the mind of an analyst

8/19/2019 The Mind of an Analyst

1/82

Manish Chokhani September 2004 1

The Mind of a Business Analyst

Applied Lessons for Investment Bankers and Research Analysts


2/82

ENAM Securities 2 August 2004

Agenda

Components of an average recommendation

What requires to be validated

First Principles of Financial Analysis

Valuation Principles

Valuation Shortcuts and Market Cycles

Business Analysis – Circle of Competence Approach

Macro Economic, Political and Social Factors

Buyer Characteristics and Compulsions

Slotting the Recommendation

Recap the Valuation


3/82


An Average Recommendation

Here are the financials Past two years, next two years

Current business trajectory is good

This is the P/E , this is the EPS or something similarly cheap sounding

Here are some comparable valuations

Local, regional, global

Occasionally:

Chance to buy a good business…

Unique Promoter …

Great Shareholders/ Funds/Pvt Equity… Backing it

So Buy It


4/82ENAM Securities 4 August 2004

What Needs to be Validated?

Validity of business financials Forecast Validity

Key Business Drivers

Any hidden liabilities/ subsidiaries / etc

Business Competitiveness

Macro factors at play Appropriate Valuation Tool

Relative validity

What else is attractive Decompose by Country / Sector / Mktcap / Promoter

What is driving the deal?

Why the deal? Why Now?

Who is the intermediary?

Whats in it for me?


5/82ENAM Securities 5 August 2004

Understand the Business Drivers

VOLUME Most loved Consumer focussed UVG stories: eg CellPhones, Retail, Hosing Loans, Media or large

addressable markets globally like ITand pharma (buzz on BPO, Textiles…)

PRICE

Most loved Pricing Power stories: Brands, Oligopolies

Excitable Commodity swings: Cement, Metals…

EFFICIENCY

IMPROVING ASSET UTILISATION Usually Cyclicals – Autos, Engineering due to operating leverage

IMPROVING COST STRUCTURE/ ECONOMIES OF TECHNOLOGY Usually Engineering, PSUs, Conglomerates…

RESTRUCTURING

Catalysts such as Privatisation, M&A, Divestitures, Buybacks…


6/82


Case Studies

Lets Examine Sustainable Valuations for

Cement

Autos

IT

Pharma

FMCG

Use 5 key measures that define peak valuations… Sales / G Block

W Cap / Sales

Sustainable or desirable OPM%

Capex requirements

Volume Growth Assumptions

Help us to decide what we lay out and what we get back…


7/82


Now Lets Attempt a DCF


8/82


Markets continuously discount all of the above…

Value multiple- Predictable- Sustainable- Scaleable

Use Bond YieldReciprocal(100/8)=12.5xas benchmark

V a l u e

Time

ROE :25%

ROE :

15%

8%Bonds

Cash

P/E=20x

P/E=12x

P/E=12x


9/82


“Virility” Symbols (Towers, diversification/ M&A) Bad qlty of IPOs

Capex > near-future reqments

Interest rates spike. Huge Credit expansion

Retail euphoria

Shock/ Leaders in trouble

Understand Market Cycles – I

Ignored, stagnant Cheap valuations Negative press

SevereUndervaluation

Important commodities take off (Steel, Gold, etc.) Catalyst/ Regulatory (eg Privatisation, LT Cap

gains exemption) Easy Liquidity

Undervaluation

Capex/ IPO/ Credit cyclerevives

Asset & Cost inflation Tourism/ Media attention “Themes” emerge, New

Valuation “Paradigms”

Fair to Over valuation

Bubble

Sharp fall followed bypull back

“Left outers” jump in

Leadership narrows

Correction

Bear Phase

Bust

Symptoms of each hump deceptively similar -- It is theQUALITY which differs:

Eg high quality IPOs & Capex at “Reasonable”Valuation stage vs flood of bad IPOs & far-out-Capex

at Bubble stage


10/82


Resulting in a Swing in Valuation Approaches

• Payback

• EV/EBIDTA• P/E• DCF

• Technical Charts

• Reflexivity• PE/G• Option Value

MomentumGARPValue

• Dividend Yield

• Price/BV• Replacement Cost

BEAR MARKET BULL MARKET BUBBLE MARKET


11/82


Valuation Measures – CASH FLOW IS THE ONLY REALITY

DCF helps to make assumptions explicit;gives a good RANGE Use probability – don’t fudge the discount rate! Factor in uncertainties and risks Terminal Value is the key – Is all the value residing there? Wider the Optimistic-Pessimistic range – lower the valuation!

