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Annual Report & Company Analysis

Presentation Flow

•Year 2008 … Worst ever phase for Markets

• Annual Report Analysis – Overview

• Balance Sheet and P&L A/c analysis

• Company Analysis

Oct 08 …. Global Crash

• The US sub-prime market crisis caused losses worth $181 billion to the world’s top 45 banks.

• Resultant de-leveraging cycle has affected all asset prices including equities negatively.

• Thus fear and forced selling had taken over fundamentals. • Developing nations paid for the mistakes made by developed

countries.

Marc Faber's comment on US economy.

Investment analyst and entrepreneur Dr. Marc Faber concluded his monthly bulletin (June 2008) with the Following:

''The federal government is sending each of us a $600 rebate. If we spend that money at Wal-Mart, the money goes to China . If we spend it on gasoline it goes to the Arabs. If we buy a computer it will go to India . If we purchase fruit and vegetables it will go to Mexico , Honduras and Guatemala . If we purchase a good car it will go to Germany . If we purchase useless scrap it will go to Taiwan and none of it will help the American economy. The only way to keep that money here at home is to spend it on coke and beer, since these are the only products still produced in US. I've been doing my part.'

India wasn’t an exception

•Indian banking system was insulated from sub-prime but equities collapsed due to forced selling.

• FII had withdrawn USD 15 Bn in CY08.

•SENSEX was trading at cheapest valuation in the recent history.

•Satyam scam aggravated the situation so till February we had a dismal scenario.

•Declining crude oil prices & inflation was ignored by the market.

1617

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80

47

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

2007 2008 2009

in U

S $

-60

-40

-20

0

20

40

60

80

100

% c

hang

e

FII net inflow ( $) SENSEX return (% )

•After their flight last year, FIIs flocked back to bet on the India growth story.

• Poured a record $17 billion (Rs 80,500 cr) in domestic equities in 2009.

•It is the highest ever inflow in the country in rupee terms in a single year

FIIs are back in India

Projected GDP growth rates

•Consumption driven economy with low export dependence, has a well capitalized & regulated financial system.

•Consumption-led growth & agri-rebound will keep up relative GDP growth rate, attracting funds flows, albeit at a lower rate.

•India remains an under-invested country and that will keep

RoEs high relative to Developed world.

• India will continue to attract genuine international fund flow as FIIs won’t get such a high growth rate elsewhere in the world except China.

India growth story likely to continue

India India GDP growth is amongst the highest…

India is amongst the fastest growing economies amidst the crisisIndia is amongst the fastest growing economies amidst the crisis

Investment in Infrastructure would be > 10 % of GDP by 2014 from 4% now. -- Budget 2010

Factors that would drive investment in the infrastructure sector

Power :Peak power capacity is 16% short of demand. T&D losses vary from 18- 62% across states.

Ports :Operating at 95% capacity with demand growing at 10% annually.

Roads :Only 2% of Indian roads are national highways. Trucks cover less than 200km per day (25% of global average).

Rail :Track coverage is 35km per 1000 sq km against global average of 100-150km. At 25kmph, average train speed is lower than China’s at 150 kmph.

Airports : Air travel penetration in India is only a 25% of Brazil’s, 20% of China’s and 2% of the US.

Investments in Infrastructure in the next few years

Equities have outperformed all other asset classes in the long run - globally as well as in India

6.00%8.70% 9.64%

10.85%

18.00%

Inflation Gold G Secs Bank FD Equities

Avg. Annualized Return for the period 1980-2009

• Macro environment is very volatile. Both Global & Domestic.

• India may not be directly connected with the world economically , but Financial Markets are connected directly so we will see volatility in the market going forward.

• These factors are beyond our control so no point in timing the market.

• What best we can do is , identify good companies for long term investment.

• Analysis of Annual Reports is the best way to start with.

What is the conclusion ?

• Overall Layout of the Annual Report.

• Cover Page

• Content

• Management Discussion

• Balance Sheet

• P & L Account

• Consolidated Financials

• Others

Annual Report Analysis – Practical Perspective

•Equity Capital

• Authorised Capital

• Issued Capital ( Bonus Component )

• Reserves

• Debt

• Investments ( Hidden Potential )

• RoCE, RoE

Annual Report Analysis – Balance Sheet

• Sales

• Sales Mix ( Segment wise , Geographical )

• Expenses

• Raw Material

• Employee

• Promotion & Others

• Depreciation & Interest

• Tax

• Profits

• Distribution of Profits

Annual Report Analysis – P & L Account

Just imagine…

How much can you make in 26 years by just investing Rs.10,000 initially in any of financial

instruments ?

