Dsij Nov18.pdf

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Subscription copy of [[email protected]]. Redistribution prohibited.

Subscription copy of [[email protected]]. Redistribution prohibited.

Value Research

November 2018 Volume XII, Number 5

28

COVER STORY

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 meticulously- researched 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 let’s grow and evolve as we undertake this voyage together.

QUALITY STOCKS AVAILABLE CHEAP

Editor Dhirendra Kumar Associate Editor Vibhu Vats Special Correspondents Kumar Shankar Roy Data Support Prasobh Nair Design Mukul Ojha, Kiran Sindhwal Production Hira Lal Data source for stocks AceEquity

‹9DOXH5HVHDUFK,QGLD3YW/WG Wealth Insight is owned by Value Research India Pvt. Ltd., 5, Commercial Complex, Chitra Vihar, Delhi 110 092.

25

INTERVIEW

‘Investing should be like playing test cricket’ V. Balasubramanian, Chief Portfolio Strategist (Equity), Mahindra Mutual Fund

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

Advertising Contact: Mumbai: 22838665 / 22838198 Delhi: 22457916 / 22457918 Venkat K Naidu +91-9664048666 Biswa Ranjan Palo +91-9664075875 Total pages 64, including cover

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47

STOCK ADVISOR

Better to read annual reports than Playboy

Columns

7

22

VALUE GURU

EDIT

by

DHIRENDRA KUMAR

Optionality and opportunity

The weak markets today provide an option to investors to improve their returns later

38 MAINSTREET

by SAURABH

MUKHERJEA

The hero delusion Considering one person to be the sole cause of events, good or bad, is a mistake

40 OFFBEAT

by

SANJEEV PANDIYA

Dealing with the ‘crisis’

While the RBI’s response to the recent rupee depreciation is surprising to many, it’s the consumer behaviour that needs to change

42 TAKING STOCK

by

MALINI BHUPTA

Politics doesn’t matter’

History suggests that Indian markets have remained unfazed by the government at the Centre, whether coalition or single-party

Withstanding market volatility the Warren Buffett Way 8

MONTHLY AGENDA

44

VIS-A-VIS

Do NBFCs yield to the yields?

Fulfilling the dream of a home

10

51

WORDS WORTH WISDOM

Schloss’s investment wisdom in 16 points

12

MARKET COMPASS

Index watch Big moves Tracking Chirag Setalvad Give thumbs up to downturns

19

STOCK SCREEN

Quality stocks available cheap Reasonably priced growth stocks Discount to book value Attractive blue chips High dividend-yield stocks

62

WORDS WORTH NOW

ANALYST’S DIARY

Getting rid of debt Dividend stars

DISCLAIMER The contents of Wealth Insight published by Value Research India Private Limited (the ‘Magazine’) are not intended to serve as professional advice or guidance and the Magazine takes no responsibility or liability, express or implied, whatsoever for any investment 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

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EDIT

Optionality and opportunity The weak markets today provide an option to investors to improve their returns later

DHIRENDRA KUMAR

‘Optionality’ is one of the concepts frequently written about by Nassim Nicholas Taleb, the great philosopher cum derivatives trader. This is surely a combination of professions unique in human history. This combination makes Taleb uniquely qualified to write about the philosophy behind investing. If one wants to understand markets and investing deeply, reading his books could be one of the best things you could do. Taleb derives the word ‘optionality’ from options in the financial sense, but the concept is much wider. In investing, an option is defined as an instrument that gives the investor the right, but but not the obligation, to buy an underlying security at a predetermined price. Of course, the the dominant use of options in India is in speculative punting. However, properly speaking, they’re something that can be used to limit the downside risk while keeping the upside potential open. What Taleb points at while talking about this concept of optionality is that this is true of all investing, as well as a lot more in life. In a way, all of investment research is about limiting your downside risk while enhancing the chances of making gains. In fact, this is the key difference between the speculator and the real investor. Take a look at the cover story of this issue, ‘25 quality stocks available cheap’. You may take it to be about an opportunistic action of taking advantage of the market crash and definitely, it’s that, but there’s more, too. However, there’s a deeper theme to this. When we invest in equity, there are so many variables which we have to consider – the company, the business, the management, the technology, the industry, the economy, the market and so much else. Deciding that an investment is worthwhile involves having an

opinion and taking a call on so many diverse factors. We could be wrong on any one of them. If we are wrong, then the investment may work out badly and it’s value may decline. No matter how wonderfully skilled we are at our research, we could be wrong on anything. In fact, we could be wrong on many things and all of us often are. That’s where ‘optionality’ comes in. As investors, we have to somehow make choices that limit the inevitable downside risk of equity investing, while leaving our upside unfettered. Two of the best ways of doing this are diversification and value investing. I’m sure that didn’t come as a surprise to you but what is actually surprising is how many investors tend to forget about this. Which is where we come to today’s situation in the equity market. There are way too many investors who, at an intellectual level, understand and appreciate this, but at a psychological level are unable to take advantage of it. The weak markets that we are seeing are nothing but an opportunity. They present to us investors not risk but optionality. If we choose good stocks, then we are assured that we are buying them at a relatively good value. That puts a cushion under us in case we fall, hence our cover story. The occasional market fall that comes to equities is actually not a bad time to be somehow tolerated while we wait for the good time. This is the good time. This is actually the time when you will make your gains while later you will simply encash them. As you read our cover story, don’t forget this even for a moment.

November 2018 Wealth Insight 7 Subscription copy of [[email protected]]. Redistribution prohibited.

MONTHLY AGENDA

Do NBFCs yield to the yields? Here are some historical graphs that show the movement of NBFCs with 10-year government-bond yields, along with their correlation

T

he latest round of market mayhem can be attributed to non-banking finance companies (NBFCs), which had proved to be wealth creators in the last two-three years. The reason for their fall are two-fold: the default by IL&FS group companies and a tightening liquidity scenario, which has caused the yields to increase. Because the margins of NBFCs are dependent on the interest rates in the economy, we wanted to see how NBFC stocks have moved with the yields on the 10-year government bonds. The graphs below suggest that while the correlation between stock prices and yields is negative, it isn’t strong. WI

10Y government-bond yield

Left axis: Index level/stock price. Right axis: 10Y bond yield

Financial Services Index 15000

10

12000

8

9000

6

6000

Correlation

-0.20

3000 0 October 2008

4 2 0

October 2018

Bajaj Finance

Can Fin Homes

3500

9.5

750

9.5

2800

8.5

600

8.5

2100

7.5

450

7.5

6.5

300

5.5

150

4.5

0

1400 700 0

Correlation

-0.34 October 2008

October 2018

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6.5

Correlation

-0.50 October 2008

5.5 4.5 October 2018

MONTHLY AGENDA Dewan Housing Finance

GIC Housing Finance

750

9.5

750

9.5

600

8.5

600

8.5

7.5

450

6.5

300

5.5

150

4.5

0

450

Correlation

-0.29

300 150 0

October 2008

7.5

Correlation

-0.42

6.5 5.5 4.5

October 2018

October 2008

Gruh Finance

October 2018

HDFC

400

9.5

2500

9.5

320

8.5

2000

8.5

7.5

1500

6.5

1000

5.5

500

4.5

0

240

Correlation

-0.26

160 80 0

October 2008

October 2018

7.5

Correlation

-0.21

6.5 5.5 4.5

October 2008

Indiabulls Housing Finance

October 2018

LIC Housing Finance

1500

9.5

400

9.5

1200

8.5

340

8.5

7.5

280

6.5

220

5.5

160

4.5

100

900 600 300

Correlation

-0.69

0 July 2013

October 2018

7.5

Correlation

-0.32

6.5 5.5 4.5

October 2008

PNB Housing Finance

October 2018

Repco Home Finance

1800

9.5

400

9.5

1500

8.5

340

8.5

1200

7.5

280

7.5

6.5

220

5.5

160

4.5

100

900

Correlation

-0.02

600 300 November 2016

October 2018

6.5

Correlation

-0.65 April 2013

5.5 4.5 October 2018

November 2018 Wealth Insight 9 Subscription copy of [[email protected]]. Redistribution prohibited.

WORDS WORTH WISDOM

Schloss’s investment wisdom in 16 points Walter J. Schloss was a legendary value investor and disciple of Benjamin Graham. Warren Buffett called him a ‘superinvestor’. Schloss encapsulated his investment methodology in 16 points. Here they are.

1 2

Price is the most important factor to use in relation to value.

Try to establish the value of the company. Remember that a share of stock represents a part of a business and is not just a piece of paper.

3

Use book value as a starting point to try and establish the value of the enterprise. Be sure that debt does not equal 100% of the equity (capital and surplus for the common stock).

4 5

Have patience. Stocks don’t go up immediately.

Don’t buy on tips or for a quick move. Let the professionals do that, if they can. Don’t sell on bad news.

6

Don’t be afraid to be a loner but be sure that you are correct in your judgment. You can’t be 100% certain but try to look for weaknesses in your thinking. Buy on a scale and sell on a scale up.

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WORDS WORTH WISDOM

7

Have the courage of your convictions once you have made a decision.

12

8

Listen to suggestions from people you respect. This doesn’t mean you have to accept them. Remember, it’s your money and generally it is harder to keep money than to make it. Once you lose a lot of money, it is hard to make it back.

9

13

Have a philosophy of investment and try to follow it. Don’t be in too much of a hurry to sell. If the stock reaches a price that you think is a fair one, then you can sell but often because a stock goes up say 50%, people say sell it and button up your profit. Before selling, try to reevaluate the company again and see where the stock sells in relation to its book value. Be aware of the level of the stock market. Are yields low and P/E ratios high? Is the stock market historically high? Are people very optimistic, etc.?

10

When buying a stock, I find it helpful to buy near the low of the past few years. A stock may go as high as 125 and then decline to 60 and you think it’s attractive. Three years before the stock sold at 20 which shows that there is some vulnerability in it.

11

Try to buy assets at a discount rather than buying earnings. Earnings can change dramatically in a short time. Usually assets change slowly. One has to know much more about a company if one buys earnings.

Try not to let your emotions affect your judgment. Fear and greed are probably the worst emotions to have in connection with the purchase and sale of stocks.

14

Remember the word ‘compounding’. For example, if you can make 12% a year and reinvest the money back, you will double your money in six years, taxes excluded. Remember the rule of 72. Your rate of return into 72 will tell you the number of years to double your money.

15

Prefer stocks over bonds. Bonds will limit your gains and inflation will reduce your purchasing power.

16

Be careful of leverage. It can go against you.

November 2018 Wealth Insight 11 Subscription copy of [[email protected]]. Redistribution prohibited.

MARKET C MPASS

INDEX WATCH

Nifty Financial Services 35.5

3.4

Price to earnings

0.75

Price to book

21.4 Market cap

Dividend yield (%)

(` lakh cr) Nifty Financial Services

Nifty

Median

Nifty Financial Services has outperformed Nifty 50 over five years.

Top gainers/losers Company name

M-cap (` cr)

1Y change (%)

ICICI Bank

2,05,239

18.4

Bajaj Finance

1,30,971

16.1

8800

Axis Bank

1,51,421

14.7

7200

Bajaj Finserv

94,761

11.6

5600

HDFC Bank

5,34,278

9.1

State Bank of India

2,48,193

8.4

Kotak Mahindra Bank

12000 10400

4000 Oct ’13

Oct ’14

Price/earnings

Oct ’15

Oct ’16

Oct ’17

Oct ’18

is at 68.6% premium to its five-year median of 21.1

42

2,16,998

7.9

Bharat Financial

14,279

3.8

Shriram Transport

24,536

0.1

HDFC

36

2,98,612

-0.3

M&M Financial

25,088

-4.0

30

Bajaj Holdings

28,953

-10.0

24

ICICI Pru Life Insurance

47,725

-18.4

18

Indiabulls Housing

41,750

-23.7

IIFL Holdings

14,931

-26.3

REC

20,579

-31.7

Price/book value is at 9.9% premium to its five-year median of 3.1

Max Financial Services

10,157

-36.2

4.20

Power Finance Corp

20,487

-37.1

Edelweiss Financial

15,269

-40.6

12

Oct ’13

Oct ’14

Oct ’15

Oct ’16

Oct ’17

Oct ’18

3.70 3.20 2.70

Valuations

2.20

Company

1.70

Oct ’13

Oct ’14

Oct ’15

Oct ’16

Oct ’17

Oct ’18

Dividend yield is 29 basis points lower than the five-year median of 1.04%. 1.95

P/B

Company

P/B

Axis Bank

2.4

IIFL Holdings

2.8

Bajaj Finance

7.5

Indiabulls Housing

2.9

Bajaj Finserv

4.2

Kotak Mahindra

4.2

Bajaj Holdings

1.3

M&M Financial

2.6

Bharat Financial

4.7

Max Financial

5.0

1.60

Edelweiss Financial

2.2

Power Finance Corp

0.5

1.25

HDFC Bank

4.6

REC

0.6

HDFC

4.4

Shriram Transport

1.9

ICICI Bank

2.0

State Bank of India

1.2

ICICI Pru Life

7.2

0.90 0.55 0.20

Oct ’13

Oct ’14

Oct ’15

Oct ’16

Oct ’17

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Oct ’18

Data as on October 10, 2018

BIG MOVES

Large caps Piramal Enterprises The company converted its debentures into 85,280 shares, which led to equity dilution.

Bajaj Finance Concerns over liquidity crunch have led to fears of slowdown in loan growth.

Bandhan Bank The RBI restricted the bank from opening new branches without its approval.

Indiabulls Housing Finance The stock fell amidst a sector-wide correction.

Godrej Consumer Products The company sold entire stake in its UK business to focus on emerging markets.

Indian Oil Corp. The government asked oil marketers to take hit of `1 on oil prices.

BPCL The government asked oil marketers to take hit of `1 on oil prices.

Tata Motors Jaguar Land Rover reported 12.3 per cent decline in sales in September 2018 YoY.

Interglobe Aviation Continuous rise in crude-oil prices is a concern for the company.

Yes Bank The RBI rejected Yes Bank’s plea for the extension of Rana Kapoor’s term by three years.

MARKET C MPASS

3M returns (%)

Price to earnings 3Y avg RoE (%)

Net profit (` crore) 3Y earnings growth (%)

-12.1

9 12.3

4,463 344

2457

-12.1

46 21.1

2,878 44

2347

-12.8

45 20.8

-18.3

10 27.5

-20.2

41 25.0

1,813 25

-22.2

5 18.8

23,629 36

157

-31.7

6 28.4

9,468 15

376

-32.6

14 11.4

2,115 -47

273

-33.0

20 74.3

1,459

-38.1

12 18.8

4,519 29

3M price (`) movement

2159

2062

1,688 –

556 485

4,091 27

1156 944

839 669

122

257

184

1081 724 362 224

Our large-cap universe has 91 large companies, making the top 70 per cent of the total market capitalisation. The list mentions the stocks that have fluctuated most wildly in the last three months. Data as on October 9, 2018

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MARKET C MPASS

BIG MOVES

Mid caps Adani Power Gujarat government has approached the Supreme Court to provide relief to power companies.

Indiabulls Ventures Having seen a big rally, the stock has corrected in the ongoing downturn.

IIFL Holdings Concerns over tightening liquidity have hit NBFC stocks.

JM Financial Concerns over tightening liquidity have hit NBFC stocks.

Vodafone Idea Intense competition from Reliance Jio has led to huge losses and a dip in the company’s operating margins.

Reliance Nippon Life Asset Management The reduction in the expense ratio by SEBI is negative for asset-management companies.

Reliance Capital Being the holding company of Reliance AMC, it may be affected by a reduction in expense ratio.

Edelweiss Financial Services Concerns over tightening liquidity have hit NBFC stocks.

Central Bank of India The bank’s Q1 loss grew to `1,522 crore against `577 crore last year.

DHFL The selling of DHFL’s commercial paper by DSP Mutual Fund at higher yields has raised concerns about company’s bonds.