P/e = d/e / (k-g) P =d/(k-g)

d = dividend per share k = shareholder return expectation k = i + r + rp (inflation+real int+risk premium)

g = growth in dividend per share

Hence Importance of payouts and cash flows for better valuation

Close approximation of P/E to ROE

Other Methods are all variants for validation EVA – Economic Value Added - Excess return over WACC quantified EVA = ROIC – (IC x WACC) CFROI – Another smart way to do a DCF


12/82


MARGIN OF SAFETY

Cash flow v/s Bond Valuations

Growth prospects

Gap between Perception and Reality

Knowledge v/s Popularity

Limited downside/ lots of upside


13/82


UNDERSTAND “GOOD BUSINESSES”

THE CIRCLE OF COMPETENCE APPROACH


14/82


BUSINESSES APPRAISAL

Think long and hard about cycles

Life cycles

Business cycles

Think about sustainability and sources of advantage

Think about external pressures on profitability

Where does this business fit on a profitability distribution?

The financial litmus tests

Think about management and the majority partner


15/82


Think of Cycles!

Nature is cyclical, not linear!

Life Cycles

Business Cycles / Boom-Bust

Seasonality

Innovation / Schumpeter

Market Cycles


16/82


LIFE CYCLE ANALYSIS

TIMETIME

S A

L E S

S A

L E S

SOFTWARESOFTWARE

JUTEJUTE


17/82


BUSINESS CYCLES

INTERMEDIATESINTERMEDIATES

FMCG, SERVICESFMCG, SERVICES

CAPITAL GOODSCAPITAL GOODSCONSUMER DURABLESCONSUMER DURABLES


18/82


COMMODITYCOMMODITY

EMERGING/EMERGING/SMALL SCALESMALL SCALE

SPECIALISED/SPECIALISED/OLIGOPOLIESOLIGOPOLIES

MONOPOLY/MONOPOLY/

CONSUMER FRANCHISECONSUMER FRANCHISE

SUSTABILITY OF ADVANTAGESUSTABILITY OF ADVANTAGE

MANYMANY

HIGHHIGHLOWLOWFEWFEW

S O U R C E S

O F A D V A N T A

G E

S O U R C E S

O F A D V A N T A

G E

BOSTON CONSULTING GROUP MATRIX


19/82


PORTER’S 5 FORCE ANALYSIS

SUBSTITUTE PRODUCTSSUBSTITUTE PRODUCTS

NEW ENTRANTS/ IMPORTSNEW ENTRANTS/ IMPORTS

SUPPLIERSSUPPLIERS BUYERSBUYERSINTRA INDUSTRYINTRA INDUSTRY

RIVALRYRIVALRY


20/82


PROFITABILITY DISTRIBUTION

ROIROI

BANKBANK

RATERATE


21/82


THE FINANCIAL LITMUS

Superior BUSINESSES Low asset requirements

Low credit / inventory

Many clients/ economic goodwill

Defensible margins

Pricing power ( inflation + )

Sustainable growth

Free cash flows

Most other businesses

Capital intensive

Working capital intensive

Want premium valuation, do not deserve it

Likely to be cyclical valuations and themes


22/82


Now lets talk Micro Focus

Costs

Capital Efficiency

People Issues

“Slack”


23/82


Costs

Are you aware of implications of:

Inappropriate Amortisation

R&D

Technology

Marketing Requirements

Training ; Leadership!

UNIT COSTS/ measures


24/82


25/82


0

100

200

300

400

1995 2003

0

3

6

9

12

Revenue (LHS) Labour Force (LHS)

Revenue/Person (RHS)

(%) (Rs.m)

Corporates have right-sized

Company Staff shed Period (Yrs) % of Labour Force

BHEL 20,000 7 30

Tata Motors 10,000 5 29

Mahindra & Mahindra 6,500 5 34

Bajaj Auto 7,800 6 37

Tisco 30,000 8 40

ACC 6,000 8 38

Right-sizing across sectors

Source: ENAM Research

Restructuring by Top 10 Corporates

1995 2003

Revenue (Rs bn) 900 2,750

Labour Force (nos) 420,000 335,000Revenue/Person (Rs m) 2.1 8.2


26/82


Capital Efficiency

Are you well focussed on:

Asset Turns: Gross Block, Working Capital?

