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January 19, 2012

Strategy
STRATEGY THEMATIC

Tomorrows ten baggers


31 firms have outperformed the BSE100 by 10x or more since 1996 (excluding Financials or firms with market cap less than US$100mn). We take a subset of these 31 and identify the drivers of their outperformance i.e. the operating levers which differentiate great firms from the rest of the market. We then apply these drivers of greatness in todays context to identify 71 firms in the BSE500 (which are most able to deliver on these drivers). Of these 71 firms, 25 pass our accounting cleanliness and governance filters (see Exhibit 1). This is the Great 25. Going beyond Good & Clean and thinking long term
Whilst the consistent and marked outperformance of our Good & Clean (G&C) portfolios over the past year has attracted attention, we have also been criticised by clients for the short termism of the G&C portfolios. (The G&C portfolios are constructed using: (i) a battery of financial tests based on the previous fiscal years data, and (ii) our forensic accounting model. Each G&C portfolio typically runs for a quarter before we revise it.) Hence, in this note we have used multi-year financial analysis to create a list of 25 great Indian companies that have the potential to be tenbaggers in the coming decade.

Analyst contacts
Gaurav Mehta
Tel: +91 22 3043 3255 gauravmehta@ambitcapital.com

Saurabh Mukherjea, CFA


Tel: +91 22 3043 3174 saurabhmukherjea@ambitcapital.com

Exhibit 1: The Great 25


Company Ticker Mcap ($mn)

Attractive Valuations* BHEL Tata Power Co. Cadila Health. Cummins India Castrol India Exide Inds. Torrent Pharma. GSFC Voltas Sadbhav Engg. Bajaj Electrical Mahindra Life. ICRA Nestle India Asian Paints Lupin Titan Inds. CMC Elgi Equipment ITC BHEL IN TPWR IN CDH IN KKC IN CSTRL IN EXID IN TRP IN GSFC IN VOLT IN SADE IN BJE IN MLIFE IN ICRA IN NEST IN APNT IN LPC IN TTAN IN CMC IN ELEQ IN ITC IN 13,240 4,592 2,621 2,117 2,068 2,018 911 607 545 340 327 206 168 7,683 5,171 3,814 3,219 555 211 31,969 2,045 1,468 1,289 670 460

Step 1: Defining greatness


We identify firms that have delivered 10 times as much returns as the BSE100 over the last 15 years. We call these firms 10Xers. After filtering such firms (there are 31 of them) for weak accounting quality and corporate governance, we get a final list of 14 stocks. It is these 14 stocks that we use to identify the drivers of greatness.

Moderate Valuations**

Step 2: The drivers of greatness


We identify what differentiates a great firm relative to an average firm at each stage of the value generation process: investment, conversion of these investments to sales, pricing discipline, balance sheet discipline and cash generation. Not only do the great firms perform significantly better than an average firm on a variety of measures encompassing the five aforementioned stages, even more interestingly the great firms show a more consistent and calibrated approach to growth over long periods of time.

Rich Valuations*** GlaxoSmith C H L SKB IN Coromandel Inter CRIN IN CRISIL EID Parry Supreme Inds. CRISIL IN EID IN SI IN

Step 3: Investment implications


We apply the winning formula (i.e. the drivers of greatness) to the BSE500 exFinancials universe of firms over the more recent past (FY06-FY11). We find that 71 firms are able to muster passing scores on two-thirds of the drivers. Of these 71, 25 firms pass our accounting quality and corporate governance standards. These 25 firms are shown in Exhibit 1. Of these 25 firms, 13 are trading below their five year valuation averages. Many of the firms which emerge from this filtering approach Tata Power, BHEL, Voltas, Cummins are cyclicals. Obviously, the fate of these firms is tied to the economy and the interest rate cycle. However, to the extent that we are relatively close to a turn in the rate cycle, even from a cyclical perspective these companies look relatively well placed.

Source: Ambit Capital research; * Trading below 5 year P/E, P/B, EV/EBITDA (on at least 2 of these 3 measures) ** Trading below either 5 year P/E, 5 year P/B or 5 year EV/EBITDA (on 1 of these three measures) *** Trading above 5 year P/E, P/B, EV/EBITDA

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Please refer to disclaimer section on the last page for further important disclaimer.

