are midcap stocks making a giant leap to large-cap status over a 10-year period, they are superstar performers usually generating outperformance relative to the Nifty of 50 per cent CAGR (over a 10year period). As I said at the beginning, much of this is intuitive but what is really helpful is that a framework like this really focuses your mind on identifying the big drivers of portfolio performance such as the mid-caps which have it in them to become a Nifty constituent a decade hence and, conversely,
Save & Prosper Will Tell You...

z z z z How you can become a crorepati How to decide which type of investments suit you How you can avoid making common mistakes Why you should start investing today, no matter how small the amount z Why attaining financial freedom is easier than you think
As an aside, these findings also point to the futility of putting the money in index tracking funds which necessarily have to buy stocks after they have entered the Nifty
the top-10 Nifty constituent which will get knocked out of the Nifty a decade hence. As an aside, these findings also point to the futility of putting your money in index tracking funds which necessarily have to buy stocks after they have entered the Nifty (i.e. just as they are about to begin underperforming) and sell stocks after they have exited the Nifty (i.e. just as they are about to begin outperforming). Its the popular hold of insane ideas like this which allow people like me to earn a living. The growing prevalence of index trackers also suggests that the following simple but counter-intuitive pair trade should generate alpha: Sell entrants into the Nifty and buy exits from the Nifty! WI
9 Yes! Prosper Volume 2

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STRAIGHT TALK
Welcome the New Year

Markets can go either way in the coming year position yourself for the scenario that you wish to see!
T
The Bull
he equity market sentiment
has suddenly turned bullish over the past few months. Unrelenting foreign inflows have pushed the Nifty to deliver a >25 per cent gain in the current calendar year. Readers of this column will recall that I had laid out a framework in the middle of the year which had pointed to a set-up for a rally despite the all pervading gloom. It is time now to bring out the crystal ball again. One of the problems with gazing at a crystal ball is that it soon begins to reflect the thinking of the watcher. Since forecasting depends on the assumptions made, it is important to lay out the assumptions and the consequent possible outcome. Let us therefore start with the bull story which, as I said, is the pervading sentiment.
With the world economy not recovering, a weaker Chinese economy, and fewer production constraints, commodity prices will remain under pressure
Chinese economy , and fewer production constraints, commodity prices will remain under pressure. This too will play into lower inflation. Lower commodity prices are generally good for India, which is still a consumer of basic materials, and a large importer of petroleum.
The bullish argument is predicated on two important hypotheses (a) a lower interest rate (b) lower commodity prices, including that of energy . The RBI in its last two policy statements has hinted towards being more open to lowering policy rates to boost growth. This, despite the fact that inflation has remained steadfastly high and above RBIs stated comfort zone of less than 7 per cent. Expectations are that with growth slowing to sub 5 per cent in the last quarter (projected) of the current fiscal, policy emphasis will shift from controlling inflation to propping up growth. If interest rates were to fall, asset markets including equity markets will rise. The second argument is also linked to the first. China has been witnessing slower growth. With China becoming slightly less dependent on exports and more on domestic consumption, it is expected that commodity intensity of its economy will reduce. Additionally , in many cases, production of commodities has increased with increased investments in production capacities across the globe over the past few years. Consequently , with the world economy not recovering, a weaker
1 year forward P/E

If both the above were to materialise, we are looking at a consensus earnings growth of 15-16 per cent , taking the Sensex EPS to higher than `1,410 (March 2014). At that level, Sensex valuation (@ 19,350) is lower than 14x, much lower than trend level of 16x-18x. Additionally , with lower interest rates, valuations can rise, yielding a Sensex target of 22,560 or higher a growth of 16 per cent. The other factor in our model is liquidity and the postulate here is that with Japan joining the bandwagon of countries willing to print money , and Europe having given up its earlier prudery in being modest about loose monetary policy , liquidity will not be a constraint. The bull seems to be alive and kicking or is it??
The Bear
The bear too seems to have sharpened claws. Let us start with inflation. Despite the best efforts of the officials (the Indian economic data is extremely prone to manipulation), inflation that a consumer sees is still above 9 per cent. Government economists therefore tend to focus on the WPI (wholesale price index). Unfortunately , this January 2013 Wealth Insight 25
STRAIGHT TALK
too remains stubbornly high and above 7 per cent. In addition, various government officials have mentioned in passing that in the next year, there will be increases in price of diesel, railway fares (including freight), power, fertilizers and perhaps an increase in service tax and excise rates. All or any of this will be inflationary . There may be a temporary fall in inflation in January , but anyone willing to push the figures will see that this is not going to last even for one quarter. RBI may succumb to the enormous pressure it is being subjected to by the government and industry and cut policy rates. In such a scenario depending on which inflation number you look at, the real interest rate will be either negative or just marginally positive. The impact on the credibility of monetary policy will be large and negative. This in itself will be inflationary . A cut in interest rates is not a given, and even if it were to come through, has to be restricted to a marginal cut to get hawks off the back of RBI. As mentioned above, with rising costs, it is very difficult to believe that corporate margins can improve. Passing on further price increase to customers is going to be really difficult. Consequently , a 16 per cent growth in earnings against a single digit growth expected till March 2013 seems to be extremely optimistic, and will likely result in a lowering of consensus estimates over the next few quarters. The fiscal deficit has been alarming and given that we enter an election year next fiscal, is likely to remain so, government protestations to the contrary notwithstanding. The current account deficit is also high hovering around $20 billion for the past couple of months. With oil prices showing signs of increasing again, India has only 14 months of cover for its net imports. The rupee will likely remain under pressure and this pressure will be further exacerbated if interest rates were to be cut. Portfolio flows may not be as robust towards emerging markets as we have seen this year (see table: Countrywise performance). Sitting in India, we tend to forget that our markets too move in tandem with global markets. A look at the table above reveals that performance of Indian indices is not extraordinary . It is in line with other emerging markets. More importantly , the last three months of so called reforms have yielded far less (see 3 mtd returns) than is being attributed to it. Money is chasing emerging markets on the basis that there is growth. But, with slower growth, and a possible rebound in larger markets say the US where the low price of energy seems to suggest a resurgence in manufacturing activity (theme for another column), it could make asset allocation shift back to developed markets. In summary, persistent inflation, expectations of higher prices of administered goods, an out of control fiscal deficit and a persistent current account deficit put 26 Wealth Insight January 2013
Country-wise performance
MSCI Index (Dec 20, 2012) 3MTD (%) YTD 1 Yr 3 Yr 5 Yr 10 Yr
TURKEY PHILIPPINES EGYPT POLAND MEXICO THAILAND COLOMBIA INDIA KOREA CHINA CHINA 50 TAIWAN SOUTH AFRICA MALAYSIA RUSSIA ADR/GDR RUSSIA CHINA A 50 INDONESIA CZECH REPUBLIC BRAZIL BRAZIL ADR MOROCCO EMERGING MARKETS
Source: www.msci.com
16.1 11.2 -8.5 13.2 6.8 5.6 9.3 0.5 4.7 12.3 11.3 0.3 4.1 1.8 2.3 2.4 7.9 -0.4 -5.0 3.1 3.5 5.5 5.0
57.5 43.6 48.2 33.8 28.8 30.6 28.1 24.2 20.0 18.4 18.3 12.0 13.3 9.5 9.9 10.0 7.7 1.3 -4.3 -2.7 -5.9 -13.0 14.9
54.8 45.2 45.1 33.3 30.3 29.3 26.5 25.4 23.9 21.0 20.6 19.3 17.1 14.7 8.8 8.7 8.0 3.0 -3.4 -4.2 -5.6 -17.1 16.9
8.1 22.7 -7.2 2.1 12.4 24.3 18.4 -1.3 10.7 0.2 2.0 2.9 8.7 12.4 0.9 1.2 -6.8 11.7 -7.6 -7.3 -8.9 -7.2 3.5
-2.7 7.1 -12.1 -8.9 4.1 11.5 16.3 -7.2 0.3 -5.3 -5.2 -0.3 3.4 4.6 -11.9 -11.6 6.1 -12.2 -5.8 -6.9 -8.5 -2.5
18.4 19.8 24.9 10.4 17.0 19.0 34.2 16.4 12.1 15.7 5.2 14.3 11.7 11.8 24.6 15.3 21.0 10.1 13.3
various pressures on the Indian economy . It is reasonable to expect that consensus earnings will fall. A 5 per cent cut in consensus could imply that the market is fully priced for next December. With no expected returns from the current level, markets will have to first fall and then rise to deliver nil returns over the year.
Chose your scenario and watch the assumptions