Lean Assets: Owned v/s Rented

Flexible Structures: Outsourcing

Impact of M&A, Restructuring?

People…


27/82


28/82

P l I


29/82


People Issues

How is the company managed?

Lifetime Employment?

How does it Hire? Train? Retain? Fire?

How does it build skills? LEADERS?

Are they Commandos? Soldiers? Mercenaries?

Succession Plans?

Empowerment?

F Mi C ifi f t


30/82


Focus on Micro, Company specific factors

How is Product or Service Quality?

Germany/Japan/China v/s India, v/s competition

How is Cost & Capital Efficiency?

Frugality as a mindset v/s “professionally managed”

What are their Value Systems?

Sugar in the milk

How is their Service to the Customer ?

The “goodwill” earned

W t h O t f Hidd B b


31/82


Watch Out for Hidden Bombs

Conflict of Interest Structures

Pvt Businesses

Inter Party relationships

Split Ownerships

Loans & Advances

Off balance Sheet Libailities

Unfunded Pensions

Litigations

Family Settlements

… and many more creative reasons why CAVEAT EMPTOR

CHOOSING “BUSINESS PARTNERS”


32/82


CHOOSING “BUSINESS PARTNERS”

Integrity / track record

Ability (not just lucky)

Understanding of key issues

Ambition tempered by reality

Commonality of objectives

Orientation towards minority


33/82


MACRO FACTORS TO BEAR IN MIND

Do you have Macro Pointers in Mind?


34/82


Do you have Macro Pointers in Mind?

Do you have a point of view about:

Politics as it affects the business

Economics as it affects the business

Demographic Trends

What are Capital Markets Signalling?

Each powerful trend can have disruptive or tidal wave effects on any business

Politics


35/82


Politics

Geo Politics affects addressable markets, terms of trade, cost of doingbusiness…

Effect of SAFTA, ASEAN, WTO/GATT

Risk Premium/Opportunity of Pakistan

Emerging US-India axis ; NAM, ML

Opportunities in “emerging” economies

Outcry against/trends favouring outsourcing

Outsourcing to India : Brewing Trouble


36/82


Outsourcing to India : Brewing Trouble

Company Outsourcing for

IT Services

Infosys Goldman Sachs, Aetna, Northwestern Mutual, Am Ex, DHL, Verizon

Tata Consultancy GE, Honda, UBS, HSBC

Wipro Transco, HP- Compacq, Nortel, General Motors, Cisco, Sony

ITES

Mphasis BFL Citi Group, Acenture, Auto Zone, Capital One

Spectramind Dell, American Express, Capital One

Pharmaceuticals

Cipla Ivax, Watson Pharma, Eon Labs

Shashun Chemicals Eli Lily, GSK Pharma

Lupin Laboratories Apotex, APP, Watson Pharma

EngineeringBharat Forge Meritor, Caterpillar, Toyota, Ford, FAW (China)

Tata Motors Rover

Moser Baer Imation, BASF

Essel Propack P&G, Unilever, Colgate

Increasing FDI reflects “openness”


37/82


Increasing FDI reflects openness

Early entrants

Cost Savings(Production Hubs)

GE, Citi IT, State Farm Amex, Bank Am

IBM, HP

Research Services Texas Instruments, GE

Recent entrants

JP Morgan, HSBC, Prudential Accenture, CGE&Y

Delphi Teva

Microsoft, Sun, Intel GSK, Pfizer, Eli Lily COVANCE

Likely entrants

BPOs in throngs Deloitte Consulting

Generic Pharma Cos

A number of CROs

Domestic MarketOpportunity

Coke, Pepsi Ford, Hyundai LG, Samsung Lafarge

Port of Singapore, P&O Morgan Stanley,

Templeton

McDonalds, Pizza Hut Honda, Toyota Nokia Michelin

Dubai Port, Maersk HSBC MF, Duestche MF Fidelity MF, ABN MF


Confident Indians going global


38/82


Confident Indians going global

Large Groups

Tata -Tetley, Daewoo , Rover tie-up

RIL - FLAG undersea cable,Trevira (Polyester

firm in Germany)

