Valueresearch Newsletter

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

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

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

28

February 2019 Volume XII, Number 8

COVER STORY

Cash-flow kings

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.

Free cash flows are a better indicator of business strength than profits. Here are some sectors and companies that have the highest free cash flows.

Editor Dhirendra Kumar Associate Editor Vibhu Vats Research & Analysis Danish Khanna Jugal Harpalani Yash Rohra

25

Data Support Sandeep Nambiar Design Kiran Sindhwal Mukul Ojha 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. 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

INTERVIEW

Banking on the potential of banking and finance

Advertising Contact: Mumbai: 22838665 / 22838198 Noida: 0120-4201008, 4571008 Venkat K Naidu +91-9664048666 Biswa Ranjan Palo +91-9664075875 Total pages 64, including cover

Dhaval Gala,

Fund Manager & Senior Analyst, Aditya Birla Sun Life Mutual Fund

4 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

Satyabrata Mohanty,

Senior Fund Manager & Head – Equity Research, Aditya Birla Sun Life Mutual Fund

Columns

by

7

37

40

42

44

EDIT

STRAIGHT TALK

MAIN STREET

OFFBEAT

TAKING STOCK

DHIRENDRA KUMAR

by

by

ANAND TANDON

SAURABH MUKHERJEA

by

by

SANJEEV PANDIYA

The flow of logic

How is the MPC doing?

Market’s a stage

Sparking wildfires

While the decisionmaking flow of any investment is complex, free cash flows can be a useful differentiator in stock research

The RBI’s Monetary Policy Committee is focusing just on inflation, not growth. This can have long-term consequences.

How competitive advantage drives churn in the stock market

How the media drives our emotions

46

STOCK ADVISOR

How to avoid value traps Why a cheap-looking stock can cost you dearly

8

MONTHLY AGENDA

Nifty 50 vs world indices

10

MARKET COMPASS

Index Watch Big moves In search of value

18

ANALYST’S DIARY

No small feat Trouble in the making Holding a fortune Inside ROE Pursuit of profits

50

MALINI BHUPTA

The big consumption shift While a digitally savvy consumer poses a huge opportunity for consumer companies, they must innovate to keep the consumer loyal to them

STOCK SCREEN

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

62

WORDS WORTH NOW

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

February 2019 Wealth Insight 5 Subscription copy of [[email protected]]. Redistribution prohibited.

&RQQHFWZLWKXV

/,&0XWXDO

/,&0XWXDO

FRPSDQ\/,&0XWXDO



ZZZOLFPIFRP

0878$/)81',19(670(176$5(68%-(&7720$5.(75,6.65($'$//6&+(0(5(/$7(''2&80(176&$5()8//< Subscription copy of [[email protected]]. Redistribution prohibited.

EDIT

The flow of logic While the decision-making flow of any investment is complex, free cash flows can be a useful differentiator in stock research

DHIRENDRA KUMAR

At Value Research, we have long held that we are as much in the education business as we are in the business of providing financial analysis and advice. Unlike anyone else who is doing something similar, we are not here to hand you a list of investments and say, “Now go and put your money in this and don’t ask any questions.” I’m much happier if readers learn what we are doing and why we’re doing it and ask questions about it. The cover story of this issue of Wealth Insight is a perfect case in point. Free cash flow is a much more arcane and geeky measure of the financial situation of a company than profits and valuations that most investors are used to. Its applicability too has a lot of ifs and buts to it. And yet, it’s a very incisive measure. It asks questions about a company’s business that are not easy to fudge and whose answers are not easy to fake. Thus, our cover story is a well-chosen mix of education and guidance. We have explained what the concept of free cash flows is and why it’s important. Based on this, we have also run our analysis on a variety of sectors and companies and presented a selection of the stocks that have bubbled to the top. As always with such companies, do keep in mind that this is not a ‘buy list’. Many of these companies may not be good investments because of other issues. Some may be great investments but for the valuations. The decisionmaking flow of any investment is complex and goes through far more than just one or two checkpoints. Being aware of all of them and having the knowledge about what works and what doesn’t is a must. Now, let’s talk about the Union Budget. By the time you get this issue in your hands, the Budget would have just come in. Therefore, in a sense, you have advantage over me because you know what it holds and I don’t. I do

hope that the finance minister will eliminate, or at least fix, the long-term capital-gains tax on equity investments that was reimposed last year. The tax worsens the biggest problem that threatens the Indian saver, who is wallowing in the financially damaging tradition of sticking overwhelmingly to deposits. Indian savers need all manner of encouragement to switch to equity-based investments. As fixed-income returns have fallen and savers are still sticking to their habits, more and more retirees are sliding towards old-age poverty. There is no solution to this, except to make equity-based investments simple and attractive to understand and implement. Before the current reimposition of the long-term capital-gains tax, this was very much the case. However, one year of experience has shown that this tax will be a considerable impediment in achieving that. As an equity investor, this tax places you in the difficult situation of having to make a mental trade-off as to whether the financial cost of sticking to a bad investment will be greater than the tax hit. Of course, since most of the time the information to make this trade-off is not available, it would end up being a random and possibly harmful decision. Last week, John Bogle, one of the great figures of the world of investments passed away. He was the father of index investing and the founder of Vanguard, which, at $5.1 trillion dollars, is now the world’s largest investment-management company. I well understand that for most of the readers of this magazine, passive investments sound like a foolish way. However, everyone cannot be an active investor and I’m sure that many of you are also mutual fund investors. Do read my tribute to Bogle at http://vro.in/s46465 – there’s much in his life that every investor should know. February 2019 Wealth Insight 7

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

MONTHLY AGENDA S&P 500 (USA) 400 300

Correlation

Returns (%, CAGR)

0.97

14.2 11.2

200 100 0 January 2009

January 2019

DOW JONES INDUSTRIALS (USA) 400 300

Correlation

Returns (%, CAGR)

0.97

14.2 10.8

Here is how various key world indices have moved vis-a-vis the Indian market, Nifty 50. While the Nifty 50 may seem to move in sync with other markets, there is a significant difference between their respective return profiles. These variations are the result of different underlying fundamentals.

Nifty 50 vs world indices

200 100 0 January 2009

January 2019

FTSE 100 (UK) 400 300

Correlation

Returns (%, CAGR)

0.89

14.2 4.5

200 100 0 January 2009

DAX 30 (Germany) 400 300

Nifty 50 Index as stated

January 2019

Correlation

Returns (%, CAGR)

0.95

14.2 8.6

CAC 40 (France) 400 300

200

200

100

100

0

Correlation

Returns (%, CAGR)

0.93

14.2 3.8

0 January 2009

January 2019

8 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

January 2009

January 2019

MONTHLY AGENDA HANG SENG (Hong Kong) 400 300

Correlation

Returns (%, CAGR)

0.84

14.2 6.3

200 100 0 January 2009

January 2019

KOSPI (South Korea) 400 300

Correlation

Returns (%, CAGR)

0.82

14.2 5.7

200 100 0 January 2009

January 2019

SHANGHAI SE A SHARE (China) 400 300

Correlation

Returns (%, CAGR)

0.47

14.2 2.9

200 100 0 January 2009

All indices rebased to 100

NIKKEI 225 (Japan) 400 300

Correlation

Returns (%, CAGR)

0.94

14.2 8.7

January 2019

BOVESPA (Brazil) 400 300

200

200

100

100

0

Correlation

0.49

Returns (%, CAGR)

14.2 8.5

0 January 2009

January 2019

January 2009

January 2019

February 2019 Wealth Insight 9 Subscription copy of [[email protected]]. Redistribution prohibited.

MARKET C MPASS

INDEX WATCH

Nifty IT Index 20.2

5.0

Price to earnings

1.45

Price to book

14.3 Market cap

Dividend yield (%)

(` lakh cr) Nifty IT

Nifty

Median

Nifty IT is the best-performing index in the last one year.

Top gainers/losers Company name

17500

M-cap (` cr)

16000

Mindtree

1Y change (%)

7,458

70

13,824

36 31

NIIT Technologies

14500

TCS

7,01,733

13000

Infosys

3,21,773

31

11500

Tech Mahindra

68,711

26

Wipro

1,52,721

2

HCL Technologies

1,27,238

-1

6,046

-7

10000 Jan-18

Apr-18

Price/earnings

Jul-18

Oct-18

Jan-19

Tata Elxsi

is at 2.7% premium to its five-year median of 19.6.

29 26

20 17 Jan ’14

Jan ’15

Jan ’16

Jan ’17

Jan ’18

Jan ’19

Price/book value is at 6% discount to its five-year median of 5.4. 8.0 6.8 5.6 4.4

Jan ’14

Jan ’15

Jan ’16

Jan ’17

Jan ’18

Jan ’19

-69

3,002

3.0 2.5 2.0 1.5 1.0 Jan ’14

Jan ’15

Jan ’16

Jan ’17

Jan ’18

10 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

Jan ’19

Dividend

Company name

P/E

P/B

yield (%)

HCL Technologies Infibeam Avenues Infosys Mindtree NIIT Technologies Oracle Financial Services Tata Consultancy Services Tata Elxsi Tech Mahindra Wipro

16.0 – 22.9 18.2 28.3 28.7 24.2 20.9 16.8 21.5

4.8 1.2 4.8 4.4 4.8 9.7 9.6 6.9 3.5 3.4

1.3 0.4 3.0 1.1 1.2 3.5 1.3 1.1 2.0 0.3

Company name

Weightage (%)

Infosys Tata Consultancy Services HCL Technologies Tech Mahindra Wipro MindTree Oracle Financial Services NIIT Technologies Tata Elxsi Infibeam Avenues

Dividend yield is 53 basis points lower than its five-year median of 1.98.

0.5

Infibeam Avenues

Weightages

3.2 2.0

-10

Valuations and dividend

23

14

Oracle Financial Services 31,608

Data as of January 16, 2019

43.5 31.1 8.3 6.9 5.9 1.5 1.3 0.8 0.5 0.2

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

MARKET C MPASS

BIG MOVES

Large caps 3M returns (%)

Interglobe Aviation Falling crude-oil prices and expansion plans on international routes are positive for the company.

DLF The company’s net profit increased 26 times, to `375 crore, in Q2 YoY.

BPCL The recent slump in crude-oil prices is beneficial for the company.

Avenue Supermarts In Q3, the company reported its slowest growth in the last eight quarters, which led to fall in stock.

Vodafone Idea The company has been posting losses due to the intense competition in the sector.

Bandhan Bank While the RBI’s restrictions on opening new branches has been relaxed, the stock has yet to recover.

Indiabulls Housing Finance The stock has yet to recover from the blow housingfinance companies received due to liquidity concerns.

Yes Bank Rana’s Kapoor’s successor is yet to be decided, which has kept the stock price in check.

JSW Steel Metal stocks corrected amidst US–China trade-war concerns.

Sun Pharmaceutical Inds. Fresh corporate-governance issues at the company have resulted in a rapid decline in the stock.

Price to earnings 3Y avg RoE (%)

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

3M price (`) movement

1,081

31.7

172 74.3

255 -48.4

18.4

7 6.5

4,213 88.2

157

15.3

9 28.4

8,329 7.0

296

4.6

97 20.2

901 –

1,333

-1.2

– -3.6

-7,222 -232.2

37

-4.1

32 20.8

1,688 –

471

821

186

1,395

36

452

-14.9

8 27.5

4274 26.8

949

-17.5

11 18.8

4,481 25.8

246

-22.4

8 12.8

9,039 195.0

-24.6

342

807

203

376 292

45 16.3

2,955 -8.9

600 452

Our large-cap universe has 97 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 January 15, 2019

12 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

MARKET C MPASS

BIG MOVES

Mid caps Linde India The company’s parent plans to delist it.

Oriental Bank of Commerce The stock gained on the back of lower losses and provisioning in Q2.

Kajaria Ceramics Amidst challenging times for the sector, the company posted increase in revenues and margins QoQ.

Adani Power The company cut its losses. It is also to benefit from amendment in the power-purchase agreements.

Adani Transmission The company was included in the MSCI Global Small Cap Index.

Union Bank of India The company reported a profit of `139 crore in Q2FY19 vs a loss of `1,530 crore in Q2FY18.

Edelweiss Financial Services The stock staged a recovery after getting bludgeoned due to liquidity concerns in NBFCs.

KIOCL The stock recovered after the government announced plans to cut stake in the company.

Dewan Housing Finance Corporation Liquidity fears in the bond market and rumours of default by the company have pummelled the stock.

Dish TV India The company’s subscription revenue fell from `1,489 crore to `1,453 crore QoQ.

3M returns (%)

Price to earnings 3Y avg RoE (%)

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

88.5

241 1.3

28 3.1

50.2

– -19.4

-3,927 -314.1

48.6

39 23.1

219 1.0

44.7

– -72.4

-2,367 -284.9

36.9

20 22.2

1,257 –

160

36.4

– -4.7

-3,565 -222.8

69

-5.1

16 13.1

977 44.0

184

-6.1

78 0.8

119 –

159

-20.6

5 24.0

1,492 30.2

281

-33.7

39 691.8

160 -2.7

3M price (`) movement

417

65

357

35

786

98

530

50

219

94

174

150

223 54

36

Our mid-cap universe has 219 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 January 15, 2019

February 2019 Wealth Insight 13 Subscription copy of [[email protected]]. Redistribution prohibited.