Investing is not about being brave or even being optimistic. It is about taking a view on the possible scenarios, and positioning oneself on the basis of what is the most likely outcome. Since the outcome is based on a probability , it is important to be clear on the assumptions being made, and to see if they still hold as time passes. It is very likely that two people given the same set of data will plump for completely different outcomes. There is no expert view here only one which you are comfortable with. I currently favour the second view choose your own and a very happy new year ahead. WI
ANAND TANDON
The author is CEO, JRG Securities Ltd.
THE CHARTIST
Getting it wrong...always
An exhaustive study reveals that due to several behavioral biases, Indian retail investors lose money even when odds are stacked in their favour
ts been an unbelievably positive
year for equity returns, given the fact that macro-economic fundamentals and corporate earnings have both deteriorated. The Nifty is up nearly 25 per cent per cent from December 2011 to December 2012. The Junior is up 44 per cent. The Midcaps are up 32 per cent. The Bank Nifty is up 50 per cent. Many other sectors have done well. For example, FMCG is up 48 per cent, realty is up 47 per cent, automobiles are up 40 per cent, pharma 31 per cent, etc. Yet, a closer look at the data suggests that the average Indian investor didnt profit from this impressive bull run. We know this because the bull run was driven entirely by FII inflows. Overseas portfolio investors pumped over `1,21,000 crore into Indian equities last year thats more than $23 billion in USD terms. When it comes to individuals investing in equity , the broad data indicates they were net sellers. Indian mutual funds were net equity sellers through the year. They sold over `20,000 crore net. Indian households pulled money out of equity as well in part, this triggered the selling by domestic institutions who had to meet redemptions. Balancing off net FII buying versus net domestic institutional selling, a large proportion of the shares that FII bought must have been sold to them by individual investors. Some of that money may have been reinvested by investors in small-caps. But quite a lot seems to have been pulled out of the market if we go by household savings data, which indicates lower direct equity exposure. This may be yet another case of the herd of Indian retail investors mistiming the market and managing to lose money even during a large bull run. It is sad. But it shouldnt be surprising. The Indian School of Business has recently released a huge study (actually a couple of studies using the same data) that suggests Indian retail investors usually lose money even when the odds are seemingly stacked in their favour. The ISB study mines NSE data, tracking every trade in
This may be yet another case of the herd of Indian retail investors mistiming the market and managing to lose money even during a large bull run
every single NSE-listed stock by a pool of 25 lakh retail investors, who operated in the secondary market between January 2005 and June 2006. This is undoubtedly the largest-ever exercise of its kind. It involved a sample of over 140 crore trades with a total value of about `37,00,000 crore (`37 lakh crore) on the NSE. The study ignored the equity derivatives market, which also has quite a lot of retail interest. In effect, this means it ignored short-sellers who carry positions for more than a single session, since all equity cash trades are settled by end-of-day . The retail segment accounted for 98 per cent of all equity trades in terms of numbers. In value-terms, the retail segment accounted for around 36 per cent of the market value of all equity trades. They made around 4 lakh trades a day . Given the frequency of trading, a fair number of the individuals in the sample tracked by ISB would be traders, rather than long-term investors. During this period (January 2005-June 2006), the Sensex and the Nifty gained by around 60 per cent. It was part of the biggest bull run in Indian history and the bull market continued for another 18 months, till January 2008. The uptrend was very broad, with advances outnumbering declines across the entire market. Net of brokerage and taxes, the population of 25 lakh investors lost about `8,400 crore. Since equities are zero-sum, the institutions who were their counter-parties must have made the equivalent profits. During that particular period, a simple strategy of buy January 2013 Wealth Insight 27
THE CHARTIST
Investors were happy if they made five small wins and one huge loss whereas they tended to be unhappy in the opposite situation
and hold on almost any stock should, on balance, have produced handsome capital gains. Yet retail investors over-traded and they consistently bought and sold stocks at the wrong time. The ISB study isolated some major behavioural biases, which seem to explain the majority of poor trading decisions that led to losses. One is what is called the Disposition Effect in behavioural economics. Most of the investor sample usually sold their winners early and held onto losers for too long. This minimised their gains and maximised their losses. There were other well-documented biases.The study found that retail investors trading patterns are very dependent on mood (called affect in psychology jargon) and the mood is in turn, very heavily influenced by recent gains or losses. Investors who had made even small gains in their recent trades tended to become hyper-active, trading far too often. Investors who had lost money in recent trades tended to cut down on activity . What is interesting is that the quanta of gains and losses didnt matter so much as the sign negative or positive. A small loss caused despondency , while a small gain caused euphoria. Investors were happy if they made five small wins and one huge loss whereas they tended to be unhappy in the opposite situation. This implies that most investors are psychologically incapable of handling some of the most profitable trading strategies. For example, trend-following strategies where an investor rides an established trend usually have a high rate of net profitability but a relatively low strike rate. Trends fail more often than not. But when they fail, a smart investor will limit losses. When a big trend starts running into profits it can compensate for many small trend-failures. However, an investor who is over-influenced by the sign and strike rate will be uncomfortable with a strategy , where he accepts several small losses in the hopes of scoring an occasional multi-bagger. The third big bias is of course, over-confidence. When a retail investor makes a winning trade, he tends to assume this is because of superior analysis. When he loses money , he attributes it to bad luck. Taken together, this leads to a high-risk attitude where the investor tend to punt more heavily than he can afford. 28 Wealth Insight January 2013
The study does confirm that most of Indias retail players are similar in behaviour to retail players elsewhere. But according to the ISB data, Indian retail investors show a larger disposition effect than individual investors from nations such as US, Japan, China and Finland. They book profits earlier and hold losses longer than their peers in other markets where such studies have been conducted. The biases revealed by the study do indicate the practical advantages to being a passive mechanical investor. A passive systematic style will yield returns if the market trends up over the long-term. Having a system imposes discipline and rationality and tones down dangerously manic-depressive trading behaviour. As mentioned earlier, the study would not have captured the gains or losses of the investor who was long only during the 18-month period. Most buy and hold strategies would have worked, assuming the investors eventually booked profits. The study also suggests that around 4 lakh traders in the ISB sample that is, roughly one out of every six individuals made net gains. Some of them would have made large profits. The big winners would be the individuals, who possessed the discipline to diagnose their own behavioural biases and iron them out. If you want to beat the market, you have to get past your own psychological weaknesses and biases. In practice, most traders who work their way past they biases do so through bitter experience and by developing systems with mechanical rules. Assuming such a system is robust, it will eventually make profits. It must be noted that buy and hold is in itself, a simple and robust system and any more complex system should be measured against the results of a buy and hold strategy . Another point is worth making. Most studies focus on efficient markets or assume that a market is efficient. It is possible to argue that India isnt really a strongly efficient market. There is a lot of asymmetry in information access. So the advantage is more for institutions versus individuals due to their better data-gathering resources and greater analytical ability . The primary markets were certainly inefficient during 2004-2008, given the multiple scandals that time. There are still lots of questions about corporate governance in listed companies and theres plenty of anecdotal evidence about information leaks. Any market efficient or not is also policy-driven and Indias arbitrary policymaking will always cause information gaps as well. WI
DEVANGSHU DATTA
The writer is an independent financial analyst
OFFBEAT
Build your own pension plan

You can stop working for money when your money works for you
W
Volatility is an asset
arren Buffet said
buy the business, not the stock, to which Charlie Munger added the tailpiece the best time to sell a stock is never. For ordinary savers and investors, it raised a dilemma: how do I know that I have taken the right decision, and that the stock or business I have bought is going to create enough wealth for me to retire on? The answer to this question has set off many other trains of thought: some people advise diversification, but that sometimes adds to the risk of failure. What if you put Reliance Industries and Reliance Communications in the same portfolio; or Hindustan Lever with Hindustan Machine Tools? Another piece of advice that pundits give you is, systematic investing, i.e. the steady , continuous investing of fixed sums of money into a good, long-term performer through good markets and bad. This helps you buy low(er) than you would, if you just suddenly sat up and decided that you would plump all your money into the markets. This would normally happen in the middle of a bull market, leaving you stranded in (maybe) a good company at high valuations. This is the reason why most of us do not get our pensions from our equity portfolios.
If you combine stock picking with systematic investing, you would need to understand fundamental analysis and add a bucketful of patience to that
ribly expensive (look at Nestle or Asian Paints). Sometimes when these blue chips go down, they can wipe out quite a lot of savings, and the earnings, if you have them, of quite a few good guesses in the equity market. Look at Aban Lloyd or Ranbaxy It becomes very important, therefore, to time your average holding cost of a stock into the lower quartile of its long-term movement, and extract a steady 25 per cent return thereafter. That would mean getting into a Reliance at 800, not 1600 and then getting `200 per annum in the form of a yield. And yet, it is not impossible to achieve such returns with a little bit of application and intelligence. Oh yes, the pundits will tell you that only the broker makes money if you trade; that is NOT true if you follow systematic trading: z Pick up a stock which has been largely ignored by the market. This will be characterised by lower-than-average volumes, negative news coverage and a graph which looks a bouncing ball losing momentum. To get an idea of what I am talking about, look at the charts of JP Associates, DLF, Aban Lloyd (P.S. I am NOT recommending these stocks, just pointing out what kind of charts to look for) z Calculate the intrinsic value being imputed by the market, by looking at the most visited point in the chart. How you choose the period over which to view that chart, takes some intelligence and experience, but choose a period over which the company has largely January 2013 Wealth Insight 29
If you combine stock picking with systematic investing, you would need to understand fundamental analysis and add a bucketful of patience to add to that. In the previous generation, you might have bought HUL or Colgate without much research and done ok for your old age. That kind of fundamental analysis wont get you very far in the 21st century . Even a Reliance Industries can go down 40 per cent, a Tata Steel 50 per cent and Reliance Communication 85 per cent over the last 5 years, spanning a bull market and 2 bear markets. You would have to add a new skill to your arsenal, an understanding of Volatility and its math. Companies who cross their previous tops in the next bull market are now few and far between, and they always look hor-
OFFBEAT
1 per cent compounded daily is not 365 per cent per annum, but 37 times your money by the time you are hitting the 365th trade
gone nowhere. For Tata Steel, this would be 2008-12 (after the Corus acquisition), for example z Look at where the stock is, with reference to such an intrinsic value. The reason why I am misusing this term from Classical Finance, is because I believe that over a long period of time, the market has absorbed and understood all information having a long-term implication on the valuation of the company In case of Tata Steel and Tata Motors, you will see 2 diametrically opposite reactions to their acquisitions, with the market reaching different levels of intrinsic value for the respective companies At this price point, you can calculate the discount to intrinsic value. Ignore the stock for the time being, if it is quoting at a premium. Tata Steel, for example, is quoting at a 30 per cent discount to its historic book value, while it has traditionally quoted at a 30 per cent premium to book value. Even if we assume that the stock will take a long time to sort out its European operations, we can take its book value as intrinsic value. z Now look at the historic bottom (usually October 2008 or December 2011 on most charts of leading companies) and calculate the distance from the current price. For example, in case of Tata Steel, that would be 20 per cent (a recent historic bottom of `320 against a current price of `400). You have an Inventory Holding target price of `320 now z From here starts the math. You have your risk: reward equation now, a risk of `80 and a target reward per annum of `100 (25 per cent of `400). Break up your investment into about 30-50 lots and try to capture the average volatility in the stock. A good rule of thumb is to try and churn (i.e. buy and sell, at a mildly varying profit) the same stock every day Different stocks have different average (daily) volatility, but they all fluctuate around the Niftys (long-term) average of 1.2 per cent. You have to try and maximise the number of turns every year; out of about 260 days, you would be doing well if you get about 210 churns every year. If your average inventory is, say, 30 such lost outstanding, you will get 0.3 per cent return on your portfolio every trading day . This is where the power of compounding kicks in. 1 per cent compounded daily is not 365 per cent per annum, but 37 times your money by the time you are 30 Wealth Insight January 2013
hitting the 365th trade. The smaller the compounding period, the larger is the impact. But to get back to the logic of our Pension Plan. Let alone 0.3 per cent per day, if you get even 0.1 per cent per day over 240 trading days (both conservative assumptions), you are sitting on a 24 per cent annualised return, not counting the power of compounding. That is a very big cushion to your returns. The actual return, if you compound slowly, may come in at a multiple of the base 24 per cent... What can go right for you? One, you might have picked up the stock in the lowest 20 per cent of its (longterm) range. That would mean that you can increase your lot sizes to 20, and trade them one at a time. Using the principles of Systematic Investing, your Average Holding Cost would anyway be in the bottom 10 per cent of the range. Two, you might have higher volatility than my prediction (which is anyway conservative). If you get in closer to the bottom, and have built up enough inventory over time, you will get much higher volatility as the stock rises in value. Three, there is a fixed risk: reward formula, that measures the amount of TIME it takes to bring down the risk to zero, provided you have stuck to the above mathematical constraints. A 20 per cent downside risk is neutralised with about 1 year of trading, while 30 per cent downside takes about 18 months. At this point, your entire holding has been traded down to an average cost which is at the bottom of the long-term chart, i.e. Tata Steel at 320 and Bharti at 250. Keep building up new positions and trading down in a disciplined manner, till the stock reaches a premium to its intrinsic value in the upper half of the chart. Then start distributing your holdings, using the proceeds to enter a stock which is going into discount territory . To understand this, see my previous columnReversion to the Mean (March 31, 2012). To the uninitiated, the math might be a little complex, but it is simple arithmetic after all. Cassandras might argue that a stock might have no bottom, and they are (theoretically) right. But this is not theory, just a very practical plan to get a market-beating return through simple, disciplined trading and regular, algorithmic closing of trades. If you get the major Operating parameters right, this is a riskless strategy . Oh yes, Tata Steel or Infosys might go to zero, like Satyam at one time or Sterling Biotech recently; but the world almost ended on December 21...you still need plans if it didnt live up to its promise. WI
SANJEEV PANDIYA
The author teaches, trades and writes. sanjeev@valueresearch.in.
INTERVIEW
Get the big picture

Dhimant Shah, Fund Manager, Principal Mutual Fund, tells Varun Chabba how his fund has delivered spectacular performance in 2012
Principal Emerging Bluechip, the fund you manage, is up 52 per cent year to date so far, the best among the midand small-cap funds. What reasons do you attribute to this success?
There are a few reasons; firstly , we focused on stock picking, we built our position in stocks where we had conviction and held on to them. This also meant that we reduced the number of stocks in the fund and made it a more focused portfolio. While picking stocks we were focused on those companies that had growth, free cash flows and sensible cash allocation policy from the companys management. We also got certain themes right, for instance, we were early into media, cement, etc. We remain fully invested through the year and did not have any cash call, this also helped in our performance. ance. I think these processes that we follow, apart from the regular screening of companies that meet our defined criteria have aided in portfolio decisions to a great extent.
Can you please explain the process part of it?