Birlas - AV Cell (Canada), Copper mines (Aus),

Carbon Black (China) etc

Sterlite - Copper Mines in Australia, Listing on

LSE

ONGC - Stake in: Sakhalin oil fields (Russia),

GNOOC oil fields (Sudan)

Auto Parts Sundaram Fasteners - Gear casting business of

Dana Spicer (UK), Plant in China

Bharat Forge – Dana Corp Forging business

(UK), Forging business of CDP (Germany)

Pharma Wochardt-Esparma (Germany)

Ranbaxy- RPG Aventis (France)

Dr. Reddy’s - Meridian Healthcare

(UK),Trigenesis Therapeutics (USA)

Cadila – French operations of Alpharma (USA)

IT Wipro - Nervewire, Utilities consulting division

of AMS (USA)

HCL Tech - BT’s call centre (Ireland)

Others Asian Paints - Berger International (Singapore)

Essel Propack - Propack Holdings

(Switzerland),Arista Tubes (UK)

Moser Baer - Mmore International (Holland)

Atlas Cycle, Ajanta Clocks - Plants in China

Macro Economic Indicators


39/82


Macro Economic Indicators

Global and local economic cycles

Capital costs

Interest rates, Currency rates, Inflation

Cost pressures: RMC, Tarriffs, etc

Social Costs / development

Competition is a given

Eg: Complete Reversal in India


40/82


Eg: Complete Reversal in India

Forex reserves

Re. depreciation

Interest rates

External debt

External debt

Forex reserves

Source: RBI, CMIE

Interest rates & Re. depreciation

-6

-3

0

3

6

9

12

15

1 9 9 3

1 9 9 4

1 9 9 5

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1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

J u l - 0 4

10

11

12

13

14

15

16

17

Rupee/ US$ (LHS) Prime Lending Rate (RHS)

(%) (%)

0

20

40

60

80

100

96-97 97-98 98-99 99-00 00-01 2-Jan 3-Feb 0̀3-04

Foreign Exchange Reserves as % of external debt

External Debt (% of GDP)

(%)

-40

-20

0

20

40

60

9 4 - 9 5

9 5 - 9 6

9 6 - 9 7

9 7 - 9 8

9 8 - 9 9

9 9 - 0 0

0 0 - 0 1

0 1 - 0 2

0 2 - 0 3

0 3 - 0 4

020

40

60

80

100

120

Trade Balance (LHS) Invisibles (LHS)

Capital Receipts (LHS) Total Reserve (RHS)

(US$ bn) (US$ bn)

Soft interest rate bias nearing an end..


41/82


Soft interest rate bias nearing an end..

Forex reserves at a peak

Source: Blloomberg, RBI, CMIE

Inflation making a comeback?Room to grow advances vs investments

Investment Deposit Ratio

35

40

45

50

J a n - 9 9

J u l - 9 9

J a n - 0 0

J u l - 0 0

J a n - 0 1

J u l - 0 1

J a n - 0 2

J u l - 0 2

J a n - 0 3

J u l - 0 3

J a n - 0 4

J u l - 0 4

Rupee volatility on the cards

-6

-3

0

3

6

9

12

15

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

J u l - 0 4

10

11

12

13

14

15

16

17


(%) (%)

0

3

6

9

12

15

J a n - 9 5

J u l - 9 5

J a n - 9 6

J u l - 9 6

J a n - 9 7

J u l - 9 7

J a n - 9 8

J u l - 9 8

J a n - 9 9

J u l - 9 9

J a n - 0 0

J u l - 0 0

J a n - 0 1

J u l - 0 1

J a n - 0 2

J u l - 0 2

J a n - 0 3

J u l - 0 3

J a n - 0 4

J u l - 0 4

(%)

0

20,000

40,000

60,000

80,000

100,000

120,000

9 3 - 9 4

9 4 - 9 5

9 5 - 9 6

9 6 - 9 7

9 7 - 9 8

9 8 - 9 9

9 9 - 0 0

0 0 - 0 1

0 1 - 0 2

0 2 - 0 3

0 3 - 0 4

(US$m)


42/82

US Interest Rates through cycles


43/82


g y

Rising commodity prices reflect USD weakness


44/82


g y p

Non-ferrous Metals Aluminium Aluminium Primary OP SPTLondon Metals Exchange Index