Strategy

Step 1: Defining greatness


We begin our analysis by identifying greatness on the basis of stock market outperformance. We identify firms which have delivered 10 times as much return as the BSE100 over the last 15 years and call these firms 10Xers. With 1996 as the initial year, we look for all firms which were listed then or subsequently, and have, over the period of their existence, delivered 10 times the returns of the benchmark BSE100 index. This gives us a list of 31 such firms from the universe of all listed firms (excl Financial Services firms) with a market cap of over US$100mn. We then filter these firms for accounting quality and corporate governance to get a final list of 14 stocks. It is these 14 stocks or 10Xers that we focus on in Step 2 of this note.
Exhibit 1: 10Xers*

10Xers since 1996


Company Infosys Wipro NMDC Sun Pharma.Inds. Hind.Zinc Jindal Steel Hero Motocorp Adani Enterp. Sterlite Inds. Exide Inds. Glenmark Pharma. Coromandel Inter United Phosp. Motherson Sumi GMDC Havells India Rajesh Exports Pantaloon Retail Opto Circuits Berger Paints Phoenix Mills Nava Bharat Vent KPIT Infosys. Praj Inds. BF Utilities Kemrock Inds. Kwality Dairy NESCO Hawkins Cookers CRISIL Chromatic India Bloomberg Ticker INFO IN Equity WPRO IN Equity NMDC IN Equity SUNP IN Equity HZ IN Equity JSP IN Equity HMCL IN Equity ADE IN Equity STLT IN Equity EXID IN Equity GNP IN Equity CRIN IN Equity UNTP IN Equity MSS IN Equity GMDC IN Equity HAVL IN Equity RJEX IN Equity PF IN Equity OPTC IN Equity BRGR IN Equity PHNX IN Equity NBVL IN Equity KPIT IN Equity PRJ IN Equity BFUT IN Equity KRI IN Equity KLD IN Equity NSE IN Equity HAWK IN Equity CRISIL IN Equity CRDS IN Equity

Our Focus Set for Step 2


Company Infosys Wipro CRISIL Hind.Zinc Hero Motocorp Exide Inds. Coromandel Inter Motherson Sumi Rajesh Exports Phoenix Mills Nava Bharat Vent KPIT Infosys. Praj Inds. Hawkins Cookers Bloomberg Ticker INFO IN Equity WPRO IN Equity CRISIL IN Equity HZ IN Equity HMCL IN Equity EXID IN Equity CRIN IN Equity MSS IN Equity RJEX IN Equity PHNX IN Equity NBVL IN Equity KPIT IN Equity PRJ IN Equity HAWK IN Equity

Our accounting and governance filters

Source: Ambit Capital research. * 10xers is a term popularized by the American business guru Jim Collins in his latest book Great by Choice. We are avid fans of Mr.Collins and have tried to apply his thinking in the Indian context of rapid economic change and insufficient data.

Obviously, over the years, these 10Xers have delivered better RoCEs, RoEs and EPS CAGR than an average firm and this has contributed to their stellar performance versus the benchmark. This can be readily seen in exhibit 2.

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Exhibit 2: 10Xers over BSE100 - RoE, RoCE and EPS
FY96-11 10xers v/s BSE100 Measure EPS (CAGR %) EPS (CAGR/Standard deviation) RoE (Change- last 5 yrs v/s first 5 yrs)* RoE (CAGR/Std Dev) RoCE (Change- last 5 yrs v/s first 5 yrs)* RoCE (CAGR/ Standard deviation)
Source: Ambit Capital research, Capitaline * For example, for a firm listed since 1996, this will be the change between the average value for FY20072011 over the average for FY1996-2000

Average 10Xers 28 0.53 15.1 0.02 13.9 0.03 BSE100 12 0.34 1.8 (0.11) 0.5 (0.11)

Median 10Xers 28 0.50 12.2 0.03 9.4 0.04 BSE100 12 0.21 (0.7) (0.02) 0.4 (0.02)

Not just growth, consistent growth


Before we go into the next section to understand what made these firms so successful, it is worth highlighting a very important fact about the 10Xers - they havent just beaten the benchmarks in terms of EPS, RoE and RoCE improvements; they have done so more consistently than other firms in the market (see the table above). This has resulted in higher CAGR to standard deviation measures (i.e. better growth adjusted for noise) on all these three counts for the 10Xers. However, the more interesting question is: What was the recipe for their success?- What was it that these firms did differently to start with that helped them generate superior financial performance and shareholder returns? To answer this question and thereby identify the drivers of greatness, we turn to the next section.

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Step 2: The drivers of greatness


To identify the drivers of greatness, we use the following chart as a framework to understand what the 10Xers do differently at each stage of a firms value addition process.
Exhibit 3: Framework for determining drivers of greatness

a. Investment (gross block)

b. Conversion of investment to sales (asset turnover, sales)

c. Pricing discipline (PBIT margin)

e. Cash generation (CFO)

d. Balance sheet discipline (D/E, current ratio)

Source: Ambit Capital research

a. Investment The first step in a firms value generation process is obviously investment.
Exhibit 4: Markers of greatness - Investment
FY96-11 10Xers v/s BSE100 Measure Gross Block (Change- last 5 yrs v/s first 5 yrs, %)* Gross Block (CAGR/Standard deviation) Net Block (Change- last 5 yrs v/s first 5 yrs, %)* Net Block (CAGR/Standard deviation)
Source: Ambit Capital research, Capitaline * For example, for a firm listed since 1996, this will be the change between the average value for FY20072011 over the average for FY1996-2000

Average 10Xers 1483 0.82 1466 0.61 BSE100 714 0.74 659 0.46

Median 10Xers 820 0.82 793 0.58 BSE100 313 0.66 295 0.41

The 10Xers invest more (much more) than the average BSE100 firms (see the first and third rows of the table shown above). While this is to be expected, the more interesting finding from Exhibit 4 is that the 10Xers have shown more consistent and calibrated growth. This is evident from the fact that the CAGR to standard deviation ratio (i.e. better growth adjusted for noise) is higher for 10Xers versus the benchmarks on both gross block and net block.