MARKET C MPASS

BIG MOVES

Small caps 3M returns (%)

Dolat Investments In Q2, the company’s profits increased to `12.6 crore vs `6.5 crore in Q2 FY18.

Indo Rama Synthetics The stock price rallied due to a fall in crude-oil prices. The company has also approved issue of new preferential shares.

Jaypee Infratech Five companies submitted expression of interest to take over the company.

Kushal The stock recovered after a steep fall in the last one year.

DB Realty A sector-wide rally in the short term took the company’s stock higher.

Hotel Leelaventure Rumours of the company’s acquisition sent the stock higher, but it soon settled.

SORIL Infra Resources The stock fell amidst a correction in small caps.

Bhansali Engineering Polymers The company’s margins fell from 7 per cent to 4.1 per cent QoQ.

Navkar Corporation The company reported an 87 per cent drop in net profit in Q2 YoY.

Shankara Building Products The company posted weak Q2 results, with a decline of 47 per cent YoY in net profits.

Price to earnings 3Y avg RoE (%)

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

189.3

38 14.1

41 139.9

76.9

– -9.0

-111 -23.9

41.3

– -23.8

-1,492 -421.6

33.8

22 70.5

56 –

29.6

– -5.1

-81 -274.0

-0.1

– -3.0

-108 13.0

3M price (`) movement

84 29 37 21

3

4

39 53

21

27

15 15 480

-29.7

46 11.1

24 23.2

-38.8

16 28.6

91 77.4

142

-44.5

9 8.3

86 7.6

92

68 –

1,089

-53.2

337

87

51

18 16.6

510

Our small-cap universe (minimum market capitalisation `500 crore) has 657 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 January 15, 2019.

14 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

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

MARKET C MPASS

In search of value Value or contra funds specialise in investing in stocks that are beaten down or offer value relative to their prices. Tracking them is an effective way to know where value lies in the market. Here is what top-rated value and contra funds have bought in the last six months (as of December 2018). ICICI Prudential Value Discovery Top 5 holdings (% of AUM) Sun Pharma SBI Infosys NTPC Power Grid

7.4 7.2 5.7 5.0 4.6

ICICI Bank Infosys L&T HDFC

Others

IOC

39.7

14.1 Power Grid

11.6

SBI

13.3

Vedanta

7.6

Bank of Baroda

Infosys

19.6

Others

42.0 Indusind Bank Axis Bank

5.5

Coal India

1.8 1.5

Top fresh entrants (% of AUM)

GAIL

Siemens

ITC

Others

67.9

Coal India

5.9

ICICI Bank

Sundaram Finance

15.6

10.5 M&M Finance

5.2

5.3

HDFC Bank

HDFC Bank

Emami

2.3 0.5

Top fresh entrants (% of AUM) Coal India

Cummins India

0.6 0.6 0.1 0.2 0.1 BHEL

Maximum inflows (% of gross flows)

M&M

5.1

11.9

5.4 Vedanta

9.5 Reliance Ind 5.8 Tech Mahindra 4.9 L&T 4.7 Bajaj Auto 4.6 HDFC

Maximum inflows (% of gross flows)

13.5

Infosys

Tata Equity PE Top 5 holdings (% of AUM)

5.7 5.2 4.8 4.0 3.7

Reliance Ind

Maximum inflows (% of gross flows)

Top fresh entrants (% of AUM)

L&T India Value Top 5 holdings (% of AUM)

ITC

M&M Financial Services

4.0 2.2 Sundaram Finance

Infosys

2.1 2.1 1.8

Aditya Birla SL Pure Value Top 5 holdings (% of AUM)

5.5 SBI 5.2 Gujarat Alkalies2.7 HPCL 2.6 Petronet LNG 2.6 ICICI Bank

Maximum inflows (% of gross flows) VIP Ind

Others

66.8

16 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

10.7

Marico

10.0 M&M

4.3

Top fresh entrants (% of AUM)

ICICI Bank

SBI

Dabur India

Yes Bank

5.5 5.2

Deepak Nitrite

4.6

Shriram Transport

3.6

SRF

2.4 2.4 1.7

MARKET C MPASS HDFC Capital Builder Top 5 holdings (% of AUM)

Maximum inflows (% of gross flows)

8.9 5.2 4.2 3.4 3.2

HDFC Bank ITC Reliance Ind BPCL ICICI Bank

HDFC Bank

Infosys Reliance Ind HDFC

5.1

Vedanta

4.0

IDFC Sterling Value Top 5 holdings (% of AUM)

4.5 RBL Bank 3.0 Ramco Cement 2.3 Indian Hotels 2.1 KEC Int 2.0 Infosys

8.9

64.7 Indusind Bank

68.6

6.6

HDFC Bank

6.3

Axis Bank ICICI Bank

5.3

BPCL

Axis Bank

4.6 3.7 Mahanagar Gas

Bajaj Auto Hero Moto ICICI Bank

8.1

Top fresh entrants (% of AUM)

ICICI Bank

Axis Bank

INOX Leisure

8.0 7.3 6.0 5.9 4.9

Maximum inflows (% of gross flows) Infosys

Others

20.0

31.4

Shriram Trpt Fin

6.0

Prism Johnson

Vardhman Textiles

1.8 1.4 Ipca Laboratories

Wipro

1.4 1.3

Vardhman Textiles

5.2

5.6

Top fresh Indusind Bank entrants (% of AUM)

Infosys

Minda Ind

6.8

Axis Bank

7.9

S H Kelkar and Company

1.2 1.1 1.0 HDFC

Maximum inflows (% of gross flows) Others

Repco Home Finance

Coal India

Quantum Long Term Equity Value Top 5 holdings (% of AUM)

Future Retail

Others

Tech Mahindra

4.8

4.2

Maximum inflows (% of gross flows)

BPCL

ITC

Infosys

8.3 6.7 6.0 6.0 5.6

ICICI Bank

5.7

76.1

Invesco India Contra Top 5 holdings (% of AUM) HDFC Bank

BPCL

Others

Top fresh entrants (% of AUM)

Prism Johnson

Yes Bank

11.3

ACC

10.4

14.6

Ambuja Cements

12.2

Top fresh entrants (% of AUM)

Shriram Transport

Ambuja Cements

Asian Paints

Dabur India

Sun Pharma

Ircon International

3.3 2.7

Yes Bank

3.4 3.0 2.1 1.4 1.2 1.2 1.9 Kotak India EQ Contra Top 5 holdings (% of AUM) ICICI Bank Reliance Ind HDFC Bank HUL Bajaj Finance

7.0 6.2 5.0 4.3 4.2

Maximum inflows (% of gross flows) ICICI Bank

Others

48.9 Infosys

11.6

Bajaj Finance

6.5

19.3

Top fresh entrants (% of AUM)

2.6 1.2

Asian Paints

7.9

Reliance Industries

5.8

Exide

0.9 0.9 0.4

February 2019 Wealth Insight 17 Subscription copy of [[email protected]]. Redistribution prohibited.

ANALYST’S DIARY

No small feat The following companies have increased their sales and profits every quarter for the last three years

H

mean making more money if the costs also increase in tandem. The mark of a good business, thus, is that it should sell more but also increase its profits at the same time. The table below lists some companies that have grown their sales as well as profits in every quarter on a year-onyear basis for the last three years – no small feat. Such a performance indicates a solid business that is growing, keeping its costs in check and raising its profits. WI

ow does a business make money? The answer is simple: by selling its goods or services for more than their total cost. But how does a business make more money than before? This question adds different dimensions to the problem now. A business can make more money by selling more or by raising its margins on the same sales or by cutting costs or by restructuring its operations and so on. Perhaps the simplest is by selling more. But selling more doesn’t always

The only way is up Market

Sales growth (YoY, %)

Profit growth (YoY, %)

3Y ret

Company name

Sector

cap (` cr)

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

(%, CAGR)

HDFC Bank

Bank

5,71,326

23.0

20.8

17.7

16.9

20.6

18.2

20.3

20.1

26.3

Infosys

IT

3,06,199

17.3

12.0

5.6

3.0

10.3

1.6

1.7

38.3

7.1

Kotak Mahindra Bank

Bank

2,30,899

20.4

16.3

19.1

12.8

17.2

15.6

21.7

29.5

21.4

Larsen & Toubro

Infrastructure

1,87,056

21.3

17.9

10.5

9.4

26.2

13.8

11.6

44.4

21.8

Bajaj Finance

Finance - NBFC

1,46,847

39.5

39.0

32.8

31.7

54.5

81.4

60.5

38.0

62.0

IndusInd Bank

Bank

89,397

29.2

22.6

21.4

15.9

4.6

23.8

26.8

24.7

17.2

Indiabulls Housing

Finance - Housing

33,794

26.1

29.0

25.9

29.5

21.4

30.3

22.3

55.3

6.0

L&T Finance Holdings

Finance - NBFC

27,214

25.0

32.2

27.1

25.6

61.9

60.3

30.3

38.7

32.3

Page Industries

Textile

26,529

10.4

17.0

22.2

17.5

10.2

45.9

41.1

32.6

23.5

Gruh Finance

Finance - Housing

17,124

15.5

11.8

16.4

12.5

20.1

20.0

18.2

28.3

24.6

Sun TV Network

Media & Entertainment

22,837

10.9

42.5

23.1

15.9

23.4

62.6

22.8

11.2

15.4

Cholamandalam Inv.

Finance - NBFC

18,599

27.7

28.1

25.7

18.6

33.6

37.8

31.1

53.2

24.5

Edelweiss Financial

Finance - NBFC

16,555

32.2

18.5

34.8

28.4

53.1

14.7

52.4

53.8

50.9

PNB Housing Finance

Finance - Housing

14,838

41.9

42.1

45.9

44.0

33.1

50.4

43.8

57.8

-0.2

City Union Bank

Bank

13,910

10.2

7.7

8.8

6.7

16.0

15.2

18.0

22.2

41.1

Minda Industries

Automobile & Ancillaries

7,979

38.5

39.8

42.2

15.8

26.1

77.5

157.0

21.9

78.4

Future Consumer

Trading

8,322

34.6

26.9

51.3

42.1

–

–

–

–

25.8

JM Financial

Finance - Investment

7,463

26.8

23.0

27.2

39.6

14.1

8.9

24.2

45.0

31.4

Tata Elxsi

IT

6,040

17.7

18.2

14.8

11.4

43.6

41.7

61.6

42.2

2.8

Can Fin Homes

Finance - Housing

3,650

11.3

10.7

10.7

12.1

7.6

11.0

6.5

34.4

12.9

Caplin Point Lab.

Healthcare

3,058

18.7

18.6

21.5

37.8

22.4

2.9

5.9

57.7

25.7

KEI Industries

Electricals

2,786

32.2

7.3

29.7

16.2

45.2

17.1

40.4

50.7

44.2

Swaraj Engines

Automobile & Ancillaries

1,815

18.4

7.5

2.5

5.3

8.0

7.3

17.0

12.6

18.1

1,517

39.4

56.4

48.6

50.4

94.1

238.9

93.5

143.8

89.1

Muthoot Cap. Services Finance - NBFC 6XU\D5RVKQL

'LYHUVLÀHG





















IOL Chemicals

Healthcare

1,086

94.2

55.3

38.5

32.9

766.8

383.6

474.5

771.3

43.7

Q1 is the most recent quarter, Q2 the next and so on. Minimum market cap `500 crore. Data as on January 14, 2019.

18 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

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

ANALYST’S DIARY

Trouble in the making The companies listed below have contingent liabilities higher than equity

I

Examples of contingent liabilities include tax disputes, pending lawsuits, guarantees, etc. The table below lists companies whose contingent liabilities are more than equity and have been increasing in the past three years. This means that if these liabilities are realised, the entire equity of these companies could be wiped off. If you are still wondering whether this really happens, Matrimony.com is a case in point. Its costs from litigation resulted in the company’s equity base turning negative. While valuing a company, hence, do see the contingent liabilities. If not anything, that will help you preclude the need for a contingency plan later. WI

n air force, stealth aircraft have a special place. They are deadlier than ordinary aircraft because they can’t be detected by most radars. Indeed, what is insidious and invisible has the potential to cause greater harm than what is visible. This reminds us of contingent liabilities. These are financial obligations that could materialise in the future. If you study just the balance sheet, you may not realise their presence. However, if you study the notes to financial statements, they could be found. The balance sheet doesn’t reflect them as they haven’t occurred yet. But they have the potential to make a dent in the balance sheet if they occur.