All Commodities

CRB All Commodity Index

Source: Bloomberg

Gold

Gold AM Fix Prices

Steel

MB HR Steel Prices

Alumina

Europe Alumina Spot Price

250

300

350

400

450

Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04

(USD/ troy ounce)

200

220

240

260

280

300

320


150

250

350

450

550


1,000

1,200

1,400

1,600

1,800

2,000


(USD)

1,000

1,200

1,400

1,600

1,800

2,000


0

100

200

300

400

500


(USD)

Consumption trends across Asia


45/82


p

Government P&L A/c AS IT REALLY IS


46/82

ENAM Securities 46 August 2004Deficit of 5-6% of GDP misleading! Receipts only 11%

Centre’s P&L (2004-05E)

Source: Government of India Interim Budget, ENAM Research

Particulars % of GDP

Total Receipts 11

-- Revenue Receipts 10

-- Capital Receipts 1

Total Expenditure 15

-- Interest 4

-- Defence & Subsidies 4

-- Transfer to States 3-- Infrastructure & Capital Expenditure 1

-- Administrative, etc. 3

Deficit 4

Total debt (Internal + External) 64

States have joined the party!


47/82


Source: RBI

Aggregate fiscal deficit of states

0

200400

600

800

1,000

1,2001,400

F Y 9 1

F Y 9 2

F Y 9 3

F Y 9 4

F Y 9 5

F Y 9 6

F Y 9 7

F Y 9 8

F Y 9 9

F Y 0 0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4 E

2.0

2.53.0

3.5

4.0

4.5

5.05.5

Fiscal Deficit (LHS) % of GDP (RHS)

(Rs.bn) (%)

Power subsidies (% of state fiscal deficit)

State (%)

Madhya Pradesh 74

Andhra Pradesh 51Gujarat 65

Karnataka 65

Maharashtra 28

Tamil Nadu 40

Source: World Bank

Profligate Governments…weaken us all


48/82


Crowds out private sector

Upward pressure on interest rates

Rupee depreciation

Making us “poorer”, costlier, less competitive> poorer!

40%

50%

60%

70%

80%

1 9 8 0 - 8 1

1 9 8 2 - 8 3

1 9 8 4 - 8 5

1 9 8 6 - 8 7

1 9 8 8 - 8 9

1 9 9 0 - 9 1

1 9 9 2 - 9 3

1 9 9 4 - 9 5

1 9 9 6 - 9 7

1 9 9 8 - 9 9

2 0 0 0 - 0 1

2 0 0 2 - 0 3 R E

Debt/GDP

Total Central & State debt as a percentage of GDP

Source: RBI

Demographics


49/82


Income Shifts

Age Group Shifts

Social Shifts

Affordability has risen dramatically


50/82



Falling prices and low interest rates have made products easily affordable

1994 2003 Increase in affordability (x)

Housing (Ratio of Hsng Price/Annual Inc.) (x) 6 3 2.0

Housing EMI (Rs.) 1,690 1,250 1.4

10-year repayment / Rs.100,000 / month

Cost of (in Rs.)

21" Color TV 18,000 11,000 1.6Washing Machine 18,000 13,000 1.4

Refrigerator (165 Ltr) 12,000 8,000 1.5

Cordless Telephone 4,000 2,500 1.6

Cellular Phone 25,000 4,000 6.3

All this has led to a boom in retail lending and consumption

Wealth effect adds to consumer power


51/82


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-3

0

3

6

9

12

15

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

J u l - 0 4

10

11

12

13

14

15

16

17


(%) (%)

Market Cap gain = $75bn

Strong rupee and low interest rates

Gold: 20,000 tonnes = $100bn gain

250

300

350

400

450

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

(USD/troy ounce)

2,000

3,000

4,000

5,000

6,000

7,000

2002 2003 2004

Source: Bloomberg

Income demographics = Secular consumption growth


52/82


1001000

20003000

4000>5000

1998

2003

20070

100

200

300

400

500

600

P o p u l a t i o n ( m )

Annual income (US$)