3M returns (%)

Price to earnings 3Y avg RoE (%)

Net profit (` crore) 3Y earnings growth (%)

45.0

– -72.4

-2,461 -217.6

-17.7

83 23.3

360 36.3

-32.6

15 21.6

1,110 30.6

-34.0

11 20.1

891 30.6

-36.9

– 7.6

-36.9

19 23.9

512 13.8

235

-38.2

5 8.9

1,224 3.7

383

-49.0

16 13.1

-55.4

– -20.2

-60.9

7 24.0

3M price (`) movement

17

479

24

395

670 451

120 79

-3,397 -201.7

55

34

148

237

917 42.4

292

149

-6,050 -313.9

68

30

1,347 27.7

622

243

Our mid-cap universe has 220 mid-sized companies, making the next 20 per cent of the total market capitalisation. The list mentions the stocks that have fluctuated most wildly in the last three months. Data as on October 9, 2018

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MARKET C MPASS

BIG MOVES

Small caps Atlas Jewellery India The company reported a profit of `6.6 crore in comparison to loss of `1.7 crore in Q1.

Sadhana Nitro Chem The company reported a 3,620 per cent rise in Q1 profits YoY.

SORIL Infra Resources The company approved a preferential issue of `550 crore to promoter and non-promoter entity.

Vakrangee Ministry of Corporate Affairs is investigating the company’s last three years’ financial statements.

Shreyas Shipping & Logistics The company reported a 68 per cent drop in profits in Q1 YoY.

Ashapura Intimates Fashion The company’s chairman and managing director Harshad Thakkar has gone missing.

Infibeam Avenues The company allegedly gave interest-free loan to one of its subsidiaries which is already in a debt trap.

Jai Prakash Associates The Supreme Court barred the company from bidding for Jaypee Infratech, which is facing insolvency.

8K Miles Software Services The company’s broker fraudulently sold promoters’ shares worth 8.42 per cent of the total equity.

Optiemus Infracom The stock fell amidst a correction in small caps.

3M returns (%)

Price to earnings 3Y avg RoE (%)

Net profit (` crore) 3Y earnings growth (%)

92.7

634 -4.1

4 9.7

83.9

18 41.1

69.0

77 21.3

15 1.5

-39.6

7 30.0

526 16.5

54

-55.7

7 26.9

68 -9.8

455

-59.5

7 26.4

59 76.9

444

-60.8

– 4.6

-61.8

– -50.3

-63.0

49 36.6

-70.6

3M price (`) movement

284 147

53 124.1

1020 555

240

405

33

202

180

-9 106.8

150 59

-698 16.4

16

6

28 6.5

8 117.0 27 -4.9

382

142 282

83

Our small-cap universe (minimum market capitalisation `500 crore) has 653 small-cap companies, making the last 10 per cent of the total market capitalisation. The list mentions the stocks that have fluctuated most wildly in the last three months. Data as on October 9, 2018

November 2018 Wealth Insight 15 Subscription copy of [[email protected]]. Redistribution prohibited.

MARKET C MPASS

Tracking Chirag Setalvad By tracking influential investors, you can get some idea about where to invest now. Here are the stock moves that Chirag Setalvad has made in his funds. Increasing conviction

Decreasing conviction

Top 10 companies where his investments as per cent of equity have gone up in the last six months

Top 10 companies where his investments as per cent of equity have gone down in the last six months

Increase (% of eq)

Decrease (% of eq)

Amount invested (` cr)

Amount invested (` cr)

Tamil Nadu Newsprint Shaily Engineering Mahindra Holidays

Chirag Setalvad is Senior Fund Manager at HDFC Mutual Fund. He manages over `50,000 crore across seven funds: Children’s Gift Fund, Hybrid Equity Fund, Long Term Advantage Fund, Mid-Cap Opportunities Fund, Multi Asset Fund, Retirement Savings Fund (includes three plans: Equity, Hybrid Equity and Hybrid Debt) and Small Cap Fund. The equity-oriented funds managed by him have given annualised returns ranging from 15 to 22 per cent.

Mcleod Russel

TI Financial Holdings

SKF India

New entrants 7RSFRPSDQLHVLQZKLFKKHKDVLQYHVWHGIRUWKHÀUVWWLPHRYHUWKH last six months Amount invested (` crore) 281 % of equity bought

Advanced Enzyme

PNC Infratech

80 128

21

26

143

36

86

21

11

8.17 3.61 3.20 2.06 2.05 1.85 1.00 0.89 0.87 0.78 Sharda INOX Firstsource Taj GVK Kirloskar Cropchem Leisure Solutions Hotels & Ferrous Resorts Inds.

Vijaya Bank

Kaveri Seed Company

EIH

Fine Lemon Organic Tree Industries Hotels

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Aarti Industries

KEC International

5.36 104 5.15 57 4.84 208 4.77 72 4.64 139 4.11 370 3.89 102 3.63 151 2.96 279 2.96 264

Capital First

Dhanuka Agritech

Blue Star

DB Corporation

VIP Industries Hindustan Construction Co. KNR Constructions Mahindra Logistics

Max India

Wockhardt

-2.84 -161 -1.02 -27 -0.90 -67 -0.82 -49 -0.82 -37 -0.70 -9 -0.62 -29 -0.43 -17 -0.31 -8 -0.23 -20

MARKET C MPASS Top holdings by per cent of equity His top 10 holdings in terms of per cent of equity % of equity

Held since

Amount invested (` cr)

Greenlam Industries

9.1

Mar-15

225

SKF India

9.0

May-09

Redington India

9.0

Mar-15

Carborundum Universal

9.0

Apr-07

VST Industries

8.9

May-09

452

Vesuvius India

8.9

Apr-07

214

Oriental Carbon & Chem

8.9

Aug-15

100

Jagran Prakashan

8.8

Jul-07

Navneet Education

8.5

Sep-12

Shaily Engg Plastics

8.4

Dec-17

828 378 630

329 271 81

Stake build-up Companies in which he has raised his stake since 2007

Top holdings by amount invested His top 10 holdings in terms of absolute investment

Company Amount invested ` cr

Held since

Current stake (% of eq)

HDFC Bank

1,878

Jan-08

0.3

Infosys

1,215

Apr-07

0.4

Balkrishna Industries

1,212

Apr-07

4.6

Voltas

1,063

Apr-08

HDFC

1,028

May-08

ICICI Bank

1,019

Apr-07

5.2

Indian Hotels

24

24

0

652 100.0

4.4

SKF India

34

31

3

620

91.2

9.0

Punjab National Bank

47

37

10

774 78.7

0.7

Federal Bank

53

41

12

708

3.5

77.4

83

60

23

653 72.3

1.9

0.3

44

20

1,143 68.8

0.9

0.5

HDFC Bank

94

63

31

1,773

67.0

0.3

Balkrishna Industries

27

18

9

1,105 66.7

4.6

Axis Bank

82

54

28

788 65.9

0.3

Tata Chemicals

23

15

8

526 65.2

2.7

Bharat Electronics

45

28

17

1,507 62.2

Larsen & Toubro

77

47

30

838

61.0

0.4

Aarti Industries

901

Aug-14

8.1

ITC

883

Apr-07

0.2

Larsen & Toubro

857

Apr-07

0.4

6.9

Complete exits Top 10 exits in terms of per cent of equity over the last one year

0.90

Current stake Buy % (% of equity)

64

Apr-07

Max India

Net value (` cr)

Bank Of Baroda

959

3.56

Sell count

Aurobindo Pharma

Sundram Fasteners

Lakshmi Machine Works

Total Buy transactions count

1.0

KEC International

38

23

15

592 60.5

6.6

HDFC

55

33

22

983 60.0

0.3

Stake cut-off Companies in which he has reduced his stake since 2007 Total Buy transactions count

Sell count

Net value (` cr)

Current stake Sell % (% of equity)

VIP Industries

0.82

Company

Hindustan Const Co.

0.70

Colgate-Palmolive

23

6

17

-26

73.9

0.0

LIC Housing Finance

19

7.0

12.0

-42

63.2

0.0

Solara Active Pharma

0.70

Emami

43

16

27

-75

62.8

0.0

Power Finance Corpn.

0.65

Havells India

16

6.0

10.0

-71

62.5

0.0

Adani Ports

0.47

Pidilite Industries

45

17

28

-121

62.2

0.0

Mahindra Logistics

0.43

TTK Prestige

33

13

20

-43

60.6

0.0

Oracle Fin Ser Soft

0.40

Capacite Infraprojects

0.37

Tata Consultancy Services

65

26

39

-37

60.0

0.0

Hindustan Unilever

20

8.0

12.0

-46

60.0

0.0

All six-month and one-year data as of August 2018

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MARKET C MPASS

Give thumbs up to downturns By investing during market downturns, you not only earn more returns but also reduce the risk of losses over the long term

A

mong many things that are curious about the stock market is investor behaviour in bull and bear markets. Investors invest more in bull markets, when stock prices have already raced, and cut down on investing in bear markets, when stock prices are down and hence stocks are trading at a bargain. It’s not that investors don’t know this fact. In fact, it’s an oft-repeated investment cliche. Yet by some quirk, investor behaviour tends to be just opposite of what it should be. The graphs below show risk and returns across various time frames in various market scenarios. Maximum returns at the least probability of loss are obtained when the market has corrected. This shows that investing in market downturns has indeed proved more profitable over the long term, that too at lower risk. In fact, over 10 years, the probability of negative returns is almost zero if you invest during a correction. The ongoing downturn is yet another opportunity to improve your returns. It’s not the time to run away from the market but to continue investing.

The magic of bear markets Value of `1 lakh 5Y

10Y

If purchased after market corrected by more than 15%

`1,82,608 `4,71,373

If purchased after market rose by more than 15%

`1,58,516 `3,37,665

Absolute difference

15%

40%

Does this mean that in order to invest you should always wait for the market to correct? No, because you don’t know when the correction might happen. In a secular bull run, you can miss out on the opportunity if you wait for a deep correction. The right method is to continue investing through all phases. As the numbers show, over the long term, even if you invest at higher levels, you earn decent returns. However, don’t make the mistake of discontinuing investing if the market corrects. That’s when you will make most returns. WI

Sensex returns across market phases Median (%, CAGR) 1Y

3Y

5Y

10Y

If purchased at any point of time

13.4

10.3

10.7

14.7

If purchased after market corrected by more than 10%

18.6

15.7

12.2

16.8

If purchased after market corrected by more than 15%

20.5

15.9

12.8

16.8

If purchased after market rose by more than 10%

11.8

7.9

9.7

13.2

If purchased after market rose by more than 15%

11.2

7.5

9.7

12.9

Probability of loss across market phases Probability of loss (%) 1Y

3Y

5Y

10Y

If purchased at any point of time

29.9

13.2

10.2

2.4

If purchased after market corrected by more than 10%

27.9

11.8

3.8

0.0

If purchased after market corrected by more than 15%

29.7

13.2

3.2

0.0

If purchased after market rose by more than 10%

34.3

15.6

12.2

4.2

If purchased after market rose by more than 15%

35.4

16.9

12.3

4.7

Sensex returns taken since 1980

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ANALYST’S DIARY

Getting rid of debt Decreasing debt means improving profitability and stability

D

Having realised this, many companies proactively bring down their debt levels. Lower debt means less interest outgo and hence better profitability. The table mentions some companies that have cut their debt and increased their interestcoverage ratios in at least four of the last five years. It also means that the company’s operations are becoming strong enough to fund its growth and expansion. The Z-Score measures the probability of going bankrupt. It should be above three for a company to be called ‘safe’. As one can see, the companies in the table have high Z-scores, which indicates that decreasing debt has also contributed towards their stability. WI

ebt is a curious financial instrument. If used well, it can give boost to a company’s profitability. If misused (intentionally or unintentionally), it comes back to haunt the promoters and investors. History is full of examples when debt has gone out of control and companies have gone bust when they failed to meet their debt obligations. Aggressive managements justify taking enormous debt for acquisitions and expansion. But the high rate of failure of acquisitions suggests that such they fail to create shareholder value in the long run. But the high debt taken drags down the acquiring company for many years to come. Overall, it appears that debt creates more problems than it solves.

Cutting debt Market Company name

Sector

cap (` cr)

United Breweries

Alcohol

31,057

0,QGLD

'LYHUVLÀHG



Balkrishna Industries

Auto Ancillaries

Relaxo Footwears

FMCG

Sheela Foam

FMCG

Total debt (` cr) 2018

2017

2016

Debt to 2015

2014

equity

Interest Z-Score

cover (x)

312

594

806

836

1,232

0.1

15.4

13.8

















20,348

867

1,391

1,898

2,358

2,439

0.2

9.7

76.3

8,182

153

178

236

239

198

0.2

14.2

29.4

7,806

48

59

115

146

188

0.1

15.0

23.3 332.1

Finolex Cables

Electricals

7,136

1

1

51

127

147

0.0

17.1

KPR Mill

Textile

4,597

648

779

883

824

962

0.4

5.8

8.7

Galaxy Surfactants

FMCG

4,193

348

393

410

451

417

0.5

6.8

8.2

Suven Life Sciences

Healthcare

3,286

28

71

83

109

91

0.0

11.5

43.3

Dixon Technologies

Consumer Durables

2,745

45

47

77

80

94

0.1

6.3

7.6

Shriram Pistons

Capital Goods

2,600

179

226

289

310

381

0.2

5.5

13.8

Nocil

Chemicals

2,402

5

15

32

150

154

0.0

8.2

209.8

VRL Logistics

Logistics

2,388

81

185

262

443

505

0.1

12.9

12.6

Nilkamal

Plastic Products

2,369

93

83

105

209

324

0.1

7.5

12.6

Ahluwalia Contracts

Realty

1,976

30

90

142

173

239

0.0

7.6

8.0

Ramco Industries

Construction Materials

1,626

213

336

363

413

408

0.1

4.2

6.2

Seshasayee Paper

Paper

1,342

149

171

302

329

389

0.2

3.7

13.2

6XU\D5RVKQL

'LYHUVLÀHG



















Grauer & Weil

Chemicals

1,149

7

20

27

68

97

0.0

7.9

36.5

Action Construction

Capital Goods

1,078

78

114

124

138

150

0.2

5.6

6.5

HBL Power Systems

Auto Ancillaries

776

366

479

549

686

734

0.5

3.1

2.3

Century Enka

Textile

563

47

53

70

152

195

0.1

4.6

33.1

Deccan Cements

Construction Materials

529

36

70

79

191

239

0.1

4.2

11.4

Data as on October 12, 2018

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ANALYST’S DIARY

Dividend stars Here are some companies that have paid increasingly higher dividends in the last five years

D

increasing with time. As the profits of a company rise, it should also distribute more to its shareholders. Stagnant dividends don’t contribute meaningfully to wealth creation. The table below mentions some dividend stars – companies whose dividends per share and dividendpayout ratios have gone up in at least four of the last five years. The dividend-payout ratio tells us the per cent of profits distributed as dividends. WI

ividends have their own aura. While capital appreciation in stocks is what most investors crave for, nobody minds good dividends. Frequently, you will find someone who has held onto a stock for many years and now the dividends alone are more than the invested capital! Some investors believe that dividends are the only ‘real’ income from owning stocks as capital appreciation is not in their hand. But for dividends to turn magical, they should be

Shining bright Market Company name

Sector

Balmer Lawrie Inv.