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Exhibit 5: Markers of greatness - Conversion to sales
FY96-11 10Xers v/s BSE100 Measure Fixed assets turnover (Change- last 5 yrs v/s first 5 yrs)* Fixed assets turnover (CAGR/Standard deviation) Sales (CAGR %) Sales (CAGR/ Standard deviation ) Source: Ambit Capital research, Capitaline * For example, for a firm listed since 1996, this will be the change between the average value for FY20072011 over the average for FY1996-2000 Average 10Xers 0.82 0.05 28 0.99 BSE100 0.59 (0.08) 16 0.91 Median 10Xers BSE100 0.83 0.04 25 0.97 (0.01) (0.10) 15 0.71

Again, the 10Xers havent just shown better improvement on both Asset Turnover and Sales than the average BSE100 firms but have also achieved it in a more consistent and calibrated manner. This has meant higher CAGR to standard deviation ratio (i.e. better growth adjusted for noise) for the 10Xers versus the average firm on both these measures. c. Pricing discipline

After ensuring translation of higher investments to sales, the next key decision for a firm is pricing. What 10xers are able to do is to maintain pricing discipline. The concrete measure at this stage is operating margins.
Exhibit 6: Markers of greatness - Pricing discipline
FY96-11 10Xers v/s BSE100 Measure PBIT margin (Change - last 5 yrs v/s first 5 yrs)* PBIT margin (CAGR/Standard deviation) Source: Ambit Capital research, Capitaline * For example, for a firm listed since 1996, this will be the change between the average value for FY20072011 over the average for FY1996-2000 Average 10Xers 9.9 0.06 BSE100 (0.7) (0.02) Median 10Xers 3.1 0.02 BSE100 (0.6) (0.01)

Yet again, the 10Xers were found to be better both in terms of PBIT margin improvement as well as better CAGR to standard deviation ratio on this measure versus the average firm. (In fact the average BSE100 firm seems to have shed PBIT margin over the past decade.) d. Balance sheet discipline Whilst all the action described above takes place on the P&L, in a high cost of capital market like India, it is essential that a firm focus on maintaining Balance Sheet discipline. We look for improvements on debt-equity and current ratios to assess a firms ability to maintain a healthy Balance Sheet.

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Exhibit 7: Markers of greatness - Balance sheet discipline
FY96-11 10Xers v/s BSE100 Measure Net Debt Equity (Change- last 5 yrs v/s first 5 yrs)* Net Debt Equity (CAGR/Standard deviation) Current Ratio (Change- last 5 yrs v/s first 5 yrs)* Current Ratio (CAGR/Standard deviation) Average 10Xers (1.02) (0.59) (0.03) (0.00) BSE100 (0.25) (0.32) (0.23) (0.06) Median 10Xers BSE100 (0.71) (0.31) (0.13) (0.05) (0.24) (0.01) (0.26) (0.08)

Source: Ambit Capital research, Capitaline * For example, for a firm listed since 1996, this will be the change between the average value for FY20072011 over the average for FY1996-2000

The 10Xers again score better not just on magnitude changes but also on CAGR to standard deviation ratio on both net debt equity and current ratio measures than the average firm. Interestingly, whilst the 10xers seem to have delevered 3-4x more than the broader market over the past decade, it is encouraging to note that the broader market has also reduced its leverage over this period. e. Cash generation Eventually everything that a firm does should lead to better operating cashflow generation (especially over the long time periods that we are using here). Healthy cash generation also then feeds back toward funding investments for the future growth of the firm (which in turn kicks off the whole virtuous cycle all over again).
Exhibit 8: Markers of greatness - Cash generation
FY96-11 10Xers v/s BSE100 Measure CFO (Change- last 5 yrs v/s first 5 yrs, %)* CFO (CAGR/Standard deviation)
Source: Ambit Capital research, Capitaline * For example, for a firm listed since 1996, this will be the change between the average value for FY20072011 over the average for FY1996-2000

Average 10Xers 23.6 0.12 BSE100 6.5 (0.12)

Median 10Xers 16.2 0.13 BSE100 3.9 0.04

The 10Xers again score better both on magnitude change (3-4x better than the average firm) as well as CAGR to standard deviation ratio versus the average firm.