1998 2003 2007

Cars: 1998 - 3m, 2003 - 6m, 2007 - 9m

Home Mortgage Outstanding: 1998 – Rs145bn,

2003 – Rs478bn, 2007 – Rs1367bn

Cellular Subscriber: 1998 - 1mn, 2003 - 14m, 2007 - 95m

Tax Payers: 1998 - 10mn, 2003 - 40m, 2007 - 80m


Volumes Value

Two Wheelers 12% 20%

Cars 13% 20%

CAGR (1994 – 2003)

Value growth far exceedsvolume growth

TV: 1998 - 70m, 2003 -98m, 2007 - 130m

2 Wheelers: 1998 - 28m, 2003 - 46m, 2007 - 80m

Cable TV Sub.: 1998 - 25m, 2003 - 48mn, 2007 - 80m

Basic Telephone: 1998 – 22m, 2003 – 44m, 2007 - 65m


53/82

Age profile points to secular growth in demand


54/82


Increasing consuming/producing age group

0

400

800

1,200

2001 2013

0 to 19 20 to 34 35 to 60 & above

Total 1,012.4m

Total 1,211.6m

Overallgrowth19.7%

Growth

34.4%

The risingconsumer class246.8m 331.6m

Source: Census 1991

World Age Population Projected To Decline

BRICs : The growth engine of the world


55/82


Source: Goldman Sachs BRICs Report


56/82

Political Contradictions reflect Social flux


57/82


MuslimLeague

CPM CONGRESS

NationalConference

BJP

RJD

BSP

SP

DMK

NCP

JD

Samta party

Telgu Desam

AIADMK

BJD

Shiv Sena

Capital Markets


58/82


Be aware of shifts

In sectors

In Leadership

In Valuations?

Where we are in the cycle?

Flat markets cloud sectoral shifts!


59/82


Sectors (% of Nifty)

Source: CMIE

Share of corporate profit / GDP

Share of sector profit % v/s Share of market cap

Should always be at the back of the mind !

1998 1999 2000 2001 2002 2003 (July) 2004

Banking 8 6 5 7 8 10 12

Commodities 42 32 22 23 25 34 37

Cyclicals 19 15 8 7 9 9 15

FMCG 19 27 16 19 21 15 9

Pharma 4 5 7 6 8 7 6

TMT 8 15 43 38 29 25 21

Total 100 100 100 100 100 100 100

Similarly, be aware of relative country valuations


60/82


P/E (x) Interest RoE (%) EPS Growth (%)

2002 2003 2004 rates (%) 2002 2003 2004 2002 2003 2004

China 15 14 13 NA 12 14 15 14 11 6India 18 15 13 4.5 18 21 24 34 13 16*

Indonesia 8 9 8 9.0 27 25 27 53 (7) 10

Korea 11 12 9 3.9 15 14 18 (5) (7) 33

Malaysia 20 16 15 3.1 10 12 13 14 20 9

Phillipines 26 17 13 7.8 6 9 11 (23) 50 30

Singapore 25 18 16 0.8 7 9 10 (19) 37 12

Taiwan 43 20 15 1.1 5 11 15 (9) 124 29

Thailand 16 12 11 1.3 16 21 23 86 35 9

Source: The Economist, Citi group. * Currently witnessing upgradation and growth to be sustained in 2005

High and Stable RoE (EVA +ve), Size and Scalability, Variety and Growth

Churn in Top 20 reflects underlying reality shifts


61/82


Source CMIE

Note: Names in red indicate exits, in blue indicate new entrants

1998 As ofJune2004

Company Name Mkt Cap (Rs. bn) Company Name Mkt Cap (Rs. bn)

Oil & Natural Gas Corpn. Ltd. 402 Oil & Natural Gas Corpn. Ltd. 927Hindustan Lever Ltd. 278 Reliance Industries Ltd. 625Indian Oil Corpn. Ltd. 272 Indian Oil Corpn. Ltd. 464Mahanagar Telephone Nigam Ltd 163 Infosys Technologies Ltd. 354

Reliance Industries Ltd. 158 Wipro Ltd 354I T C Ltd. 153 Hindustan Lever Ltd. 286State Bank Of India 129 Bharti Tele-Ventures Ltd. 278Hindustan Petroleum Corpn. Ltd. 110 State Bank Of India 253G A I L (India) Ltd. 106 I T C Ltd. 222Bharat Heavy Electricals Ltd. 86 I C I C I Bank Ltd 194Tata Motors Ltd. 77 Ranbaxy Laboratories Ltd 187