Finance

Latest dividend

Dividend

cap (` cr)

2018

2017

Dividend/share (`) 2016

2015

2014

payout ratio (%)

yield (%)

872

24.0

17.0

12.5

12.5

12.0

99.3

6.1

12.2

Z-Score

Sonata Software

IT

3,393

10.5

9.0

9.0

7.0

3.8

56.6

3.3

Reliance Infrastructure

Power

8,638

9.5

9.5

8.5

8.0

7.5

18.7

2.9

0.2

Hindustan Zinc

Non - Ferrous Metals

1,17,358

8.0

29.4

27.8

4.4

3.5

36.4

2.9

13.6

Redington

Trading

3,536

2.4

4.3

2.1

1.9

0.9

19.9

2.7

4.0

Trident

Textile

2,940

1.5

1.5

0.9

0.6

0.3

28.3

2.6

2.0

'&06KULUDP

'LYHUVLÀHG



















Control Print

Consumer Durables

563

6.5

6.0

6.0

4.0

2.5

33.9

1.9

17.8

Skipper

Capital Goods

963

1.7

1.6

1.4

1.3

0.2

14.4

1.8

3.0

CRISIL*

Ratings

11,764

28.0

27.0

23.0

20.0

19.0

65.9

1.7

34.6

NBCC

Realty

9,639

0.8

0.8

1.0

0.6

0.5

42.4

1.6

2.2

Godrej Consumer

FMCG

73,131

15.0

15.0

5.8

5.5

5.3

62.5

1.4

8.4

Jamna Auto

Auto Ancillaries

2,853

0.9

0.7

0.6

0.2

0.1

27.0

1.2

8.9

Grauer & Weil

Chemicals

1,149

0.6

0.4

0.3

0.2

0.2

21.3

1.2

7.5

APL Apollo Tubes

Iron & Steel

Maruti Suzuki

Auto Ancillaries

2,960

14.0

12.0

10.0

6.0

5.0

21.0

1.1

4.7

2,20,006

80.0

75.0

35.0

25.0

12.0

30.7

1.1

10.4

Granules India

Healthcare

Alicon Castalloy

Auto Ancillaries

2,341

1.0

0.9

0.7

0.5

0.4

19.1

1.1

2.8

835

6.3

4.3

3.8

3.0

2.5

21.6

1.0

3.2

Igarashi Motors

Capital Goods

2,021

6.0

6.6

5.5

4.4

Sundaram Finance

Finance

15,075

12.0

11.5

11.0

10.5

3.0

27.7

0.9

13.3

10.0

18.7

0.9

Voltas

Consumer Durables

16,854

4.0

3.5

2.6

2.3

-

1.9

23.1

0.8

5.3

Lakshmi Machine Works Textile

6,324

40.0

35.0

40.0

Gujarat Gas

Trading

8,473

4.0

3.0

2.5

37.5

30.0

20.4

0.7

5.5

5.0

2.1

18.8

0.6

2.6

Berger Paints

Chemicals

27,611

1.8

1.8

1.7

1.3

1.1

37.9

0.6

8.6

Solar Industries

Chemicals

9,143

6.0

Dollar Industries

Textile

1,570

1.6

5.0

4.5

3.4

2.4

24.6

0.6

9.2

1.0

0.3

0.0

0.3

14.3

0.6

Dr. Lal Pathlabs

Healthcare

8,037

5.7

4.5

3.0

2.5

1.5

1.1

22.0

0.5

75.0

6FKDHIÁHU,QGLD 

$XWR$QFLOODULHV



















Advanced Enzyme

Healthcare

2,150

0.5

0.4

0.2

0.1

0.1

6.2

0.3

11.0

Data as on October 12, 2018. *Dividend data for 2017 to 2012. For explanation of the Z-Score, see the ‘Stock Screen’ section.

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VALUE GURU

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VALUE GURU

Withstanding market volatility the Warren Buffett Way Warren Buffett explains why market volatility is good for long-term investors

T

he market has caused a lot of heart pain in the recent days. Many emerging large caps have once again become mid caps and many mid caps have turned into small caps. In these tough days, it pays to heed the advice of the world’s best investor. Read about how Buffett thinks of markets and what he does in volatile times.

The stock doesn’t know you own it How often is it that a stock nosedives just after you have bought it or the markets start falling right after you buy a large position in a stock? This is the reality of investing. Stocks will go down after you purchase them and up after you sell. The trick is not to get too bothered about these fluctuations, rather accept them as inevitable. Says Buffett, “I have no idea where the market is going to go. I prefer it going down. But my preferences have nothing to do with it. The market knows nothing about my feelings. That is one of the first things you have to learn about a stock. You buy 100 shares of General Motors (GM). Now all of a sudden you have this feeling about GM. It goes down, you may be mad at it. You may say, ‘Well, if it just goes up for what I paid for it, my life will be wonderful again’. Or if it goes up, you may say how smart

you were and how you and GM have this love affair. You have got all these feelings. The stock doesn’t know you own it. The stock just sits there; it doesn’t care what you paid or the fact that you own it.”

Why you should root for a lower market? The fall in markets in the recent days has caused many heartburns. While it may have caused a dent in your portfolio, think about how prices have come down for many stocks. This is not to say that current prices are close to the fair value of stocks but that the frothy enthusiasm has been cut out. Many IPOs, for instance, that saw their stocks being oversubscribed many times over are now available much cheaper absent the enthusiasm around them. Many good-quality mid caps are now available reasonably cheaper today than they were in a long time. Here’s Buffett explaining why you should root for a lower market. “Practically anybody in this room is probably more likely to be a net buyer of stocks over the next ten years than they are a net seller, so everyone of you should prefer lower prices. If you are a net eater of hamburger over the next ten years, you want hamburger to go down unless you are a cattle producer. If you are going to be a buyer of Coca-Cola and you don’t November 2018 Wealth Insight 23

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VALUE GURU

“Charlie and I spend no time thinking about where the market’s going... There are always going to be some good and bad things happening. I’ve seen more people lose more money by getting focused too much on one factor. We’ve never bought something due to macroeconomic concerns.” own Coke stock, you hope the price of Coke goes down. You are looking for it to be on sale this weekend at your supermarket. You want it to be down on the weekends not up on the weekends when you tend the supermarket. The NYSE is one big supermarket of companies. And if you are going to be buying stocks, what you want to have happen? You want to have those stocks go down, way down; you will make better buys then. Later on twenty or thirty years from now when you are in a period when you are dis-saving, or when your heirs dis-save for you, then you may care about higher prices.”

Where does this come from? Buffett’s deep-rooted desire for a lower market is a lesson he learnt early in his career, picking it up from his teacher Benjamin Graham. Here he’s talking about what converted him to root for lower stock prices. “There is Chapter 8 in Graham’s Intelligent Investor about the attitude toward stock market fluctuations, that and Chapter 20 on the Margin of Safety are the two most important essays ever written on investing as far as I am concerned. Because when I read Chapter 8 when I was 19, I figured out what I just said was obvious, but I didn’t figure it out myself. It was explained to me. I probably would have gone another 100 years and still thought it was good when my stocks were going up. We want things to go down, but I have no idea what the stock market is going to do. I never do and I

never will. It is not something I think about at all. When it goes down, I look harder at what I might buy that day because I know there is more likely to be some merchandise there to use my money effectively in.”

You should not look for market forecasts Many investors search for the trend of the markets before buying or selling stocks. There are many ‘television gurus’ that profess to tell where the markets are likely to head. In reality, no market expert ever knows in which direction the markets will move. You would do much better if you ignore what these experts say. Here’s Buffett on these market experts. “People have always had this craving to have someone tell

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them the future. Long ago, kings would hire people to read sheep guts. There’s always been a market for people who pretend to know the future. Listening to today’s forecasters is just as crazy as when the king hired the guy to look at the sheep guts. It happens over and over and over.”

What you should do then? Heed Buffett’s advice on market movements, “Charlie and I haven’t the faintest idea where it goes next week, next month or next year. We are not in that business. It isn’t our game. We see thousands of companies priced every day. We ignore 99% of what we see. Every now and then, we find an attractive price for a business. When we buy it, we would be happy if the market was closed for a few years; you wouldn’t get a price quote daily if you owned a farm. We look at expected yield, cost of taxes. If you buy a farm, you would look at the cost of fertilizers, what a farm produces relative to the purchase price, price per acre, production per acre, etc. We make judgements.”

The last word Buffett says, “Charlie and I spend no time thinking about where the market’s going. We do know when we’re getting good value [when we’re buying a stock or business]. There are always going to be some good and bad things happening. I’ve seen more people lose more money by getting focused too much on one factor. We’ve never bought something due to macroeconomic concerns.” WI

V. BALASUBRAMANIAN

Chief Portfolio Strategist (Equity), Mahindra Mutual Fund

INTERVIEW

‘Investing should be like playing test cricket’ From the painstakingly tough reading sessions about listed companies in those voluminous BSE bulletins in the mid-90s to having instant information at few pushes on his phone today, V Balasubramanian has seen the Indian stock market evolve over the last four decades. But his passion for stocks has only grown. As Chief Portfolio Strategist (Equity) of Mahindra Mutual Fund, he brings to table simple, yet profound, investing lessons, with a dash of cricket that any retail investor can relate to. Ask him about expensive valuations of consumer stocks and he doesn’t mince words with the usual earnings-growth justification. Instead, Bala talks about how Chennai Super Kings took M S Dhoni. He was the costliest player at that time and he remains costliest. But look at the value he has generated, much more than what they expected, he argues. When we quiz him about long-term investing, Bala talks about test cricket, where it makes sense to stick around for five days. It doesn’t make sense to hit a six and get out on the next ball, he quips. Here is his full interview with Kumar Shankar Roy.

Tell us a bit about how you came to the stock market and portfolio management. When I was young I had only two passions. I loved sports and I liked mathematics and English as subjects in school. When I turned 20-22, I got passionate about the stock market. I didn’t know anything about it. No one in my family knew what the stock market was. They understood it as a gamble. Hence, the advice was not to get carried away by it. But I was fascinated by what was happening at the stock exchanges. As my office was close to the Madras Stock Exchange, I used to interact with the people there. I started my stockmarket journey in 1984, and ever since I have never looked back because I am very passionate about what I am doing.

Around 1984, there was no Internet. Information was not freely available. So, how did you go about doing research and analysis?

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INTERVIEW

It was difficult. Even till 1995, we used to go and get a BSE bulletin. It would have 26 alphabetical volumes that covered historical financial data. The only thing you could get was that and you knew that there is this company and this is the last year’s balance sheet. Beyond that, you didn’t know anything at all. There was no management discussion. Everything was by hearsay. And that time, there were some people who were privy to information. Slowly, things changed. The birth of NSE totally changed the dimension of the market. Then there was no looking back. And now we have become one of the most transparent markets.

So your early investments were in personal capacity. Until 1990, it was all personal investment. In 1990, I joined Indian Bank Mutual Fund and I was there till 2002. After that I had the opportunity to work in the Treasury of the bank before I joined IDBI Mutual Fund. I am now at Mahindra. The learning curve has been steep and quite long.

How was the learning curve in terms of the lessons that you drew from this journey? It’s a continuous process. Even today I am learning something. In the market, there are endless tricks, endless happenings. The best thing I have learned is how to learn from mistakes. One of my strengths is that I don’t repeat my mistakes.

So what are the things you do not do while managing your investments? Quite a few. Don’t look at your investments as stock-related; look at them as portfolio-related. That is the biggest thing I have learned. Earlier my focus used to be on an individual stock. Now it is the overall investment approach that matters.

For me, any investment is a long-term strategy. You invest money for the future. You do not invest money today for taking it out tomorrow. If you are in test cricket, it makes sense to stick around for five days. It doesn’t make sense to hit a six and get out on the next ball. Because then you lose five days and you have to sit in the dressing room and cannot do anything when others are playing. After you get out, there can be beautiful times you cannot make use of. Opportunities come often, but then the best thing to remember in investments is that you look for high-quality companies based on research. You look for growth as well as value. But beyond a point

the movement in boring stocks is super slow. But then the fall is also not substantial. But those are the stocks that generate superior wealth on a long-term basis.

Do you use growth parameters to select these boring stocks? It can be growth or value or at times a combination of both.

So, you don’t look at volatility. We look at the company. There are opportunities. You try to make use of the volatility and pick the right stock at the price you want. Sometimes the stock can be very good but it is very expensive. You may not be comfortable with the price. It is not just that you like a stock, so you make an investment.

“Opportunities come often, but then the best thing to remember in investments is that you look for high-quality companies based on research. You look for growth as well as value. But beyond a point value doesn’t make sense; it is relative. Patience in good-quality stocks creates wealth.” value doesn’t make sense; it is relative. Patience in good-quality stocks creates wealth.

Over the past 30 years, the market has risen significantly. Will it be the same in the next 30-40 years? I am confident that the market will grow. I never expected the Sensex to be at 38,000 in 1990. In a period of 28 years, it has grown by 38 times.

You often look for boring stocks. Why? I call a stock boring because it doesn’t move on a day-to-day basis as you would like. The movements are not orderly. It is possible that

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The entry price also matters a lot. If you pay a higher price, the waiting period becomes more. Probably your assumptions come right but your rate of return may not match your expectations.

How do you assess the management? When you assess the management, it need not only be larger groups. Small caps can also have superior management quality. A company that has displayed superior corporate governance for a long time is definitely worth watching.

Is entering cyclical companies at the right time also important?

INTERVIEW management of a company. So as a caretaker of people’s money, how do you approach such a situation?

Definitely, but you will have to be spot on there. You have to be there at the early stages of the cycle to reap its full benefit.

We just look at the management quality. Who comes there, who is the successor? Look at the processes, the way they structure their businesses, internal processes, how they manage their people, how they manage their money, how they manage opportunities or a lack of them. These determine the company’s success as they become the company’s culture.

If a stock drops by 30 pert cent in one day, what do you do? If the stock falls because there is a serious issue, you will have to revisit your assumptions and your model. There can be opportunities in that fall also but you have to do your homework again. The power of a good company lies in cashing in on the opportunities that the market or economy throws. Panic may provide you opportunities but one should weigh that properly. If the reason for the fall appears to be impacting only the short-term prospects of a company, I may look for entry point.

Do you like to stay close to the benchmark? Staying close to the benchmark will at best give you benchmarklike returns. There are chances it may not give you those also. If you stay close to the benchmark, the best return you can get is the benchmark return minus expenses. This is as good as investing in an ETF or an index fund. So there is no point in tracking a benchmark. We do look at the benchmark very closely; it’s not that we ignore it. But the skill lies in beating the benchmark. The focus should be on how to beat the market. If the benchmark indices have 200 stocks, then you cannot buy all 200 stocks. So at no point I limit myself to the benchmark.

What is your view on the expensive valuations of consumption-related stocks? Let me give you an example. Look at the way Chennai Super Kings took Dhoni. He was the costliest player at that time and he still remains costliest. But look at the value he has generated, which is

“If you stay close to the benchmark, the best return you can get is the benchmark return minus expenses. This is as good as investing in an ETF or an index fund.” much more than what they had expected. Quality is always pricey. If the fundamentals are good and if the company has a good corporategovernance history, one may have to pay a slightly higher price for that. Quality companies generally fare well in a falling market because of their ability to show superior financial performance in tough times also. Historically, these companies have always traded at a premium.

When you analyse such a stock, do you ascribe a price for the management? Definitely. You fix a price for the quality of the management.

Sometimes there is a tussle between the promoters and the executive

There is a lot of performance pressure. How do you keep yourself cool? I don’t look at other’s performance. As long as we are giving more than benchmark returns, we are competitive. If your underlying thesis is right, then I am sure that performance will come. Maybe the waiting period will be more but the returns eventually arrive.

In terms of portfolio construction, how do you decide on stock weights? Weight is the biggest differentiator in terms of return. Generally, I do not have a structure that a few stocks are given very high weights. I try to avoid huge differences in weights among stocks.

Do you monitor portfolio on a day-today basis? Yes, we do monitor our portfolios daily. There will always be cases of imbalances because the market is so dynamic. But then we are not in a hurry. We try to correct when the flows happen.

During bullish periods, when so much money is coming in, doesn’t it get scary? Doesn’t it cause an imbalance? Yes, it may cause an imbalance. The allocation approach will be different during these times. We should be ready for such phases. WI November 2018 Wealth Insight 27

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COVER STORY

QUALITY STOCKS AVAILABLE CHEAP 28 Wealth Insight November 2018 Subscription copy of [[email protected]]. Redistribution prohibited.

COVER STORY

A

fter years of going just up, the market’s crash landing this year has caused much pain for investors. The fall has been so broad-based that there have been few hiding places. The Nifty 500 index is down close to 10 per cent. The fall in mid caps and small caps has been more pronounced. The Nifty Midcap Index is down 23 per cent while the Smallcap index is down 35 per cent. The good news is that when markets go down and stocks become cheaper, you get more bang for your buck. If you go about buying in the market today, you are likely to find more stocks for your investable amount. Lower markets also throw up many highquality stocks that become more rationally valued than they were in a long time. In this issue of Wealth Insight, we present a list of quality stocks that are available cheap today. In order to arrive at this list, we searched for companies that have lost at least 20 per cent of their market value since the Budget and among them, stocks that are trading lower than their five-year median P/E ratios. Other filters that we applied include the following: z Net profit should have increased by at least 8 per cent annually in the last five years, in line with the rate of inflation (of 8 per cent). z Profits in each of the last five years z Return on equity of at least 15 per cent in four out of five years z Current P/E should be lower than the five-year median P/E z Z-Score more than three, F-Score equal to or more than six and C-Score less than four (for non-banking financial companies, Z-Score, F-Score and C-Score are not applicable) The table on the next page lists the stocks that cleared these filters. The following pages feature select stocks from the ones that cleared the filters. Please note that the stocks mentioned in this cover story aren’t our recommendations. Research them thoroughly before investing in them.