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A framework for picking tomorrows multibaggers


Having identified the drivers of greatness in the previous section, we now turn to identifying tomorrows multibaggers. For this we look for firms, which in more recent times (FY2006-FY2011), have replicated the same sort of operational metrics improvement which the 10Xers have shown over FY1996-2011, in terms of improvements across factors (a)-(e) outlined above. These improvements are not just magnitude based improvements but should also reflect consistency as measured by CAGR to standard deviation ratios. These steps (investment, conversion to sales, pricing discipline, financial discipline etc.), if undertaken, should then result in improvements in the bottomline as measured by EPS while also resulting in higher return ratios, as measured by RoEs and RoCEs. Again, these should not just be magnitude based improvements but also higher CAGR to noise improvements. We thus have a total of six heads which we weigh equally to provide each firm a cumulative greatness score on 100. Improvements are measured over the last six years (FY2006-FY2011). These six headings along with the respective sub-criteria are outlined below.
Exhibit 9: Factors used for quantifying and identifying greatness in India
Head 1 Investments Criteria a. Above median gross block increase (FY09-11 over FY06-08) b. Above median gross block CAGR to standard deviation 2 Conversion to sales a. Improvement in asset turnover (FY09-11 over FY06-08) b. Above median asset turnover CAGR to standard deviation c. Above median sales increase (FY09-11 over FY06-08) d. Above median sales CAGR to standard deviation 3 Pricing discipline a. Above median PBIT margin increase (FY09-11 over FY06-08) b. Above median PBIT margin CAGR to standard deviation 4 Balance sheet discipline a. Below median Debt:Equity decline (FY09-11 over FY06-08) b. Below median Debt:Equity CAGR to standard deviation c. Above median current ratio increase (FY09-11 over FY06-08) d. Above median current ratio CAGR to standard deviation 5 Cash generation and EPS improvement a. Above median CFO increase (FY09-11 over FY06-08) b. Above median CFO CAGR to standard deviation c. Above median EPS increase (FY09-11 over FY06-08) d. Above median EPS CAGR to standard deviation 6 Return ratio improvement a. Improvement in RoE (FY09-11 over FY06-08) b. Above median RoE CAGR to standard deviation c. Improvement in RoCE (FY09-11 over FY06-08) d. Above median RoCE CAGR to standard deviation
Source: Ambit Capital research

Threshold or Medians for BSE500 firms (over FY06-FY11) 80% 0.95 0 (0.03) 80% 1.0 0.07 0.06 0.03 (0.01) 0.04 0.10 82% 0.13 33% 0.27 0 (0.05) 0 (0.07)

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Quantifying greatness
From the universe of BSE500 firms, after removing Financial Services firms and firms with insufficient data, there were 396 firms which we scored on the six headings highlighted on the previous page. The cut-off for greatness was placed at 66.7%* and there were just 71 firms (less than 18% of the total population of 396 firms) which could manage a score above this cut-off.
Exhibit 10: Distribution of firms on the greatness score
90 80

* The greatness score is calculated by assigning equal weights to the 6 factors outlined in Exhibit 9 on the previous page. Thus each of these 6 factors carries a weight of 16.7%. The scoring on sub-criteria within each of these factors is binary with a firm getting either 1 or 0 based on whether it has done better than the respective threshold or not. These scores are then cumulated to arrive at a final greatness score on 100 for the firm.

Zone of mediocrity
218 firms score < 50%

Good, not Great


107 firms (between 50% and 67%)

Greatness beckons
Only 71 firms score > 67%

70

No. of firms

60 50 40 30 20 10 0 0%-10% 10%-20% 20%-30% 30%-40% 40%-50% 50%-60% 60%-70% 70%-80% 80%-90% 90%-100%

Greatness Score

Source: Ambit Capital research

In the next exhibit, we present key financial data on the three zones defined above Mediocrity (217 firms), Good but not great (107 firms), and Great (71 firms) based on their degrees of greatness.
Exhibit 11: Zones of greatness - Financial summary
Mediocre Number of firms Mcap (US$ mn) Share price (3-year CAGR) Gross block (3-year CAGR) Sales (3-year CAGR) EPS (3-year CAGR) CFO (3-year CAGR) RoE (3-year average) RoCE (3-year average) Debt equity PE (FY11) PB (FY11) EV EBITDA (FY11)
Source: Ambit Capital research, Capitaline

Good but not great 107 523 30% 25% 20% 17% 14% 20.1 20.3 0.48 15.0 2.2 8.3

Great 71 552 38% 14% 21% 27% 17% 27.6 28.7 0.29 12.4 2.6 7.5

218 417 12% 15% 14% -2% 0% 12.9 12.3 0.75 12.5 1.5 7.4

With regard to fundamentals, the superiority of Great firms compared to the other two groups is evident in Exhibit 11. However, the bottom three rows of the exhibit show that the 71 Great firms are actually trading at a 10% valuation discount to 107 Good but not great firms. Of these 71 great firms, only 25 clear our accounting and corporate governance filters and this gives us our final list of 25 great companies. We present the Great 25 in the next section (Step 3).