Take a wild guess ???

Let us look at the real example…

If you have subscribed in 100 shares of ________ company with a face value of Rs. 100 in 1980…

In 1981 company declared 1:1 bonus = you have 200 shares

In 1985 company declared 1:1 bonus = you have 400 shares

In 1986 company split the share to Rs. 10 = you have 4,000 shares

In 1987 company declared 1:1 bonus = you have 8,000 shares

In 1989 company declared 1:1 bonus = you have 16,000 shares

In 1992 company declared 1:1 bonus = you have 32,000 shares

In 1995 company declared 1:1 bonus = you have 64,000 shares

In 1997 company declared 1:2 bonus = you have 1,92,000 shares

In 1999 company split the share to Rs. 2 = you have 9,60,000 shares

In 2004 company declared 1:2 bonus = you have 28,80,000 shares

In 2005 company declared 1:1 bonus = you have 57,60,000 shares

At the end of 2005…

You have 57,60,000 shares of the company

Any guess about the company ?

(Hint : Its an Indian company)

Any guess about the present valuation ?

The result of ‘Power of Compounding’

Your present valuation is about

Rs. 340 Cr.+

&

The company is ‘WIPRO’

•Focus on the Winners of Tomorrow

•Growing Industries

•Quality of Management

• Business potential

Companies with significant competitive advantages

Companies that are expected to increase/maintain market share

•Financial performance of the company.

• Earning Guidance

A combination of the above is expected to result in exponential growth.

Past examples are Colgate , Marico , Zydus Wellness etc.

How Do We identify stocks for value creation

Buy Good stock at Fair Price and not Fair stock at Good Price

Colgate – Palmolive

• A 51% subsidiary of Colgate US, Colgate Palmolive (India) (CPIL) is a market leader in the Indian oral care industry since decades.

• The company has products across variants and price points in toothpaste, toothpowder, and toothbrushes, and has leadership in each of these.

• The company maintained its leadership position at 50 % market share in the toothpaste category during Jan-Dec'08 period.

• The company's toothbrush category witnessed a increase in its market share by 2.8% to 38% during Jan-Dec'08 period.

Colgate – Palmolive ( Rs 733)

Growth Prospects :

•Penetration of modern oral-care products below 55% is low in India as many people in rural India still clean their teeth with traditional products.

•Per capita consumption of toothpaste in India is among the lowest globally. 92 grams, even countries like China and Malaysia consume much at 219 grams and 285 grams.

•Just 7% of the population here brushes twice a day as compared with 61% in China.

Capital Restructuring :

•To address overcapitalization and reward shareholders, CPIL cut its share capital from Rs 136 crore to Rs 13.6 crore FY 2008.

•This reduction has substantially improved the return ratios like return on capital employed (RoCE) and return on equity (RoE). RoCE spurted to 129.95% in FY 2008 from 90.01% in FY 2007. RoNW improved to 104.67% from 71.23%.

• Regular dividend paying company with payout ratio 75-80 %

Financials FY 10E

Sales Rs 1,920 Cr ( 14% growth) Profit Rs 360 Cr ( 25% growth)

Zydus Wellness

Zydus Wellness ( Rs 410)

• For every 15 shares ( FV 5) of Cadila Healthcare – 4 Shares ( FV 10) of Zydus Wellness were allotted.

• Price of Cadila on Record Date – 270

• For 1,500 Cadila Healthcare – 400 Zydus shares allotted.

• Cost of 1,500 Cadila shares – 1500 * 270 = 4,05,000

• Value of 1,500 Cadila shares @ CMP 850 – 1500 * 850 = 12,75,000

• Value of 400 Zydus Wellness @ CMP 410 – 400 * 300 = 1,64,000

• Total Gain – ( 12,75,000 +1,64,000 – 4,05,000 = 10,34,000) or 255 % .

De Merger details

Future Potential

• Zydus’ foray into sugar free products and artificial sweeteners was a master move.

• As India grows at an ever faster rate the citizens become richer and tend to have more diabetes and obesity problems as the trend is from the other developed countries.

• As a result they would be able to tap the massive potential of this sector because people will need sugar free products.

• Demand is only going to increase and with the business set up completely Zydus will be the company best set to capitalize on the surge in demand.

Marico

•Marico is a leading Indian group in consumer products and services in the Global beauty and Wellness space.

• Marico’s Parachute and Saffola are among India’s top 100 most trusted brands

• Parachute continues to be the world’s largest packaged Coconut Oil Brand.

Brands

Marico Ltd ( Rs 113)

•In the recent years, Marico entered the skin care solutions business through Kaya Skin Clinics offering a range of highly effective and safe services.