There are a couple of processes that have helped us. Firstly, the use of our in-house stock screening model which flags off companies for further analysis. Then, there is a rigorous follow up for companies that we invest in be it quarterly updates or interaction with the management to ensure that things are on track. Last but not the least, we are always on the lookout for new ideas especially in the mid-cap portfolio, these can make a difference to the perform-
How do you select you stock universe? What factors do you keep in mind while making the stock selection?
The first thing that we do is to get the macro picture right and then graft a micro understanding of the companies on to the big picture. For example, a few months ago our exposure to financials was below the schemes benchmark and as we got into an environment where we perceived that we are almost close to the peak of the interest rate cycle. So we January 2013 Wealth Insight 31
INTERVIEW
reversed our position and today our financials are slightly overweight compared to the benchmark. As a corollary , we increased weightages in other rate sensitive sectors such as auto and construction. Besides having a macro view, we got the micro picture right using our analysts views on stock selection. In terms of the stock universe the inhouse stock screening tool that we use covers nearly 400 stocks. Once you have identified the stocks, you just wait for an appropriate level to increase your weightages in the identified stocks. it shouldnt be different. We are in an environment where because of the global liquidity we have seen some amount of allocations happening to emerging markets as well. India has got a decent portion of the same. What will help will be continued momentum from the Government on the reforms steps that they have taken. If these reforms and policies continue, then I think there will be a case of good performance from the mid- and small-cap space. There are many examples where todays large size companies were yesteryears mid- and small-caps companies like Titan or Crompton Greaves. With valuations still being fair we feel optimistic for the mid- and small-cap space. al, corporate balance sheets are not too leveraged. Further the valuations currently are not euphoric and growth and the underlying return on equity support valuations. We are broadly trading at mean valuations for the last couple of years and with other asset classes offering limited upside, equity should be able to outperform.
Are you anticipating anything from the Union Budget?

The budget exercise will be constrained by the high level of spending and weak revenue growth that we have been seeing. Hence fiscal consolidation is one key area that one would need to watch. We hope the budget is growth oriented and offers a path to the next level of reforms, like the GST. We need to have government policies that make India an attractive investment destination that attracts foreign capital.
What do you avoid while building a portfolio?

While building a portfolio, we are not biased against any sectors. You can say that we are kind of sector agnostic. Our entire thesis is driven by getting the expected absolute and relative returns right. What we try internally is to get the valuation metrics right because valuations are the cornerstone and stock price will follow the earnings power of the company. For example, if something of a value of `100 is available at `50 and if we believe that the journey from `50 to `100 is likely to transpire in a reasonable period of time then we certainly would like to ride that journey. So it is critical to get the valuations of the defined universe as stock prices will always follow the earnings power of the company. Lastly, we try to avoid great exposure to themes not amenable to valuation. Techniques or something we cant justify in terms of appropriate value.
We are kind of sector agnostic with our entire thesis driven by getting the expected absolute and relative returns right
Do you think the market has the potential to go further up from here?
I would say yes, with measured optimism. We have seen reform moves from the Government and if it takes the right steps the rising trend in the market will continue. I think there is scope for re-rating especially because in the past two years the earnings have not been to the full potential. Post-Lehman crisis, most of the companies were working to get their leverage right, and more recently were grappling with the currency volatility besides dealing with cost pressures owing to raw material and high labour costs etc., The favourable part is that in gener-
What should investors look for while investing? If someone invests in the fund right now, how long will it take to get rewarded?
I think in terms of getting rewards, it would be extremely important for the investor to be exposed to equity as an asset class because elsewhere in fixed income instrument you are getting around 8 per cent. The last 15 years have seen the profits of corporate India grow at 15 per cent CAGR and finally the returns follow the earnings power and hence I am looking at returns which should be certainly better than returns that you earn in debt instruments.
What is your view on mid- and smallcap universe over the next 6 months?
I think most of the times it is an alternating cycle where the largecaps lead and mid-caps follow. Typically the large-caps lead the valuations and mid- and small-caps usually follow suit. This time around too 32 Wealth Insight January 2013
You also manage Principal Dividend Yield. How do you strike a balance between these two fairly different funds which require different strategies?
Yes, the characteristic of this fund is quite different from the mid-cap fund that I manage. The procedure of investing remains same. Only the choices and the way you allocate money in this fund are different. WI
10 Stocks
for 2013
Mohammed Ekramul Haque ccording to the Efficient Market theory , stocks always trade at their fair value, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. We are into that time of the year when predicting the future seems to be the general vocation with soothsayers predicting the year ahead, just weeks after predicting the end of the world. There are numerous stock recommendations for 2013 that you would come across. Our list of ten stocks is not a prediction, it is a lot more than a list of ten stocks. Analysts at Value Research constantly work towards understanding business and stocks. We go a lot more deeper to analyse stocks to ascertain what exactly influences stock prices. Stock price movements follows no discernible pattern, that is, they exhibit no serial correlation, according to the Efficient Market theory . Which means, stock prices are as likely to go up as they
COVER STORY
are to go down on any given day , irrespective of their movements in the past. Take for instance, the first half of 2012, when the Sensex had marginal gains between January and May . However, the same index soared over the next seven months to gain 20.5 per cent, and ended with full year gain of over 25 per cent. What triggered this rise in the second half was a spate of announcements and measures by the government that provided the necessary impetus to the market. The Sensex ended the year close to the psychological 20,000 mark. The improved market sentiments have helped the fortunes of the markets to recover. We arrived at a list of ten hand-picked stocks across sectors that are among the best and have bright prospects in 2013 and beyond. As always, we intervened with a few filters to qualify these stocks. There is no tip for an exit price or time with these stocks. You need to invest in them with a three-year time horizon to benefit. Happy Investing.
Long-term bets
Company Amara Raja Ashiana Housing Cummins India DiviS Laboratories Eicher Motors KPIT Cummins Mahindra & Mahindra NMDC Ltd Sun Pharmaceutical Tata Consultancy Services
Data as on December 20, 2012;
Industry Auto ancillary Real estate Diesel engines Pharmaceutical Automobiles Software Automobiles Mining & minerals Pharmaceutical Software
Mcap (` cr) 4,218 428 14,085 14,838 7,393 1,999 58,433 63,634 77,301 2,44,339
CMP (`) 247 230 508 1,118 2,738 104 952 161 746 1,248
PATM (%)* 8.25 28.62 13.41 28.34 8.12 9.66 4.4 64.48 36.59 21.52
D/E ratio* 0.1 0.09 0 0.03 0.03 0.32 1.39 0 0.03 0
TTM PE 15.6 7.38 22.46 23.83 21.94 10.97 18.47 8.98 29.69 19.63
Adj EPS** 15.83 31.03 22.62 46.91 64.27 10.49 53.69 17.87 29.52 64.29
EPS 3yr 25.37 28.61 13.49 22.19 76.08 27.16 23.31 21.09 28.76 28.43
PEG 3 yr 0.61 0.26 1.66 1.07 0.29 0.4 0.79 0.43 1.03 0.69
*D/E ratio and PATM for FY12;
**EPS pertains to ttm earnings
COVER STORY
AMARA RAJA BATTERIES
Set to last long

A
mara Raja Batteries is the countrys second-largest manufacturer of lead-acid batteries in the organised sector. It caters to the automotive (55 per cent of FY12 revenues) and industrial (45 per cent of FY12 revenues) verticals. Amara has a market share of 28 per cent in fourwheeler Original Equipment Manufacturer (OEM) market, 19 per cent in the four-wheeler replacement and 25 per cent in two-wheeler replacement markets. It also has a market share of 46 per cent and 32 per cent in telecom and UPS battery segments, respectively .
Amara Raja Batteries

Year Market Cap (`cr) Total Return (%) Dividend Yield (%) Financials Revenue (`cr) Net Profit (`cr) EPS Profitability Return on Capital Return on Net Worth (Equity) Operating Margin (%) Valuation Price / Earnings Price / Book Value 11.6 3 10.9 2.5 8.4 2.6 39 29.3 14.2 32.4 24.9 13.6 39.6 35.2 18.1 2,364 215 12.6 1,759 148 8.7 1,463 167 9.8 Mar-12 2,501 55 1.3 Mar-11 1,615 16 2.4 Mar-10 1,398 343 1.8
Why you should buy Amara Raja?

Robust demand: The automotive battery market is expected to grow at around 15 per cent annually over the next two years. Driving this growth would be demand for replacement batteries, new sales growing by 10-12 per cent and a shrinking unorganised sector that is finding it more difficult to compete with the expanding network of the organised players. According to Ashvin Shetty of Ambit Capital, revenue growth between FY13 and FY14 should be around 25 per cent and 18 per cent respectively . Market share gains: Amara is expected to step-up its market share from current levels of 28 per cent to around 30 per cent by the end of 2013. The gain has a lot of do with market leader Exide floundering. Exide has been losing market share between FY10-FY11 on account of capacity constraints, though, has been on a corrective path since. Amara in the meantime has increased its capacity , dealer network and OEM presence. Expanding its reach: Besides increasing the production capacity of its Chittoor (Andhra Pradesh) plant from 5.6 million units to 6 million units, the company is also planning to increase its OEM share in the two-wheeler segment by pumping in an investment of `100 crore. On a roll: Amara reported a robust 27.9 per cent (y-o-y , Q2FY13) growth in revenue driven by a robust double-
Revenue growth for Amara is expected to be around 18 per cent while its market share is expected to touch 30 per cent
digit growth in its automotive replacement segment. Automotive OEM and industrial battery segments though exhibited marginal growth on account of the current general weakness in the four-wheeler and two wheeler markets. Automobile sales fell by 8.3 per cent (yo-y) in November. If this weakness continues, Amara and other battery manufacturers will suffer. Margins on the rise: Amara reported a 73 basis points jump in operating margins on the back of lower lead prices. Better product mix too chipped in raising Ebitda margins to 16.4 per cent. With Amara taking a 4.5 per cent price increase from November 2012, margin improvement may continue in the next quarter as well. Amara trades at 0.6 times its 3-year PEG ratio. Given that the company is tuning itself to do all the right things expanding capacity and deepening its distribution network, expect it to keep on humming for some time.
Vis-a-vis the Sensex

300 250 200 150 100 50 Dec 09
Amara Raja Sensex
Dec 12
Stock price movement for 3 years
COVER STORY
ASHIANA HOUSING
Your portfolio builder

shiana Housing is a realty player unlike its peers. It does not build in any of the top cities in fact, it consciously avoids them. Ashiana has no debt, is cash flow positive and its RoCE at 40 per cent during the last three years is the highest among its peers. First recommended in our August 2011 issue, Ashiana has gained nearly 50 per cent since our buy call.
Ashiana Housing
Year Market Cap (`cr) Total Return (%) Dividend Yield (%) Financials Revenue (`cr) Net Profit (`cr) EPS Profitability Return on Capital Return on Net Worth (Equity) Operating Margin (%) Valuation Price / Earnings Price / Book Value 4.4 1.3 5.6 1.4 4.8 1.4 39.9 33.6 36.9 35.8 28.8 39 38 32.7 41.7 243 70 37.4 150 44 23.6 113 37 20.3 Mar-12 307 26 1.4 Mar-11 244 35 1.3 Mar-10 176 205 1.5
Why you should buy Ashiana Housing?