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Step 3: Investment implications


Great firms, but are these good stocks? Having identified the 25 great firms that exhibit the ingredients required to be tomorrows winners, we next run a valuation check to ascertain if they are currently trading at reasonable prices for outright investments. We compare these firms with respect to their 5-year average valuations on three metrics P/B, P/E and EV/EBITDA. We find 13 firms to be inexpensive on at least two of the three metrics and hence attractive for investment. Six firms are expensive compared to their 5-year average P/B, P/E and EV/EBITDA multiples. However, as we had highlighted in our October 19 note, Good & Clean 3.0: Battleships, empirical evidence suggests that valuations dont make much of a difference when investing in high quality firms with a long term (at least one year) horizon. It is worth noting that three firms Exide, Coromandel and CRISIL appear both in the Focus Set created in Step1 and in the Great 25 shown below.
Exhibit 12: The Great 25 Arranged by attractiveness of valuations
Current Valuation SN Ticker Company P/E Attractive Valuations* 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BHEL IN Equity TPWR IN Equity CDH IN Equity KKC IN Equity CSTRL IN Equity EXID IN Equity TRP IN Equity GSFC IN Equity VOLT IN Equity SADE IN Equity BJE IN Equity MLIFE IN Equity ICRA IN Equity NEST IN Equity APNT IN Equity LPC IN Equity TTAN IN Equity CMC IN Equity ELEQ IN Equity ITC IN Equity SKB IN Equity CRIN IN Equity CRISIL IN Equity EID IN Equity SI IN Equity BHEL Tata Power Co. Cadila Health. Cummins India Castrol India Exide Inds. Torrent Pharma. GSFC Voltas Sadbhav Engg. Bajaj Electrical Mahindra Life. ICRA Nestle India Asian Paints Lupin Titan Inds. CMC Elgi Equipment ITC GlaxoSmith C H L Coromandel Inter CRISIL EID Parry Supreme Inds. 10.9 18.1 20.1 20.0 21.6 16.3 15.0 4.3 9.7 13.3 10.4 8.9 18.0 41.4 31.6 22.0 33.6 17.9 13.6 31.6 31.7 10.8 32.5 24.2 12.3 3.0 1.8 5.7 5.2 16.1 3.6 3.9 0.9 2.0 2.2 2.4 0.9 3.3 33.7 11.4 5.4 13.7 4.2 3.0 9.4 9.2 3.5 15.0 2.1 4.1 6.2 10.6 15.6 13.7 12.6 10.6 10.1 2.9 6.6 8.3 6.1 6.2 11.6 25.0 19.3 17.7 21.5 13.4 7.8 18.6 17.7 7.6 20.9 13.6 7.4 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 1 1 0 0 1 0 0 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 3/3 3/3 2/3 2/3 3/3 2/3 2/3 3/3 3/3 3/3 3/3 3/3 2/3 1/3 1/3 1/3 1/3 1/3 1/3 0/3 0/3 0/3 0/3 0/3 0/3 P/B EV/ Ebitda Cheap w.r.t history? Overall cheap on (1 for Yes) how many EV/ counts? P/E P/B Ebitda

Moderate Valuations**

Rich Valuations***

Source: Ambit Capital research, Bloomberg, Capitaline. * Trading below 5 year average P/E, P/B, EV/EBITDA (on at least 2 of these 3 measures) ** Trading below either 5 year average P/E, 5 year P/B or 5 year EV/EBITDA (on 1 of these three measures) *** Trading above 5 year average P/E, P/B and EV/EBITDA