Bajaj Auto Ltd 73 Housing Development Finance Corpn. Ltd 151Bharat Petroleum Corpn. Ltd. 63 G A I L (India) Ltd. 144Industrial Development Bank of India 63 Tata Motors Ltd. 141Hindalco Industries 56 Bharat Petroleum Corpn. Ltd. 131Larsen & Toubro 51 Steel Authority Of India Ltd. 122Tata Iron & Steel Co. Ltd. 50 Hindustan Petroleum Corpn. Ltd. 121Castrol India 46 Maruti Udyog Ltd 119Steel Authority Of India Ltd. 43 Bharat Heavy Electricals Ltd. 113National Aluminium Co 39 Tata Iron & Steel Co. Ltd. 110

Total Market Cap 2,418 Total Market Cap 5,270

… and the Index hides more than it shows!


62/82


0

5,000

10,000

15,000

20,000

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

Infosys Wipro Satyam

0

400

800

1,200

1,600

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

Ranbaxy Dr Reddy's

Cipla Sun Pharma

0

200400

600

800

1,000

1,200

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

HDFC HDFC Bank

0

2,000

4,000

6,000

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

Zee Hero Honda

IT Pharmaceuticals Banking Media & Auto

0204060

80100120140160180200

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

1,5002,0002,5003,000

3,5004,0004,5005,0005,5006,0006,500

Indexed Sensex (LHS) Sensex (RHS)

All Figures indexed 100= price in 1994


63/82

PSS companies outperform markets over time!


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Infosys Vs Sensex HDFC Vs Sensex

HLL Vs Sensex MICO Vs Sensex

RIL Vs Sensex

0

100

200

300

400

500

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

Reliance Industries (LHS) Sensex (RHS)

0

10,000

20,000

30,000

40,000

50,000

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

Infosys Sensex (RHS)

0100

200

300

400

500

600

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

HDFC Sensex (RHS)

0

100200

300

400

500

600

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

HLL Sensex (RHS)

0

100

200

300

400

500

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

MICO Sensex (RHS)

Multibaggers of the last 10 years


65/82


Price as on 14/7/94 Price on 15/7/04 CAGR (%)

Satyam Computers 3 326 62

Infosys Technologies 13 1443 60

Wipro 6 525 56

Sun Pharmaceuticals 21 351 33

Hero Honda 33 460 30

Cipla 41 231 19

Ranbaxy 214 976 16

Zee Telefilms 30 126 15

HDFC 161 550 13

Dr Reddy's 248 749 12

Source: Bloomberg; Adjusted for bonuses and stock splits; NIFTY constituents only

Multibaggers since 9/11 : The REAL BSE-30!


66/82


Company Price as on Price on CAGR

15/7/04 11/9/01 (%)

Oriental Bank 240 34 92

Mahindra & Mahindra 476 68 91

SAIL 33 5 87

Tata Motors 407 75 76

ONGC 654 136 69

Shipping Corp Of India Ltd 117 24 68

Tata Iron & Steel Co Ltd 327 84 57

BHEL 527 135 57

IPCL 157 40 57

Grasim 952 274 51

GAIL 182 53 51

Reliance Energy 571 176 48

ABB 730 225 48

Bajaj Auto 841 266 47

Tata Chemicals Limited 121 39 45

Company Price as on Price on CAGR

15/7/04 11/9/01 (%)

National Aluminium Co Ltd 139 48 43

HPCL 288 111 38

Tata Tea 386 150 37

Hero Honda 460 183 36

Tata Power 254 101 36

Sun Pharma 351 141 35

Ranbaxy 976 415 33

ICICI Bank 238 103 32

SBI Bank 431 187 32

Glaxo 603 282 29

Indian Hotels 370 175 28

BPCL 314 159 26

Satyam Computers 326 175 23

ACC 232 128 22

Gujarat Ambuja 275 155 21

Source: Bloomberg; Adjusted for bonuses and stock splits; NIFTY constituents only

AOL, Time Warner merger – A lesson to remember


67/82


0

20

40

60

80

100

1 9

9 6

1 9

9 7

1 9

9 8

1 9

9 9

2 0

0 0

2 0

0 1

2 0

0 2

2 0

0 3

2 0

0 4

Announcement of Merger

Stock Price of Time Warner: now AOL Time Warner

(US$)

Lets Summarise TILL THIS POINT

V l i d h h i l f


68/82


Value is created through an interplay of:

Macro Trends

Micro Focus

Subtler Nuances

Business Leaders must constantly be on top of these ; good leaders and investors

continuously value these.