Focus on tier II and III cities: Ashiana has focused on cities such as Bhiwadi, Jaipur, Jamshedpur, Halol (Gujarat) and Patna. Typically, the company has invested in towns that are developing into industrial hubs and those that are turning into IT hubs such as Ahmedabad, Jaipur, Nagpur, Nasik, Raipur and Vadodara. Mid-income housing gains: Rather than going after the crme de la crme, it focuses on mid-income housing projects with a typical ticket size of ` 25-45 lakh. Projects awaiting clearances: Ashiana has 9.6 million sq ft lined up for development but is waiting government clearances for most of them. In Rajasthan alone it is waiting for clearances for 7.8 million sq ft. Such delays are expected to take a toll on the companys topline. Bookings to pickup in FY14: Bookings are expected to gain momentum in FY14 with the companys 3.6 million sq ft project in Bhiwadi and two others in Uttarpara (West Bengal) and Halol expected to come up by H2FY14. Lavasa legacy: The Ministry of Environment stopped all construction in Lavasa in November 2010. It eventually allowed construction in Q4FY12 and Ashianas bookings at its old-age retirement community it is building in Lavasa have slowly picked up. Future growth drivers: With cash of `104 crore (September 2012), the company is looking at Bengaluru, Chennai, Haryana, Hyderabad and Pune for land deals. Strong cash flows: Cash flows from bookings in current
Bookings are expected to pick up in FY14 with three major projects coming up in Rajasthan, West Bengal and Gujarat
projects are expected to remain robust at between `70-80 crore (CRISIL estimates) during the next 2-3 years. Change in accounting: Ashiana changed its accounting methodology from percentage-completed to the more accurate possession-based with effect from April 2012. As a result, topline and PAT for the next two years are expected to decline (from FY12 levels) even though cash flows are expected to remain strong during this period. Ebitda margin expansion: Ashianas Ebitda margins are expected to expand by as much as 3.6 per cent over the next three years as contribution of high-margin projects like those of Rangoli Gardens, Jaipur and Utsav, Lavasa take centre-stage. On a NAV basis, Ashianas fair value is estimated at `256 per share (CRISIL estimates). At the CMP of `220, there is still some value left and the stock trades at a very reasonable 6.4 times its ttm earnings. Buy with a 5-year horizon. January 2013 Wealth Insight 35

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Ashiana Housing Sensex
Dec 09
Dec 12
COVER STORY
CUMMINS INDIA
Powering India
ontinued power shortages in large parts of India create a steady demand for Cummins gensets. The situation does not seem will change anytime soon. Cummins reaps benefits in the meantime. It is one of the very few companies that have managed an average RoCE of 40 per cent during the last three years.
Cummins India
Year Market Cap (`cr) Total Return (%) Dividend Yield (%) Financials Revenue (`cr) Net Profit (`cr) EPS Profitability Return on Capital Return on Net Worth (Equity) Operating Margin (%) Valuation Price / Earnings Price / Book Value 23.3 6.7 22.9 7.5 22.9 6.5 43.1 30.7 18.6 47.8 35.1 19.7 41 30 21.4 4,117 591 21.3 4,043 591 21.3 2,845 444 16 Mar-12 13,773 2 2.2 Mar-11 13,554 33 2.2 Mar-10 10,169 177 2.3
Why you should buy Cummins India?

Continued power shortages create strong demand: South India overall suffers 15 per cent power deficit and North India (11 per cent deficit). It has resulted in demand for Diesel Generator sets spiking to 25 per cent (y-o-y), and will remain robust in medium term. Dominant market share: Domestic power gensets account for 55 per cent of revenues. Cummins already has more than 50 per cent of the market share in High HP and Medium HP . In the low HP segment, Cummins share stands at around 13 per cent levels. High demand improves pricing: Cummins has announced a price hike of 3 per cent effective from January 2013. This is the second increase this financial year, the first hike of (also) 3 per cent was announced in June 2012. To Cummins advantage, these price hikes are coming in at a time when commodity prices are softening. This should positively benefit margins going forward. Already raw material costs have declined from FY12 levels of 64.3 per cent to current levels of 62.5 per cent (Q2FY13). According to Satyam Agarwal of Motilal Oswal, this cost should come down closer to 61 per cent by the fourth quarter of the current financial. Margins as a result of cooling raw material prices, a weak rupee and subsequent price hikes are expected to improve from 18.5 per cent in the beginning of the year to closer to 19 per cent by the last quarter. Huge capex programme: Cummins will invest `1,800 crore into capacity expansion over the next five years.
Margins as a result of cooling raw material prices, a weak rupee and subsequent price hikes are expected to further improve
This will be financed through internal accruals and/or liquid investments. Exports will take time to bounce back: Exports fell 28 per cent (q-o-q in Q2FY13) on account of a sluggish global demand especially in the High HP segment. According to Agarwal, exports could remain weak for the remaining part of the current financial - estimated to fall by 60 per cent (y-o-y) and as well as in FY14 before bouncing back. Earnings per share on the back of robust demand, a softening commodity price trend and price hikes undertaken by Cummins are expected to see a growth of 20 per cent and 17 per cent in FY13 and FY14 (Motilal estimates). Cummins trades at 22 times its ttm earnings that is at a premium at which the BSE capital goods index (PE of 19) trades at. On account of its dominant market position, strong cash flows and high returns on capital, Cummins is a good bet in the capital goods space.

600 525 450 375 300 225 Dec 09
Cummins India Sensex
Dec 12
COVER STORY
DIVIS LABORATORIES
The King of CRAMS

I
f you want to invest in one contract research and manufacturing services (CRAMS) player in India, it should be Divis Labs. Founded in 1990, Divis has two main verticals custom synthesis and generics. In custom synthesis of active pharmaceutical ingredients (APIs), Divis collaborates with innovator companies from conception to commercialisation stage to bring the drug to market. Custom synthesis brings in 44 per cent of Divis revenues (FY12). The other vertical is generic exports and accounts for the remainder of its topline. Divis high-margins business can rival that of the best pharma companies. Its return on capital has averaged at a high of 36 per cent in the last ten years among the best in its class.
DiviS Laboratories
Year Market Cap (`cr) Total Return (%) Dividend Yield (%) Financials Revenue (`cr) Net Profit (`cr) EPS Profitability 1,864 533 40 1,317 429 32 942 340 26 Mar-12 10,176 13 1.7 Mar-11 8,962 -0.5 1.48 Mar-10 8,973 42 0.88
Why you should buy Divis Labs?

Relationships: Divis today has partnerships in place with 20 of the top-25 global pharma companies. In a $45 billion global CRAMS market Divis has this strong competitive advantage. CRAMS revenues are expected to grow by around 20-25 per cent over the next two years. Building capacity: Divis has undertaken capacity expansion of around `450 crore in the past two years. Apart from that, it is targeting fresh capacity investments to the tune of `150-200 crore in FY13 alone. Robust revenues: In the latest quarter (Q2FY13), it reported robust revenue growth. Custom synthesis business (48 per cent of Q2 topline) grew 31 per cent (y-o-y) while API sales (52 per cent of sales) surged 35 per cent (y-o-y). Divis though cut its revenue outlook for FY13 from 25 per cent to 20-25 per cent. That has hit market sentiments. The cut has to do with delayed USFDA inspections of its new units and lower than expected ramp-up in nutraceutical business. But Divis structural story remains intact and it has guided 20 per cent revenue growth for FY13E and 25 per cent growth for FY14E.
Return on Capital Return on Net Worth (Equity) Operating Margin (%) Valuation Price / Earnings Price / Book Value
34.2 27.2 39.7
28.2 25.9 39.7
27.3 24.9 46.4
19.1 4.8
20.9 5.0
26.4 5.9
Divis Ebitda margins are next only to industry leader Sun Pharma and its earnings are expected to grow by 20 per cent annually
Superior margins: Improved product mix and better currency realisation have helped Divis post gross margins of 66.1 per cent (Q2FY13). The said quarter saw margins expand 6.7 per cent because of the above-stated factors. Ebitda however expanded by just 3.6 per cent because of higher power costs which are expected to remain at current levels (because of power shortages) for at least the next 2-3 quarters. The high power costs notwithstanding, Divis Ebitda margins at 39.3 per cent are second only to industry leader Sun Pharmas 44 per cent margins (Q2FY13). According to Manoj Garg of Edelweiss Securities, Divis topline is expected to grow between 2122 per cent in the next two years while earnings per share are expected to grow by 27 per cent and 25 per cent, respectively in FY13 and FY14. Invest with a long-term horizon. Long-term investors have already seen 60 per cent gains in the past 12 months.

1250 1050 850 650 450
DiviS Laboratories Sensex
Dec 09
Dec 12
COVER STORY
EICHER MOTORS
Smooth ride on rough roads

Did you know that even today there is a minimum sixmonth waiting period for the iconic Royal Enfield motorcycles? Did you know that the Bullet 350 is the longest running motorcycle brand in India being launched here first in 1955? Eicher has traditionally been known as a heavy commercial vehicle manufacturer. The company though relies on the Royal Enfield motorcycles as much for its earnings. Its tie-up with Volvo in 2008 has been a turning point. It now has the technology to take on the best in its industry .
Eicher Motors
Year Market Cap (`cr) Total Return (%) Dividend Yield (%) Financials Revenue (`cr) Net Profit (`cr) EPS Profitability Return on Capital Return on Net Worth (Equity) Operating Margin (%) Valuation Price / Earnings Price / Book Value 12.9 2.7 17.6 2.7 9.9 0.8 46.5 36.5 12 33.9 26.8 10.3 15.9 12 8 5,678 497 114.4 4,397 307 70.1 2,939 129 65.9 Mar-12 3,983 20 1.1 Mar-11 3,320 88 0.9 Mar-10 830 162 1.1
Why you should buy Eicher?

The Royal Enfield brand alive and kicking: The current demand for Royal Enfield (RE) far outstrips the supply leading to a minimum six month waiting period. According to Chirag Jain of Motilal Oswal, RE will contribute 41 per cent of Eichers Ebitda this calendar. That share is expected to go up to 44 per cent next year. Also, REs demand is expected to grow at 25 per cent annually over the next two years. Building capacity: Enfields annual capacity is around 60,000 bikes. By outsourcing some of its work, it is actually able to produce 1,20,000 bikes a year; due to which the waiting period often runs upto six months. It is now setting up a new plant in Chennai, to start production in first quarter of 2013, with an annual capacity of 1,50,000 bikes (upgradable to 2,50,000) at a cost of `150 crore. CVs, the road ahead: The partnership between Eicher and Volvo has been advantageous to both. Eicher gains from Volvos technological expertise while the latter gains from Eichers deep understanding of the local markets, low cost base and existing relationships with component suppliers. Volvo has chosen Volvo-Eicher Commercial Vehicles (VECV) as its global manufactur-
A new plant is being set up in Chennai which will more than double the present production capacity of 60,000 Royal Enfield bikes
ing hub for 1,00,000 units of medium duty engines to cater to its global requirements. That puts a lot of business Eichers way . The JV sold 49,043 vehicles in CY11 25 per cent growth in volume. Thats around $1 billion in sales (`4,916 crore). Volvo will invest `2,500 crore into the JV by 2013 to make India the companys global manufacturing hub. Eicher is no small fry in the commercial market itself. Its trucks are known for their high fuel-efficiency . In the 5-14 MT segment it has a market share of 30 per cent. The category has grown at 25 per cent annually in the last three years. Strong balance sheet. Unlike a number of its peers, Eicher has a strong balance sheet. Debt-equity ratio is at zero. Investments are valued at `512 crore (CY11). Invest with long-term horizon. The impact of new Chennai plant and Volvos investments should put Eicher on a smooth run for the next couple of years.