Problems to solve Market cap Company Name

Sector

Ashoka Buildcon

Infrastructure

Reliance Naval

Logistics

Coal India

Mining

Hinduja Ventures

Media & Entertainment

Reliance Comm

Telecom

Network 18 GMR Infrastructure HCL Infosystems

Trading

Jaiprakash Associates Hindustan Aeronautics Gateway Distriparks

(` cr)

3,738

Contingent liabilities-toshareholders’ funds (%) 2018

2017

2016

543

240

173

Disputes/issues

Claims, tax disputes, bank guarantees

956

478

160

90

1,42,770

396

137

90

Service tax, excise duty, sales tax General disputes

825

382

42

32

Service tax, licence fee

3,698

341

22

18

Litigation and spectrum charges; custom and excise duties; service tax

Media & Entertainment

4,026

327

287

204

Decreasing shareholder funds

Infrastructure

9,808

297

220

147

Decreasing shareholder funds

790

287

72

66

Increase in excise duty and income tax

Cement

1,742

234

198

61

Income-tax disputes

Aviation

26,111

176

147

142

Sales-tax and income-tax disputes

Logistics

1,223

173

147

145

Bank guarantees

Schneider Electric

Capital Goods

2,306

169

71

29

Increase in excise and sales duties and income tax

Gujarat State Petronet

Gas Transmission

10,244

163

68

67

Bank guarantees and contractual disputes

Future Retail

Retailing

22,481

162

149

3

Corporate guarantees

Future Enterprises

Retailing

1,624

153

119

4

Guarantees

Usha Martin

Iron & Steel

981

150

106

29

Fuel surcharge matters, increase in excise and sales duties, tax disputes

PNC Infratech

Infrastructure

3,901

140

114

94

Sales-tax disputes, bank guarantees

Mahindra Holidays

Hospitality

2,867

135

134

121

Luxury tax and matters pertaining to revenue recognition

NBCC

Realty

10,431

131

127

109

VAT and income-tax disputes

Panacea Biotec

Healthcare

1,039

117

102

79

Decreasing shareholder funds

TV18 Broadcast

Media & Entertainment

5,837

109

107

88

Lawsuits for copyright and objectionable content, defamation suits

Atul Auto

Automobile & Ancillaries

Zee Media Corporation

Media & Entertainment

734

107

36

11

1,156

102

66

7

Data as on January 18, 2019

20 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

Bank guarantees Corporate guarantees

ANALYST’S DIARY

Holding a fortune The following companies have large investments in other listed companies

V

not with the investment but the ‘investors’, i.e., the companies that have made these investments. It could be that these investor companies’ core operations are suffering or they are highly indebted or they have other loss-making subsidiaries. As one can observe, in many cases they are the parent companies and may never sell these investments. Hence, they are being valued at a significant discount, what is also called the ‘holding-company discount’ in stock-market lingo. Another reason could be that the investments made by these companies have grown at a faster rate than their own market caps. On the bright side, these investments are likely to give protection against a downside in the investor company. WI

aluing a company is a crucial offshoot of investment research. If you ever get to see an analyst’s Excel sheet, you will find it filled with abstruse calculations that he has done to arrive at the right value of the stock. If you are already shaking your head and wondering what’s the need for all that, given the classic P/E, P/B and PEG measures, the table below might open up your eyes to a different reality. It lists some companies with their investments in other listed companies. The remarkable thing about these companies is that their investments are at least 50 per cent of their own market sizes. At first sight, it appears that there is no relation between the market value of the company and its investments. Is this an anomaly or is there more to it? The problem may lie

Where does the value lie? Company name

Sector

Rajapalayam Mills

Textile

Alembic

Healthcare

Market cap (` cr)

Investment

Investments as

value (` cr)

% of market cap

Prominent holdings

512

2,288

447.2

Ramco Industries

1,150

3,458

300.6

Alembic Pharmaceuticals

Stake (% of eq)

9.7 29.5

Uniphos Enterprises

Trading

733

1,958

267.1

UPL

Kirloskar Industries

Capital Goods

845

1,956

231.4

Swaraj Engines

Sundaram-Clayton

Automobile & Ancillaries

6,754

15,085

223.3

TVS Motor co

57.4

E.I.D. Parry

Sugar

3,976

8,043

202.3

Coromandel International

60.6

Kama Holdings

Plastic Products

3,242

6,149

189.7

SRF

52.3

Ramco Industries

Cement

1,909

3,327

174.3

Ramco Cements

21.0

Godrej Industries

Chemicals

17,754

27,278

153.6

Godrej Agrovet

58.0

*UDVLP,QGXVWULHV

'LYHUVLÀHG







8OWUD7HFK&HPHQW



NIIT

IT

Vedanta

Non - Ferrous Metals

Future Enterprises

Retailing

Network 18 Media

Media & Entertainment

5.1 17.4

1,469

1,751

119.2

NIIT Technologies

23.5

72,950

75,080

102.9

Hindustan Zinc

64.9

1,692

1,351

79.8

Future Supply Chain

51.2

4,230

3,351

79.2

TV18 Broadcast

51.2 29.2

Universal Cables

Electricals

940

702

74.6

Vindhya Telelinks

RSWM

Textile

553

362

65.4

HEG

Triveni Engineering

Sugar

1,276

826

64.8

Triveni Turbine

21.8

Sadbhav Engineering

Infrastructure

3,703

2,356

63.6

Sadbhav Infrastructure

69.0

HT Media

Media & Entertainment

1,099

678

61.8

Hindustan Media Ventures

74.3

India Motor Parts

Trading

744

443

59.5

Sundaram Finance

8,568

4,872

56.9

Quess corp

537

301

56.1

Graphite India

10,041

5,560

55.4

Gujrat Gas

54.2

2.5

2.6

Thomas Cook

Hospitality

GKW

Iron & Steel

48.8

Gujarat State Petronet

Gas Transmission

7H[PDFR,QIUDVWUXFWXUH

'LYHUVLÀHG







7H[PDFR5DLO



Bharat Bijlee

Capital Goods

641

336

52.4

Siemens

0.01

2.1

Data as on January 16, 2019

February 2019 Wealth Insight 21 Subscription copy of [[email protected]]. Redistribution prohibited.

ANALYST’S DIARY

Inside ROE

3URÀWPDUJLQVRIFRPSDQLHVZLWKSHUFHQW52( Profit margin (%, YoY) Company name

(2018)

(2017)

(2016)

(2015)

Indiabulls Real Estate

33.49

15.28

10.90

10.28

The DuPont formula segments ROE and helps us make more sense of it

Delta Corp

21.61

16.27

10.81

-9.13

Navin Fluorine

19.72

17.49

11.57

9.25

Can Fin Homes

19.55

17.39

14.51

10.57

R

Prakash Industries

12.85

3.35

1.02

0.30

IG Petrochemicals

12.47

8.95

5.80

0.69

Solar Industries

11.97

11.38

11.28

10.69

Sterlite Technologies

11.38

8.50

7.02

-0.11

DCM Shriram

9.54

9.03

4.98

3.58

Suprajit Engineering

9.52

8.78

7.76

7.53

PPAP Automotive

9.15

6.37

3.83

3.32

Satia Industries

9.07

7.17

2.53

1.59

JK Paper

8.35

5.78

2.10

-0.73

Uniply Industries

8.10

5.03

2.64

0.31

Shriram Pistons

7.83

7.27

5.93

4.21

Bharat Bijlee

7.72

1.92

1.01

-5.10

OE (return on equity) is one of the most important and common ratios used to analyse a company. And why not? We all want to see how much of the income is attributable to shareholders, who own the equity. However, just dividing net income by shareholders’ equity can only tell you so much. In the 1920s, the DuPont Corporation developed a formula which broke ROE into three components: profit margin, asset turnover and financial leverage. This helps us understand the reason behind the increase or decrease in ROE. Here is the DuPont equation: ROE = (Net income/Sales) × (Sales/Total assets) × (Total assets/Total equity) The first part of the formula calculates profit margin. Profit margins usually increase if there is any increase in the selling price and/or decrease in expenses. An increase in the profit margin reflects a strong bargaining power. Asset turnover (the second part of the formula) tells us how efficiently a company is able to use its assets to generate revenue. A high asset turnover is usually the result of a company successfully increasing its sales and managing its assets in an optimal manner. These two components examine the operations of a business. It is usually preferable that ROE increases due to any one or both of these factors (in case of the highlighted names, it increases because of both). However, it is worth noting here that net profit margin and asset turnover can be in contrast. For example, a company in the fast-food business may have a high asset turnover due to relatively lower assets but lower profit margins. Similarly, a manufacturer of customised and expensive equipment may have a low asset turnover but high profit margins. The third part of the equation is financial leverage, which is also known as the equity multiplier. It tells us how much debt a company uses to fund its assets. Let’s say a company has `100 as assets and `20 as owners’ equity. The balance-sheet equation (assets less liability equals to equity) will signify `80 as company debt. Hence, if a company borrows more to finance its assets, the ratio has to increase. This increases a company’s risk of default and makes it riskier. We applied DuPont equation on the companies which have an ROE of more than 20 per cent. The tables list the results as per each segment. WI

22 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

NR Agarwal Industries

7.36

4.54

1.93

-4.40

Larsen & Toubro

7.04

6.25

5.47

5.35

Visaka Industries

6.38

4.05

2.22

1.89

Mahindra CIE

5.38

3.06

1.92

-1.36

&RQÀGHQFH3HWUROHXP

4.32

0.91

0.28

-6.93

Lumax Industries

3.42

3.07

2.63

1.31

Filatex India

3.03

2.37

1.85

0.55

Wheels India

2.81

2.49

1.86

1.39

IOL Chemicals

2.77

0.60

-6.21

-15.66

Aditya Birla Fashion

1.64

0.81

-1.82

-12.33

Coffee Day Enterprises

1.25

0.25

-3.58

-5.69

$VVHWWXUQRYHUVRIFRPSDQLHVZLWKSHUFHQW52( Asset turnover (times) Company Name

(2018)

(2017)

(2016)

(2015)

Mishtann Foods

7.36

5.07

3.63

0.20

NR Agarwal Industries

1.80

1.65

1.39

1.24

&RQÀGHQFH3HWUROHXP

1.39

1.37

1.04

0.85

Future Lifestyle

1.34

1.16

0.88

0.84

IOL Chemicals

1.23

0.98

0.87

0.59

Generic Engineering

1.11

0.85

0.09

0.03

JK Paper

0.87

0.85

0.85

0.74

Oracle Financial

0.77

0.77

0.50

0.35

Delta Corp

0.44

0.37

0.30

0.23

Zee Learn

0.32

0.25

0.22

0.20

)LQDQFLDOOHYHUDJHRIFRPSDQLHVZLWKSHUFHQW52( Assets to equity (times) Company Name

(2018)

(2017)

(2016)

(2015)

&RQÀGHQFH3HWUROHXP









Generic Engineering

1.76

1.70

1.24

1.22

Minimum market cap `500 crore. The third table excludes financial companies.

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

ANALYST’S DIARY

Pursuit of profits Here are some companies that have started showing profits after a streak of losses and hence are witnessing a turnaround

T

here are many ways of profiting from stocks, depending on how adventurous you want to be. If you are staid, you might want to go for plain value or growth investing. If you can handle the thrills and chills of investing, you might want to try your hand at picking turnarounds. Turnarounds are enigmatic. They can make money quickly if you are right. If you are wrong, probably you will be holding a dud stock that punctually moves down when the rest of the market is moving up. But how do you spot a prospective turnaround? Alas, there are no clear answers. Perhaps the following table can help. It lists those companies that

have started to show profits after a streak of losses. Before the recent four quarters, these companies had made losses in at least six of the preceding 10 quarters. However, in the recent four quarters, they have shown profits in at least three. Sounds interesting? But we have also got some homework for you. The numbers given below have not been adjusted for exceptional gains. While it’s unlikely for a company to keep reporting profits just on the back of exceptional items, you should research these companies thoroughly before taking a buying decision. WI

+HUHFRPHVWKHSURÀW Market

PAT (` cr)

No. of loss-

Company name

Sector

cap (` cr)

Q1

Q2

Q3

Q4

making quarters*

Steel Authority of India

Iron & Steel

20,900

554

540

816

1Y returns (%)

43

10

-49 26

Aditya Birla Fashion

Retailing

16,601

43

6

113

35

6

HEG

Capital Goods

14,426

889

770

634

342

7

17

Future Consumer

Trading

8,322

3

0

7

-3

10

-38

Westlife Development

Trading

5,977

8

12

7

8

7

6

3ULVP-RKQVRQ

'LYHUVLÀHG















Indiabulls Integrated

Miscellaneous

2,857

2

0

47

-16

6

49

Intellect Design Arena

IT

2,843

34

44

23

10

6

17

Bombay Dyeing

Textile

2,446

246

-94

11

3

8

-58

HMT

Automobile & Ancillaries

2,318

5

12

4

1

7

-55

6HTXHQW6FLHQWLÀF

+HDOWKFDUH















GVK Power

Power

1,192

12

16

23

11

9

-72

Shriram EPC

Infrastructure

1,145

21

6

-35

15

7

-64

Atlas Jewellery India

Trading

1,075

7

7

2

-5

7

39

Usha Martin

Iron & Steel

1,018

28

12

12

-111

9

14

Elpro International

Realty

896

83

5

2

4

8

-13

Godawari Power

Iron & Steel

850

68

56

103

74

7

-51

BF Utilities

Power

830

2

8

1

16

6

-61

Elecon Engineering

Capital Goods

812

49

7

52

-3

6

-28

Oriental Hotels

Hospitality

805

79

-4

6

2

6

-10

Timex Group India

Consumer Durables

557

3

3

8

-5

6

-2

Andhra Petrochemicals

Chemicals

542

15

31

6

16

7

1

Q1 is the most recent quarter, Q2 the next and so on; *Out of 10 quarters preceding the recent four quarters. Minimum market cap `500 crore. Data as on January 14, 2019.