Real winners understand this and play to create enduring value.

May run out of luck, never out of wisdom !


69/82


NOW: BUYER BEHAVIOUR

Understand Fund Manager Behaviour!

Approaches to Portfolio Construction


70/82


Approaches to Portfolio Construction

Top Down v/s Bottom Up

Value v/s Growth

Think of Where we are in the Market Cycle!

Client Requirements

Match Needs, Requirements and Abilities

Your OWN Portfolio?

Elements of Valuation


71/82


Top Down

Bottom Up

MomentumValue Growth

KYC and Thyself!


72/82


Asset Allocation

Country Allocation

Sector Allocation

Large Cap

Small

Cap

Pvt. Banks / Pension Funds /

Macro Funds/ Fund of Funds

Regional Funds

Country Funds/ Mutual Funds

HNW / PMS / Absolute Return

Funds/ “Hedge” Funds

Relative

Absolute

Key Success Factors : Match Your Pitch!


73/82


Pvt. Bankers / Pension Funds / Macro Funds

Regional Funds

Country Funds

Absolute

Return

Funds

• Institutional Marketing

• Deployment of Large Pools

• Capital Preservation

• Marketing Scale & Scope

• Economist

• Fund Manager • Technician

• Stock Picker

CAPITAL

UBS, GAM

GSIC, ADIA

PICTET

JANUS

GMO

LLYOD GEORGE

HSBC, , CIBC, JFICICI, HDFC, UTI

SLOANE

ABERDEENARISAIG

EMIC

OPPENHEIMER

Decomposing Approaches


74/82


Sector CountryAsset Class

Top Down

• Equities

• Bonds• Currencies• Property• Commodities

– Oil – Precious metals

– Natural Resources

• Developed Markets

• Emerging Markets• Regional markets

• FMCG

• Pharma• Services• TMT• Manufacturing

• Cyclicals


75/82

Some Lessons from History

Japan V/s UK in 1944


76/82


Japan V/s UK in 1944

Korea V/s India in 1950

Singapore!

Hero Honda V/s Kinetic Honda

Bharti V/s IDEA

Infosys V/s HCL

HDFC Bank V/s SBI

There is NO trade-off between Top- Down and Bottom up

Valuation Approaches based on Sentiment Swings


77/82


• Illiquid

• Misunderstood

• Hated/Uncovered

• Appraised value

• Institutional Favorites

• UVG Stories

• Imagine it!

• DCF or Option value

• Max Volume

• News Flow

• Volatile

• Technicals

Value Growth Momentum

In Reality, there is no distinction. Growth and Momentum are

LongTerm/Short Term Value catalysts

Think Client Management

WHO is the CLIENT?


78/82


WHAT does he want from you?

HOW are you shaping his expectations & mindset?

WHY should he stick to you?

“Most clients would rather have their fund manager fail

conventionally than succeed unconventionally.”

— Marc Faber

Decompose | Decompose | Decompose


79/82


Sectors Large Cap Medium Cap Small Cap Total

FMCG

Pharma

Banks

IT

Telecom

Media

Engg

Autos

Commodities

Total

SUMMARY

UNDERSTAND YOURSELF OBJECTIVELY


80/82


Everybody is not Schumacher or Tendulkar: TAKE HELP, BE SELF AWARE

UNDERSTAND THE INVESTMENT LANDSCAPE A grip of Macro, Micro, Accounting and Street Smartness is REQUIRED

UNDERSTAND THE UNDERLYING INVESTMENT What will make it tick or explode?

UNDERSTAND THE MARKET PARTICIPANTS Who are you playing against and how does he play?

FOLLOW BASIC PRINCIPLES AND STICK TO THEM!

BE HAPPY !

How is your Portfolio Tilted?


81/82


BUILD A CONSCIOUS LIFESTYLE !

WORK

COLLEAGUES

PROFESSIONAL

COLLEGUES

OWN

INTERESTS

FAMILY

CLIENT TIME


82/82

the mind of an analyst

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