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COVER STORY

Opportunities amidst the fall Market cap (` cr)

5Y profit growth (%, CAGR)

5Y median ROE (%)

TTM P/E

5Y median P/E

Z-Score

F-Score

C-Score

Ret. since Budget (%)

5Y CAGR (%)

65,225

18.4

23.5

18.1

21.4

6.5

7

1

-26.8

15.8

5,079

72.8

46.4

13.2

17.3

13.6

7

3

-49.5

95.9

25,817

20.2

18.9

33.7

37.0

4.8

7

1

-22.6

33.2

Finance

3,182

41.0

19.0

10.3

20.5

–

–

–

-46.9

56.8

Const. Materials

3,771

23.6

31.1

22.5

27.8

5.1

6

2

-47.2

43.9

11,075

8.9

17.3

16.3

20.3

3.2

6

1

-31.5

11.1

Company name

Sector

Adani Ports

Logistics

Avanti Feeds

FMCG

Bharat Forge

Auto Ancillaries

Can Fin Homes Century Plyboards

Coromandel International Chemicals DFM Foods

FMCG

1,127

29.9

25.2

43.9

62.6

6.7

8

2

-31.9

47.8

GIC Housing Finance

Finance

1,264

16.7

17.9

6.5

11.1

–

–

–

-44.7

17.6

Grauer & Weil

Chemicals

1,085

26.3

18.0

16.1

16.4

7.4

8

1

-28.2

62.4

Hero MotoCorp

Automobiles

57,598

11.6

37.5

15.6

20.5

9.0

7

2

-22.2

6.8

IIFL Holdings

Finance

13,233

33.0

20.4

13.5

14.1

–

–

–

-43.2

54.0

Indiabulls Housing

Finance

38,232

24.8

29.1

9.3

12.6

–

–

–

-36.0

33.2

Interglobe Aviation*

Aviation

29,338

23.3

68.0

20.1

20.1

6.6

8

2

-37.2

-

JM Financial

Finance

6,331

37.2

17.3

9.8

13.0

–

–

–

-54.1

25.1

LIC Housing

Finance

20,742

13.8

18.7

9.9

14.9

–

–

–

-23.1

16.6

Mahanagar Gas

Gas Transmission

7,798

9.9

22.3

16.2

19.7

7.8

8

0

-22.7

-

Maithan Alloys

Ferro Manganese

1,508

46.0

22.0

5.1

6.7

6.9

8

1

-42.0

76.6

Mayur Uniquoters

Miscellaneous

1,630

17.3

23.2

17.3

24.0

11.0

7

1

-27.1

23.3

Minda Corporation*

Auto Ancillaries

2,723

91.7

20.5

17.4

22.5

3.5

6

0

-40.1

17.1

Repco Home Finance*

Finance

2,303

20.8

16.5

10.4

24.9

–

–

–

-41.3

5.4

Suprajit Engineering

Auto Ancillaries

3,166

24.1

23.4

21.9

32.4

5.6

6

1

-24.5

46.1

Supreme Industries

Plastic Products

12,569

8.1

25.0

25.7

30.1

10.9

6

2

-24.5

22.0

Swaraj Engines

Auto Ancillaries

1,694

7.7

25.2

20.7

24.7

13.2

7

2

-29.1

25.5

Vesuvius India

Capital Goods

2,133

11.1

15.7

23.6

24.5

8.8

6

1

-24.7

24.4

Yes Bank

Bank

55,861

26.6

19.9

12.4

17.4

–

–

–

-32.2

28.6

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COVER STORY ADANI PORTS

Game of margins Returns since Budget (%)

-26.8

5-year CAGR (%)

15.8

Copyright© 2012 Adani Group

Adani Ports is the country’s leading port operator, with 10 ports and terminals under operations that account for 24 per cent of India’s total port capacity. Some of its marquee ports include Dahej, Mundra, Hazira and Visakhapatnam.

The major part of Adani’s stock hit this year can be traced to the company’s tepid June 2018 quarter results, where it reported a decline in consolidated net profit by 9 per cent. It also reported an 8.6 per cent hit on the top line. Cargo volumes were up 9 per cent in the quarter. Higher capacity utilisation, mechanisation and automation led to operating-margin expansion. The company has guided that margins are likely to expand ahead. The correction in the stock hit the price by a fifth. At 18 times earnings, Adani now trades at lower than its five-year median valuation of 21 times. AVANTI FEEDS

Profiting from aqua culture Returns since Budget (%)

-49.5

5-year CAGR (%)

95.9

Avanti Feeds is a leader in shrimp-feed market, with a domestic market share of 43

per cent. In 2002, it entered into a technical collaboration with the Thai Union, which is the world’s largest seafood manufacturer, processor and exporter. Shrimp-feed manufacturing contributed 83 per cent to Avanti’s total revenues in FY18, while 17 per cent of its revenue came from the shrimp-processing segment. The recent fall in its stock price was a result of a slowdown in shrimp demand in the US, leading to a downward pressure on prices in international and domestic markets. Due to the US– China trade war, along with Christmas around the corner, the demand for shrimp from India is expected to increase. The recent budget push by the government of `10,000 crore to the aquaculture sector and the company’s plans to enter into the fish-feed segment provide it with reasonable growth opportunities. Even after a significant fall of around 50 per cent since Budget, Avanti has compounded shareholder wealth at a rate of 96 per cent per annum during the last five years. BHARAT FORGE

Not just about forging Returns since Budget (%)

-22.6

5-year CAGR (%)

33.2

Bharat Forge is best known for its automotive forgings – chassis, crankshafts, axle beams and connecting rods, among many other components. A little lesserknown fact is that the company is present in oil and gas, wind power, mining, construction, railways and aerospace-equipment verticals. Even lesser-known fact about it is that it also manufactures components for tanks and fighter jets. The stock has been a market favourite for most of this year. The market expected higher earnings growth on account of increased demand of heavy-duty Class 8 trucks in the US. Expectations of higher earnings have made the stock trade at a premium median valuation of 40x in the last one year – one of the highest in the automotive-component space.

The stock also hit a bump on news of a slowdown in demand for the Class 8 trucks in the US. Orders slipped to 42,800 units in September this year after the company registered orders of more than 50,000 units both in July and August. The bump notwithstanding, the mediumterm demand for the trucks is positive and is expected to positively impact earnings. The company, in the meantime, has increased the share of non-

Bharat Forge is even present in oil and gas, wind power, mining, construction, railways and aerospace-equipment verticals November 2018 Wealth Insight 31 Subscription copy of [[email protected]]. Redistribution prohibited.

COVER STORY

automotive revenues to total revenues with the benefit of de-risking itself from the automotive space. CAN FIN HOMES

A roof over head Returns since Budget (%)

-46.9

5-year CAGR (%)

56.8

Promoted by Canara Bank in 1987, Can Fin Homes is a housingfinance company which operates through a network of 152 branches and 21 affordable-housing loan centres. Its has recognised affordable housing as its key focus area, which is also reflected in its average ticket size of `18 lakh (lower income-group loans). As of June 30, 2018, it had a loan book of `16,000 crore, with a customer base of 1.3 lakh. Home loans constitute 90 per cent of its loan book. It also offers loan against property, builder loans and staff loans. At 7.7 per cent, the company enjoys cost of funds lower than most of its peers. It procures 52 per cent of its funding requirements from the market, which may temporarily increase its cost of funds due to the ongoing liquidity crunch. Recently, it has fallen more than most of its peers, which can be attributed to higher exposure to market borrowings. Seventy-two per cent of its loan book is

exposed to South India. The company also has one of the lowest NPAs, at 0.44 per cent, which is a by-product of its conservative lending policies and higher share of salaried professionals (73 per cent) and lower loan-to-value ratios in case of loan against property. As of June 30, 2018, it had a capital-adequacy ratio of 18.7 per cent, which is well above the regulatory requirement of 12 per cent. The company has compounded shareholder wealth by 58 per cent annually in the last five years. CENTURY PLYWOOD

The plywood centurion Returns since Budget (%)

-47.2

5-year CAGR (%)

43.9

Century Plywood is one of the most prominent companies in the plywood sector. It recently entered into the MDF (medium-density fiberboard) segment, which is gradually gaining traction. Century is one of the largest players in the organised market, accounting for almost 25 per cent of the market. Lately, the company has faced a tough time in most of its segments. Plywood, which contributes around 66 per cent of the company’s revenues, is suffering from a lower realisation due to sale of low-grade products. Laminates, which contribute 21 per cent of its revenues, have witnessed a steep increase in prices of raw materials, translating into lower margins. MDF, which is a newly incorporated segment, contributes 5 per cent to the company’s revenues and is facing excess capacity in the market due to intense competition, leading to price cuts. Currently, the company

is trying to gain market share at the cost of margins, the fruits of which will be reaped in future. All these factors sent its stock southwards by around 47 per cent since Budget. The benefits from the implementation of GST and e-way bill have yet to be realised, while the demand for housing, a recognised name and newly incorporated MDF division provide it with a room for growth. The stock has not made any wealth for its investors in the last three years. Still it has compounded investor wealth by 44 per cent in the last five years. COROMANDEL INTERNATIONAL

Green shoots Returns since Budget (%)

-31.5

5-year CAGR (%)

Coromandel International is a Murugappa group company, manufacturing farm nutrients and crop-protection products. It has 16 per cent share in phosphatic fertilisers and is the market leader in Andhra Pradesh and Telangana. The company’s key markets include Andhra Pradesh, Telangana, Maharashtra, Karnataka, West Bengal and Odisha. Monsoon rains and acreage in these regions impact 93 per cent of Coromandel’s NPK (nitrogen, phosphorus and potassium) fertiliser volumes and

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11.1

COVER STORY

While many of us may not have heard about DFM foods, most of us are aware of Crax and Natkhat snacks manufactured by the company. DFM foods has been manufacturing Crax since 1984. 73 per cent of its overall volumes. In a positive for the company, overall acreage (area under cultivation) has increased in its markets. It has increased 5 per cent in Telangana, 7 per cent in Karnataka and 11 per cent in West Bengal, while falling 2 per cent in Maharashtra and 1 per cent in Andhra Pradesh. Acreage of soybean is up 6 per cent, paddy up 2 per cent and sugarcane up 4 per cent. This is good news for the company as these three crops are high fertiliser-consuming crops.

Coromandel is down by a third from its year highs this year. Valuations at 16.67x are close to its yearly lows and below its five-year median of 20 times. DFM FOODS

The CraX factor Returns since Budget (%)

-31.9

5-year CAGR (%)

47.8

While many of us may not have heard about DFM foods, most of us are aware of Crax and Natkhat snacks manufactured by the company. DFM foods has been manufacturing Crax since 1984. It also sells cheese balls, various types of mixtures and potato sticks (Fritts). The company’s negative working-capital cycle is a by-product of its 100 per cent

advance policy. The `5 and `10 packs account for around 90 per cent of its sales. Crax accounts for more than 63 per cent of its total revenue and its overdependence on Crax is a potential risk. Many children buy Crax for the surprise toy inside it, which also accounts for a large portion of its rawmaterial costs. The recent rise in crude-oil prices has increased its packaging cost, while depreciation in the rupee has also increased the cost of importing toys and machines. The company’s operations are heavily concentrated in North India, which accounts for 75 per cent of its revenue. The company is trying to diversify into other regions at lower margins, which may depress its profits in the future. All these concerns have led DFM’s stock price to fall by 32 per cent since Budget. Still the company has compounded shareholder wealth at a rate of 48 per cent per annum in the last five years. Further capacity expansion, small size and untapped geographies provide the company ample growth opportunities. HERO MOTOCORP

Poised for a heroic comeback Returns since Budget (%)

-22.2

5-year CAGR (%)

6.8

Hero MotoCorp is the country’s largest motorcycle manufacturer. It sells two out of every three motorcycles in the up to 110 cc segment. The stock has lost a fifth of its market value since the Budget. Announcement by the arch-rival Bajaj Auto that it is looking once again at the 110 cc segment has put the stock price under pressure. Rising input costs are another concern. The mandatory third-party insurance also adds to the cost. The announcement by Bajaj comes at a time when Hero has not been successful to make inroads in either the premium segment or scooters. Competitors like Bajaj and TVS have flourishing business in the premium segment while erstwhile partner Honda has captured the scooter market.

Hero is looking to add to its premium segment with as many as four new launches in the next couple of quarters. A big positive for the company as it looks to expand its premium segment is the strong volume growth in the 110 cc segment in the recent months. September 2018 saw its highest-ever sales of motorcycles in a month and highest-ever halfyearly sales. The price correction in the meantime has resulted in Hero trading at close to its fiveNovember 2018 Wealth Insight 33

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COVER STORY year low P/E band, making it an attractive large-cap stock at current valuations. INDIABULLS HOUSING FINANCE

Bear attack Returns since Budget (%)

-36.0

5-year CAGR (%)

33.2

Indiabulls Housing is the secondlargest housing-finance company in India by market cap, with a total loan book of `1.26 lakh crore as of June ’18. It mainly caters to middle-class population and has an average ticket size of around `24 lakh. Seventy-nine per cent of its total loan book consists of retail mortgage loans, while the remaining 21 per cent comprises corporate-mortgage loans. The company reported a 21 per cent jump in net profit in the September 2018 quarter over the previous year, driven by strong loan-book growth of 29 per cent, to `1,28,900 crore. Spreads at 3.24 per cent were in its guided range. The liquidity concerns affecting the sector as a whole are not an issue with IBHF as the company maintains around 12–15 per cent of its balance sheet in liquid assets. According to the company, cash and liquid investments to the tune of `21,250 crore, consisting of high-quality mutual fund units and government securities, can be liquidated in seven days if needed. The company has guided loan

book growth of 20–25 per cent in the medium term. In the last one year, IBHF has traded at a median P/B of 3.8x and has even commanded peak valuations of 4.6x. After the meltdown in the sector, it now trades at a P/B of 2.2x. INTERGLOBE AVIATION

The high-flyer Returns since Budget (%)

-37.2

5-year CAGR (%)

-

The country’s largest airline has been in a bumpy ride for some time. Higher crude price, up more than 45 per cent in the last one year, and a depreciating rupee, down 13.5 per cent in the last one year, has pummelled the stock this year. The recent trend of flash sales of tickets by incumbents has kept the realisations in check.

Lower ticket prices mean lower profits. Even though Interglobe is the largest operator in the industry, it has little choice but to follow other airlines in announcing ticket sales. The combined effect of higher fuel costs and lower ticket prices saw Interglobe’s net profit nosedive 97 per cent in Q1 this year. With the operating environment not changed much, the September 2018 quarter numbers could remain depressed as well. The silver lining about Interglobe is that it is the most efficient airline in the country. It is

likely to be the last man standing when all other airlines go into red. The prospect of losses should stabilise ticket prices at some time. If the ongoing troubles at the competitor Jet result in winding up of the cash-starved airline, Interglobe will be one of the biggest beneficiaries. Interglobe’s upcoming long-distance international operations, expected to be low-cost as well, should see the company make gains. JM FINANCIAL

Just another challenge Returns since Budget (%)

-54.1

5-year CAGR (%)

25.1

Incorporated in 1973, JM Financial is a holding company operating in multiple businesses, which include lending, investment banking, broking, wealth management, asset management and asset reconstruction. Its prime segment is its lending business, which contributes 70 per cent and 68 per cent to its revenues and profits, respectively. The lending business constitutes real-estate developer loans, home loans and corporate loans, which include workingcapital loans, loans to promoters against securities and short-term bridge loans to acquire companies. Real-estate developer loans constitute 67 per cent of the company’s `16,500 crore loan book

If the ongoing troubles at Jet result in winding up of the cash-starved airline, Interglobe will be one of the biggest beneficiaries 34 Wealth Insight November 2018 Subscription copy of [[email protected]]. Redistribution prohibited.