24 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

INTERVIEW

Banking on the potential of banking and finance T

he banking-and-finance sector has never been free from media coverage. The current times are no different. Whether it is the NPA concerns of publicsector banks or the liquidity crunch faced by NBFCs, the sector has been passing through a tumultuous phase. Amidst all this, however, quality stocks in the sector have continued to bring returns to the investor. Aditya Birla SL Banking & Financial Services Fund, which manages over `1,600 crore, is a top-rated fund in its category. We speak to the fund managers of this fund to get an idea about how they pick stocks and what has made their fund virtually immune to the turmoil in the sector.

How do you pick banking stocks for your fund? Running a bank is always an interplay between attracting low-cost deposits, a diversified loan book and strong risk management. Each of these constitutes a

Dhaval Gala

Satyabrata Mohanty

Fund Manager & Senior Analyst, Aditya Birla Sun Life Mutual Fund

Senior Fund Manager & Head – Equity Research, Aditya Birla Sun Life Mutual Fund February 2019 Wealth Insight 25

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

INTERVIEW

strong competitive moat and emanates from organisational culture, which is very difficult to build. Hence, our large allocations are to banks which have a strong deposit franchise, diversified loan books, and an ability to cross-sell and effectively manage the risks. Our smaller allocations are to play some specific themes – regional banks/small-finance banks or banks focused on SMEs or purely corporate banks.

What attracts you to an NBFC? NBFCs are generally strong asset franchise. They may not enjoy the borrowing-cost advantage that banks can boast of but they can be nimble-footed and reach sections of population that are traditionally ignored/unbanked. A dominant product category, an ability to appraise informal/selfemployed customer segment, better ability to collect receivables, an ability to reach customers faster and in a better way than banks, low-cost product delivery the are key differentiators of NBFCs vis-a-vis banks. Our first and foremost criterion in evaluating an NBFC is to understand the opportunity size of the niche segment that the company is operating in and how difficult it is for banks to disrupt the segment. Beyond that, we assign importance to credit underwriting processes, liability management and promoter background in that order. Identifying such NBFCs at an early stage can be very rewarding.

Some analysts believe that housingfinance companies (HFCs) don’t have a long-term case because banks can also do what they are doing. How do you see this? Housing finance is the largest segment within retail financing in India. Companies like HDFC, LIC Housing Finance, Gruh Finance

have been in existence for over a few decades now and have delivered steady ROEs. Housing demand or opportunity size for this segment remains large and penetration levels will continue to rise in the years to come. The housing-finance space, over the years, has attracted massive competition and has now left very thin margins for the companies in this business. The customer profile varies from formal salaried to informal salaried to self-employed. The collateral profile varies widely based on city, town, etc. Banks have traditionally focused on the salaried segment in top cities. Hence, there is ample opportunity for HFCs but in other segments and micro markets. HFCs which are directly competing with banks may find it difficult to maintain margins. But HFCs focusing on small-ticket housing/ semi-urban and rural segment of housing loans still have a good headroom for growth and can deliver sustainable and superior return ratios.

With the advent of discount brokers, full-service brokers are under stress. How do you see the broking industry five to 10 years from now? Over the past seven years, top 10 brokers have consistently gained market share from the small-time brokers. Active clients as well as trading revenue has witnessed steady growth over the period. There is only one discount broker, called Zerodha, which has made to the top of the list. Other discount brokers are struggling. Full-scale brokers have also started diversifying their revenue streams to financial-product distribution, wealth management, etc. Bank-based brokers have been able to maintain their cash yields over the past seven years, despite the huge consolidation in the industry.

26 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

How do you value a finance stock? Valuation is determined by interplay of three main aspects: size of the opportunity, promoter’s ability to scale up and return on equity. The promoter’s ability to scale up enjoys maximum weight. We look at P/BV vs. sustainable RoE. The key is to calculate the right RoE progression of the stock and that will be based on management execution and business-model core competency. Banks with consistent growth and asset quality across cycles tend to get higher P/BV multiple.

What makes a bank better than the other in terms of quality? While the opportunity size is similar for everyone, the ability to scale up and maintain profitability differs vastly between banks. For example, opportunity for unsecured lending (personal loan and credit cards) has always been huge but only two private-sector banks have been able to build a profitable model of size. To sum up, a stable funding franchise, customer segmentation and underwriting practices are key to any banking business model.

When do you see the NPA problem of public-sector banks getting over? We think the corporate NPA cycle is nearing an end. Rural lending is a space to watch, but even adjusted for that, one should expect NPA ratios to improve. The only reason why NPAs declined sharply from 2003 to 2008 was the strong global as well as domestic growth cycle. Since then, the growth cycles in India as well as globally have been patchy. Hence, it is very difficult to have a sustained NPA reduction for corporate/PSU banks but that is likely to improve.

When do you realise that it’s time to quit a bank or an NBFC? We keep evaluating the companies

INTERVIEW

we own based on our framework of business, management and valuation (BMV). This means that if there is deterioration with respect to the business model/ strategy (this includes assessment of asset quality and growth prospects) or changes in management (execution team and risk-management profile) or there is a valuation mis-mismatch with our expectations, we decide to sell.

loans should start seeing normalcy in a few quarters. Competitive intensity has already reduced and pricing power could be back after a long time for HFCs. Liquidity is still tight at the medium end of the curve. Though the situation has improved for good players, we remain cautious and focus on asset-quality trends. If they turn bad, the funding environment can become tough for weaker players.

The recent crash in housing finance and NBFCs has spooked investors. How is the situation now?

What’s your view on the movement of interest rates in the coming year?

Markets have already started differentiating between the good HFCs and the troubled HFCs. The HFCs that don’t have much exposure to large ticket loans against property or developer

This is not the first or the last time that the interest-rate cycle is on the hardening side. Each such cycle weeds out weak players and strengthens the efficient ones. Our endeavour is to be invested in the efficient players to ensure longevity.

NBFCs with pricing power will emerge as the key winners.

What allocation should an investor do towards banking and finance stocks? Allocation purely depends on individuals risk appetite. Having said that, within an equity portfolio, banking and finance should have decent representation. We believe that BFSI is a secular growth story as penetration levels in most sub-segments remain lower as compared to those in developed countries. In our view, one should be overweight on this sector. Further, the financial-savings theme will be multi-year story. Life-insurance, asset-management and general-insurance segments will offer structural growth and steady return ratios. WI

The authoritative guide PRE-PUBLICATION OFFER: `100 OFF

z Expert analysis and detailed data on

handpicked funds by Value Research analysts

z Learn how to build a winning portfolio

and track its performance

z Performance data on every Indian

mutual fund scheme

To be published in February 2019

https://shop.valueresearchonline.com/store/

February 2019 Wealth Insight 27 Subscription copy of [[email protected]]. Redistribution prohibited.

COVER STORY

Free cash flows are a better indicator of business strength than profits. Here are some sectors and companies that have the highest free cash flows.

Cash-flow kings

28 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

COVER STORY

Yash Rohra

F

ree cash flows are one of the most important factors that impact your investments. How? For that, first understand what they are. Free cash flows are what a company is left with after spending for business operations and capital expenditure. They are an important determinant of dividends and buybacks. They are also instrumental in expanding the business organically or through acquisitions. That’s what makes them an important analytical metric.

Why free cash flows are important There are hundreds of companies that are profitable, earn good margins, report good numbers and yet don’t make a lot of money for their investors. A big reason for this is that many of them have little cash left after spending large sums for growth or capex. At times, they make pricey acquisitions financed through debt that suck up all the profits to service interest payments. Now take the example of ITC Ltd. The company generated free cash flows of over `10,000 crore in FY18. This has enabled it to invest in its FMCG business. Or take the case of Divi’s Laboratories, which generated free cash flows of `500 crore in FY18. This enabled it to cope with an import ban on one of its plants. These two examples illustrate how companies with free cash flows are better able to tide over huge investments and temporary setbacks.

Net profit vs. free cash flows Net profit and free cash flows are two very different beasts. The net profit a company reports is based on accrual accounting. It often does not capture the actual cash inflows a business earns. Free cash flow, on the other hand, captures the actual net cash after incurring expenses required for normal functioning or expansion.

The search for free-cash-flow kings With the importance of free cash flows in mind, we set out to search for companies

that generate them year after year. We looked for companies that consistently generated free cash flows of more than 5 per cent of their sales in the last three years. Our search criteria included other nonnegotiables: a return on equity of more than 15 per cent in at least four of the last five years and a Z-Score of more than three. We also excluded companies operating in the financial sector since free cash flow is not a right parameter to evaluate these companies.

Our observations Here is what we observed in the companies that made it to our lists: z Most of the companies with healthy free cash flows are debt-free. z A number of them paid large dividends. z Many incurred significant capital expenditures from internal funds. z A number of them rewarded shareholders by way of buybacks. z Free cash flows are also a function of large-scale operations, which provide them cost advantage and economies of scale. The following pages list out the top freecash-flow generators in four top sectors that throw up a large number of free-cash-flow companies: technology, FMCG, automobiles and healthcare. We also take a look at how some of the top companies in these sectors allocated their free cash to shareholder benefit. Finally, we list out free-cash-flow kings in other sectors. In the tables that follow, we have used a metric called the free-cash-flow yield, which signifies strength of free cash flows. It is calculated by dividing free cash flows by market cap. The higher the FCF yield, the better it is for the investor. So, when you look at your next investment, keep an eye out for free cash flows. To improve your investment process and returns, take free cash flows into account. As always, the companies mentioned in the list are not our recommendations. If you intend to invest in any of them, do thorough research.

February 2019 Wealth Insight 29 Subscription copy of [[email protected]]. Redistribution prohibited.

COVER STORY AUTOMOBILES

Capex... not a problem While the auto sector is capital-intensive, quite a few companies in the sector have generated free cash flows due to their dominant positions

A

utomobiles is a capex-driven sector, since it requires heavy investments to build capacity. Still, many companies operating in this sector have made to our list. Some of the prominent reasons behind this are: Negative working capital cycle: Some of the selected companies have a negative working capital cycle, which is a result of their dominant position. They get money faster from their customers than they pay their suppliers. Less working-capital requirements lead to higher free cash flows. Cyclical capex requirements: Their capital-expenditure requirements move in a cycle, which leads to cyclically high free cash flows. Once capacity has been installed and is running, it keeps on producing with minimal capex requirements. Economies of scale: The leading players in the automobile industry enjoy a significant cost advantage once they start operating at a large scale.

the same period, with the remaining getting added to its investments. Bajaj Auto: Bajaj Auto has generated free cash flows of more than `10,500 crore in the past three years, out of which it has paid dividends of more than `5,500 crore, while investing the rest for the long term. Eicher Motors: In past three years alone, Eicher has generated free cash flows of more than `3,800 crore after spending `1,800 crore on capital expenditures. Its free cash flows have added to its cash balance and investments. Castrol: Castrol has generated free cash flows of more than `1,900 crore, while incurring capital expenditures of just `130 crore, in the past three years. During the same period, it distributed around `1,700 crore as dividends. Its average dividend-payout ratio during the last three years was 84.5 per cent.

Select examples Maruti Suzuki: Maruti generated free cash flows of more than `20,500 crore after spending around `10,000 crore on capex in the last three years. It also paid dividends of close to `4,900 crore during

Automobiles: Cash-Áow kings Cash and Market

FCF

FCF

Dividend

equivalents

Company name

cap (` cr)

(FY18)

FY18

FY17

Debt to

3Y

FY16

yield (%)

yield (%)

(` cr)

equity

CAGR (%)

Maruti Suzuki

2,23,115

7,903

9.9

10.1

10.2

3.5

1.1

1,291

0.0

20.6

Bajaj Auto

78,672

4,144

16.5

14.1

15.2

5.3

2.2

6,558

0.0

4.6

Hero MotoCorp

58,371

3,196

9.8

9.7

7.4

5.5

3.3

5,829

0.0

5.5

Eicher Motors

55,986

1,736

19.4

16.5

15.4

3.1

0.5

1,845

0.0

6.0

Castrol India

14,901

574

16.0

19.0

21.3

3.9

4.6

784

0.0

-11.7

Balkrishna Industries

17,170

339

7.6

17.9

25.7

2.0

0.9

517

0.2

39.9

Wabco India

12,302

216

8.4

5.1

8.7

1.8

0.1

802

0.0

3.4

875

98

8.4

14.4

9.7

11.2

0.8

178

0.0

14.3

NRB Bearings

1,966

94

11.0

8.0

10.8

4.8

1.3

37

0.6

13.0

Swaraj Engines

1,834

67

8.7

11.4

6.8

3.6

3.3

124

0.0

16.6

Sterling Tools

1,238

26

5.7

8.9

8.3

2.1

0.6

56

0.1

50.5

Sharda Motor Industries

FCF as a % of sales

30 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

COVER STORY FMCG

It’s all about distribution Once FMCG companies have established a wide distribution network, they can keep generating free cash flows

F

MCG companies may not have to keep investing heavily in fixed assets, or plant and machinery, but they have to invest heavily in their distribution channels. However, once their distribution channels are established and the products start to gain acceptance, FMCG companies start to generate free cash flows. The companies in the table have been selected for the following reasons: z Widely accepted products with established distribution channels z Outsourcing of manufacturing, which requires minimal capital expenditures z Low production cost due to economies of scale z Low working-capital requirements due to a negative working-capital cycle

Select examples ITC: ITC has generated free cash flows of more than `25,000 crore after spending `8,200 crore on capital expenditures in the last three years. It has also paid dividends of more than

`21,500 crore, while investing the remaining amount. Currently, its distribution network covers more than one lakh markets and 60 lakh outlets. HUL: HUL has generated free cash flows of more than `12,300 crore in the last three years and paid dividends of `13,000 crore during the same period. Its distribution channel covers over two million retail outlets, while its products are available at more than 64 lakh outlets across India. Nestle: Nestle has earned free cash flows of more than `3,900 crore in the last three years, out of which it has paid dividends of `2,150 crore. The remaining amount has gone into its investments and cash balance. Its distribution network covers more than 35 lakh outlets across India. Gillette: Gillette has earned free cash flows of around `560 crore in the last three years and paid dividends of `800 crore during the same period. Its distribution network includes lakhs of retail outlets across India.