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More colour on the Great 25


Exhibits 13 through 15 in the following pages provide greater colour on these 25 great companies. More specifically, exhibit 13 provides a financial summary of these firms based on historical data. Exhibit 14 provides market cap, 3-month ADV and forward looking EPS and BVPS CAG` for these firms over FY11-FY13. Finally, Exhibit 15, provides a brief description of the key business activities of each of these firms.
Exhibit 13: The Great 25 Financial summary based on historical data
Ticker BHEL IN TPWR IN CDH IN KKC IN CSTRL IN EXID IN TRP IN GSFC IN VOLT IN SADE IN BJE IN MLIFE IN ICRA IN NEST IN APNT IN LPC IN TTAN IN CMC IN ELEQ IN ITC IN SKB IN CRIN IN CRISIL IN EID IN SI IN Company BHEL Tata Power Co. Cadila Health. Cummins India Castrol India Exide Inds. Torrent Pharma. GSFC Voltas Sadbhav Engg. Bajaj Electrical Mahindra Life. ICRA Nestle India Asian Paints Lupin Titan Inds. CMC Elgi Equipment ITC GlaxoSmith C H L Coromandel Inter CRISIL EID Parry Supreme Inds. Share price (3 year CAGR) -1% 9% 56% 38% 39% 40% 57% 69% 20% 53% 61% 22% 29% 40% 43% 54% 57% 83% 63% 36% 64% 80% 59% 38% 100% Gross block (3 year CAGR) 23% 14% 14% 8% 6% 14% 14% 4% 19% 45% 17% 23% 11% 16% 17% 21% 6% 5% 14% 13% 5% 6% 19% 23% 13% Sales (3 year CAGR) 29% 21% 25% 14% 13% 17% 18% 10% 17% 36% 26% 38% 25% 21% 20% 29% 30% 0% 23% 15% 22% 26% 16% 26% 23% EPS (3 year CAGR) 29% 23% 38% 21% 32% 52% 26% 47% 20% 14% 20% 17% 19% 27% 28% 25% 43% 25% 19% 14% 20% 48% 32% 47% 60% CFO RoE (3 year (3 year CAGR) average) -8% 30% 53% 14% 13% -4% 19% 35% -52% 87% 20% DNA* DNA* 26% 17% 46% 112% 16% 29% 22% 20% 41% 27% -14% 17% 29.2 14.8 33.3 32.6 76.7 34.9 30.7 24.0 35.2 8.8 34.5 8.4 22.7 119.3 45.5 33.9 40.2 31.4 25.6 29.2 29.0 43.4 41.2 27.4 36.1 RoCE (3 year average) 44.3 12.5 25.7 44.4 117.5 45.8 26.4 30.3 46.2 12.0 41.3 9.6 33.9 169.0 57.5 25.9 49.4 35.8 41.2 43.1 44.3 31.3 53.6 21.7 34.9 Debt Equity (0.5) 1.6 0.4 (0.0) 0.0 0.0 0.1 (0.1) (0.3) 2.1 0.1 0.3 0.0 0.0 0.0 0.2 (1.0) (0.1) (0.4) (0.1) 0.0 0.4 0.0 1.0 0.9

Source: Ambit Capital research, Capitaline * Cash flows reversed from negative to positive during the period and hence CAGR cannot be computed

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Strategy
Exhibit 14: The Great 25 Forward looking data
Sr. Ticker No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BHEL IN TPWR IN CDH IN KKC IN CSTRL IN EXID IN TRP IN GSFC IN VOLT IN SADE IN BJE IN MLIFE IN ICRA IN NEST IN APNT IN LPC IN TTAN IN CMC IN ELEQ IN ITC IN SKB IN CRIN IN CRISIL IN EID IN SI IN Company BHEL Tata Power Co. Cadila Health. Cummins India Castrol India Exide Inds. Torrent Pharma. GSFC Voltas Sadbhav Engg. Bajaj Electrical Mahindra Life. ICRA Nestle India Asian Paints Lupin Titan Inds. CMC Elgi Equipment ITC GlaxoSmith C H L Coromandel Inter CRISIL EID Parry Supreme Inds. Mcap (US$ mn) 13,240 4,592 2,621 2,117 2,068 2,018 911 607 545 340 327 206 168 7,683 5,171 3,814 3,219 555 211 31,969 2,045 1,468 1,289 670 460 3-month ADV (US$ mn) 21.2 6.3 1.2 2.3 0.6 4.4 0.2 0.8 2.0 0.3 0.3 0.1 0.4 2.6 4.1 7.7 17.3 0.3 0.1 27.2 1.1 0.9 1.5 0.3 0.2 FY11-13 EPS CAGR (%) 9.1 3.9 17.7 2.6 5.3 13.6 17.2 3.2 -9.9 22.3 13.5 30.5 6.3 21.5 16.7 18.8 26.8 7.6 -4.1 18.8 20.0 18.9 18.5 DNA 30.5 FY11-13 BVPS CAGR (%) 23.3 16.2 24.5 11.5 12.2 19.5 22.9 24.4 14.7 23.5 17.6 11.4 11.6 51.4 23.9 26.4 34.1 18.4 20.4 11.2 12.1 7.8 19.7 DNA 30.4