COVER STORY

All of Maithan Alloys’ domestic clients have been its customers for more then seven years, which indicates long-term relationships and customer stickiness as of June ’18. These loans have an average tenure of around threefour years, while the company’s corporate-lending loans are shortduration loans, ranging from 1.5 to two years. In comparison to the slightly long-term nature of its assets (loans given), the company’s borrowings are of short-term nature. Thirty-three per cent of its borrowings are from commercial paper, which is a short-duration borrowing instrument with a maturity of maximum nine months. This may create problem for the company due to the ongoing liquidity crunch in the market. Its other businesses are also cyclical in nature and may suffer if market conditions worsen. The company has high net interest margin of 6.1 per cent, return on assets of more than 4.5 per cent, NPA of 0.5 per cent, and capital adequacy of more than 20 per cent. Its long track record of more than 40 years is a proof of its ability to survive downturns. Even after a recent fall of 54 per cent, the company has compounded its investor wealth at 25 per cent annually over the last five years. LIC HOUSING FINANCE

Business problems Returns since Budget (%)

-23.1

5-year CAGR (%)

16.6

Promoted by Life Insurance Corporation, LIC Housing was incorporated in 1989. It mainly caters to middle-class population, with 87 per cent of its customers being salaried. Its loan ticket size is around `23 lakh, with a loan book of `1.69 lakh crore as of June ’18. Seventy-nine per cent of its total loan book consists of housing

cent in Q1FY19 to less than 1 per cent in the coming quarters. MAITHAN ALLOYS

The manganese master Returns since Budget (%)

loans; 16 per cent consists of loan against property and other noncore loans; developer loans comprise 5 per cent. Concerns over the rising share of non-core loans, declining spreads and high valuations, along with the volatility in its sector has seen LIC Housing’s stock lose close to a fourth of its value since the Budget. While core home-loan growth has remained at 10 per cent (YoY), the share of non-core products has steadily increased over the last many quarters, going up from 16 per cent in FY17 to 21 per cent in Q1FY19. The company has witnessed a fall in spreads from 1.95 per cent in the last quarter of FY17 to 1.31 per cent in the first quarter of this year. Current spreads are close to their historical lows of 1.1 per cent. Net interest margin in the last quarter (Q1FY19) was down 15 basis points to around 2.34 per cent. The company hiked its prime lending rate in August this year, which should help margins in the next quarter. This sluggishness in core loans and falling spreads has in turn resulted in falling valuations. Its current P/B of 1.65x is now significantly lower than its five-year median of 2.6x. The management has guided 15 per cent growth in home loans this year and aims to reduce NPAs from 1.21 per

-42.0

5-year CAGR (%)

76.6

Maithan Alloys started its commercial production in 1997. It is the lowest-cost and largest manganese-alloy manufacturer in India. It manufactures and exports ferromanganese, silicomanganese, ferrosilicon, etc. Its products are primarily used in steel manufacturing. For instance, 10–15 kg of ferro-alloys are required for producing a tonne of steel. Its domestic and international business both constitute around 50 per cent to its revenues. Its domestic customer base includes reputed clients like SAIL, JSW, JSPL and Jindal Stainless. All its domestic clients have been its customers for more then seven years, which indicates long-term relationships and customer stickiness. The recent developments on trade war, strong dollar and rising crude prices have led to renewed concerns of a global growth slowdown, which may lead to reduced demand for steel and its products. The recent-quarter numbers also witnessed a flat

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COVER STORY growth of just 6 per cent in revenues in comparison to the previous year, which was well below its annual revenue growth of 40 per cent in FY18. Also, the company currently operates at 95 per cent capacity, which may constrain its ability to meet additional demand in the short term. However, it is planning to increase its capacity to 1.5 times by FY21 and two times by FY22, which will be entirely funded by internal accruals. Its high dependence on the steel sector is a potential risk factor. Even after the recent fall of 42 per cent, Maithan has created serious wealth for its shareholders, compounding it at a rate of 76 per cent in the last five years. REPCO HOME FINANCE

Doing it differently Returns since Budget (%)

-41.3

5-year CAGR (%)

5.4

Incorporated in 2000, Repco Home finance is a housing-finance company, with a niche focus on twoand three-tier cities. It is mainly present in areas where formal sources of lending are minimal, so it faces minimal competition from mainstream banks. The company mainly provides loans to self-employed individuals. Such loans account for more than 57 per cent of its total loan book. Unlike its peers, which provide loans for purchasing residential property, around 45 per cent of Repco’s loans are given for selfconstruction of homes. As of June 30, the company had a total loan book of `10,074 crores (82 per cent home loans and 18 per cent loans against property). Currently, it is diversifying away from loan against property and lowering its ticket size for non-housing loans due to increasing NPAs in this

segment. Its net NPAs of 2.4 per cent are amongst the highest, while its provision-coverage ratio of 40 per cent is one of the lowest when compared to its peers. Repco is highly concentrated in South India, which accounts for more than 87 per cent of its loan book. Tamil Nadu alone accounts for 59 per cent of its loan book. Its lowticket size of `14 lakh also reflects its niche focus on small households. The company has one of the highest net interest margins of 4.7 per cent, which is a by-product of lending to lower income segments. In the past one year, its business in Tamil Nadu suffered due to Supreme Court ban on unapproved properties and high sand prices. The situation now has started to normalise and will help it to regain its growth momentum. Further, diversification in nonSouth regions and a low base still provide the company significant growth opportunities. It is not highly dependent on market borrowings, which account for around 20 per cent of its funding requirement. It also had a capital adequacy of 23 per cent as of June 18, which provides it with an ability to sustain through the ongoing liquidity crunch. SUPREME INDUSTRIES

Supreme by nature Returns since Budget (%)

-24.5

5-year CAGR (%)

22.0

Supreme Industries is a plastic-

products manufacturer that makes household plastic products like tables, chairs, packaging films and industrial-use products like PVC pipes and storage and material handling crates. Its handling volumes of over 3.2 lakh tonne make it the country’s largest plastic processor. Supreme’s industrial and consumer divisions have been driving growth for the company, growing by 37 per cent and 24 per cent, respectively (June 2018 quarter). These verticals also reported the highest growth in segment profits. Supreme has reduced its volume guidance for FY19 from the earlier 12–15 per cent to 10–12 per cent.

Supreme has been a stock-market favourite for some time. In the last one year alone, the stock has traded at a median valuation of 37 times earnings and even peak valuations of 47 times. The correction in the market has seen Supreme lose onethird from its peak price this year. Valuations too have cooled down to 25 times earnings. SWARAJ ENGINES

Powering M&M Returns since Budget (%)

-29.1

5-year CAGR (%)

25.5

Swaraj Engines, known for its diesel engines, was originally promoted by Punjab Tractors and Kirloskar Oil Engines in 1985. Later, in 2007, Punjab Tractors was acquired by

Repco mainly provides loans to self-employed individuals. Such loans account for more than 57 per cent of its total loan book. 36 Wealth Insight November 2018 Subscription copy of [[email protected]]. Redistribution prohibited.

COVER STORY

Rana Kapoor has long been credited as the man behind the success of Yes Bank. His aggressive management style has been behind Yes Bank’s growth in the recent years

Mahindra and Mahindra (M&M). Currently, Swaraj is jointly promoted by M&M (33.3 per cent stake) and Kirloskar Industries (17.4 per cent stake). Since 2007, it has witnessed a dramatic turnaround in its operations, increasing its market share from 9 per cent in 2007 to 17 per cent in 2017. M&M is also the largest tractor manufacturer, with market share of around 43 per cent in tractors. Swaraj caters to around 80 per cent of M&M Swaraj brand tractors. It has recently suffered a decline of 60 basis points (0.6 per cent) in its operating margin due to higher cost of inputs. Further, more than 9 per cent deficit in monsoon and an expected fall in volume growth to lower double digits collectively have lead to its stock price fall by 29 per cent since the Budget. But its strong branding, market positioning, negative working-capital cycle and plans for capacity expansion make it a promising case. Even after the recent fall, Swaraj’s stock has compounded shareholder wealth at a rate of 24 per cent in the last five years. VESUVIUS INDIA

Steely fundamentals Returns since Budget (%)

-24.7

5-year CAGR (%)

24.4

Incorporated in 1991, Vesuvius India is a subsidiary of Vesuvius UK, which is the world leader in molten metal-flow engineering. Vesuvius India is a manufacturer and trader of refractories, with around 50 per cent market share in the steelrefractory segment (refractory is a material primarily used in moulding or shaping steel and can resist very high temperatures). The company has zero debt on its balance sheet, with its cash accounting for around 16 per cent of its market cap. Its performance is directly related to the growth of the steel industry, which makes the company cyclical in nature. Steel companies are also going through a rough phase, with three

of Vesuvius’ clients already facing insolvency proceedings. The recent correction of 25 per cent in stock price is the result of the slowdown seen in the steel industry, leading to a fall of close to 7 per cent both in its trailing 12-month revenue and profits. Still the company has managed to compound its shareholder wealth at a yearly rate of 24 per cent during the last five years.

YES BANK

Hit by RBI’s no Returns since Budget (%)

-32.2

5-year CAGR (%)

28.6

Yes Bank’s woes started in the later part of this year when the RBI found that it had underreported NPAs to the tune of `10,532 crore for FY16 and FY17. This was followed by the RBI’s marching orders for Rana Kapoor, CEO and co-founder. It cut his tenure to January 31, 2019, much earlier than the three-year extension Kapoor got from shareholders in June this year. Rana Kapoor has long been credited as the man behind the success of Yes Bank. His aggressive management style has been behind the bank’s growth in the recent years. The bank’s future is now clouded with uncertainty. There’s regular infighting between co-founder groups. Will its accounting come under the scanner? Who will be held for the under-reporting of NPAs? Yes Bank is likely to announce Rana’s successor by December 15 and will forward its choice to the RBI for approval. Given the current uncertainties, the stock could remain under pressure. WI November 2018 Wealth Insight 37

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MAIN STREET

The hero delusion Considering one person to be the sole cause of events, good or bad, is a mistake

SAURABH MUKHERJEA

Over the past decade, psychologists

In the 1970s, India was awful at one-day internationals (ODIs). Then, in the early 1980s, we have used neural imaging to show that the human started improving and won the World Cup in 1983. brain has to work hard even to make simple decisions After that, the steady trend of improvement in our such as choosing between various flavours of ice win–loss ratio in ODIs continued. In fact, the cream. Furthermore, even whilst making such improvement continues to this day. straightforward decisions, the brain does not make Along the way, we have had several successful the same decision when faced with the same choice in captains. In spite of these leaders having had several identical circumstances! Thankfully, evolution has high points in their career and in spite of the given us a method to reduce all this hassle – heuristics underlying 40-year win–loss trend being or mental thumb rules or shortcuts positive, each of these leaders went which help us simplify complex We have an through phases where they were seen decisions into simple ones. For instance, emotional need as less than ideal. During these phases, faced with two equally well-qualified applicants for a role, our thumb rule to dramatise and they were slammed for all sorts of reasons – loss of form, advancing age, will tell us to hire the person with work personalise a decadent lifestyles, etc. Our success is a experience in more demanding roles. trend that is, in combination of many factors that have The very fact that we survive suggests shaped the sport over the years – from that most of these thumb rules work reality, our coaching facilities to the fitness more often than not. They help us underpinned by regime and the diet of our players, a simplify complex decisions and thus steady, larger role for technology and, finally, save our mental firepower for decisions the financial package of the players. more critical than choosing between institutional There is no way that India could have flavours of ice cream. However, improvements produced a player as fit as Virat Kohli sometimes these thumb rules let us in the 1970s. In the India that we grew down and we land in hot water. up in, enabling facilities like highquality gyms didn’t even exist outside of five-star Hero worship is a dangerous mental shortcut hotels. Kohli is part of the same structural time trend In a diverse country like India where most institutions that has given us a wonderful Under-19 World Cup are weak, where the rule of law is enforced unevenly winning team, with players who are streets ahead of and where trust between economic agents tends to be the age-group opposition. low, we have a strong tendency towards hero worship. However, it is hard to enjoy a narrative around a In fact, there is an obsession in the Indian media structural time trend. We need the glory and glamour about the heroic Indian cricket captain. A Martian of a dashing leader either leading us to victory or reading the Indian press would believe that Indian cruelly betraying our trust. We have an emotional cricket’s success at any point in time hinges largely on need to dramatise and personalise a trend that is, in the abilities (or lack thereof) of the cricket captain. 38 Wealth Insight November 2018 Subscription copy of [[email protected]]. Redistribution prohibited.

MAIN STREET

reality, underpinned by institutional improvements.

Investment implications

steady,

We gravitate towards companies where the promoter/CEO is a clean, capable and hard-working – a god-like figure who delivers outstanding results

Some of us tend to use ‘hero worship’ as a framework for thinking about business, i.e., we gravitate towards companies where the promoter/CEO is a clean, capable and hard-working – basically, a god-like figure who delivers outstanding results. Phil Rosenzweig of IMD has shredded this thought framework into little pieces. Rosenzweig worked at HP for seven years before teaching at Harvard first and then at IMD. As he highlights in The McKinsey Quarterly (2007, number 1): How does the halo effect manifest itself in the business world? Imagine a company that is doing well, with rising sales, high profits, and a sharply increasing stock price. The tendency is to infer that the company has a sound strategy, a visionary leader, motivated employees, an excellent customer orientation, a vibrant culture and so on. But when the same company suffers a decline – if sales fall and profits shrink – many people are quick to conclude that the company’s strategy went wrong, its people became

complacent, it neglected its customers, its culture became stodgy and more. In fact, these things may not have changed much, if at all. Rather, company performance, good or bad, creates an overall impression – a halo – that shapes how we perceive its strategy, leaders, employees, culture, and other elements. And then there are some investors who extend this framework to politics, i.e., they look for a leader who can lead the nation to greater glory. They will point you towards a ‘before and after’ time trend, i.e., before the hero arrived our shirts were off-white and then thanks to the hero’s cleansing effect, our shirts became dazzling white. Rather than arguing with the believers, I prefer to tune into a Tina Turner hit from Mad Max: Beyond Thunderdome (1985): We don’t need another hero, We don’t need to know the way home, All we want is life beyond the Thunderdome, Looking for something we can rely on, There’s got to be something better out there. WI Saurabh Mukherjea is the co-author of Coffee Can Investing and the founder of Marcellus Investment Managers.

November 2018 Wealth Insight 39 Subscription copy of [[email protected]]. Redistribution prohibited.

OFFBEAT

Dealing with the ‘crisis’ While the RBI’s response to the recent rupee depreciation is surprising to many, it’s the consumer behaviour that needs change

SANJEEV PANDIYA

Normally, an interest-rate hike is a

approaching about 40–45 per cent uptick and threatening to go up to 70 per cent at the peak of $100. And India big negative for equity markets, so why did the markets loses $1.2 billion for every dollar that oil go ups – that’s react so surprisingly to the RBI’s (surprising) refusal to $18 billion extra per annum over the last year’s outgo. raise interest rates? But let’s start at the beginning. This has pushed up India’s current account deficit to There’s this principle called the impossible trinity, an expected 2.8 per cent of GDP, not fun. which says that you cannot allow free capital flows The dollar has appreciated 14 per cent so far, well (India has partially freed capital flows), an independent above the 8 per cent it should have done (two years’ monetary policy (which India is moving towards, with inflation of 4 per cent each, counted from 68, works a clear inflation-targeting mandate given to a relatively out to 73.44, somewhat the current ‘independent’ Monetary Policy But currency markets are feeling Committee) and keep your exchange rate There’s a reward level). the pain, spoiled by the excess flows of under control. for good 2017, and used to the overvaluation of So keeping this textbook economics the rupee. in mind, the MPC said like a sarkari behaviour and a At a time of generally tighter money, babu that its given mandate is to keep punishment for the Indian markets are throwing a inflation under control and that has been bad behaviour. tantrum. So far, they have been used to behaving. And since managing the rupee looking to the RBI to save them, like (levels) is not its job, there’s a market to Good behaviour, Raghuram Rajan came in last time with take care of that. in the current his FCNR bonds. The talk was all about Now, that has not been the historical context, would be ‘defending the rupee’ and looking to the image of the RBI. In fact, the public has RBI to ‘save them’. always counted on the RBI to ‘rescue’ to shift to the But imports are just around 20 per them by reading the tea leaves to figure Metro, save on cent of GDP and interest rates are a out their ‘comfort’. Just last year, the your oil bill and blunt tool that will affect the entire rupee was pushed to the wall by Donald country. Why increase interest rates Trump’s weak-dollar insistence, when he buy the market and slow down all investment activity threatened to put India under at 10,300. surveillance for being a ‘currency (and levered consumption, such as it manipulator’. The RBI found it difficult is), especially at a time when liquidity to absorb all the $20 billion that came in during and trust are suffering in the aftermath of the IL&FS January–March 2017 and had to let the rupee appreciate. blowout? Besides, overall inflation is pretty benign It stayed that way for precisely a year. That resulted in (thanks to lower fruit and vegetable prices, an odd a massive over-appreciation of the rupee, almost 20 per contributor), especially in an election year, when cent to its real effective exchange rate. growth is important to spruce up the government’s Then came the current ‘oil-price shock’. In report card. Besides, it simply was not the RBIs’ job percentage terms, it qualifies to be called a shock, (as per its mandate), even though it had the image of 40 Wealth Insight November 2018 Subscription copy of [[email protected]]. Redistribution prohibited.