FMCG: Cash-Áow kings Cash and Market

FCF

FCF

Dividend

equivalents

Company name

cap (` cr)

(FY18)

FY18

FY17

Debt to

3Y

FY16

yield (%)

yield (%)

(` cr)

equity

CAGR (%)

ITC

3,54,609

10,371

23.9

17.7

19.0

2.9

1.8

13,469

0.0

11.5

Hindustan Unilever

3,86,585

5,186

14.6

11.2

10.5

1.3

1.1

6,356

0.0

30.1

Nestle India

1,10,076

1,622

16.2

14.8

11.6

1.5

0.8

2,851

0.0

26.6

Godrej Consumer Products

79,647

1,412

14.3

18.1

7.6

1.8

1.3

1,816

0.6

23.2

Dabur India

74,423

889

11.5

9.7

12.8

1.2

1.8

1,019

0.2

16.1

GSK Consumer Healthcare

31,527

674

15.6

13.5

12.6

2.1

1.0

3,585

0.0

4.8

Colgate-Palmolive (India)

36,038

485

11.6

9.2

10.8

1.3

1.8

456

0.0

12.7

P&G Hygiene & Health Care

32,302

377

15.4

17.3

15.5

1.2

0.3

400

0.0

20.6

VST Industries

4,896

377

39.8

11.0

9.1

7.7

2.4

452

0.0

22.7

Bajaj Corp

5,665

162

19.6

22.1

22.0

2.9

3.1

321

0.0

-1.7

21,161

156

9.3

11.0

11.6

0.7

0.4

237

0.0

11.8

5,196

61

12.0

10.7

21.7

1.2

0.6

561

0.0

16.6

Gillette India Zydus Wellness

FCF as a % of sales

February 2019 Wealth Insight 31 Subscription copy of [[email protected]]. Redistribution prohibited.

COVER STORY PHARMA

A pill for tough times In spite of facing regulatory headwinds, some pharma companies have maintained higher margins and generated free cash flows

E

ven after all the issues surrounding pharma companies, such as USFDA (the drug regulator in the US) scrutiny, pricing pressure in the US and intense competition, they continue to generate meaningful free cash flows. Although their margins have taken a hit recently, they continue to be high in comparison to the margins in other sectors. Some of the prominent reasons behind their high free cash flows are: z Once a pharma plant starts working, it keeps on generating revenues with minimal capex requirements. z Pharma companies derive a large portion of their revenues in dollars, which leads to higher margins. z Economies of scale keep their costs in check.

In FY18, Sun generated free cash flows of over `2,000 crore. Divis Laboratories: Divis has earned free cash flows of more than `1,900 crore in the last three years after spending `1,000 crore on capex. During the same period, it has paid dividends of more than `950 crore and used the rest of the cash to increase its investments. Abbott India: Abbott has generated free cash flows of more than `690 crore in the last three years, without incurring any material capital expenditure. During the same period, it has paid a dividend of `290 crore and added the rest of the amount to its cash balance.

Select examples Sun Pharma: In the last one-two years, Sun Pharma has been surrounded by negative news. Still, it has been able to generate free cash flows of more than `8,500 crore in the last three years after spending `8,800 crore on capital expenditure. During the same period, it conducted a buyback and paid dividends of more than `5,500 crore.

Pharma: Cash-Áow kings Cash and Market

FCF

FCF

Dividend

equivalents

Company name

cap (` cr)

(FY18)

FY18

FY17

Debt to

3Y

FY16

yield (%)

yield (%)

(` cr)

equity

CAGR (%)

Sun Pharmaceutical Industries

1,06,494

2,013

7.6

11.2

11.9

1.9

0.5

14,020

0.3

-17.6

Divis Laboratories

40,252

502

12.9

19.0

17.0

1.2

0.7

2,002

0.0

10.3

SanoÀ India

14,329

379

15.4

10.7

8.4

2.6

1.1

730

0.0

13.7

9,281

210

24.5

20.1

18.1

2.3

0.0

104

0.4

7.8

17,196

180

5.5

9.8

8.6

1.0

0.6

1,031

0.0

12.4

Dr. Lal Pathlabs

8,070

125

11.8

13.2

14.6

1.5

0.5

458

0.0

6.3

Advanced Enzyme Technologies

1,920

105

26.9

29.0

29.9

5.5

0.3

61

0.1

-12.1

Thyrocare Technologies

2,899

63

17.8

17.5

22.2

2.2

1.8

112

0.0

-4.3

842

11

9.4

7.5

30.7

1.4

0.3

12

0.0

112.9

Eris Lifesciences Abbott India

Valiant Organics

FCF as a % of sales

32 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

COVER STORY INFORMATION TECHNOLOGY

The dollar effect Since most IT companies have clients based in developed countries, they get their payments in a stronger currency, which contributes to their cash flows

I

T is a services-driven sector. Because, generally, IT companies derive a major portion of their revenues in US dollars, they have high dividend payouts and regularly buy back their stock. Other prominent reasons that make them stand out are: z Their major expense is employee cost. Post that, all revenues make it to the profits. z They do not have to incur any major capex to run their businesses. z They do not have major workingcapital requirements z They enjoy client stickiness as it’s difficult for their clients to switch to a different company, given the complexities.

Select examples Infosys: In the last three years, Infosys has generated `27,000 crore in free cash flows. The company has paid dividends of

more than `21,000 crore and conducted a buyback of another `13,000 crore during the same period. Its dividends and buybacks were more than its free cash flows during the same period. Recently, in Q3, it has announced a buy back of over `8,000 crore. TCS: TCS has generated a massive `63,500 in free cash flows in the last three years alone. Again, its shareholders were the biggest beneficiaries. TCS paid dividends of more than `31,000 crore and bought back its shares worth `16,000 crore. Oracle Financial Services: It has hardly incurred any capex in the last 10 years but still generates free cash flows of around 25 per cent of its sales. In the last three years, it has generated more than `2,800 crore in free cash flows and paid a dividend of more than `4,500 crore during the same period thanks to its cash-rich balance sheet. WI

IT: Cash-Áow kings Cash and Market

FCF

FCF as a % of sales

FCF

Dividend

equivalents

Company name

cap (` cr)

(FY18)

FY18

FY17

Debt to

3Y

FY16

yield (%)

yield (%)

(` cr)

equity

CAGR (%)

Tata Consultancy Services

7,08,507

23,263

18.9

19.7

15.8

3.3

1.3

42,868

0.0

16.4

Infosys

2,96,959

11,220

15.9

12.8

11.7

3.8

3.2

26,225

0.0

8.6

Wipro

1,47,766

6,353

11.7

13.2

12.8

4.3

0.3

29,402

0.3

5.5

HCL Technologies

1,26,926

3,007

5.9

10.9

9.9

2.4

1.3

6,375

0.0

4.2

Tech Mahindra

68,035

2,763

9.0

11.4

8.6

4.1

2.0

6,489

0.1

9.9

Oracle Fin Services Software

31,249

1,127

24.9

24.0

16.6

3.6

3.6

2,646

0.0

-0.6

Larsen & Toubro Infotech

30,875

746

10.2

16.9

12.7

2.4

1.2

1,628

0.0

46.0

Mindtree

13,322

463

8.5

10.9

6.2

3.5

1.1

1,050

0.1

4.8

Hexaware Technologies

9,556

381

9.7

7.1

8.2

4.0

1.2

549

0.0

10.1

NIIT Technologies

7,121

295

9.8

13.8

7.5

4.1

1.3

784

0.0

29.1

Sonata Software

3,130

291

11.9

7.4

8.8

9.3

3.5

477

0.1

19.2

eClerx Services

4,166

264

19.3

21.3

27.8

6.3

0.1

605

0.0

-8.5

Tata Elxsi

6,036

185

13.4

9.6

7.8

3.1

1.1

394

0.0

-1.9

Accelya Kale Solutions

1,389

91

23.9

22.4

17.2

6.6

4.9

64

0.0

-0.7

February 2019 Wealth Insight 33 Subscription copy of [[email protected]]. Redistribution prohibited.

COVER STORY

Other cash-Áow kings Cash and Market

FCF

FCF as a % of sales

FCF

Dividend

equivalents

cap (` cr)

(FY18)

FY18

FY17

FY16

Debt to

3Y

yield (%)

yield (%)

(` cr)

equity

CAGR (%)

1,16,239

7,114

31.6

29.8

31.8

6.1

2.9

22,186

0.0

25.2

Company name

Sector

Hindustan Zinc

Non - Ferrous Metals

Petronet LNG

Inds. Gases & Fuels

32,130

2,820

9.2

6.2

8.9

8.8

2.1

4,820

0.1

17.5

Interglobe Aviation

Aviation

42,175

2,683

11.7

22.4

17.8

6.4

0.5

12,925

0.3

-4.8

Sun TV Network

Media & Entertainment

23,249

856

28.9

28.8

37.4

3.7

1.7

1,888

0.0

11.8

Pidilite Industries

Chemicals

56,634

620

10.2

12.0

13.8

1.1

0.5

1,279

0.0

26.0

HDFC Asset Management

Finance

32,354

602

34.2

29.8

50.8

1.9

1.1

1,313

0.0

-17.1

Marico

Agri

50,027

431

6.8

9.6

12.2

0.9

1.1

686

0.1

19.3

Indraprastha Gas

Inds. Gases & Fuels

18,645

409

8.9

17.7

11.4

2.2

0.8

1,448

0.0

33.1

Page Industries

Textile

25,833

398

15.6

10.0

10.7

1.5

0.6

285

0.1

20.0

Mahanagar Gas

Gas Transmission

8,888

383

17.2

13.7

9.8

4.3

2.1

780

0.0

24.2

Reliance Nippon Life

Finance

9,982

374

23.6

22.9

17.4

3.8

3.8

691

0.0

-49.5

Jagran Prakashan

Media & Entertainment

3,418

344

14.9

15.9

16.9

10.1

2.6

164

0.1

-11.9

L&T Technology Services

Capital Goods

17,040

329

8.8

10.6

13.1

1.9

0.7

375

0.0

32.0

Maithan Alloys

Ferro Manganese

1,376

273

14.5

9.1

10.9

19.9

0.6

393

0.1

64.3

CRISIL

Ratings

11,814

254

15.3

16.7

17.7

2.2

1.7

271

0.0

-6.1

Essel Propack

Plastic Products

3,385

206

8.5

7.0

7.8

6.1

1.1

174

0.6

10.2

Just Dial

Miscellaneous

3,305

205

26.2

14.5

8.0

6.2

0.0

80

0.0

-16.2

Finolex Cables

Electricals

6,869

199

7.1

7.3

13.8

2.9

0.9

805

0.0

20.2

VRL Logistics

Logistics

2,540

160

8.3

7.5

9.0

6.3

1.4

19

0.1

-12.0

Kalyani Steels

Iron & Steel

943

159

11.8

11.1

6.4

16.9

2.3

151

0.2

6.5

AIA Engineering

Capital Goods

15,947

157

6.4

6.7

19.9

1.0

0.5

1,356

0.0

26.0

Kaveri Seed Company

Agri

3,513

136

16.6

16.5

29.6

3.9

0.5

589

0.0

14.1

Care Ratings

Ratings

2,977

136

40.9

41.1

37.1

4.6

2.8

292

0.0

-6.1

Hindustan Media Ventures

Media & Entertainment

951

103

11.8

13.5

8.6

10.9

0.9

497

0.1

-23.9

Grindwell Norton

Abrasives

6,131

95

6.7

9.3

8.6

1.6

0.9

272

0.0

14.5

Mayur Uniquoters

Textile

1,786

79

13.9

13.6

10.6

4.4

0.4

183

0.0

-5.5

MPS

Media & Entertainment

901

76

28.4

15.4

16.3

8.4

2.5

311

0.0

-14.2

Greenlam Industries

Construction Materials

2,076

70

6.2

15.0

6.2

3.4

0.3

10

0.7

13.1

Hawkins Cookers

Consumer Durables

1,554

68

12.4

11.1

5.8

4.4

2.4

87

0.2

3.3

GM Breweries

Alcohol

1,079

67

7.3

7.1

8.8

6.2

0.4

10

0.0

-5.4

Grauer & Weil (India)

Chemicals

1,140

63

12.6

16.6

16.2

5.5

1.2

122

0.0

12.7

ICRA

Ratings

3,059

63

20.3

18.1

17.9

2.1

0.9

330

0.0

-9.4

Kewal Kiran Clothing

Textile

1,479

47

10.1

14.1

7.6

3.2

2.8

156

0.1

-17.7

La Opala RG

Construction Materials

2,402

45

17.4

24.3

6.6

1.9

0.5

205

0.0

-11.4

Orient Refractories

Capital Goods

2,752

38

6.0

9.4

15.6

1.4

1.1

120

0.0

38.1

Elantas Beck India

Chemicals

1,932

31

8.1

13.8

11.6

1.6

0.2

160

0.0

18.3

‘FCF’ stands for free cash flows. Data in all tables as on January 10, 2019. For newly listed stocks, returns are since listing.