Source: Bloomberg, Ambit Capital research

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Strategy
Exhibit 15: The Great 25- Business activity description
Sr. No. Ticker Company Business activity description Bharat Heavy Electricals Limited manufactures power plant equipment. The Company's products include gas turbines, generators, thermal sets, diesel shunters, turbo sets, hydro sets, power transformers, switch gears, circuit breakers and boilers. The Company also manufactures compressors, valves, rectifiers, pumps, capacitors, oil rigs, as well as castings and forgings. Tata Power Company Limited generates and supplies electricity in Mumbai and its suburbs. The Company also constructs and operates independent power plants as well as captive power plants for industrial concerns. Tata Power also provides various services related to electricity distribution, erects and commissions transmission lines, and is diversifying into the telecommunications market. Cadila Healthcare Ltd. manufactures, and markets healthcare solutions ranging from formulations, active pharmaceutical ingredients, vaccines, diagnostics, health and dietetic foods, animal healthcare to cosmeceuticals. The Company's products are available in tablets, capsules, injections, liquids, dry syrups, powders, granules, and ointments. Cummins India Limited manufactures internal combustion engines, including diesel, reciprocating piston, gas turbine and gasoline engines. The Company also manufactures generating sets and public transport-type passenger motor vehicles, including luxury coaches and air-field buses. In addition, Cummins India Ltd. operates a computerized and fully-equipped research and development facility. Castrol (India) Limited manufactures and markets automotive and industrial lubricants and specialty products. The Company's products include lubricating oils, greases and brake fluids. The Company also manufactures cable filling compounds, jellies, waxes and other items. Exide Industries Ltd. manufactures a wide range of lead and electric storage batteries. The Company's batteries are used for automobiles, railways, aircrafts, power stations, telephone exchanges, and other uses. Torrent Pharmaceuticals Ltd. manufactures bulk drugs and pharmaceutical formulations. The Company's formulations include cardio-vascular, psychotropic and anti-biotic drugs while its bulk drugs include atenolol, ciprofloxacin and norfloxacin. Torrent Pharmaceuticals has wholly owned subsidiaries in several regulated and less regulated international markets. Gujarat State Fertilizers & Chemicals Limited manufactures fertilizers and chemicals in four product areas: Finished Products, Intermediate Products, Polymers and Fibre Products. The Company also maintains trading activities in nylon products, petrochemicals, industrial gases and plastics. Voltas Limited offers engineering solutions for a wide spectrum of industries in areas such as heating, ventilation and air conditioning, refrigeration, electro-mechanical projects, textile machinery, machine tools, mining and construction equipment, materials handling, water management, building management systems, indoor air quality and chemicals. Sadbhav Engineering Limited provides construction services, with a focus on irrigation, roads and highways, and mining operations. The Company constructs earthen dams and canals, rehabilitates and upgrades roads, and excavates overburden of mineral properties. Bajaj Electricals Limited manufactures electric fans and general lighting items, such as lamps, special lamps, fluorescent tubes, and lighting fixtures. The Company also manufactures consumer durables like small electrical appliances. Mahindra Lifespace Developers Limited specializes in the construction and operation of commercial and residential property complexes, projects management services and business centers. ICRA Limited provides investment information and credit rating services in India. Nestle India Ltd. manufactures brand name milk products and other food products The Company's products include Everyday dairy whitener, milk powder and ghee, Milkmaid sweetened condensed milk and Cerelac weaning foods. Nestle's beverages include Nescafe and Sunrise coffee and Nesfit enriched glucose powder. Nestle also manufactures Maggi noodles, soups and sauces. Asian Paints Limited manufactures a wide range of decorative paints, varnishes, enamels, and black & synthetic resins. The Company, through its subsidiaries, also manufactures specialty industrial chemicals and vinyl pyridine latex products which are used in the manufacture of rubber tires. Lupin Limited manufactures bulk actives and formulations. The principal bulk actives manufactured by it include Rifampicin, Pyrazinamide, Ethambutol (anti-TB), Cephalosporins (anti-infectives) and cardiovasculars. The company also possesses competencies in phytomedicines, in which medicines are made out of plant and herbal resources supported by the discipline of modern medicine. Titan Industries Ltd. manufactures and retails jewelry and watches. The Company produces quartz analog electronic watches, watch movements, step motors and watch cases. CMC Ltd. provides computer users with a range of computer software and hardware support services. The Company's services comprise of hardware maintenance, site preparations, installation and commissioning of systems, software development, education and training.

BHEL IN B H E L

TPWR IN Tata Power Co.

CDH IN Cadila Health.

KKC IN Cummins India

CSTRL IN Castrol India

EXID IN Exide Inds.

TRP IN Torrent Pharma.

GSFC IN G S F C

VOLT IN Voltas

10

SADE IN Sadbhav Engg.

11

BJE IN

Bajaj Electrical

12 13

MLIFE IN Mahindra Life. ICRA IN ICRA

14

NEST IN Nestle India

15

APNT IN Asian Paints

16

LPC IN Lupin

17

TTAN IN Titan Inds.

18

CMC IN CMC

Ambit Capital Pvt Ltd

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Strategy
Sr. No. Ticker Company Business activity description Elgi Equipments Limited manufactures reciprocating and screw type air compressors, diesel engines. generators and pumps, garage equipment, auto products and heat pressure cleaners. Elgi markets a range of wheel balancers, oil suction units, AC recovery plants, mobile service units, and pasteurizer and bottle washers. The Company operates in India and markets its products globally. ITC Limited, a member of BAT Group of UK, is a holding company, which has a diversified presence in Cigarettes, Hotels, Paperboards & Specialty Papers, Packaging, Agri Business, Packaged Foods & Confectionery, Branded Apparel, Greeting Cards and other FMCG products.