OFFBEAT

being the protector of the rupee value. So free capital flows should now take care of the rupee’s value, since inflation had been protected by the RBI. Since the country had taken care of its fundamentals (and the government did its bit by keeping the fiscal deficit under control), the rupee would find suitors on its own, either through its exporters or through capital flows. Right? We don’t know. In the short term, the markets threw a real tantrum as if they had been deserted by the RBI. And they have threatened to jump out of the window if Mommy does not pay attention. The threat is of an FII pullout (do FIIs panic like our retail investors?) and sheer panic, since RBI seems comfortable with the current levels of the RBI. That’s not really true. Very rarely, but the RBI indicated a ‘comfortable’ level of `72.50 and most banks have indicated a range of 69–73 for the rupee. So what’s cooking? Who is going to win this ‘tantrum battle’. Will Mommy call the bluff of the recalcitrant kid, or will the kid really jump off the windowsill? In dispute is the role of the RBI and, rarely, whether the government should play Mommy to the markets. If unnecessary imports are the problem (and a lot of that might include fuel oil, not just the old suspects like gold, electronics, etc.), then you should clamp down on those through customs duty. Why should 20 per cent of the economy (the importing economy) hold up the entire economy and demand that we increase rates to bring in capital flows, which by the way, somebody has to pay. For a long time, the government held its nerves, passing through the price signals coming from the oil market that demand is overheating through global growth and inventories are reducing. This demands a change of behaviour from the people who are consuming too much. In a world with lots of alternate (energy) options, I don’t know why we must stick to old habits and then crib about paying for them. If you want to still run that big SUV and don’t take the Metro (or better, shift permanently to an EV), then don’t blame Modi for it. Like in all economics, there’s a reward for good behaviour and a punishment for bad behaviour. Good behaviour, in the current context, would be to shift to the Metro, save on your oil bill and buy the market at 10,300. Bad behaviour would be to pay through your nose at the petrol pump, lose your savings and therefore sell the Nifty to 10,300 in order to fund the oil bill. Take your pick, which part of the economy do you want to be in? Previous governments used to distort the message

that the (oil) markets were giving. The government would rush to protect its spoilt child – the Indian middle and corporate classes – and subsidise their oil bill from its own kitty, and push up general inflation through the expansion of its own fiscal deficit. It’s important that this government has not done any such thing, retaining the Modi image for doing the right thing in the face of political odds. So then why did the Modi government lighten the message to masses by reducing the excise duty? Ah well, nobody’s perfect, especially in an election year. But remember, it’s temporary and could come back after the elections. Be prepared, high oil prices are not going down unless there’s a structural shift of energy demand out of oil. Unlike previous cycles, Big Oil is not fooled into investing into new capacity this time, only to see oil prices go through the floor by the time the oilfield comes up. You will only see marginal and balancing investments, and of course, shale will invest in shorter gestation projects. But the most likely cause of the next crack in the oil market will be a pronounced shift to electric vehicles, which will be faster than you can imagine. Without knowing this, I shifted last year out of my car and tried to make do with Delhi’s public transport – just an experiment to see whether it affected my productivity. Amazingly, it improved my productivity. The new DTC buses are amazing. I get reading and YouTube time, no traffic hassles, and at 1 per cent of the cost of running my car. Try it. The whole of Europe is going the same way! WI The author teaches, trades and writes at spandiya.blogspot.com

November 2018 Wealth Insight 41 Subscription copy of [[email protected]]. Redistribution prohibited.

TAKING STOCK

Politics doesn’t matter History suggests that Indian markets have remained unfazed by the government at the Centre, whether coalition or single-party

MALINI BHUPTA

It is that time of the year again when

coalitions at the Centre. The nature of the formation at the Lok Sabha need not translate into better stockstrategists will begin to write reams on what will market returns, contrary to what many may want happen to financial markets as the world’s largest people to believe today. democracy heads into elections in 2019. What surprises One would have thought that a minority government me is that each time equity strategists fan out into the or a wobbly coalition would not bode well for investors, country and visit districts in some of the most hotly but surprisingly equity-market returns have not reacted contested states and come back with very interesting particularly negatively to such developments. Between anecdotes on what the local tea-stall owner said about December 1989 and November 1990, when the Janata Dal the government of the day or how roads had or hadn’t government headed by V P Singh and his improved in the hinterland. And after supposedly ‘socialist’ finance minister the optics, these analysts/strategists Even though was at the helm, the Sensex returned come out with their prognosis on what 73.43 per cent, shows a research done by could the outcome of the election be, Prime Minister DHFL Pramerica Mutual Fund. The next basis which they ‘modify’ their view on Narendra Modi best phase (in terms of returns) for the the financial markets and the returns continues to markets came during the regime of the they could generate for investors. A Congress-led P V Narasimha Rao foreign brokerage I know had kept a retain his government that was in power between positive stance on India for four years, popularity June 1991 and May 1996. Interestingly, which it changed last month, as Indian rankings, the this was a minority government and markets appeared too expensive. Over the last 39 years since the BSE BJP is unlikely to during this time, the Sensex returned Sensex came into being, India has seen repeat the same 24.46 per cent. And during the previous National Democratic Alliance’s regime all kinds of governments – coalitions feat in 2019 as it (with Atal Bihari Vajpayee as the prime and single regimes. And there is no minister) between March 1998 and May pattern that has emerged over this period did in 2014 2004, the Sensex returned an annualised to suggest that a ‘stable’ government 3.31 per cent. portends better for the markets than the That any particular formation does not affect the governments that collapsed in a matter of months or market’s performance may not go down well with many even days. It would be safe to say that India’s economy who believe that a ‘stable’ government alone is good for and financial markets remain unfazed by politics, a few the markets. Experts have often said that good blips here and there notwithstanding. Don’t believe me; economics does not make for good politics. And this let the data speak for itself. particular BJP government, led by Prime Minister Data show that there is little correlation between Narendra Modi, could encounter some reversals, political ideologies and stock-market returns. And now thanks to rather disruptive reforms it has undertaken for the shocker – markets returns are not particularly during its tenure, like the roll-out of GST in 2017 and impacted by either stable single party rule or unstable 42 Wealth Insight November 2018 Subscription copy of [[email protected]]. Redistribution prohibited.

TAKING STOCK Movement of India’s stock market under various governments Government-headed by

Start

End

Tenure

Market returns (%)

Janata Party - Mr. Morarji Desai

April-79

July-79

4 months (*)

15.86

Janata Party - Mr. Charan Singh

July-79

June-80

1 year

5.43

Congress - Mrs. Indira Gandhi

July-80

October-84

4 years 3 months

20.28

Congress - Mr. Rajiv Gandhi

November-84

November-89

5 years

20.82

Janata Dal - Mr. V.P. Singh

December-89

November-90

11 months

73.43

Janata Dal - Mr. Chandrashekar

November-90

June-91

8 months

6.15

Congress - Mr. P.V. Narasimha Rao

June-91

May-96

4 years 11 months

24.46

NDA - Mr. Atal Bihari Vajpayee

May-96

May-96

13 days

2.30

United Front - Mr. H.D. Deve Gowda

June-96

April-97

11 months

3.10 1.30

United Front - Mr. I.K. Gujral

April-97

March-98

10 months

March-98

May-04

6 years 2 months

3.31

UPA - Dr. Manmohan Singh

May-04

May-14

10 years

17.66

NDA - Mr. Narendra Modi

May-14

Till date

4 years 5 months

10.68

NDA - Mr. Atal Bihari Vajpayee

Notes: (1) Market returns calculated as CAGR returns by the BSE Sensitive Index during the respective periods. (*) (2) The BSE Sensitive Index was instituted in April 1979. Therefore, the fourmonth period of the Janata Party denotes the time when the Index was available. The Janata government took over in March 1977. Source: ‘How important is an election result to a stock market investor’, DHFL Pramerica Mutual Fund.

demonetisation in 2016. Most experts have now termed demonetisation as ‘much ado about nothing’. Seeing the rising discontent in some sections of society that have been impacted by these disruptive reforms, the BJP’s rhetoric has switched from ‘Achche Din’ to ‘Who Else?’ Many believe that a ‘Maha Gathbandhan’ would prove to be a disaster for India’s economy. In reality, markets don’t dance to the tunes of political parties. History shows that the highest returns have, in fact, been generated while coalition governments with support from the Left have been in power. Even though Prime Minister Narendra Modi continues to retain his popularity rankings, the BJP is unlikely to repeat the same feat in 2019 as it did in 2014. The BJP won 147 seats from its key states – Madhya Pradesh, Gujarat, Uttar Pradesh and Rajasthan – which were 52 per cent of all seats won. In 2014, eight states accounted for 201 seats. According to CLSA, if the BJP’s vote share dropped by 5 percentage points, then its tally in its eight states would fall by 39 seats. The brokerage doesn’t make provision for addition of 10 per

cent new first-time voters. Like many other equity strategists, Mahesh Nandurkar of CLSA also doesn’t expect BJP to reach the magic figure of 272 seats in 2019 on its own. Crystal-ball gazing may make news, but unfortunately it doesn’t bear much impact on the economy. E A Sundaram, Chief Investment Officer of DHFL Pramerica Mutual Fund, says the building blocks for a robust stockmarket returns are the following factors: z An economy and political system that encourage private enterprise z A system where rule of law is followed z An ecosystem where entrepreneurship is encouraged and where it thrives z Proper regulatory framework, both in banking system and capital-market system z A promise of a long-term economic growth and corporate profitability India is an economy that is already blessed with these. Investors must now buy right and sit tight! WI The author is the editor of Value Research Stock Advisor

November 2018 Wealth Insight 43 Subscription copy of [[email protected]]. Redistribution prohibited.

Vis-à-vis

Fulfilling the dream of a home Here is how LIC Housing Finance and Gruh Finance, two similar-sized home-loan providers by market cap, stand in comparison with each other

LIC Housing Finance

Gruh Finance

Promoted by Life Insurance Corporation, LIC Housing was incorporated in 1989. It provide loans to retail customers and developers for the purchase and construction of residential property. It mainly caters to the middle-class population, with 87 per cent of its customers being salaried. Its home-loan ticket size was around `23 lakh in 2018. As of June 30, 2018, the company had 275 marketing offices.

Promoted by HDFC and Aga Khan Fund for Economic Development, Gruh Finance was established in 1986. It provides loans for purchase, construction, extension, repair and renovation. Its small ticket size of just `7.8 lakh is a reflection of its niche focus. It caters to rural population and small households. As of June 30, 2018, it had a retail network of 194 branches in 11 states.

Financials

Financials

NII (` cr)

Net profit (` cr)

3,938

2,087

Net worth Loan book (` cr) (` cr)

M-cap (` cr)

CAR (%)

Cost of funds (%)

NII (` cr)

Net profit (` cr)

15.49

8.3

770

406

12,793 1,68,652 20,038

Net worth Loan book (` cr) (` cr)

1,381

15,857

Mkt cap (` cr)

CAR (%)

Cost of funds (%)

19,679

18.9

7.5

NII: Net interest income | CAR: Capital-adequacy ratio

Price chart

P/B chart LIC Housing Finance

690

Gruh Finance

530

18

370

12

210

6 Rebased to 100

50 October 2013

October 2018

LIC Housing Finance

24

0 October 2013

1.5 12.5

29.1 16.8

Price to book

1.3

Gruh Finance

October 2018

13.6 22.8

1.71 0.61

6.6 8.8

Net margin (%)

Dividend yield (%)

Operating expenses as % of loan book

2.5

Five-year annualised growth (%) ROE (%)

ROA (%)

22.9 17.3

2.38

16.7

13.5

4.4

Net interest margin (%)



23.0

21.0

0.43

0

Net NPA (%)

NII growth

EPS

Loan book growth

FY18 data. Price-related data as on October 8, 2018. Loan book as of Jun 2018.

The housing finance industry has grown at a rate of 20 per cent in the last five years, driven by lower interest rates, government-launched Pradhan Mantri Awas Yojana, rising middle-class population and increased migration towards urban areas. Recently, a liquidity crunch triggered by a default by IL&FS has led to a short-term liquidity crunch, which has hit hard the stocks of housing financiers.

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Stock Advisor

Better to read annual reports than Playboy Stock research is incomplete without going through the annual report November 2018 Wealth Insight 47 Subscription copy of [[email protected]]. Redistribution prohibited.

Stock Advisor Vikas Vardhan

I

f you are a cricket enthusiast, you can surely make out the difference between a T20 and a test-match commentary. A T20 match commentary gives a ballby-ball description of the shots played and the runs scored. On the contrary, a test-match commentary is slightly slow-paced and discusses the strategy of players and the teams, how they played in the last match, their future potential, etc. While a T20 commentary reminds us of quarterly results, test matches are the equivalent of companies’ annual reports. Like T20 matches, quarterly results are more glamorous and attract attention in the market, while the release of annual reports is not celebrated, though they are equally, if not more, important as quarterly results. Going through an annual report should be an inherent part of the investment process and merely relying on quarterly results may lead to missing out on important information. Annual reports are one of the most reliable sources to gather company-specific information in an exhaustive manner. Ideally, annual reports serve two purposes. First, they help generate ideas and take investment actions and, second, they help identify red flags and early signs of trouble when everything seems to be going well. To summarise, annual reports act like an anchor to your investment decision.

Annual reports act as an anchor “Other guys read Playboy, I read annual reports,” said Warren Buffett in an interview when asked about how he discovered and got conviction in PetroChina, one of his best investments, which yielded more then 50 per cent over five years. Warren Buffett has always built his conviction and based his investment decisions on annual reports. He and his team read hundreds of annual reports in a year. Obviously, a retail investor cannot think of reading on such a scale but it is desirable that one should go through the annual reports of the companies in which one has invested or is considering to invest. We, at Value Research Stock Advisor, have a similar approach to investments. Our proprietary nonnegotiables (which act as a filter) and Risk Score (which we prepare for every company under consideration) are derived thoroughly from annual

reports. We use the annual report to initiate investment ideas and for us, quarterly results act as a performance tracker. For instance, take a company that shows 20 per cent growth in earnings for two quarters. This is the performance of the company, which is an outcome of a certain strategy. An annual report will tell you what the company has done to achieve this growth, what its strategy was and whether this performance will sustain for long or not.

Qualitative information in annual reports Annual reports are a repository of qualitative information which is crucial in making an investment decision. Such information includes the following:

Management discussion and analysis (MD&A) and chairman’s speech: These two sections narrate the aspirations of a company and where it wants to be in the future. It describes the core competence of a company and where the company is spending to build capabilities. Not only does MD&A give an idea about the future strategy of a company, it also tells you if the management really walks the talk. Read older reports and you can check if the company has stuck to its plans or strayed away frequently from its path. For instance, a few years ago, the management of one of our recommended companies stated that it wanted to reduce exposure to a fast-growing segment because it looked risky. Today, without falling for the temptation of fast growth, it has reduced that exposure to this segment from 22 per cent in FY13 to 8

Annual reports serve two purposes: first, they help generate ideas and take investment actions and, second, they help identify red flags and early signs of trouble 48 Wealth Insight November 2018 Subscription copy of [[email protected]]. Redistribution prohibited.

Stock Advisor

Earnings are accounting profits wherein actual cash may or may not have been received for the sale made. The company may manipulate its revenue by showing sales and corresponding debtors in its book. collusion between the company and the auditor. Such corporate-governance issues severely hit the stock price. Educomp’s stock has corrected over 90 per cent from its peak value and is a penny stock now. Other scattered bits: Annual reports may also have some passing comments on unscrupulous accounting activities, which should not be overlooked. For instance, consider high related-party transactions, wherein a company might be selling or purchasing goods from the promoter’s private firm to give it an undue advantage. Such instances should be closely inspected. Other things like serial resignations of the top management or key personnels should also be thoroughly investigated. per cent in FY18. The historical context gives the comfort in reading the current statements made by the management.