3200 2500 1800 1100 400
Eicher Motors Sensex
Dec 09
Dec 12
COVER STORY
KPIT CUMMINS INFOSYSTEMS
Many roads to Rome

T
here are many routes for Indian IT companies to develop sustainable business models away from domestic IT firms obsession with the banking, financial services and insurance (BFSI) verticals and its traditional focus on application development and maintenance (ADM) services.
KPIT Cummins Infosystems

Year Market Cap (`cr) Total Return (%) Dividend Yield (%) Financials Revenue (`cr) Net Profit (`cr) EPS Profitability Return on Capital Return on Net Worth (Equity) Operating Margin (%) Valuation Price / Earnings Price / Book Value 9.8 2 15.6 2.5 10.5 2.3 23.7 22.1 15.4 18.8 19.2 15.7 28.1 31.3 19.2 1,500 145 8.2 987 95 5.4 732 86 5.5 Mar-12 1,424 -5 0.9 Mar-11 1,477 46 0.4 Mar-10 903 349 0.6
Why you should buy KPIT Cummins?

A different path: KPIT has consciously steered itself towards verticals like automotive, manufacturing, energy and utilities to drive revenues. Today , the automotive, transportation and manufacturing verticals bring in 71 per cent of its revenues. And KPITs strategy seems to be paying off. Revenues grew 5.5 per cent (q-o-q, Q2FY13) at par with the best in the industry . Volume growth came in strong at 4 per cent. Billion-dollar game: KPITs current run-rate stands at `1,500 crore (FY12). It has set a target of $1 billion by 2017 (`5,422 crore). It needs to grow revenues by 29 per cent annually till 2017 to achieve that target. That is slightly higher than KPITs current growth rate of 26 per cent (last five years). Also, its half-yearly revenues this financial are already higher by 72 per cent compared to the corresponding period of the previous year. According to Dipen Shah of Kotak Securities, KPIT will achieve FY13 revenue runrate of around 50 per cent over the previous year twice the sector growth rate estimated for FY13. The acquisition bridge: In the past 10 years, it has acquired 10 companies. Inorganic revenue growth in FY12 and FY11 stood above 40 per cent (y-o-y). Excellent management pedigree: As an outsider, you can gain an idea about the acquirer or how an acquisition will turn out if key personnel flee or stick around. KPIT comes out with flying colours on this aspect as many of the key personnel of companies acquired by KPIT con-
KPIT has acquired 10 companies in last 10 years and most of the key personnel of the such companies continue to work for it
tinue to work with the company even post-acquisition. Stake sale and issue of fresh share: KPIT plans to raise `162 crore by way of equity issue in Q3. This inflow of fresh equity will strengthen the companys balance sheet. According to Shah of Kotak, equity dilution at around 7.3 per cent will impact FY14 earnings by 4 per cent. As a result of the fresh infusion, KPIT should have net cash of `120 crores by end FY13. Revolo revolution: KPIT in association with Bharat Forge is developing Revolo a technology that will convert existing diesel and petrol engines to hybrids. Testing has shown fuel efficiency improve by 35 per cent and emissions lower by 30 per cent. Could be launched by end FY13/FY14. The opportunity is huge but markets are not factoring in this yet. KPIT trades at 11 times is ttm earnings. Buy with a five-year horizon.

140 120 100 80 60 40 Dec 09
KPIT Cummins Sensex
Dec 12
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COVER STORY
MAHINDRA & MAHINDRA (M&M)
Riding like the Cheetah

ahindra & Mahindra (M&M) has come a long way from being just a jeep manufacturer to churning out hip-and-hit SUVs on Indian roads.
Mahindra & Mahindra

Year Market Cap (`cr) Total Return (%) Dividend Yield (%) Financials Revenue (`cr) Net Profit (`cr) EPS Profitability Return on Capital Return on Net Worth (Equity) Operating Margin (%) Valuation Price / Earnings Price / Book Value 13.1 2.5 13.3 2.9 12.4 3 16.8 18 12.3 20.1 26.2 16.2 23.1 33.4 17.2 59,418 2,776 53.1 36,864 3,198 52.4 31,569 2,871 43.8 Mar-12 41,050 0 1.8 Mar-11 41,025 28 1.6 Mar-10 30,853 185 1.7
Why you should buy M&M?

SUVs, the new it thing: In recent times there has been an explosion in demand for SUVs a category that did not really become fashionable till the launch of the decades-old model of Toyota Qualis. Today, the share of SUVs in the total passenger car market has risen from 14 per cent 3 years ago to 20.3 per cent. In the last 3 years SUV category has grown at 18 per cent annually higher than the 16 per cent growth posted by sedans. In YTD13, the segment grew a whopping 61 per cent and M&M with its early focus on this category has managed to capture 60.5 per cent of this market. Not a one-trick pony: Mahindra does not need to rely on SUVs alone to keep its cash registers ringing. It is present in a number of categories: the light commercial vehicles (LCV) medium and heavy commercial vehicles (M&HCV), passenger cars and tractors. LCVs to drive growth: M&M has a formidable presence in the LCV segment with a market share of 29.4 per cent. Growth in LCVs has been at a high 18. 2 per cent (y-o-y, in CY12). Mahindra has launched a number of vehicles addressed to this segment like the Bolero Pickup (mini truck), Gio (compact truck and small cab), Maxximo, Gio and Genio (all variants of pickups). Ruling the rural market: M&M has always been very strong in the tractor segment. It was the leader with 31 per cent market share in 2007 when it acquired Punjab Tractors, owners of famous Swaraj brand. By 2012, Punjab Tractors had done complete turnaround. Standalone revenues tripled to `3,000 crore, bottomline jumped six times to `500 crore. M&M and Punjab Tractors have a combined market share of 42 per cent.
It is not just SUVs that are driving growth, even in tractors space M&M and Punjab Tractors have a dominant market share
Deep dealer network: M&M, by virtue of its long presence in the commercial vehicle segment, today has 200 main dealers and around 600 service network for its utility vehicles. The depth of the service network is essential for M&M to build its brands across the country . Many international brands without a strong presence in India have failed because of this count. GM for instance had to close down its Opel brand of passenger vehicles (the famous Opel Astra was a rage at its time) in 2006. At the time of closure, the company had only 80 service centres across India! Capex plans: M&M has plans to invest `500 crore in capex over the next three years. It envisages an investment of `250-300 crore into its subsidiaries. M&M with its hit SUVs and successful tractors appears to have struck the right formula to speed ahead of its peers. Hang tight. January 2013 Wealth Insight 45

1000 850 700 550 400
Mahindra & Mahindra Sensex
Dec 09
Dec 12
COVER STORY
NMDC
Iron shakti
G
oa and Karnataka have closed down their illegal mines. Orissa has fallen hard on erring ones. So, the limelight has now shifted on to the state-owned NMDC, the countrys largest iron ore producer. With iron ore in short supply in the country , the prospects of the highquality iron ore producer seem bright.
NMDC
Year Market Cap (`cr) Total Return (%) Dividend Yield (%) Financials Revenue (`cr) Net Profit (`cr) EPS Profitability Return on Capital Return on Net Worth (Equity) Operating Margin (%) Valuation Price / Earnings Price / Book Value 8.8 2.6 17.3 5.9 33.8 8.2 49.4 33.3 97.1 58.1 38.9 86.6 40.3 26.7 84.6 11,262 7,266 18.3 11,369 6,500 16.4 6,239 3,447 8.7 Mar-12 63,871 -43 2.8 Mar-11 1,12,379 -4 1.2 Mar-10 1,16,622 88 0.6
Why you should buy NMDC?

Near monopoly: With the Supreme Court banning mining in Karnataka in 2011, the Central Government gave NMDC all the requisite approvals. With no private players now allowed to operate, NMDC has consequently turned into a monopoly in the region. High quality reserves: It has an annual production capacity of 32MTPA and reserves of 1,354 million tonnes. Also, with an Fe content of 64 per cent (high-quality ore), NMDCs reserves are of highest quality in the world. Capacity gains: NMDC plans to increase its production capacity from current levels of 32 MPTA to 51 MPTA by FY16. Two new mines in Chhattisgarh and Karnataka both with a mining capacity of 7 MTPA each are expected to come online by that timeframe. According to Neha Majithia of Microsec Research, an increase in production capacity would mean that mining capacity should grow by 9.77 per cent annually between FY12-FY16. High mine life: NMDCs mines in Bacheli and Kirandul (both in Chhattisgarh - these are sites and typically contain multiple ore deposits) have an average life of 25 years. That provides a certainty that reserves will not run out in a couple of years even on increased production. Its Bailadila mines (also in Chhattisgarh) have a reserve life of 50 years. Foray into pellets: NMDC is building at 1.2 MTPA pellet plant at Donimalai (Bellary , Karnataka). It has set aside `572 crores for this project expected to be commissioned in April 2013.
NMDC is the most profitable iron miner in the world and enjoys near monopoly in many parts of the country
Huge capex programmes: NMDCs key capex projects include: 3MTPA integrated steel plant in Chhattisgarh at a capex of 15,525 crores, 2MTPA pellet planet in Nagarnar at a capex of `807 crore, coal production from the Shahpur East and West (MP) mines. In total, NMDC will invest `30,000 crore to increase production. High margins to continue: NMDC is the most profitable iron miner in the world with Ebitda margins of 79 per cent (FY12). All the aforementioned reasons have helped the company cap costs at $17 per tonne (FY12). To get an idea of how low this is, consider Sesa Goa (the second largest iron ore producer in India) which reported a cost of $84 per tonne (FY12). NMDC is a zero-debt company with a net cash balance of `20,000 crore. NMDCs RoCE has averaged at 40 per cent during the last 3 years. The stock trades at an attractive PEG ratio of 0.43x. Buy with a long term horizon.

600 500 400 300 200 100 Dec 09
NMDC Sensex
Dec 12
COVER STORY
SUN PHARMA
More acquisitions ahead

F
rom revenues of `750 crore in 2002 to `8,126 crore in 2012, Sun Pharma has come a long way . Fighting for Israel-based Taro Pharmaceuticals and winning over its detractors, Sun Pharma today is a poster boy for Indias fast rising pharma conglomerates. And it wants more.
Sun Pharmaceutical
Year Market Cap (`cr) Total Return (%) Mar-12 58,977 29 0.7 Mar-11 45,753 23 0.8 Mar-10 37,066 61 0.8
Why you should buy Sun Pharma?