34 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

6XEVFULEH 1RZ Insights into Indian mutual funds

BUY A NEW SUBSCRIPTION

DIGITAL

RENEW EXISTING SUBSCRIPTION

DIGITAL+ PRINT

DIGITAL

DIGITAL+ PRINT

3 months for `270

3 months for `382

1 year for `936

1 year for `1,404

Save 40%

Save 15%

Save 48%

Save 22%

1 year for `1,026

1 year for `1,494

3 years for `2,484

3 years for `3,510

Save 43%

Save 17%

Save 54%

Save 35%

Delivery by courier

Delivery by courier

Start my subscription from Name (Mr/Mrs/Ms) Address

Pin Code

State

Phone E-mail Cheque Number

Date

Bank & Branch Payable to Value Research India Pvt. Ltd., New Delhi

*221/,1(

&$//

:+$76$33

0$,/

www.valueresearchonline.com

0120-4201008 0120-4571008

+91-9868891830

C-103, Sector 65, Noida - 201301 [email protected]

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

6XEVFULEH 1RZ Insights into the Indian stock market and companies

BUY A NEW SUBSCRIPTION

DIGITAL

RENEW EXISTING SUBSCRIPTION

DIGITAL+ PRINT

DIGITAL

DIGITAL+ PRINT

3 months for `300

3 months for `356

1 year for `975

1 year for `1,320

Save 20%

Save 5%

Save 35%

Save 12%

1 year for `1,050

1 year for `1,395

3 years for `2,250

3 years for `3,375

Save 30%

Save 7%

Save 50%

Save 25%

Delivery by courier

Delivery by courier

Start my subscription from Name (Mr/Mrs/Ms) Address

Pin Code

State

Phone E-mail Cheque Number

Date

Bank & Branch Payable to Value Research India Pvt. Ltd., New Delhi

*221/,1(

&$//

:+$76$33

0$,/

www.valueresearchonline.com

0120-4201008 0120-4571008

+91-9868891830

C-103, Sector 65, Noida - 201301 [email protected]

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

STRAIGHT TALK

How is the MPC doing? The RBI’s Monetary Policy Committee is focusing just on inflation, not growth. This can have long-term consequences.

ANAND TANDON

The Finance Act 2016 amended the RBI Act 1934 to provide an institutional framework for monetary-policy management. Section 45 of the RBI Act and its sub-sections created the legal framework, whereby a Monetary Policy Committee (MPC) was set up. The central government, in consultation with the RBI, was required to set up a formal inflation target once every five years and the MPC was mandated to set monetary policy to achieve that target. While the press note (dated September 29, 2016) announcing the formation of the MPC mentions that the MPC is expected to maintain “price stability while keeping in mind the objective of growth,” no mention of growth objective translates into the RBI Act. As per the Act, MPC simply has one objective, as stated in Section 45ZB(3), “The Monetary Policy Committee will determine the policy rate required to achieve the inflation target.” This simple statement has done much damage to economic performance as we shall soon see.

MPC’s policy action Since its formation, MPC minutes (published within two weeks of the meeting) are available for the past 14 meetings (up until January 2019). Let’s look at some of the actions taken by the MPC. The graph ‘CPI vs repo rate’ shows the Consumer Price Index (CPI) growth and the corresponding changes made by the MPC to keep it to the target figure (4 per cent +/- 2 per cent). Even the uninitiated can see that the MPC is failing miserably in setting direction. Repo rates were cut just as inflation started to rise and then raised twice at the peak of the inflation cycle. Minutes of MPC 3, when effects of demonetisation were just beginning to wear off, show that the MPC members are unwilling to cut rates because of the ‘transient’ effects of economic shock.

Dr Viral Acharya’s says, “On the one hand, headline inflation has remained low and there is a good case to be made that there is at least a temporary output gap created due to liquidity shortage induced by the currency replacement. Since our flexible inflationtargeting mandate also requires paying attention to growth, it could be natural to lower the policy rate to restore growth levels.” Having stated that there is no sign of worsening inflation and a clear sign of low growth, he then goes on to say, “On the other hand, a low headline inflation has been largely driven by food deflation and the most recent numbers have been heavily driven by the large dip in vegetable prices. In the past, food deflation has had strong seasonal patterns which have tended to rebound and with vengeance when rainfall disappoints.” When translated, this means ‘we will remove all elements of inflation that are low and then make a case for looking at only those that are high. If that doesn’t suffice to convince, then maybe the monsoon will fail!’ Does this demonstrate a model-based or a data-driven’ approach? Or does it smack of dogma – ‘we’ve decided what to do and we’ll just use whatever data is convenient to justify it’? It also raises a fundamental question: if the MPC mandate is to look at inflation as defined by the CPI, why are we looking at defining new inflation measures like core inflation or even more interesting ‘inflation without vegetables!’ If the understanding is that interest rates affect only core inflation (or some variant), would it not be better to define an inflation figure that is targetable and then focus on that rather than allowing MPC members to play ‘bullshit bingo’?

The first dissent The fifth MPC marked the first dissent by at least one member, Prof Dholakia. Arguing for a cut in repo rate, February 2019 Wealth Insight 37

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

STRAIGHT TALK CPI vs repo rate 7 6

CPI 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25

Repo rate

6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00

5 4

5.21 5.07

4.88 4.20 3.63

3.41

3

3.65

3.89

3.17

3.28 3.28

2.99

4.87 4.92 4.17 3.69 3.70

3.58

3.38

2.36

2.18

2

4.44 4.28 4.58

6.25 6.25 6.50 6.50 6.50 6.50 6.50

2.33 2.19

1.46 1 0 O

N 2016

D

J

F

M

A

M

J

J

A

S

O

N

D

J

F

A

M

M

2017

J

J

A

S

O

N

D

2018

available at this stage. Without more clarity, it is possible to make policy errors that can be large and costly in the medium term. Accordingly, I vote to wait and watch” Translated, this means ‘I know inflation is falling, but I don’t like lower rates. So I’ll wait till I get data that shows there is no need to cut rates!’

Dr Dholakia stated, “The three-month and 12-month advance inflationary expectations as per the RBI survey of households are unambiguously declining and are among the lowest levels observed in the history of such surveys. ...there cannot be disagreement on the Indian economy significantly underperforming compared to its potential now for quite some time.” He goes onto add, “Any theoretical rule-based policy for flexible inflation targeting would not only justify but also necessitate at least 50 basis point cut in the policy rate.” Note at this time, real interest rate (as calculated on the repo rate) is a high 2.7 per cent. This implies that even the highest-rated borrowers would face a real interest rate of a back-breaking 4.5 per cent or more. Forecast inflation was still in the range 3.5–4.5 per cent (see the table ‘Inflation forecast vs actual CPI’). Dr Micheal Patra disagrees, “The revised inflation trajectory for the first half of 2017–18, the near-term inflation outlook, is admittedly benign. Yet, in a situation in which transitory and structural factors are meshed and difficult to decouple, apparently divergent messages emanate from the few data points that are

And the change to ‘calibrated tightening’ Having stuck it out with high rates while inflation remained within target range, the MPC then decided majestically to raise rates just as inflation expectations and realised inflation fell off sharply. Astoundingly MPC 13 even changed their stance to ‘calibrated tightening’ even as growth remained sub-par. Dr Chetan Ghate justifies his position, “While I am comforted by the decline in median inflationary expectations of households for the one-year ahead horizon by 30 bps in the last RBI’s survey, the median one-year ahead expectations are now higher by 180 basis points over the September 2017 round. Meanwhile, the three-month median inflationary expectations

MPC’s meetings and policy action Meeting number

Institution

Action proposed on repo rate

1

2

Cut 0.25

No change No change No change No change Cut 0.25

3

4

5

6

7

8

9

10

11

No change No change No change No change Inc. 0.25

12

13

Inc. 0.25

No change No change

14

Dr Chetan Ghate

ISI

1

1

1

1

1

1

1

1

1

1

1

1

Inc. 0.25

Dr Pami Dua

DSE

1

1

1

1

1

1

1

1

1

1

1

1

1

1

Dr Ravindra Dholakia

IIM A

1

1

1

1

Cut 0.5

Cut 0.5

Cut 0.4

Cut 0.25

1

1

1

1

1

1

Dr Micheal Patra

RBI

1

1

1

1

1

no change 1

1

Inc. 0.25

Inc. 0.25

1

No change 1

1

R Gandhi

Dep Gov RBI

1

1

Member changed - Dr Viral Acharya takes over

Dr Urjit Patel

Gov RBI

1

1

1

1

1

1

1

1

1

1

1

1

1

1

Dr Viral Acharya

Dep Gov RBI

1

1

1

1

1

1

1

1

1

1

1

1

Note: 1 = Vote for the resolution, other numbers are in per cent. Inc. = Increase. Source: RBI.

38 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

1

STRAIGHT TALK

increased by over 50 bps compared to the previous round, with a cumulative increase of about 220 basis points over the September 2017 round.” This translates into: ‘Though inflation is falling, I’ll chose figures from periods I like so that I can justify a rate hike!’ He continues, “What worries me on the pick up in growth is the dismal consumer confidence numbers, with consumer confidence in Q2 FY18-19 worsening. Ideally, in a growing economy, the durability of growth is better sustained if it is supported by growing consumer confidence. Notwithstanding this, I continue to remain sanguine about current and medium-term growth prospects as in the last policy. I vote for an increase in the policy repo rate by 25 basis points at today’s meeting of the Monetary Policy Committee. I also vote for a change in the stance from ‘neutral’ to ‘calibrated tightening’.” This translates into: ‘So while there is poor consumer confidence, I know that things will improve (someone whispered in his ear, I guess), so let’s tighten the policy.’ I wonder if someone can even find a shred of consistency in the arguments above. Prof Dholakia, perhaps the only consistent voice on the MPC, has this to say in MPC 14: “Drastic and sudden changes in external economic environment have taken place ….RBI’s own downward revision of the forecast of inflation 12 months ahead…is a clear indication of their long-term impact on the economy. Thus, a policy response is called for. If there is no policy action in response to such a major favourable shock, the MPC would run the risk of being considered

neither current nor relevant! Under such circumstances, retaining the stance of calibrated tightening seems totally inconsistent and unjustified.”

Change of mandate is required The purpose of the MPC was to make policy making consistent and transparent and less based on individual dogma. As shown above, this has not been achieved. Some changes that are needed can be set out as below: z Clear articulation of the need to support growth with clearly set targets: An inflation target without a corresponding constraint to foster growth has already led to and will continue to lead to an extremely high real interest rate to the detriment of the economy. z Unambiguous identification of target: If the CPI is to be targeted, specious arguments about transients, vegetables, international trade wars, etc., should not be allowed to colour views. Obviously the economy is dynamic. The reason of frequent meetings is to make rapid adjustments. Ignoring short-term changes to respond to a hypothetical long-term equilibrium negates the purpose of the frequent meetings of the MPC. z A maximum target for real interest rates Ideally, there has to be a performance measure of how the MPC has performed in terms of forecasting inflation and also in supporting growth. Otherwise, the MPC may prove to be an impediment to growth. That will cost many of India’s young their jobs. WI Anand Tandon is an independent analyst.