Management compensation and board members: Management compensation will tell you how greedy managers get when the times are not good. If the management is taking out huge salaries, even in lean periods, it may not have shareholder interest as its top priority. An ideal compensation which sets the management’s direction right is one where the fixed component is low and the larger part depends on the profits. Similarly, look for board composition. Do all board members regularly attend company meetings? An ideal composition is where there are several independent directors. Auditor’s report: Companies appoint an external auditor to audit their accounts. The auditor reports whether the company has complied with the rules and regulations in maintaining its books. If there is anything questionable, the auditor can raise a concern. Moreover, looking at the history of auditors can throw light on the company’s mala fide intentions. For instance, if auditors have been changed frequently or they have resigned unexpectedly, this is a sign of trouble in making. Take the case of Educomp. It was found in the company’s annual report that that the auditor’s address was just next to the company’s registered address, that too on the same floor. This smacked of a

Quantitative information in annual reports While many financial websites provide data on listed companies, annual reports are still important. Here is some crucial quantitative information that you can get from annual reports: Cash flow statement: Earnings are accounting profits wherein actual cash may or may not have been received for the sale made. The company may manipulate its revenue by showing sales and corresponding debtors in its book. The cash-flow statement shows the actual cash the company has received or spent. This statement is difficult to manipulate. In the Indian context, annual reports are also important because the cash-flow statement is disclosed only in it.

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Though the balance sheet is now mandated to be published halfyearly, due to absence of detailed schedules, it can hide many things. Schedules, which are available only in the annual report, are where crucial details are found I have a personal anecdote which helped me realise the importance of cash flows. In April 2012, while I was researching on some companies, I wondered if there is any company which had delivered a sequential growth in earnings per share for the past 20 quarters (five years) without any fall. That is when I discovered Amar Remedies and was mesmerised by its performance. Naturally, curiosity set in and I analysed the company deeper. Its income statement was very attractive, but the cash-flow statement revealed the truth. The company was selling on credit and was not realising any cash for the same. I stayed away from this company. Soon enough, the company went in for liquidation in December 2013.

should take a note of it.

Detailed financials of subsidiaries: Quarterly results do give consolidated statements but do not give the break-up for subsidiaries. In the annual report, you can get the broad break-up of the financials of subsidiaries and how money is moved through them. There may be cases where the money is poured into a loss-making entity just to benefit the promoters.

Summing it up In India, where certain reporting is anonymous and done at annual frequency, reading the annual report is a must to build conviction in a stock. Quarterly results

Schedules to the income statement and balance sheet: Though the balance sheet is now mandated to be published half-yearly, due to absence of detailed schedules, it can hide many things. Schedules, which are available only in the annual report, are where crucial details are found. For example, take total debt. Usually, debt is classified as long-term debt and short-term debt but there could be a large component of debt (called ‘current maturities of debt’) which does not appear under both these categories and is hidden under other current assets. In absence of schedules, one cannot make out the actual total debt of the company. Similarly, on the asset side, there is an item called loans and advances. It sums up all the advances a company has paid and loans given to any party. Paying an advance for taxes or expenditures is OK but if the advance is made to a related party or the promoter without sufficient interest, then it may be a way to siphon off money. We found this trend in the annual report of Birla Power, a penny stock now. The debt taken for a power project was used to provide money to the group companies. Contingent liabilities: Contingent liabilities are expenses, charges or any other liabilities which may arise in the future and are dependent on uncertain events. These events include pending cases in the court or warranties given to customers, etc. If a negative outcome can erode a substantial portion of the company’s net worth, one 50 Wealth Insight November 2018 Subscription copy of [[email protected]]. Redistribution prohibited.

are equally important, but they should not be studied in isolation but in conjunction with the annual report. As a retail investor, the annual report may scare you and look complicated. If you do not understand accounting, one way to start is by reading the message from the management. What if you do not understand the annual report as it looks very complex and doesn’t make sense? Simply drop that company. Probably, the company is too complex and hence better avoided. As far as the subscribers of Value Research Stock Advisor are concerned, they can rest assured that we are avid readers of annual reports and quarterly results and enjoy reading them. WI

STOCK SCREEN

Ideas to delve deeper

S

ound investment methods outlast cycles and fads and generate profits over the long run. Value Research presents stock screens based on time-tested principles. What are stock screens? These are a listing of attractive stocks based on the objective principles of sound investment. We apply stock filters carefully crafted by Value Research analysts on the universe of Indian stocks to identify these attractive stocks. The filters are devised to identify stocks of the following kinds: ŒQuality stocks available cheap Œ A ttractive blue chips Œ Stocks available at a steep discount to book value Œ High dividend-yield stocks Œ Growth stocks available at reasonable prices We believe that stocks listed in this section are a good starting point to start a close scrutiny before adding them to your portfolio.

However, please note that they are not our recommendations. Each stock screen explains the reason behind picking the stock, which over time will help you develop your own investing rules. As we will be evolving such models and implementing changes to the methodology to be in line with economic and market cycles, the list will be dynamic and updated periodically. In the following pages of ‘Stock Screen’, we present five categories that collectively list a number of stocks. With these, you will be well-equipped to select stocks to build your own portfolio after doing further research. If you think that stock picking is a lot of hard work, you can get started with these screens and with time understand the way the ideas are shaping to make your own judgement on stock selection. Great investments are not easy to find, but practice, patience and sound principles are all that you need.

Key terms Universe companies In order to arrive at our universe of companies, we checked if the companies traded on all the days for the last two quarters. We considered the companies with a market capitalisation of more than `500 crore. Price to book value (P/B) Price to book value is the ratio of the price of a stock to the 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) The price-to-earnings ratio, or the P/E ratio, is simply the ratio of the price of a stock to its earnings per share. It shows in multiples how much investors are willing to pay for the earnings. The thumb rule of valuing a stock is that a high-growth stock will have a high P/E ratio, while a value stock will have a relatively lower P/E ratio. Earnings per share (EPS) Earnings per share, or EPS, is calculated by dividing the company’s net profit with the total number of outstanding shares. EPS growth Growth of the EPS over a specified time period – trailing 12 months (TTM), a quarter or five years. Quarterly comparisons are on a year-on-year basis. For five years, the figures are annualised. 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 earnings to the EPS growth of the stock. In all our analyses, we have taken five-year historic EPS growth. Earnings yield Earnings before interest and taxes (EBIT) divided by enterprise value. Enterprise value is market cap added to total debt and less cash and equivalents. Dividend per share Total dividend declared during the year divided by the total number of outstanding shares. Net sales This is simply the income that a 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 bottom-line (net profit) performance. A company may be earning revenue at a high rate. But if it is doing so by incurring a very high cost, the bottom line may not grow in proportion to the growth in the top line (sales). Interest-coverage ratio (ICR) This indicator is generally used to gauge whether a company has the ability to service its debt. The interest-coverage ratio is calculated as the ratio of operating profit to interest outgo. A company with an

ICR of more than two implies that it can service more than twice its current interest charges. Debt-equity ratio The debt-equity ratio is calculated as the ratio of total outstanding borrowings of the company to its total equity capital. It essentially tells us which companies use excessive leverage to achieve growth. Conventionally, the debt-equity 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. Stock return Stock return is calculated by taking the percentage change in the price of the stock adjusted for bonus or split. Dividend 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 stock’s dividend yield changes every day. Dividend-payout ratio This is the total dividend paid to the shareholders as a percentage of net profit. Altman Z-Score Developed by Edward Altman of New York University, the Z-Score predicts a company’s financial distress or the possibility of its going bankruptcy within two years. A Z-Score of more than three is desirable. Modified C-Score It tells the probability of financial manipulations. In order to develop it, we have modified James Montier’s C-Score. A C-Score of less than four is desirable. Piotroski F-Score Developed by Joseph Piotroski, the F-Score highlights financial performance as compared to that in the previous year. It thus points out to the current outperformer Growth Value in terms of profitability and financial improvement. An F-Score of seven or above is good. Large Stock style It indicates the style of the stock. It is derived from a combination of the stock’s valuMid ation — growth or value — and its market capitalisation — large, mid and small. For example, on the Small right we have shown the stock style of a large-cap growth stock.

November 2018 Wealth Insight 51 Subscription copy of [[email protected]]. Redistribution prohibited.

STOCK SCREEN

Quality stocks available cheap The stocks listed below clear essential checks on solvency, accounting, recent financial performance and valuations No. of companies that cleared the filters

REASONS TO INVEST

THE FILTERS

Safety Soundness Good performance Reasonable valuations

1,023

Market cap greater than `500 cr Z-Score greater than 2.99 F-Score greater than or equal to 7

C-Score less than 4 PEG less than 1 P/E to median P/E less than 1.5 Earnings yield greater than 5%

596 113 106 40

Banking and finance companies were removed from this analysis as the metrics don’t apply to them.

Safe bets Company

Stock style

HEG Engineering

Manali Petrochemicals Chemicals

Graphite India Engineering

UPL Chemicals

Escorts Automobile

International Paper APPM FMCG

Sunflag Iron & Steel Co Metals

Goa Carbon Energy

Suven Life Sciences Healthcare

VenkyS (India) FMCG

National Aluminium Co Metals

Quick Heal Technologies Technology

Altman Z-Score

Piotroski F-Score

Modified C-Score

Earnings yield (%)

P/E

PEG

Market cap (` cr)

Share price (`)

52-week high/low (`)

12.1

8

3

15.8

9.5

0.10

17,666

5.1

9

3

19.5

8.7

0.34

601

35

56-30

15.7

8

2

14.1

11.3

0.19

19,746

1,013

1127-432

3.6

8

2

8.6

15.8

0.68

32,552

638

850-537

5.2

9

2

9.1

19.0

0.83

7,646

618

1018-541

4.0

9

1

9.1

18.3

0.34

1,900

477

591-277

3.5

8

3

18.5

7.4

0.08

1,071

59

100-48

4.9

8

3

11.5

16.0

0.21

648

705

1215-397

10.4

8

3

8.6

18.9

0.72

3,169

248

338-161

6.6

9

2

10.8

15.9

0.20

3,479

4.1

8

2

20.9

6.7

0.23

12,757

66

98-57

32.6

8

1

17.5

13.8

0.16

1,326

188

404-181

52 Wealth Insight November 2018 Subscription copy of [[email protected]]. Redistribution prohibited.

4,422 4955-1165

2,475 4725-1787

STOCK SCREEN

Company

DCM Shriram Diversified

Himadri Speciality Chem Energy

Bhansali Engg Polymers Chemicals

Zee Media Corporation Services

Gujarat Narmada Valley Chemicals

Maithan Alloys Metals

Star Cement Construction

Tata Metaliks Metals

Phillips Carbon Black Chemicals

Meghmani Organics Chemicals

HIL Construction

NR Agarwal Industries FMCG

Insecticides (India) Chemicals

Action Const Equipment Construction

Federal-Mogul Goetze (I) Automobile

KNR Construction Construction

Shemaroo Entertainment Services

NRB Bearings Engineering

Sharda Motor Industries Automobile

Stock style

Altman Z-Score

Piotroski F-Score

Modified C-Score

Earnings yield (%)

P/E

PEG

Market cap (` cr)

Share price (`)

52-week high/low (`)

3.9

9

2

14.4

9.1

0.51

5,985

384

628-237

4.9

9

3

7.9

19.6

0.19

5,266

126

197-106

13.4

9

2

7.2

22.4

0.19

2,233

135

225-107

6.0

9

2

7.0

18.9

1.00

1,226

26

50-22

3.5

9

2

25.2

5.8

0.21

5,265

338

549-315

6.9

8

1

32.1

5.2

0.10

1,559

536

1026-490

4.6

8

1

7.7

14.4

0.90

4,528

108

152-80

3.9

8

0

13.0

9.2

0.23

1,473

578

976-545

3.1

8

1

9.5

13.5

0.33

3,762

218

319-157

4.2

9

2

17.9

9.8

0.12

1,972

77

129-69

4.6

9

1

9.8

16.2

0.84

1,554

3.8

8

1

13.5

8.5

0.09

833

488

616-267

3.6

8

1

14.8

9.6

0.50

841

406

950-361

5.4

9

2

8.6

18.3

0.33

1,198

103

204-69

7.0

8

2

6.4

26.6

0.17

2,285

413

592-392

4.3

8

2

9.4

9.3

0.23

2,599

184

349-165

12.7

8

2

10.2

16.1

0.82

1,205

437

595-373

3.4

8

1

8.7

15.0

0.78

1,564

161

193-131

5.1

8

3

15.7

11.9

0.53

953

2,094 2606-1180

1,601 2754-1426

November 2018 Wealth Insight 53 Subscription copy of [[email protected]]. Redistribution prohibited.

STOCK SCREEN Company

Stock style

Altman Z-Score

Cigniti Technologies Technology

Ahluwalia Contracts (India) Construction

Sandesh FMCG

Andhra Petrochemicals Chemicals

Beekay Steel Industries Metals

Confidence Petroleum India Services

DIL Healthcare

Grauer & Weil (India) Chemicals

Sandur Manganese Metals

Piotroski F-Score

Modified C-Score

Earnings yield (%)

P/E

PEG

Market cap (` cr)

Share price (`)

52-week high/low (`)

4.6

8

2

7.2

13.7

0.26

1,056

383

492-222

7.6

8

2

10.5

17.4

0.45

1,983

296

443-260

7.1

8

2

28.6

8.6

0.99

636

839

1509-800

8.3

8

3

11.0

10.6

0.09

762

90

99-36

4.6

8

1

17.8

7.4

0.08

648

340

556-228

7.9

8

0

6.3

27.7

0.46

919

34

57-21

4.0

8

0

13.3

13.3

0.15

740

806

1123-255

7.7

8

1

8.8

17.9

0.76

1,209

53

86-42

8.1

9

1

27.5

7.3

0.30

1,031

1,178

1470-771

Data as on October 17, 2018. New entrants.

Reasonably priced growth stocks Growth investing is about picking companies that are fast growing their bottom lines. But make sure that the valuations are not overheated. REASONS TO INVEST

No. of companies that cleared the filters

THE FILTERS

All-weather style Companies with strong fundamentals Greater stability vis-a-vis value or growth

Market cap greater than `500 cr

Π At least 20% in the trailing 12

Earnings growth of: Π At least 20% in the past five years

1,023

months YoY  Π At least 20% in latest quarter YoY

194

Stocks with a P/E of less than 15

65

On fast track Company

Stock style

HEG Engineering

JK Paper FMCG

Bajaj Holdings Financial

5Y median P/E

PEG

9.5

16.4

0.10

9,237.6

6,416

10.2

10.3

0.16

50.0

36

8.8

8.2

0.46

32.2

33

P/E

54 Wealth Insight November 2018 Subscription copy of [[email protected]]. Redistribution prohibited.

Quarterly EPS TTM EPS growth (%) growth (%)

5Y EPS growth (%)

Market cap Share (` cr) price (`)

52-week high/low (`)

108 17,666 4,422 4955-1165 146

3,015

170

194-97

31 28,740 2,577 3248-2451

STOCK SCREEN Company

Magma Fincorp Financial

Jain Irrigation Systems Chemicals

Indiabulls Housing Fin Financial

Manali Petrochemicals Chemicals

Graphite India Engineering

PNC Infratech Services

Capital First Financial

Yes Bank Financial

L&T Finance Holdings Financial

Sunflag Iron & Steel Co Metals

Tata Power Company Energy

Tata Steel Metals

JSW Steel Metals

Reliance Capital Financial

IIFL Holdings Financial

PPAP Automotive Automobile

KEC International Engineering

NOCIL Chemicals

National Aluminium Co Metals

Stock style

P/E

5Y median P/E

PEG

Quarterly EPS TTM EPS growth (%) growth (%)

5Y EPS growth (%)

10.9

11.8

1.17

54.0

1,860

26

2,760

102

194-97

13.4

34.9

0.13

71.5

46

42

3,274

66

150-55

7.8

12.4

0.27

20.6

31

29 33,660

789

1440-766

8.7

9.7

0.34

646.5

108

35

56-30

11.3

18.6

0.19

2,759.9

1,228

85 19,746 1,013

1127-432

10.7

16.8

0.23

243.9

85

20

3,458

136

228-122

12.9

29.3

0.24

55.2

39

47

4,671

472

902-437

11.8

17.1

0.43

29.5

21

20 53,518

232

404-165

14.3

17.1

0.81

56.3

36

21 24,144

120

214-115

7.4

10.8

0.08

59.4

99

73

1,071

59

100-48

5.0

27.7

0.06

379.1

240

77 19,583

73

102-60

4.6

14.0

0.13

91.5 10,371

32 66,786

555

756-493

11.0

18.8

0.16

276.4

234

67 87,431

362

428-238

4.6

10.5

0.50

172.0

173

21

6,272

248

626-222

14.0

13.9

0.41

34.3

31

35 13,731

431

874-383

13.7

13.4

0.15

49.3

51

99

551

393

723-351

14.8

19.8

0.18

37.9

44

67

7,182

279

443-240

13.8

12.2

0.34

45.7

70

74

2,558

155

236-139

6.7

13.4

0.23

432.8

187

83 12,757

66

98-57

32

Market cap Share (` cr) price (`)

601

52-week high/low (`)

November 2018 Wealth Insight 55 Subscription copy of [[email protected]]. Redistribution prohibited.