Strong US sales: US sales now bring in 53 per cent of Suns gross formulations revenues and are on a roll growing at a robust 66 per cent (y-o-y, Q2FY13). Sun has 136 ANDAs (Abbreviated New Drug Applications) pending approval with the USFDA and expects to file another 25 in FY13. Suns total ANDA filings stand at 395 including that of its subsidiary Taro; making its portfolio one of the largest among Indian generic players in the US. Taro, Suns Israeli subsidiary , leans on the US for more than 85 per cent of its revenues and has an Ebitda margin of 51 per cent (one of the highest in the industry). Taros core strengths in dermatology has enabled the company to take price increases recently on the back of which revenues (Q2) were up by 16 per cent (y-o-y) and Ebitda was up 33 per cent. Margins are expected to taper down as competition intensifies. Formidable domestic position: India brings in a third of Suns formulations revenues. It has a market share of 4.7 per cent in the domestic formulations market. Sun ranks first in six therapy areas of cardiac, ophthalmology , neurology , orthopaedics, psychiatry and gastroenterology . Domestic sales growth at 19 per cent (y-o-y for Q2FY13) is expected to remain strong going forward. High-margins business: Suns Ebitda margins at 44 per cent are the highest among domestic players. Suns strong presence in high-margin lifestyle segments should help the company maintain its current profitability . The company has an estimated $1 billion in
Dividend Yield (%) Financials Revenue (`cr) Net Profit (`cr) EPS Profitability Return on Capital Return on Net Worth (Equity) Operating Margin (%) Valuation Price / Earnings Price / Book Value
8,019 2,974 25
5,728 1,911 17.6
4,007 1,347 13
30.2 27.5 45.2
23.6 22.1 39.9
18.6 18.1 38.4
22.8 4.8
25.1 4.8
27.4 4.7
US sales now bring in 53 per cent of Suns gross formulations revenues, and are growing at a robust 66 per cent
cash (`3,367 crore in FY12). This is especially important when pursuing a strategy of acquisitions, enough hints of which have been given in interviews to media. Role of Israel Makov: In May this year, Dilip Shanghvi, the founder-promoter of Sun made a decision that stunned the industry . He stepped down to make way for Makov as chairman of Sun Pharma. This is a gamechanger event for Sun especially given what Makov has achieved in his past stint with one of Suns arch rivals Teva Pharmaceuticals. Under Makovs five years as CEO, Tevas revenues jumped four-fold to $8.5 billion. Net income skyrocketed an even higher six-fold. Teva shareholders during his period at the helm (2002-2007) saw total share price gain of 1,000 percent! Even half of that performance will gladden the hearts of Sun Pharmas shareholders. Hold for a period not less than five years. January 2013 Wealth Insight 47

800 650 500 350 200
Sun Pharma Sensex
Dec 09
Dec 12
COVER STORY
TATA CONSULTANCY SERVICES (TCS)
Blazing all guns

T
ata Consultancy Services (TCS) has been on a roll for quite some now. Between 2008-12 (YTD), TCS gained cumulative returns of 130 per cent. Erstwhile bellwether Infosys actually lost 32 per cent in the same period. It is no wonder then that the market is betting on TCS as the next Infosys.
Tata Consultancy Services

Year Market Cap (`cr) Total Return (%) Dividend Yield (%) Financials Revenue (`cr) Net Profit (`cr) EPS Profitability Return on Capital Return on Net Worth (Equity) Operating Margin (%) Valuation Price / Earnings Price / Book Value 22 7.8 25.6 9.5 21.9 8.3 51.4 39.1 30.4 51.2 43 31.6 47.7 41.8 29.9 48,894 10,523 53.1 37,325 9,190 46.3 30,029 7,093 35.7 Mar-12 2,28,572 -1 2.1 Mar-11 2,31,439 51 1.2 Mar-10 1,52,818 189 2.6
Why you should buy TCS?

Beating peers with full-services model: Rather than focusing on select verticals or premium services (a la Infy) TCS has maintained a full-services model upstream or downstream, premium or bread-and-butter services, consulting or even application development and maintenance. Why bread-butter services are delivering more for TCS? Volumes. These services are estimated to account for a whopping 70 per cent of all IT spends and such nondiscretionary spends are essential for smooth running of client operations. In an environment that is yet to open up its purses to discretionary spending, these services then become essential to maintain growth. That is where TCS has kept its eye on and Infy has looked away . These acquired clients will be open to bring more services to TCS rather than trying out a fresh vendor. Strong execution drives topline: TCS strategy certainly seems to be paying off. Revenue growth came in at a robust 4.6 per cent (q-o-q) in Q2FY13 much higher than Infys 2.6 per cent growth. It saw volumes grow 4.9 per cent (q-o-q). Key verticals reported better than industry numbers. BFSI was up four per cent (q-o-q), manufacturing up nine per cent, retail up six per cent while energy and media were both up five per cent. TCS management expects a good demand environment with deals being finalised and on-schedule rampups ahead. It sees discretionary spend improvements going well into FY14.
Bread-butter services account for a whopping 70 per cent of all IT spends and are essential to maintain growth
Envious cash flow position: The September 2012 quarter saw operating cash flows up 70 per cent (y-o-y) in dollar terms and 100 per cent up in rupee terms. On a trailing twelve month basis, TCS operating cash flows have improved around 24 per cent (y-o-y) while free cash flows are up 96 per cent. Best-in-class employee retention: Attrition levels at 10.2 per cent (ttm) are the lowest in the industry . Quarterly annualised attrition rate in Q2FY13 stood at 13.3 per cent 7.4 per cent points lower than Infy . Total headcount has improved 18 per cent (y-o-y). Net hires stood at 10,500. TCS is looking to hire 25,000 fresh engineers this year. TCS valuations are not cheap. The stock trades at 19.63 times its ttm earnings. The market is giving a premium to TCS full-services model and its superior volume growth and by all counts TCS appears still on a roll. WI

1550 1300 1050 800 550
TCS Sensex
Dec 09
Dec 12
STOCK
IDEAS
Discount to book value
alue investors hunting for inexpensive stocks look for stocks based on discount on book value. The late Benjamin Graham used book value as a gauge of liquidation value. Buying a stock below book can provide what Graham called a margin of safety . A stock trading near or below book value, can be bought for close to or, less than what it is worth by this measure. Clearly, investors looking at this largely value-oriented metric prefer buying assets for less than what they are. However, a pricebook ratio below one is no guarantee of safety . It is important to examine the quality of a companys assets. A low price to book could also be an indication of negative forward looking investor confidence like poor earnings projections or a disproportionate amount of intangible assets on the books. A low price book value ratio has been considered a reliable indicator of undervaluation in firms. Empirical evidence suggests that over long time periods, such stocks do better. To check on quality of stocks that we short-listed, we have looked for companies with a positive five-year earnings growth with the most
recent return on net worth more than 10 per cent. To add further safety , we looked at stocks that had price 25 per cent less than the book value per share and debt-equity of less than 1.5 per cent were short-listed, eliminating companies that had a low book value because of high debts or weak earnings. A low discount to book value alone is no guarantee of safety; it is important to examine the quality of a companys assets. This month, 20 stocks made the cut with MRF being the only company that entered the list while Allahabad Bank, Dena Bank, Educomp Solutions, HSIL, Indian Bank, KRBL, Syndicate Bank and Tulip Telecom were the ones that exited the list. WI
REASONS TO INVEST
Really cheap Relatively undervalued Companies with assets
The filters
Price at least 20 per cent below the book value (143/762) Return on net worth of more than 10 per cent in most recent year (54/143) Debt-equity ratio of less than 1.5 per cent (41/54) Companies must have a 5-year earnings growth of more than 10 per cent (20/41)
Discount to book value

Company
Stock style P/B PE PEG Dividend yield (%) Debt-Equity ratio ROE (%) Mrkt cap (` cr) Share price (`) 52 Week high - low
MRF
Tyres & Allied
0.19 0.78 0.75 0.58
9.14 4.92 4.23 3.35
0.33 0.32 0.20 0.22
0.20 4.70 4.99 3.66
1.00 31.07 1.10 19.25 0.66 21.61 1.15 19.29
5,293 12,480 12,5856,472 6,541 380 406 117 140 109 13979 161101 14474
Andhra Bank
Bank - Public
Andhra Sugars
Diversified
Diamond Power Infra

Cable
STOCK
IDEAS
Company
Stock style
P/B
PE
PEG
Dividend yield (%)
Debt-Equity ratio
ROE (%)
Mrkt cap (` cr)
Share price (`)
52 Week high - low
Geodesic
IT - Software
0.16 0.16 0.70 0.72 0.55 0.55 0.74 0.55 0.48 0.70 0.78 0.30 0.63 0.44 0.51 0.24
1.36 0.83 3.72 7.10 1.86 4.34 7.62 2.89 2.14 4.17 5.59 3.33 4.01 3.51 1.79 1.35
0.11 0.02 0.18 0.51 0.02 0.20 0.66 0.11 0.11 0.30 0.54 0.30 0.07 0.22 0.04 0.07
6.48 0.52 2.21 0.92 26.09 0.00 1.39 0.00 5.08 3.25 2.53 2.02 3.11 2.15 1.96 7.76
0.65 18.25 0.29 36.20 0.18 23.88 0.14 13.99 0.19 56.73 0.99 15.48 0.51 11.36 0.90 15.25 0.57 24.48 0.71 18.59 0.00 14.07 0.88 12.62 1.00 16.42 1.21 14.83 0.10 15.48 0.66 23.18
279 131 2,700 307 281 559 13,824 465 716 3,121 486 716 2,783 344 700 212
31 29 68 109 288 98 526 130 118 446 316 99 77 46 51 64
6628 43525 9164 15382 438276 25586 680328 15672 13365 492302 351233 14791 8746 5627 7710 34063
Glodyne Technoserve
IT - Software
Gujarat State Fertilizers

Fertilizers
KNR Construction
Engineering - Construction
Navin Fluorine Intl.

Chemicals
Ramky Infrastructure
Reliance Infrastructure
Power Generation/Distribution
Sarda Energy & Minerals

Steel/Sponge Iron/Pig Iron
Shree Ganesh Jewellery

Diamond & Jewellery
State Bank Of B&J*

Bank - Public
Tata Sponge Iron

Steel/Sponge Iron/Pig Iron
Uflex
Packaging
United Bank of India

Bank - Public
Unity Infraprojects
Vikas WSP
Chemicals
Zylog Systems
IT - Software
Price up to December 19, 2012; Growth rates are all annualised; Indicates new addition to list *State Bank of Bikaner & Jaipur
STOCK
IDEAS
Reasonable priced growth stocks

easonably Priced Growth Stocks (GARP) are a combination of both growth and value investing which was popularised by the legendary Peter Lynch. While a growth strategy is more focused on a companys earnings growth and value investing seeks companies having their prices below their intrinsic value, growth at reasonable price as a strategy, hunts for stocks that have both a growth potential and are also trading at a reasonable price. A typical GARP investor seeks to invest in companies that have had a positive performance over the past few years, and also have positive projections for the upcoming years. A solid benchmark to spot a GARP stock is PEG ratio or price/earnings growth ratio. The PEG shows the ratio between a companys PE ratio (valuation) and its expected earnings growth rate over the next several years. A GARP investor would seek out stocks that have a PEG of 1 or less, which shows that PE ratios are in line with expected earnings growth. This helps to uncover stocks that are trading at reasonable prices. GARP investing meets an admirable set of criteria in finding solid companies with good growth prospects and minimal risk, all at a good price. When arriving at our
list of GARP stocks we looked for stocks with at least 20 per cent in the past five years, growth of at least 20 per cent in latest quarter compared to the same quarter in the previous year and growth of at least 20 per cent in trailing twelve month compared to previous years corresponding period refining the growth to consistency. Finding companies that have a consistently high ROE generally shows that you are dealing with good management and a strong business. This month, 31 stocks made the cut with Mayur Uniquoters being the company that entered the list this time while Accelya Kale Solutions, Sharon Bio-Medicine, Eros International Media and MRF being some that exited the list. WI
REASONS TO INVEST
All-weather investment style Works in all markets Companies with strong fundamentals Greater stability vis-a-vis Value or Growth
The filters
Earnings growth of: At least 20 per cent in latest quarter on YoY basis (280/762) At least 20 per cent in the trailing 12-months (151/280) At least 20 per cent in the past 5-years (62/151) Stocks with a price-to-earning (PE) of less than 12 (30/62)
Reasonable priced growth stocks

Company
Stock style P/E Industry P/E PEG Quarterly growth (%) TTM EPS growth growth (%) 5Y (%) Mrkt cap (` cr) Share price (`) 52 Week high - low
Mayur Uniquoters
Textile
12.80 10.34 7.36 9.33
0.23 0.22 0.27
52.20 53.35 84.64
46.21 55.86 41.97 33.33 55.28 40.30
516 769 919
476 97 392
505160 10544 505146
Aarti Industries
Chemicals
Ajanta Pharma
Pharmaceuticals & Drugs
11.00 25.90
STOCK
IDEAS
Company
Stock style
P/E
Industry P/E
PEG
Quarterly growth (%)
TTM EPS growth growth (%) 5Y (%)
Mrkt cap (` cr)
Share price (`)
52 Week high - low
Atul
Dyes & Pigments
9.55 12.36 12.24 18.13 11.31 15.15 7.52 9.54
0.25 0.32 0.20 0.27
204.57 21.43 30.38 95.56
86.22 37.62 22.73 38.03 34.73 57.30 65.02 27.84
1,335
450
472135 1,377785 1,410585 303154 1,049498 13768 11048 23556 222151 14273 547258 224143 16758 13680 1,473653 14269 4825 231106 389166
Axis Bank
Bank - Private
56,998 1,334 5,605 1,309 2,602 1,074 831 519 336 6,575 2,651 366 4,063 574 749 269 939 119 94 167 207 89 491 209 135 126
Bajaj Finance
Finance - NBFC
Balkrishna Industries
Tyres & Allied
Bannari Amman Sugars