,QÁDWLRQIRUHFDVWYVDFWXDO&3, Date of Meeting no. meeting

Inflation forecast Stance

Q4FY17

H1FY18

H2FY18

Actual CPI (Average over H1FY19

H2FY19

reference period)

Repo rate

Real rate

1

03-Oct-16

Accommodative

5.00

3.57

6.25

2.68

2

06-Dec-16

Accommodative

5.00

3.57

6.25

2.68

3

07-Feb-17

Neutral

4–4.5

4.5–5

3.56

6.25

2.69

4

05-Apr-17

Neutral

4–4.5

4.5–5

3.56

6.25

2.69

5

06-Jun-17

Neutral

2–3.5

3.5–4.5

3.56

6.25

2.69

6

01-Aug-17

Neutral

2–3.5

3.5–4.5

3.56

6

2.44

7

03-Oct-17

Neutral

4.2–4.6

4.57

6

1.43

8

05-Dec-17

Neutral

4.3–4.7

4.57

6

1.43

9

06-Feb-18

Neutral

5.1–5.6

4.5–4.6

4.57

6

1.43

10

04-Apr-18

Neutral

4.7–5.1

4.40

4.32

6

1.68

11

04-Jun-18

Neutral

4.8–4.9

4.70

4.32

6.25

1.93

12

30-Jul-18

Neutral

4.40

4.7–4.8

4.32

6.5

2.18

13

03-Oct-18

Calibrated tightening

3.8–4.5

2.63

6.5

3.87

14

03-Dec-18

Calibrated tightening

3.8–4.2

2.63

6.5

3.87

Note: The colours represent inflation forecasts made and modified over time. For example, the first forecast for H1FY18 at 4–4.5 per cent was made in Feb 2017 and the realised inflation averaged 3.56 per cent over H1FY17. Source: RBI.

February 2019 Wealth Insight 39 Subscription copy of [[email protected]]. Redistribution prohibited.

MAIN STREET

Market’s a stage How competitive advantage drives churn in the stock market

SAURABH MUKHERJEA setting up operations (legal costs, capex for a factory, The uneven manner in which the Indian stock market paying for packaging and branding) are `10 crore and churns has puzzled us for several years. To be specific, suppose that the variable costs (raw materials and fuel the churn in the Sensex has been around 25–30 per cent primarily) are very low in comparison. Assuming that for the past decade, i.e., over a 10-year period, around the market size is `100 crore, if the market leader has 50 seven–nine companies exit the Sensex (and an equally per cent market share (which is not unusual when a number enter). In contrast, churn in the BSE 500 has sector is in its infancy), the fixed costs form only 20 per been around 50–60 per cent, implying that over the cent of its revenues. In contrast, if the other players course of a decade, between 250–300 companies exit the have each around 10 per cent market share, their index (with an equivalent number entering). In fact, revenues are barely enough to cover there is no other broad-based index in their fixed costs. Thus, the barriers to any other major stock market which Churn in the BSE entry appear to be relatively high at this churns anything as much as the BSE 500. stage of the sector’s evolution. To date, we have failed to understand 500 has been why the BSE 500 churns twice as much Stage 2 – Rapid new entry: As the niche around 50–60 as the Sensex. market grows, the cost advantage of the per cent, largest player is narrowed down at a perunit level (as fixed costs can be defrayed Fluctuation in competitive advantage implying that across a wider revenue base). So, the Now, however, we believe we have a over the course competitive disadvantage reduces for cogent theory for why churn is so much of a decade, the non-leading players. As result, higher in the BSE 500 than in the Sensex. operating margins start coming under Basically, we are seeing Indian between 250– pressure for the leader. Markets grow companies’ moats go through various 300 companies rapidly by attracting new customers stages of waxing and waning as these exit the index who are by definition non-captive. These companies grow and as the sectors in customers provide a viable base for new which they operate grow as well. entrants. Additionally, what also tends to happen is the Stage 1 – Inception: A niche market emerges and a firm success of the market leader draws new entrants into which is dominant in that niche prospers as other the market. La Opala is an example of a firm currently players in that niche either don’t have a quality in Stage 2. product and/or have higher total cost/unit produced. So, let’s assume that the `100 crore market we saw in The market leader establishes its dominance in the Stage 1 grows 10 times over the course of a decade and niche (which can be geographic niche or a niche in the becomes a `1,000 crore market. Assume further that our product space) and spreads outwards. Garware market leader still has 50 per cent market share and Technical Fibres is an example of a firm currently in that the laggards still have around 10 per cent market Stage 1. share each. However, the laggards’ revenues are now The fact that the market leader has a cost advantage comfortably in excess of their fixed costs (of `10 crore) can be easily demonstrated. Suppose the fixed costs of 40 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

MAIN STREET Investment implications and this attracts lots of new entrants. In fact, the 1. As the Indian economy gets networked with better laggards are now likely to have free cash flows, which roads, low-cost flights (along with several smaller they will spend on heavy marketing and advertising. airports) and widely available broadband, it is Such a spend will force the market leader to also spend increasingly becoming possible to discover ‘niche’ on marketing, which will drag down the market leaders’ markets which can be catered to on a regional or margins. national basis (whereas in the past, these markets were Stage 3 – Intense competition: Now there are several each a little island in a small town or village with poor players in the burgeoning market and although the connectivity to the next town or village). These niche market leader still has the best operating margins, opportunities are what’s creating lots of Stage 1 and there are other profitable and increasingly sizeable Stage 2 firms. For example, over a decade ago, La Opala players in a large and highly competitive market. focused on a niche segment in the tableware market – Operating efficiency is now a critical driver of success opalware. Around this, the firm first built a franchise in in this stage of a sector’s evolution. For example, eastern India and then across India. Its market cap went mobile telephony or vehicle financing today. from up from around `150 crore 10 years ago to around The big risk for the market leader at this stage – `2,500 crore now. La Opala’s success has now attracted bigger than the more obvious risk of rising competitive Borosil and Cello Wim Plast into the opalware market. intensity – is that it tries to deal with slowing earnings growth by entering new markets or new industries. If 2. Competitive intensity is relatively low in Stages 1 and he does so, then the leader’s ability to deal with 2, peaks in Stage 3 and moderates somewhat in Stage 4. intense competition in his core business is diluted and Share-price growth for market-leading firms is therefore with that dilution in focus goes his likely to follow the same path. chances of improving operating 3. Stage 3 usually comes when a company Once a company efficiency. Bharti’s entry into Africa in has broken into the BSE 500 after a good has nailed down 2009 is an example of a less-than-ideal run lasting at least five years. This is response to rising competitive intensity when the average fund manager in India its moats in in its core market. In contrast, HDFC the typically sell-side analyst in Stage 4, it is very and Bank’s and Gruh Finance’s obsessive Mumbai ‘discovers’ a stock. Because hard to dislodge. focus on expanding inside their core Stage 3 is the toughest of the four stages, market allowed them to reinforce their This explains why it also helps us to understand why leadership even as an increasing number companies that have just entered the churn in the of challengers entered their markets. BSE 500 find it so hard to sustain earnings Sensex is so Bharti is an example of a business growth and share-price momentum. currently in Stage 3. 4. Companies which seem to be in Stage much lower than 4 are ‘consistent compounders’ like Stage 4 – The leader consolidates: In the the churn in the Relaxo, Page Industries, Dr Lal Pathlabs, final stage in a sector’s evolution one or BSE 500. Asian Paints, HDFC Bank, Gruh Finance, two players create very powerful moats Pidilite, Nestle, etc. Once a company has (not just around efficiency but also around customer captivity and nailed down its moats in Stage 4, it is favourable access to lower-cost inputs). These players very hard to dislodge. This explains why churn in the Sensex is so much lower than the churn in the BSE 500. then drive everybody else out of the industry by not hiking prices, which hampers the ability of the less 5. Investors are far more likely to make healthy returns efficient players to hike prices and stay profitable. For (due to the spread between return on capital and cost of example, Dr Lal Pathlabs has not hiked prices in the capital being juicy) from Stage 1 and Stage 4 companies. last two years, whilst Asian Paints’ 10-year price-hike Stage 4 companies are likely to have multi-billionCAGR is just 2 per cent. In short, these companies are dollar market caps. Stage 1 are likely to have market consistent compounders. cap below $0.5 billion. A market-leading firm only makes it to Stage 4 if it 6. Smart investors focus on Stages 1 and 4. The lazy works hard on improving efficiency and staying focused money chases stocks in Stage 3. Thanks to the lure of in Stage 3. If a firm loses focus in Stage 3, then Stage 4 the rear-view mirror, the temptation to invest in Stage – and consistent compounding – proves elusive for it, as 3 stocks tends to be very high. WI Bharti Airtel, Tata Steel and numerous other large Saurabh Mukherjea is the co-author of Coffee Can Investing and the Indian companies have discovered over the past decade. founder of Marcellus Investment Managers. February 2019 Wealth Insight 41 Subscription copy of [[email protected]]. Redistribution prohibited.

OFFBEAT

Sparking wildfires How the media drives our emotions

SANJEEV PANDIYA

The #MeToo campaign has quieted

feeling of conflict when we feel our value systems have been violated. a little, so what I am saying need not be focused only on In itself, righteous indignation is a strong-enough how the campaign attracted attention, held it and how/ emotion, rooted in our sense of right and wrong. Also why it then sobered down. What I am saying is known as our morality, it’s mostly supplied by the applicable in general to a much larger range of trends collective unconscious (made famous by Carl Jung), that follow similar patterns in evolution. which is filled with our religious principles and our Across nature, trends are sparked, take root, flare culture. But it’s made doubly strong because it is fed by up and then ‘sober down’. For example, consider herding, which transmits this emotion from one to wildfires. Wildfires happen when the underlying another across the population. Do you conditions are ‘fertile’, i.e., the soil is full get the connection with dry timber of dried timber or agri-residue. They The media is feeding a forest fire? have a role in evolution, in that they devoted to So now let’s come to the second stage, ‘recycle’ the organic matter in dead sparking wildfires after fertile conditions. You need a spark leaves and turn them into ashes, so that to set the forest floor on fire and that’s they may be regenerated in the form of where there are by righteous indignation. So, new organic matter. fertile conditions. provided anything that catches the imagination We see this in human behaviour, too, This is not (and anger is the perfect limbic emotion) but with a pernicious difference. can contribute to such a spark. Conditions turn ‘fertile’ in the sense that intelligent But this is where the analogy veers people ‘get bored’, a common human evolution with a off. Nature has a specific objective in condition, often called ‘mind wandering’ purpose; it’s just creating wildfires: the recycling of in intelligent company. And then they organic matter. But suppose there was switch on the TV, which turns them into a predator an arsonist who’s going around creating ‘dry timber’, waiting to be ‘sparked’. waiting to prey wildfires randomly, wherever he sees This is where the crowd becomes fair on the weak. fertile conditions – that’s his business. game for the media. Once the TV has Exactly that’s what happens in been turned on, the battle commences in human behaviour. There’s an entire business, the right earnest to catch the eyeballs. And everything that media, that’s devoted to sparking wildfires where there catches eyeballs is there on display as entertainment, are fertile conditions. This is not intelligent evolution infotainment (in the name of news) and what have you. with a purpose; it’s just a predator waiting to prey on So what drives eyeballs? the weak (aka the stupid). One of the critical life skills We have 46 basic emotions and an important in the modern world is to understand how (and why) motivator is anger. Mostly, anger is defined as ‘feeling the media works and the underlying (limbic) emotions thwarted’ (from an explicit or subliminal objective), that it harnesses to trap you into an irrationality. And but it has shades of grey. One of the important grey that irrationality is seriously damaging for your areas around anger is righteous indignation, the 42 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

OFFBEAT

(financial) health. To live in this jungle of modern civilisation, it’s very important to know about this predatory animal. We often call the media scurrilous. But the media is neither a person nor an institution with any centralised (thinking) mind of its own. Whenever you give a monolithic name to something (a country, a religion, the judiciary or the media), you credit that monolith with a thinking mind. But the media is an unthinking animal, rather like tigers. They are a danger the moment you enter the forest, but it’s nothing personal; they are neither specifically looking for you, nor do they have any enmity while they are preying on you. They don’t even remember the mauling they gave you because you were not careful. Anybody who sits in the public eye is exposed to this risk, just as anyone who seeks to take a walk in the forest must risk the prospect of suddenly coming up against a tiger. We see this regularly in markets, should we dare to buy a publicly listed company, especially one which is in the glare of the media. The excess volatility and the noise surrounding F&O stocks, which make little changes in business prospects (see the recent movements in the stock prices of Indigo, Tata Steel or Sun Pharma), is entirely the creation of the TV media. Anticipating this news and being able to handle the resultant mayhem is a critical business for the derivatives trader. In fact, it’s almost all he does. But back to the #MeToo movement to explain an important point. The original spark is not important, but the underlying emotion is always righteous indignation – just like the media latched onto the

unfortunate rape victim (who was raped in a moving bus). Well, that was certainly news, but without the macabre violence, it would have remained a minor statistic in police records. By giving the victim a name, this was turned into a major emotive issue that harnessed (you guessed it) righteous indignation. The point I am making is not the merit of the sparking event, but the way events unfolded thereafter. Those serve the animal, not the original victim – rather like the accident of you getting lost in the forest is a minor detail. Thereafter, it’s for the tiger who found you to decide his pleasure with you. So, if steel prices in China have dropped by 20 per cent, it is then linearly assumed that the same will happen in India. And depending on the nature of the coverage, stock prices will follow suit. Never mind if steel imports don’t tick up, and reality is far removed from the reportage. Surviving this media-led stampede is a critical life skill in the markets, and it is not for you to ask why these things happen as much as it is not for you to ask what the tiger has against you, personally. An understanding of the underlying driving emotions is, therefore, a critical life skill if you want to live in the modern world as much as a deep knowledge of the various predators stalking you in the jungle is a critical survival skill. The point is this is not counted as education in the financial courses and is a critical missing link. The current state of financial education is like teaching about the jungle (of human civilisation) by putting up a map. How useful is that knowledge against the appearance of a tiger? WI The author teaches, trades and writes at spandiya.blogspot.com

February 2019 Wealth Insight 43 Subscription copy of [[email protected]]. Redistribution prohibited.