•The chain of Kaya clinics (all company owned) is now 74 strong, spread across 21 cities in India and 11 in the Middle East. Its customer base is now more than 5,00,000.

Kaya Skin Clinic

Sales Growth & Distribution of Profits

Investment Through Shares Value ( Rs)

April 1996 Original purchase IPO 100 17,500

August-02 Bonus Equity ( 1:1) 200  

May-04 Bonus Equity ( 1:1) 400  

Feb-07 Split ( 10:1) 4000  

Return Through Shares Value ( Rs)

January 31 ,2009 Market Value 4000 452,000

       

April 1996- March 2009 Dividend   21,058

Gross Return     473,058

       

Investment Cost     17,500

Compounded Annual Return since IPO 27%

IPO cost ( Rs) 4.37

Current Price ( Rs) 113

Sustainable Wealth Creation

Emami( Infra + FMCG)

Emami Infra EMAMI( FMCG)

Emami De-Merger

Zandu( Realty + FMCG)

Zandu Realty ZANDU( FMCG)

31

14 1

EMAMI Ltd( Eamami & Zandu

FMCG business)

EMAMI Infra( Eamami & Zandu

Realty business)

Before De-Merger (Dec 09)Shares Price Value

Emami Ltd 300 515 154,500

Now ( Feb 09) Shares Price Value

Emami Ltd 300 694 208,200Emami Infra 100 ??Total Value 208,200

Value accretion

Hyatt Mumbai +Bangalore property

Hyatt Kolkatta +Orissa property +

CashHyatt Delhi

Asian Hotels Ltd10

5 5 5

• The proposed three-way split of Asian Hotels seems to be a positive move for its shareholders as Promoters have acquired independent interests.

• Three co-promoters - Sushil Gupta ( Mumbai ) , Shiv Jatia ( Delhi ) and Umesh Saraf ( Kolkatta) , getting charge of their own property to manage and grow.

• The value of 508 rooms Hyatt Delhi is being pegged at around Rs 850 crore.

• The fundamentals for the hospitality sector remains strong and demand continues to outstrip supply in big cities.

• Promoters have infused Rs 340 cr @ Rs 540 pre De-merger.

Asian Hotels Ltd ( Price Rs 450 )

Apollo Hospitals • Started as a 150 beds hospital in

1983. Now has 4,350 beds.

• Toady it has become one of the country’s premier healthcare providers.

• Growth of 32%in top line to Rs 1,635 cr for FY09.

• New initiatives to address the healthcare delivery gap in the country – Health Hiway

Dr Reddy’s Lab• Established in 1984 with initial

capital of Rs 25 Lacs.

• Emerging global pharma company. Presence in 40 countries.

• Products are marketed to US , Europe and Russia.

• Revenues of USD 3 billion by 2013 from current level of USD 1.36 billion (FY'09).

Maruti Suzuki

• Subsidiary of Suzuki Motor Corp. Japan. • India’s largest passenger car company. 50%

market share. • Produced and sold over 7.5 million vehicles in

India and exported over 5 lacs units. • Offers full range of cars. • Turnover for FY 09 Rs 20, 358 cr and PAT Rs

1,218 cr.

Identify a company before the world knows about it.

You will always make exponential gain in these stocks.

Look beyond listed stocks.

• ADITYA BIRLA NUVO

• BAJAJ AUTO

• HDFC

• PANTALOON RETAIL ( INDIA )

• SBI SUBSIDIARIES – SBM,SBT

• UNITED SPIRITS

• ORACLE FINANCIAL SERVICES

• OLD PVT. SECTORS BANKS

Annual Reports worth studying

Rules for Investment success by Sir John Templeton.......

• Invest , Don’t trade or speculate in stocks.

• Buy Value not market trend or economic outlook.

• Diversify , Invest in stocks as well as bonds.

• Do not be fearful or negative too often .

• There is no free lunch.

• Do your homework or hire an expert.

• Learn from your mistakes.

Investing should be more like watching paint dry or watching grass grow……If you want excitement take $800 and go to Las Vegas.

- Paul Samuelson American neoclassical economist. A Nobel Prize winner

Long Term investment

is like a coconut tree.

We can enjoy coconuts only after 6 Yrs

But they keep coming for next 100 Yrs

GANESH S. SHANBHAG

Cell No: +91-9821095274

E-mail : ganesh@smsfs.com

Website : www.smsfinancial.com

This presentation is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This presentation is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. The presentation is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. SMS or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. SMS or any or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations.

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Mutual fund investments are subject to market risk. Please refer to the offer documents before investing.

 

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