STOCK SCREEN Company

Stock style

JMC Projects (India) Construction

Kolte Patil Developers Construction

Bhageria Industries Chemicals

West Coast Paper Mills FMCG

Thirumalai Chemicals Chemicals

Rane (Madras) Automobile

DLF Construction

India Glycols Chemicals

Gujarat Narmada Valley Chemicals

GM Breweries FMCG

Bharat Bijlee Engineering

Maharashtra Seamless Metals

Technocraft Industries (I) Metals

Firstsource Solutions Services

Gujarat Ambuja Exports FMCG

Chennai Petroleum Corp Energy

Prakash Industries Diversified

Centrum Capital Financial

Phillips Carbon Black Chemicals

P/E

5Y median P/E

PEG

13.1

17.0

0.30

22.1

61

38

1,435

86

141-67

12.9

16.6

1.85

63.5

48

22

1,761

229

405-205

12.9

5.6

0.16

163.7

24

77

675

308

365-208

9.2

13.5

0.14

56.5

52

267

2,332

353

400-178

7.1

11.8

0.13

21.7

126

55

1,270

124

244-102

10.9

25.4

0.45

346.9

137

36

570

490

1050-421

5.7

41.5

0.12

56.1

702

59 25,775

144

274-143

9.8

17.5

0.58

411.0

193

27

1,290

416

621-315

5.8

8.5

0.21

178.8

69

36

5,265

338

549-315

11.8

13.9

0.30

23.4

92

37

1,043

571

966-509

8.3

39.2

0.14

431.0

511

102

643 1,136

1790-964

12.0

17.0

0.68

169.4

65

31

3,149

471

552-407

12.3

9.8

1.25

46.2

38.8

34.7

1,427

581

630-421

12.3

10.0

0.71

34.2

27.3

28.3

4,292

62

84-36

12.5

7.9

0.72

215.0

91.6

24.7

2,699

239

310-146

3.7

5.3

0.16

365.9

74.5

27.0

3,805

256

481-221

3.7

8.9

0.14

169.6

254.3

32.1

1,829

112

276-101

4.7

62.1

0.05

3,863.1

742.3 133.5

1,724

41

67-30

13.5

25.1

0.33

102.5

111.8

3,762

218

319-157

56 Wealth Insight November 2018 Subscription copy of [[email protected]]. Redistribution prohibited.

Quarterly EPS TTM EPS growth (%) growth (%)

5Y EPS growth (%)

36.7

Market cap Share (` cr) price (`)

52-week high/low (`)

STOCK SCREEN Company

Meghmani Organics Chemicals

Himachal Futuristic Comm Communication

NR Agarwal Industries FMCG

Rain Industries Construction

GNA Axles Automobile

Sequent Scientific Healthcare

Zuari Agro Chemicals Chemicals

Sanwaria Consumer FMCG

BL Kashyap & Sons Construction

Gujarat Alkalies Chemicals

Balaji Amines Chemicals

LG Balakrishnan Automobile

Renaissance Jewellery Cons Durable

Cigniti Technologies Technology

Andhra Petrochemicals Chemicals

Beekay Steel Industries Metals

DIL Healthcare

Dolat Investments Financial

KSE FMCG

Stock style

5Y median P/E

PEG

9.8

12.1

0.12

93.8

98.7

93.4

1,972

77

129-69

14.9

11.5

0.55

73.0

68.4

35.6

2,590

21

37-18

8.5

8.3

0.09

35.6

66.3

95.4

833

488

616-267

5.7

8.8

0.21

94.6

158.4

39.6

6,248

186

475-149

14.4

22.3

0.23

26.4

63.7

23.0

773

360

579-306

3.0

52.5

0.06

46.6 31,545.9

38.7

1,263

52

119-43

13.1

19.3

0.54

69.6 2,021.3

24.9

1,025

245

690-195

7.7

11.2

0.23

72.8

118.0

31.6

873

12

34-10

9.7

62.5

0.24

123.9

347.8

35.3

541

25

72-24

7.0

7.1

0.30

92.1

96.4

23.4

4,358

599

935-432

13.3

11.2

0.41

48.6

51.5

32.6

1,651

507

782-408

14.9

14.1

0.72

96.0

32.6

20.6

1,344

423

671-351

8.2

5.1

0.41

36.4

48.3

25.7

538

286

412-167

13.7

30.0

0.26

764.8

118.1

55.5

1,056

383

492-222

10.6

14.2

0.09

4,952.1 1,262.2

51.2

762

90

99-36

7.4

9.1

0.08

77.1

106.7

30.1

648

340

556-228

13.3

25.7

0.15

478.9

443.0

98.8

740

806

1123-255

15.0

18.0

0.29

351.0

861.1

47.9

524

30

41-7

9.8

10.4

0.13

52.5

194.5

86.1

737 2,304 4000-1515

P/E

Quarterly EPS TTM EPS growth (%) growth (%)

5Y EPS growth (%)

Market cap Share (` cr) price (`)

52-week high/low (`)

November 2018 Wealth Insight 57 Subscription copy of [[email protected]]. Redistribution prohibited.

STOCK SCREEN Company

Stock style

Sandur Manganese Metals

Satia Industries FMCG

Stovec Industries Engineering

Ultramarine & Pigments Chemicals

WPIL Engineering

5Y median P/E

PEG

7.3

11.0

0.30

182.1

8.2

5.5

0.05

14.1

19.0

13.8 12.5

P/E

Quarterly EPS TTM EPS growth (%) growth (%)

5Y EPS growth (%)

Market cap Share (` cr) price (`)

52-week high/low (`)

102.8

27.7

1,031 1,178

78.2

67.4

44.9

633

0.45

28.3

31.9

50.9

508 2,435 3875-2211

13.9

0.39

68.2

44.0

40.1

695

238

435-211

22.5

0.40

354.4

181.3

42.6

830

850

987-501

1470-771

633

719-125

Data as on October 17, 2018. EPS growth rates are annualised. Median P/E is for less than five years if five-year data are not available. New entrants.

Discount to book value Stocks available at a discount to their book value indicate bargain and inherent value, provided the business fundamentals are sound No. of companies that cleared the filters

REASONS TO INVEST

THE FILTERS

Really cheap Relatively undervalued Companies with assets

Market cap greater than `500 cr

1,023

Companies must have a fiveyear earnings growth of more than 10% Price at least 10 per cent below the book value

Debt-equity ratio of less than 1.5 times Return on net worth of more than 10% in the most recent year

814 571 426 23

Bargain hunt Company

Stock style

Ajmera Realty & Infra India Construction

Bharat Road Network Construction

BSE Financial

Chennai Petroleum Corp Energy

Dhampur Sugar Mills FMCG

P/B

0.96

P/E

Dividend yield (%)

PEG

Debt-equity ratio

RoE (%)

Market cap (` cr)

Share price (`)

52-week high/low (`)

6.8

0.16

2.1

0.9

15.9

551

155

366-145

0.94 31.0

-

0.4

1.0

11.5

1,105

129

210-128

0.99 13.8 -0.19

5.6

0.0

22.4

3,303

638

1000-624

0.95

3.7

0.16

7.2

1.1

24.5

3,805

256

481-221

0.98

8.3

0.08

2.0

1.4

15.9

1,012

153

331-72

58 Wealth Insight November 2018 Subscription copy of [[email protected]]. Redistribution prohibited.

STOCK SCREEN Company

Stock style

DLF Construction

Eros International Media Services

Hinduja Global Solutions Services

Hindustan Media Ventures FMCG

HT Media FMCG

Indiabulls Real Estate Construction

Indian Metals Metals

Kiri Industries Chemicals

Kuantum Papers FMCG

NLC India Energy

PC Jeweller Cons Durable

Polyplex Corporation Chemicals

Prakash Industries Diversified

Renaissance Jewellery Cons Durable

Sandesh FMCG

Sarda Energy & Minerals Metals

Srikalahasthi Pipes Metals

Thomas Cook (India) Services

P/B

P/E

PEG

Dividend yield (%)

Debt-equity ratio

RoE (%)

Market cap (` cr)

Share price (`)

52-week high/low (`)

0.75

5.7

0.12

1.4

0.5

14.5

25,775

144

274-143

0.32

3.1

0.32

0.0

0.3

11.0

738

77

260-60

0.92

7.3

0.62

1.5

0.4

13.6

1,407

667

1038-572

0.78

7.6

1.03

0.8

0.1

14.8

1,043

145

275-140

0.43

4.0

0.38

0.8

0.5

15.0

1,096

47

118-43

0.65

1.9

0.04

0.0

0.9

39.4

3,774

84

263-80

0.61

6.5

0.24

5.4

0.7

16.4

751

280

799-243

0.92

3.9

0.18

0.0

0.1

11.2

1,332

424

682-399

0.76

7.2

0.18

0.4

0.5

11.1

538

616

1032-504

0.97

8.9

1.27

5.3

1.0

15.4

12,985

85

119-65

0.55

3.9

0.30

0.9

0.3

14.9

2,228

56

601-53

0.63

8.1

0.09

7.7

0.3

11.7

1,669

522

668-406

0.64

3.7

0.14

0.0

0.3

14.5

1,829

112

276-101

0.94

8.2

0.41

0.0

0.6

11.9

538

286

412-167

0.93

8.6

0.99

0.6

0.0

12.8

636

839

1509-800

0.77

6.1

1.03

1.7

0.9

14.0

1,088

301

642-295

0.71

6.6

0.06

3.3

0.3

14.8

849

182

449-171

0.89

1.3

0.01

0.2

0.0

120.8

7,751

210

303-193

Data as on October 17, 2018. New entrants.

November 2018 Wealth Insight 59 Subscription copy of [[email protected]]. Redistribution prohibited.

STOCK SCREEN

Attractive blue chips Investing in blue chips at reasonable valuations is one of the simplest methods of wealth creation with limited pain REASONS TO INVEST

No. of companies that cleared the filters

THE FILTERS

Liquidity Large companies in respective businesses Strong balance sheets Liked by institutions

Large and mid caps Debt-equity ratio of less than two Interest coverage ratio should be more than two Average ROE should not have fallen more than 20 per cent in any year Annualised earnings growth of more than 20% over the past five years PEG of less than 1.5 Five-year average return on equity above 20%

326 270 212 91 41 23 10

Solid foundation Stock style

Debt-equity Interest ratio coverage ratio

5Y avg RoE (%)

5Y EPS growth (%)

Share price (`)

52-week high/low (`)

4.3

22.8

31.5

10,191 1,252

1445-875

1.50

0.0 163.6

25.1

29.4

15,544 7,294 8820-4142

18.8

0.47

0.4

42.7

31.0

21.6

44,309

756

827-527

Avanti Feeds

14.7

0.20

0.0 147.7

48.7

71.5

5,681

418

980-355

Hero Motocorp

15.4

1.30

0.0 171.2

36.6

28.1

Minda Industries

24.9

0.41

0.4

12.6

20.4

58.7

8,287

317

459-266

Natco Pharma

17.0

0.27

0.1

58.6

21.9

54.2

13,302

717

1050-636

Rajesh Exports

12.0

0.53

1.2

3.5

20.9

22.8

16,477

558

874-542

Sundram Fasteners

29.8

0.91

0.5

15.8

20.9

43.1

11,417

541

689-470

Tata Elxsi

21.6

0.49

0.0 456.5

39.1

44.3

6,178

991

1491-821

P/E

PEG

29.7

1.18

1.3

35.7

Aurobindo Pharma

Company

Aarti Industries Chemicals

Abbott India Healthcare

Healthcare

FMCG

Automobile

Automobile

Healthcare

Cons Durable

Engineering

Technology

Data as on October 17, 2018. EPS growth rates are annualised. New entrants.

60 Wealth Insight November 2018 Subscription copy of [[email protected]]. Redistribution prohibited.

Market cap (` cr)

56,221 2,808 3883-2692

STOCK SCREEN

High dividend-yield stocks Good dividends are not just a bonus in addition to stock returns, they also accumulate to become sizeable in the long run REASONS TO INVEST

No. of companies that cleared the filters

THE FILTERS

Cushion against volatility Higher total return Generate regular tax-free income

Market cap greater than `500 cr

1,023

Stocks with sustained per share dividend and amount over the past five years

Dividend payout ratio of less than 40%

889 20

Stocks with a current dividend yield of more than 3%

11

Dear dividend Company

Stock style

BSE Financial

Gujarat Industries Power Energy

Gujarat Mineral Dev Corp Energy

IRB Infrastructure Dev Construction

Moil Metals

NLC India Energy

ONGC Energy

PTC India Energy

Reliance Capital Financial

Reliance Infrastructure Energy

Srikalahasthi Pipes Metals

P/E

PEG

Dividend per share (`)

Dividend Dividend Earnings yield (%) pay-out ratio (%) yield (%)

Market cap (` cr)

Share price (`)

52-week high/low (`)

13.8

-0.2

36.0

5.6

27.0

53.0

3,303

4.6

1.3

2.7

3.7

24.6

22.6

1,110

74

146-68

6.4

-2.3

3.5

3.7

31.5

21.6

3,042

96

181-84

4.8

0.4

5.0

4.0

19.1

14.3

4,428

126

286-120

10.1 -33.8

5.5

3.2

36.0

29.3

4,441

173

286-155

8.9

1.3

4.5

5.3

35.2

9.3

12,985

85

119-65

9.4

2.8

6.6

3.0

38.3

11.4 2,08,027

162

213-145

7.1

0.4

4.0

5.3

33.3

4.0

2,230

75

128-64

4.6

0.5

11.0

4.4

21.2

13.6

6,272

248

626-222

6.5

-0.6

9.5

3.0

18.7

23.2

8,328

317

590-275

6.6

0.1

6.0

3.3

19.0

27.0

849

182

449-171

638 1000-624

Data as on October 17, 2018. New entrants.

November 2018 Wealth Insight 61 Subscription copy of [[email protected]]. Redistribution prohibited.

WORDS WORTH NOW

I again say that Aadhaar challenge still stands. My Aadhaar is still public and nobody has been able to do any harm. I still maintain that Aadhaar disclosure does not increase digital vulnerability. R S Sharma TRAI chief, Financial Express, October 12, 2018

Where the IL&FS issue is concerned, I would blame it entirely on the rating agency. Even till as late as August they were enjoying AA and AAA rating and all of a sudden it was reduced to junk. Ashok Kumar Pradhan MD & CEO, United Bank of India, BusinessLine, October 15, 2018

The Fed is going wild. They’re raising interest rates and it’s ridiculous... That’s not the problem (trade stand-off with China). The problem in my opinion is the Fed... I think the Fed has gone crazy. Donald Trump US President, Business Standard, October 12, 2018

...When a country like the US will see higher growth, inflation rising, unemployment at rock bottom, clearly there will be monetary tightening and interest rates will impact financing flows and financing costs and this will determine capital flows. We need to prepare for that and now is the time... Measures can still be taken and shock absorbers put in to deal with this new reality. Christine Lagarde MD, IMF, The Economic Times, October 12, 2018

Trade is very critical because that is what has lifted people out of extreme poverty. I am a globalist. That is my job. That is our only chance of ending extreme poverty. We need more trade, not less trade. Jim Yong Kim President, World Bank, Financial Express, October 12, 2018

Calibrated tightening means that in the current rate cycle, a cut in the policy repo rate is off the table, and we are not obliged to increase the rate at every policy meeting. Urjit Patel RBI Governor, Financial Express, October 20, 2018

62 Wealth Insight November 2018 Subscription copy of [[email protected]]. Redistribution prohibited.

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