Sugar
6.59 10.03 5.89 18.74 8.66 18.43 9.76 25.90 10.77 18.11 7.58 16.97 5.13 18.26 12.71 19.65 5.65 16.97 10.17 18.43 6.96 18.13 11.28 16.97 5.49 26.57 7.63 15.15 3.71 15.34
0.21 255.11 167.81 30.86 0.10 575.60 117.31 60.94 0.32 0.37 0.45 0.33 0.14 0.36 71.60 207.27 27.12 119.26 169.58 28.51 41.77 54.59 63.27 26.58 41.99 23.87 58.10 22.68 44.79 37.20 23.54 35.52
Bombay Burmah
Tea/Coffee
Commercial Engineers
Auto Ancillary
Granules India
Gujarat Mineral
Mining & Minerals
Hexaware Technologies
IT - Software
HIL
Cement & Construction
IL&FS Trpt Networks

Infinite Comp Solutions

IT - Software
0.11 141.83 122.63 50.29 0.13 0.29 0.47 0.05 0.11 0.17 27.89 35.00 25.40 65.73 24.34 44.90 25.61 78.05 36.11 23.95 69.09 24.14 78.86 101.20 42.69 68.06 56.67 21.79
Innoventive Industries
Auto Ancillary
Jammu & Kashmir Bank

Bank - Private
6,517 1,344 2,055 636 7,628 393 107 31 205 304
KPIT Cummins
IT - Software
Kwality Dairy (India)

Consumer Food
Muthoot Finance
Finance - NBFC
Parekh Aluminex
Aluminium & Aluminium
STOCK
IDEAS
Company
Stock style
P/E
Industry P/E
PEG
Quarterly growth (%)
TTM EPS growth growth (%) 5Y (%)
Mrkt cap (` cr)
Share price (`)
52 Week high - low
Petronet LNG
Industrial Gases & Fuels
10.76 12.03 6.84 7.27 8.68 8.68
0.49 0.31 0.25 0.37 0.37
20.91 147.16 52.80 38.62 21.30
25.95 22.12 65.87 21.73 26.87 29.08 31.19 30.30 48.76 34.73
12,116 26,922 24,459 533 3,722 700 644 543
162 204 248 316 199 51 130 61
180122 224131 251142 350227 222101 7710 14062 7022
Power Finance Corpn.

Finance Term Lending
Rural Elect Corpn

Finance Term Lending
Selan Exploration Tech

Oil Exploration
11.29 11.41 12.71 18.43 1.79 9.06 9.33 9.33
Tube Inv Of India

Auto Ancillary
Vikas WSP
Chemicals
0.04 424.92 251.57 45.58 0.18 159.44 0.13 43.53 51.71
Vinati Organics
Chemicals
Welspun India
Textile
3.01 10.34
21.46 140.11 23.13
Price up to December 19, 2012; Growth rates are all annualised; Indicates new addition to list
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STOCK
IDEAS
High dividend yield stocks
hen equity markets get a bearish undertone due to macro headwinds like inflation and rising interest scenario, many high dividend paying companies are available at attractive dividend yields. High dividend-paying stocks with solid fundamentals are one of the safest ways to generate meaningful returns in the stock market, because the dividend yield acts as a buffer against volatility . However, zeroing in on dividend stocks is not as simple as it sounds. Simply picking a stock that boasts the highest dividend yield does not help. You need to go deeper and examine the reasons for the high dividend payout. For instance, the company could have been distributing the profits because of an extraordinary income or due to dearth of profitable opportunities or new projects to invest in. Blindly chasing the current yield would be a recipe for disaster. When looking for high dividend yield stocks, look for companies with sustained dividend payout. We
short-listed companies with sustained per share dividend keeping in mind the fact that yield shoots up when the share price drops. For this reason, we factored in a dividend yield of 3.5 per cent. Our list is made of companies with a good track record of growth, sound financials and history of dividend payment. This month, 24 stocks made the cut with Zylog Systems being the only company that entered the list while Geodesic, Glodyne Technoserve and Union Bank Of India are the three companies that exited the list. WI
REASONS TO INVEST
Cushion against volatility Higher total return Generates regular tax-free income
The filters
Stocks with sustained per share dividend and amount over the past 5-years (246/762) Dividend payout ratio of less than 40 per cent (202/246) Stocks with a current dividend yield of more than 3.5 per cent (24/202)
High dividend yield stocks

Company
Stock style P/E PEG Dividend per share (`) Dividend yield (%) Dividend pay Avg out ratio (%) Div 5Y (%) Mrkt cap (` cr) Share price (`) 52 Week high - low
Zylog Systems
IT - Software
1.35 0.07 4.92 0.32
5.00 5.50
7.76 4.70 4.31 4.57 4.37
9.46 60.00 22.89 49.00 33.03 228.00 20.16 160.00 22.78 45.00
212 6,541 1,059 6,641 1,109
64 117 650 448 126
34063 13979 709463 528341 170120
Andhra Bank
Bank - Public
Balmer Lawrie & Co

Diversified
7.35 0.58 28.00 4.34 0.22 20.50 6.12 0.46 5.50
Corporation Bank
Bank - Public
Deepak Fertilisers
Fertilizers
STOCK
IDEAS
Company
Stock style
P/E
PEG
Dividend per share (`)
Dividend yield (%)
Dividend pay Avg out ratio (%) Div 5Y (%)
Mrkt cap (` cr)
Share price (`)
52 Week high - low
Dhunseri Petrochem
Tea/Coffee
5.09 0.22 6.49 3.27 6.36 0.73
4.50 1.80 3.50
4.00 3.76 4.37 3.77 3.92 4.18 26.09 5.18 8.76 4.33 6.04 5.08 4.59 6.92 3.64 4.44 3.53 4.56 3.77
31.85 35.00 24.02 81.00 28.74 165.00 22.80 131.00 18.88 59.00 21.33 35.00 31.65 236.00 27.44 71.00
394 445 1,565 366 8,219 3,020 281 510
113 48 80 491 191 36 288 31 457 116 116 118 21 202 28 113 184 35 80
131100 7140 10066 547258 265152 6119 438276 5630 552431 175103 15291 13365 2218 304192 4220 12279 253146 12934 9545
Elecon Engineering Co
Engineering - Industrial
Graphite India
Electrodes & Welding Equip
HIL
Cement & Construction
5.13 0.14 18.50 4.49 0.24 4.92 0.08 7.50 1.50
Indian Bank
Bank - Public
Manappuram Finance
Finance - NBFC
Navin Fluorine Intl.

Chemicals
1.86 0.02 75.00 5.14 0.15 1.60
NIIT
IT - Education
Oil India
Oil Exploration
8.21 0.23 40.00 4.82 0.22 5.08 0.81 2.14 0.11 8.38 0.05 5.00 7.00 6.00 0.94
27.90 339.00 27,454 22.53 69.00 28.45 56.00 12.40 32.00 36.39 7.82 1,149 258 716 8,480 1,166 337 779 8,691 508 5,291
Polaris Financial Tech

IT - Software
Sasken Comm Tech

IT - Software
Shree Ganesh Jewellery

Diamond & Jewellery
SJVN
SRF
Textile - Manmade Fibres
3.95 0.42 14.00 11.37 0.53 6.70 2.76 10.08 0.27 2.55 0.27 5.03 0.19 1.00 5.00 6.50 1.60 3.00
20.75 114.60 34.22 52.00 31.77 47.00 24.82 36.40 7.57 48.00 17.99 19.00
Take Solutions
IT - Software
Tamil Nadu Newsprint

Paper & Paper Products
Torrent Power
Tulip Telecom
IT - Networking
UCO Bank
Bank - Public
STOCK
IDEAS
Attractive bluechips
tocks that are high on quality are conferred the bluechip mantle. Blue chips are stocks that have already been discovered and are tracked by so many people that there is nothing that goes unnoticed in them. Yet, these are sought after by investors because they are less volatile, liquid and offer stability to a portfolio and yet play a role in the way the markets move. Typically, bluechip stocks are shares of the largest, most consistently profitable, and most prestigious companies with a long history of paying dividends during good and bad years. Our stock selection is based on stocks that have over 20 per cent CAGR on EPS over the past five years, debt-equity ratio of less than 2 and interest cover ratio of more than 2. There is a belief that such stocks are less risky as compared to the smaller stocks, which is true to a certain extent because the intrinsic risk is low as many of these have high market shares and strong balance sheets. It is for this reason that we have included stocks with five-
year average return on equity of more than 20 per cent without declining more than 10 per cent in a year and price-to-earnings growth (PEG) of less than 1.5 were shortlisted. This month, 18 stocks made the cut with Glaxosmithkline Consumer Healthcare being the only company that exited the list. WI
The filters
Companies with a capitalisation of above `2901crore (270/762) An annual earning growth of more than 20% over the past 5-years (89/270) Debt-equity ratio of less than 2 (73/89) Interest coverage ratio should be more than 2 (60/73) 5-year average return on equity above 20% (43/60) Average return on equity should not have fallen more than 20% in any year (19/43) PEG of less than 1.5 (18/19)
REASONS TO INVEST
Liquidity Large companies in respective business Strong balance sheet Liked by institutional investors
Attractive bluechips
Company
Stock style P/E PEG Debt-Equity Int. coverage ratio ratio ROE Avg. EPS growth 5Y (%) 5Y (%) Mrkt cap (` cr) Share price (`) 52 Week high - low
Adani Ports
Port
19.40 0.47 34.48 1.25 25.49 0.93 8.15 0.40 27.45 1.17
1.18 0.04
7.00 34.11
21.56 41.39 29.58 27.57 20.16 27.39 29.97 20.19
29,049 5,716
145 889
158105 989519 1,342673 328195 386294
Bata India
Leather
Bayer CropScience
Pesticides & Agrochemicals
121.24 0.01 201.90 0.07 23.69
4,885 1,237 57,139 233 357
Bharat Heavy Electricals

Electric Equipment
Coal India
Mining & Minerals
26.77 23.38 225,589
STOCK
IDEAS
Company
Stock style
P/E
PEG
Debt-Equity Int. coverage ratio ratio
ROE Avg. EPS growth 5Y (%) 5Y (%)
Mrkt cap (` cr)
Share price (`)
52 Week high - low
CRISIL
Ratings
33.67 1.36 32.91 1.20 11.46 0.37 16.86 0.72 29.13 1.20 28.75 1.31 8.21 0.23 37.39 0.95 15.48 0.38 39.90 0.98 19.50 0.87 34.62 0.72 23.13 0.50
0.22 20.04
43.34 24.71 35.69 27.33 29.03 31.07 49.78 23.27 21.03 24.32 34.38 21.97 23.01 36.14 45.19 39.51 34.82 40.85 41.04 40.72 28.65 22.35 40.42 48.11 48.18 46.51
7,281 1,037 9,106 7,534 602 224
1,262750 654321 289199
Emami
Household & Personal Products
Engineers India
Engineering
257.37 0.40 135.49 0.41 87.32 34.72
Hero MotoCorp
Automobile
38,310 1,919 2,2791,703 3,899 27,641 27,454 357 618 457 400274 632412 552431
Info Edge (India)