19

ELEQ IN Elgi Equipment

20

ITC IN

ITC

21

Glaxo SmithKline Consumer Healthcare Limited manufactures and sells malted milk food products. The SKB IN GlaxoSmith C H L Group's products, which include energy & protein products, cereals, baby foods, ghee & butter, are sold under the "Horlicks", "Boost", "Viva", "Brylcream", "Eno", "Maltova" and "Gopika" brand names. CRIN IN Coromandel Inter CRISIL IN CRISIL Coromandel International Ltd. manufactures fertilizers and pesticides. The Company produces both chemical and organic fertilizers, insecticides, fungicides, herbcides, and plant biostimulant. Crisil Ltd. operates a credit rating agency in India. The Company specializes in the areas of risk identification, classification and assessment, across a broad spectrum of industries. E.I.D. - Parry (India) Limited is a diversified manufacturer of fertilizers, pesticides, sugar, ceramics, electronics and seeds. The Company is also diversifying into the manufacture of organic fertilizers, biopesticides, acetic acid, wall tiles and horticultural activities. Supreme Industries Limited manufactures industrial and engineered molded products and storage and material handling crates. The Company also manufactures chemicals, multilayer sheets, multilayer films, packaging films and expanded polyethylene foam, PVC pipes and fittings, molded furniture and disposable EPS containers.

22 23

24

EID IN EID Parry

25

SI IN

Supreme Inds.

Source: Bloomberg

Ambit Capital Pvt Ltd

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Strategy

Institutional Equities Team


Saurabh Mukherjea, CFA Research Analysts Aadesh Mehta Anand Mour Ankur Rudra, CFA Ashvin Shetty Bhargav Buddhadev Chandrani De, CFA Chhavi Agarwal Dayanand Mittal Gaurav Mehta Hardik Shah Krishnan ASV Nitin Bhasin Pankaj Agarwal, CFA Parita Ashar Puneet Bambha Rakshit Ranjan, CFA Ritika Mankar Mukherjee Ritu Modi Shariq Merchant Sales Name Deepak Sawhney Dharmen Shah Dipti Mehta Pramod Gubbi, CFA Sarojini Ramachandran Production Sajid Merchant Kausalya Vijapurkar Praveen Mascarenhas Production Editor Database (022) 30433247 (022) 30433284 (022) 30433251 sajidmerchant@ambitcapital.com kausalyavijapurkar@ambitcapital.com praveenmascarenhas@ambitcapital.com Regions India / Asia India / Asia India / Europe India / Asia UK Desk-Phone (022) 30433295 (022) 30433289 (022) 30433053 (022) 30433228 +44 (0) 20 7614 8374 E-mail deepaksawhney@ambitcapital.com dharmenshah@ambitcapital.com diptimehta@ambitcapital.com pramodgubbi@ambitcapital.com sarojini@panmure.com Industry Sectors Banking / NBFCs FMCG Technology / Telecom / Education Automobile Power / Capital Goods Metals & Mining Construction / Infrastructure Oil & Gas Derivatives Research Technology / Education Services Banking Construction / Infrastructure / Cement NBFCs Metals & Mining / Media / Telecom Power / Capital Goods Mid-Cap Economy Cement Consumer Desk-Phone (022) 30433239 (022) 30433169 (022) 30433211 (022) 30433285 (022) 30433252 (022) 30433210 (022) 30433203 (022) 30433202 (022) 30433255 (022) 30433291 (022) 30433205 (022) 30433241 (022) 30433206 (022) 30433223 (022) 30433259 (022) 30433201 (022) 30433175 (022) 30433292 (022) 30433246 E-mail aadeshmehta@ambitcapital.com anandmour@ambitcapital.com ankurrudra@ambitcapital.com ashvinshetty@ambitcapital.com bhargavbuddhadev@ambitcapital.com chandranide@ambitcapital.com chhaviagarwal@ambitcapital.com dayanandmittal@ambitcapital.com gauravmehta@ambitcapital.com hardikshah@ambitcapital.com vkrishnan@ambitcapital.com nitinbhasin@ambitcapital.com pankajagarwal@ambitcapital.com paritaashar@ambitcapital.com puneetbambha@ambitcapital.com rakshitranjan@ambitcapital.com ritikamankar@ambitcapital.com ritumodi@ambitcapital.com shariqmerchant@ambitcapital.com Head of Equities (022) 30433174 saurabhmukherjea@ambitcapital.com

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Strategy

Explanation of Investment Rating


Investment Rating Expected return (over 12-month period from date of initial rating) >5% <5%

Buy Sell
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