IT - Software
Lupin
Oil India
Oil Exploration
545.49 0.46 0.55 0.48 0.21 14.34 7.16 20.18 10.09 16.77 42.42
Page Industries
Textile
3,757 3,368 3,6102,275 3,742 25,710 5,668 295 290 670 302160 314158 727505
Supreme Industries
Plastic Products
Titan Industries
Watches & Accessories
Torrent Pharmaceuticals
TTK Prestige
Consumer Durables
3,990 3,518 3,9962,151 3,499 276 289142
Whirlpool Of India
Consumer Durables
STOCK
IDEAS
Update on companies with moat

n the July 2011, 5th Anniversary Issue, we focused on companies with moat. The moat concept as popularised by Warren Buffett, are companies that are durable in the long run. These are companies with competitive advantage derived from their scale, brand or some other reason and show the ability to translate their
I
Paints
advantage into growing the business and profits, and staying ahead of the competition. Wide moat businesses may not be available at cheap prices. This following list is a status update on the 13 companies with moat. Given the current state of the Indian market, valuations of some of these stocks are attractive and worth considering to invest. WI
REASONS TO INVEST
Solid fundamentals Easy to understand Market leader Brand Recall
Moat companies
Company
Stock style P/E PEG RONW (%) TTM earning EPS 1Y Ret growth (%) growth 5Y(%) over Sensex* Market cap (` cr) Share price 52 Week high - low
Asian Paints Bosch

Auto Ancillary
40.66 1.42 26.72 1.68 32.8 1.29
41.35 25.44 83.1
18.49 1.46 -9.12 33.76 7.48 6.52 3.3 22.41 19.37 9.18 -4 18.59 25.54
28.61 15.9 25.5 22.76 25.85 19.56 22.17 17.04 24.06 25
40.37 12.09 19.17 16.29 -8.27 26.3 1.95
42,444 4,425 4,4492,551 28,519 9,083 9,4006,550 14,313 289 338194 1,482932 1,262750 518322 16699 307197 1,720971
Castrol India
Lubricants
Colgate-Palmolive (I)
Household & Personal Products
38.5 1.69 108.97 33.67 1.3 51.11 30.72 16.05 35.58 19.29 90.31 33.33 26.77 48.49
19,590 1,441 7,281 1,037 14,091 12,083 508 142 290
CRISIL
Ratings
Cummins India
Diesel Engines
22.47 1.15 23.28 1.05 33.79 1.98 20.67 0.86 46.36 1.85 9.1 0.35 29.46 1.24 39.9 0.89
Exide Industries
Auto Ancillary
ITC
Cigarettes/Tobacco
20.36 2,28,218
Larsen & Toubro

31.63 1,00,445 1,633 -8.55
Nestle India
Consumer Food
47,278 4,904 5,0243,930 64,486 10,791 25,710 163 211 290 206139 225134 314158
NMDC
Mining & Minerals
25.65 -14.54 23.67 44.97 25.46 52.74
Pidilite Industries
Chemicals
Titan Industries
Watches & Accessories
Price up to December 19, 2012; Growth rates are all annualised; *Return Over Sensex means Stock Return - Sensex Return
STOCK
IDEAS
Glossary
Current ratio. It is the ratio of a companys current assets (the most liquid
assets, such as cash and cash equivalents, account receivables, etc.) to its current liabilities (liabilities that are closest to maturity and hence need to be paid back first). By comparing the latter with the former, an investor can get an idea of how liquid a companys assets are. However, in certain circumstances, a high current ratio could be due to the fact that the company is having problems in recovering its receivables. Alternatively, it could be having a problem in selling its inventory, which is why the current ratio may be unusually high. Universe companies(762). This quarter we revised out universe. We checked the company should have traded on all the days for last two quarters. We considered the companies having market cap of more than `300 crore. Price to book value(P/BV). Price to book value is the ratio of price of the stock to book value per share of the company. It shows how much premium investors are willing to pay for the underlying net assets of the company. Price to earnings (P/E). Price to earnings ratio or P/E ratio is simply the ratio of price of the stock to its earnings per share. It shows in multiples how much the investors are willing to pay for earnings. The thumb rule of valuing a stock is that high growth stock will have a high P/E ratio while a value stock will have a relatively lower P/E. Earnings per share (EPS). Earnings per share or EPS is calculated by dividing the companys net profit with the total number of outstanding shares. Net sales. This is simply the income that the company derives by selling the goods and services that it produces. The downside of taking sales as an indicator of growth is that it may not be matched by a similarly scintillating bottomline performance. A company may be earning revenue at a high rate. But if it is doing so by incurring a very high cost, the bottomline may not grow in proportion to the growth in the topline. Interest coverage ratio (ICR). This indicator is generally used to gauge whether a company has the ability to service its debt. Interest coverage ratio is calculated as the ratio of operating profit to interest outgo. A company with ICR of more than two implies that it can service more than twice its current interest charges.
Debt-equity ratio (DE Ratio). Debt-equity ratio is calculated as the ratio of

total outstanding borrowings of the company to its total equity capital. D-E ratio essentially tells which companies use excessive leverage to achieve growth. Conventionally D-E ratio of less than two is considered safe. Return on equity (RoE). This is measured by taking profit after tax as a percentage of net worth of the company. It indicates how efficiently the company has been able to utilise investors money. Net worth. Net worth is the net value of the company that shareholders can claim in case of a bankruptcy. It is composed of broadly the equity capital and the reserves held by a company. One risk in using this indicator is that companies could potentially inflate this figure by issuing more equities at regular intervals. Stock return (Stk Return). The stock return is calculated by taking the percentage change in the price of the stock adjusted for bonus or split. Dividend yield (Yield). This is defined as the percentage of the dividend paid per share to the current market price of the stock. Since the denominator in this ratio is the market price, a stocks dividend yield changes everyday. Price-earnings to growth (PEG). This ratio demonstrates how high a price we are paying for the growth that we are purchasing. It is the ratio of price-to eanings to EPS growth of the stock. In all our analysis we have taken five-year historic EPS growth. Dividend payout ratio (DPR). This is the total dividend paid to the shareholders as a percentage of Net Profit Operating profit margin (OPM). OPM is operating profit as a percentage of Net Sales.
Net profit margin (NPM). NPM is the Net Profit as a percentage of Total Income (Sales plus other Income) Growth Value Stock style. It indicates the style of the stock. This is derived from a combination Large
of the stocks valuation growth or value and its market capitalisation large, mid and small. For example, on the right we have shown the stock style of a largecap growth stock.
Mid Small
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Signature January 2013 Wealth Insight 59
WORD OF MOUTH
Thanks to the international financial crisis of 2008, we had to take counter-cyclical measures. These measures meant that we had to suffer shortfall in revenue, increase in expenditure, thanks to the stimulus packages in order to keep the economy going. Because of the additional expenditure that we incurred in order to protect the flagship programmes and to isolate the vulnerable sections of the society , the fiscal deficit expanded,
P CHIDAMBARAM, Finance Minister, India
These are things which, by and large, would drive investors away in most countries. You start looking for geographies where you can make a difference. There are no known bold acquisitions on the horizon, what I have been telling everyone is that because of the economic downturn, we need to really digest and get our debt at a more manageable level.
RATAN TATA, on government inaction that is driving away investment and forcing companies to seek growth abroad.
Business Standard, December 7, 2012
Economic Times, December 14, 2012
I have great confidence that one way or another, the US will avoid going over the so-called fiscal-cliff, even if it means just barely hanging on by the countrys fingertips. We havent found a solution to this. What seems to be the right thing to do in the short-term is absolutely the opposite of what we need to do in the long-term.
MERVYN A KING, Governor, Bank of England, discussing the economic challenges facing Britain and the United States in their approaches to monetary policy and financial regulation.
New York Times, December 10, 2012
Recent inflation patterns and projections provide a basis for reinforcing our October guidance about policy easing in the fourth quarter. Risks to inflation remain and accordingly, even as the policy emphasis shifts towards growth, the policy stance will remain sensitive to these risks.
DV SUBBARAO, Governor, Reserve Bank of India
Economic Times, December 18, 2012
Domestic factors will play an important role in reviving growth, though the economy will continue to be influenced by growth overseas. We should not be overtly influenced by one number because issues of base effect are there.
RAGHURAM RAJAN, chief economic advisor, India, on the 8.2 per cent IIP growth in October 2012.
Livemint, December 13, 2012

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2012 Value Research India Pvt. Ltd.

Total pages 62, including cover

January 2013 Wealth Insight 3

Wealth Insight Advisory

Get the big picture

Pharma Stock Insight-2012

Big moves Index watch 2012 in nutshell

NBFC Bank Research and development

IPOs and merchant bankers

Man the doors

Welcome the New Year

Build your own pension plan

4 Wealth Insight January 2013

IPOs and merchant bankers

he Sebi chiefs criticism

January 2013 Wealth Insight 5

BIG MOVES: LARGE CAPS

Mkt Cap ` 32,070 cr TTM Sales ` 7,768 cr

TTM Profit `784.35 cr P/E 35.96

Mkt Cap ` 40,272 cr TTM Sales ` 18,534 cr

TTM Profit `1,120.86 cr P/E 34.24

Jindal Steel & Power

Mkt Cap ` 43,035 cr TTM Sales ` 14,300 cr

TTM Profit `1,839.33 cr P/E 22.78

Mkt Cap ` 24,521 cr TTM Sales ` 6,013 cr

TTM Profit `1,270.16 cr P/E 18.31

Mkt Cap ` 25,071 cr TTM Sales ` 3,939 cr

TTM Profit `168.74 cr P/E 143.11

Mkt Cap ` 18,823 cr TTM Sales ` 30,675 cr

TTM Profit `2,858.18 cr P/E 6.81

Mkt Cap ` 22,075 cr TTM Sales ` 13,230 cr

TTM Profit `755.61 cr P/E 25.60

Mkt Cap ` 21,107 cr TTM Sales ` 33,148 cr

TTM Profit `3,140.86 cr P/E 6.68

6 Wealth Insight January 2013

BIG MOVES: MID CAPS

Mkt Cap ` 12,818 cr TTM Sales ` 15,713 cr

TTM Loss `474.31 cr P/E

Mkt Cap ` 16,382 cr TTM Sales ` 4,953 cr

TTM Loss `1,666.65 cr P/E

State Bank of Mysore

Mkt Cap ` 3,081 cr TTM Sales ` 20 cr

TTM Loss `81.92 cr P/E

Mkt Cap ` 3,233 cr TTM Sales ` 5,585 cr

TTM Profit `412.23 cr P/E 7.34

Mkt Cap ` 7,053 cr TTM Sales ` 12,103 cr

TTM Profit `202.08 cr P/E 33.02

Mkt Cap ` 9,092 cr TTM Sales ` 959 cr

TTM Profit `164.62 cr P/E 48.75

Mkt Cap ` 3,287 cr TTM Sales ` 3,509 cr

TTM Loss `355.83 cr P/E 7.90

Mkt Cap ` 13,069 cr TTM Sales ` 1,527 cr

TTM Profit `309.67 cr P/E 40.40

8 Wealth Insight January 2013

BIG MOVES: SMALL CAPS

Mkt Cap ` 926 cr TTM Sales ` 160 cr

TTM Profit `0.97 cr P/E 955.51

Mkt Cap ` 957 cr TTM Sales ` 108 cr

TTM Profit `44.20 cr P/E 16.20

Mkt Cap ` 1,238 cr TTM Sales ` 490 cr

TTM Profit `47.69 cr P/E 21.89