TAKING STOCK

The big consumption shift While a digitally savvy consumer poses a huge opportunity for consumer companies, they must innovate to keep the consumer loyal to them

MALINI BHUPTA

Consumer is king we’ve heard often

expenditure by 2030. In contrast, India had 68 cities with one million plus population and accounted for 33 enough. But in India, the consumer is the very engine of per cent of the country’s household expenditure in economic growth. Be it the Asian crisis of 1997 or the 2016. global financial crisis of 2008, India has managed to The opportunity is undoubtedly huge, but the path weather most global storms with relative ease because to this proverbial pot of gold is going to be littered with of a large domestic economy. Powering the world’s many disruptions. In an era where technology will fastest-growing economy is private consumption, which pretty much define how we live, work and consume, accounts for 60 per cent of India’s GDP. In contrast, often referred to as the Fourth Industrial Revolution, consumption accounts for 40 per cent of China’s the consumption space too will be shaken up as economic growth, while 60 per cent is investments. It is consumer expectations from brands and consumption the domestic consumer that has come to the rescue of patterns change. The early signs are already visible. companies and investors in the worst of times. Given Shared mobility is already impacting automobile sales that the contribution of investments in India’s growth in urban markets. From Bengal to Madhya Pradesh, trajectory is erratic, consumption is the only reliable consumers are increasingly looking for exciting food engine of growth. And herein lies both the opportunity items online. Food is the most searched consumer and threat for investors as the consumer’s preferences category on Google, followed by hair care and skin care. and behaviour are fast changing, as are cravings. And 26 per cent diaper sales and 16 per cent of cereal First, the good news. India is set to become the sales in Bangalore are happening world’s third-largest economy in the next through e-commerce. five years from the world’s sixth largest Domestic Undoubtedly, technology shifts and at present. Domestic consumption is consumption is e-commerce will determine how expected to be a $3 trillion opportunity by 2030, according to the World Economic expected to be a consumers consume, but another theme seems to be silently emerging in India. Forum’s insight report on the future of $3 trillion Newer brands and categories are likely consumption in India (dated January opportunity by to emerge because consumer patterns 2019). As urbanisation gains pace, India’s are no longer uniform. Over the next few households will consume more goods 2030, according years, Indians born in liberal India and services. And the opportunity is not to the World (those born between early 90s and early limited to any particular economic Economic 2000s) will come of age economically. segment or age group. The opportunity These 700 million plus Indians will not is going to be huge and spread across Forum’s report only consume more compared to the different income groups. McKinsey on the future of previous generation but will demand believes that India will have 100 cities consumption in differentiated products. This will be the with a population of one million plus first challenge for existing consumer and this population will account for 49 India companies as these consumers are more per cent of India’s total household 44 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

TAKING STOCK

open to experimentation. The World Economic Forum’s report on India says, “One of the most challenging and exciting implications for companies in India is the opportunity to shape consumption patterns – in terms of categories consumed, brands purchased or ways of accessing products and information.” One of the themes that is playing out even now is the emergence of new categories and brands that are breaking away from the one-size-fits-all products. Premium yogurt maker Epigamia and Paper Boat are two such examples. Launched in 2013, Paper Boat is a preservative-free alternative to aerated drinks. It has both traditional and unique flavours, like ‘Aam Panna’ and ‘Chilli Guava’. Its revenues grew 71 per cent year on year in FY18. Danone’s investment arm has invested `170 crore in Epigamia, after exiting the dairy business last year. The general understanding is that the traditional FMCG players that continue to do the same old stuff will lose market share of up to 10 percentage points in coming years as consumers turn to new brands. Currently, category leaders have 40 per cent market share but this will be challenged by newer brands in the future. What’s changing consumer behaviour very rapidly is media penetration, changing aspirations and focus on well-being. And the value-conscious Indian consumer may veer towards private labels that meet the aspirational needs at affordable ticket prices. Not surprisingly that newer categories like ‘masstige’ products are making their way on shelves and e-commerce marketplaces. Masstige products are those that are between mid-market and super luxury but have affordable prices. Nyka, India’s premium beauty-products retailer, is adding new products under the private labels after its nail-colour range found acceptance. While 75 per cent customers come to Nyka through its app, its offline stores, too, are doing well. Each store currently clocks revenues of `3 crore a year and Nyka’s October 2018 sales stood at `108 crore, up 40 per cent from September 2018. What will tip the scales will be the connected Indian consumer. With 750 million Indians expected to be connected to high-speed internet, the demand for products and services will go through the roof as will

expectations from existing brands. Shreyash Sigtia, Industry Head, Consumer Packaged Goods, at Google, recently said at a consumer conference that the share of searches from metros has declined from 45 per cent prior to Jio to 36 per cent now. Almost 28 per cent searches through the Google app are now voice-based. So what are Indians searching on Google when it comes to consumer products? There were 2.5 billion searches annually on food, ranging from desserts, chocolates, fruits and vegetables. Hair care has seen 750 million searches, while skin care has seen 650 million searches annually. According to a Google–BCG study, 40 per cent FMCG sales by 2020 would be influenced by the digital medium. India’s consumption story is set to be rewritten by new-age and tech-savvy consumers. It’s a big opportunity for sure, but there are risks to this story as well. A big bet is on India’s per-capita GDP will be going past $2000 in a year or two, which has been a tipping point for consumption in most other economies like Singapore, Russia, China and Brazil. As per-capita GDP goes past $2000, consumption booms. The World Economic Forum’s consumer report estimates that by 2030, India will add 130 million middleincome households and 21 million high-income households, overall doubling the share of these households to 51 per cent. But all this hinges on job creation. Indians need at least 100 days of reskilling to be prepared for the jobs of 2022. Only 2.3 per cent of India’s workforce is skilled compared to 40 per cent in China. To keep Indians relevant in an evolving economy, at least 125 million Indians will need to be skilled. While some companies like Honda, IBM, Lenovo and Motorola are skilling Indians, the scale is enormous. IBM, under Atal Innovation Mission, is set to train high-school graduates for careers in artificial intelligence, block chain and cybersecurity. If the reskilling of Indians does not go as per plan and new jobs are not created, then the consumption story could easily be minus 100 million households from the middle-income pyramid. And that would derail India’s gravy train. WI The author is the editor of Value Research Stock Advisor

February 2019 Wealth Insight 45 Subscription copy of [[email protected]]. Redistribution prohibited.

How to avoid value traps Why a cheap-looking stock can cost you dearly

46 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

Vikas Vardhan Singh

S

tock market can be irrational at times. But it is this irrationality that also generates opportunities. While stock prices can significantly move in both directions, there is often a reason why a stock is in the dumps. This means that when the market gives an opportunity to buy a stock at an unbelievably low price, it’s likely that there is something fishy about the company. If a company has also been growing its earnings at a fast pace but is still trading at a mouthwatering multiples, it merits a deeper investigation before you invest in it. Retail investors are frequently lured by cheap valuations and don’t delve into the reasons why the company is trading at such low multiples. A stock with cheap valuations can be a ‘value trap’, i.e., its cheap valuations don’t signify value but are due to bad underlying fundamentals. How to avoid value traps? Ask why the stock is trading at cheap valuations. To illustrate this, we studied certain companies that have grown their earnings over the short and long terms and yet are available at attractive valuations. We filtered out stocks that have grown their profits by more than 20 per cent annually over the last three years and by more than 20 per cent in Q2 YoY. Further, we selected those which are available at a price-to-earnings multiple of less than seven and market capitalisations of more than `500 crore (see the table). We then found out the reason for their ultra-low valuations. While the answers were not readily apparent, one key issue common to all these companies is the quality of earnings. Let’s have a look at them.

HEG HEG manufactures graphite electrodes that are mainly used in making steel. Its earnings have grown at an annualised rate of 357 per cent in the last three years. Its share price has multiplied by 24 times during this period. The return on equity stands at 75 per cent. What has caused HEG to deliver such spectacular numbers? The reason for this was the sudden rise in the price of the graphite electrode from $3,000 per tonne to $15,000 per tonne in the past two years. This happened because China clamped down on polluting industries, leading to

30 per cent fall in the capacities of Chinese graphiteelectrode makers. The fall in supply proved to be a boon for Indian graphite-electrode companies. HEG’s stock is available at a P/E of just five.

What explains the valuation HEG has thrived on declining competition and not because of an improvement in its own fundamentals. A sudden rise in the prices of a commoditised product, like graphite electrodes, may not last long as more players in India and globally join the market to fill the gap. Moreover, many Chinese companies whose operations were shut down have started getting environmental clearances and are adding new capacities. This may reinstate competition. India is also facing similar issues on the environmental front as China does and this may lead to production curbs here, too. A few months back, the government imposed a 20 per cent tariff on the export of graphite electrodes. These uncertainties have raised questions about the sustainability of HEG’s growth.

HEG has thrived on declining competition and not because of an improvement in its own fundamentals. A sudden rise in the prices of graphite electrodes may not last long as more players in India and globally join the market to fill the gap.

Graphite India Graphite India, like HEG, manufactures graphite electrodes. So, it is also a beneficiary of the spurt in graphite-electrode prices. Its earnings have grown at an annualised rate of 208 per cent in the past three years. During this period, the stock has returned 112 per cent annualised but is still available at a P/E of 5.3 times. At 45 per cent, the RoE is also very high.

What explains the valuation Graphite India has even more company-specific issues than HEG. Firstly, on the pollution front, it has started

Value traps P/E

P/B

3Y PAT growth Q2 PAT growth (%, CAGR) (%, YoY) ROE (%)

Company name

Sector

HEG

Capital Goods 5.37

4.39

357.1

682.1

75.6

Graphite India

Capital Goods 5.29

45.0

3.32

208.0

980.6

Dewan Housing Finance Finance

4.70

0.67

30.2

52.5

14.2

Indiabulls Real Estate

Realty

2.00

0.88

77.7

49.5

39.4

Nava Bharat Ventures

Power

5.35

0.54

74.6

427.5

8.5

Sanwaria Consumer

Agri

5.45

1.39

67.9

104.7

20.3

Century Enka

Textile

6.28

0.62

32.0

28.1

8.0

February 2019 Wealth Insight 47 Subscription copy of [[email protected]]. Redistribution prohibited.

getting the regulator’s attention. After protests erupted against the company’s plant in Bangalore, the Supreme Court directed the company to pay compensation, which is yet to be decided. Secondly, the company is embroiled in a case related to its auditor, PricewaterhouseCoopers. PwC has been alleged of violations in accounting practices in nine companies, including Graphite India.

After protests erupted against the company’s plant in Bangalore, the Supreme Court has directed Graphite India to pay compensation, which is yet to be decided

Dewan Housing Finance Corporation Dewan Housing Finance (DHFL) is an NBFC which lends to retail customers and developers. Despite profit growth of 30 per cent annualised in the last three years and more than 50 per cent in Q2 year on year, the company’s stock has fallen more than 60 per cent from its peak in September 2018. This was the result of the liquidity crunch post the IL&FS default and the panic selling of company’s bonds by mutual funds. The stock is trading at a P/E of 4.7 times and a P/B of 0.65 times.

What explains the valuation Other than the panic in the NBFC sector, there are company-specific issues which are responsible for DHFL’s cheap valuations. The holding company of DHFL, Wadhawan Global Capital, raised `2,125 crore through zero-coupon non-convertible debentures. These debentures have a backing of DHFL through its subsidiaries. A default on these bonds would spell trouble for DHFL.

The holding company of DHFL, Wadhawan Global Capital, raised `2,125 crore through zero-coupon non-convertible debentures. These debentures have a backing of DHFL through its subsidiaries. A default on these bonds would spell trouble for DHFL.

Indiabulls Real Estate Indiabulls Real Estate is focused on residential and commercial properties in tier 1 cities. The company has grown its revenue by 29 per cent and net profit by 48 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

78 per cent annualised in the past three years. This looks commendable, given the state of the real-estate sector. The company’s total debt has come down from `9,510 crore in FY17 to `6,600 crore in FY18. Despite the growth, the stock has fallen by more than 60 per cent in the last one year. This was primarily due to the liquidity crunch faced by housing-finance companies, which meant lower funds for realty developers like Indiabulls Real Estate. The stock is trading at a P/E of just two.

What explains the valuation In FY18, the company’s revenue jumped to `5,927 crore from `2,320 crore a year ago. When looked at closely, the annual report reveals that the revenue includes profit from sale of subsidiaries and rental commercial projects. Generally, such profits are shown separately in the income statement and not included in the revenue. However, being a real-estate company, Indiabulls has reported them as revenue. In absence of such items in the next financial year, it’s likely that the company will report a far less revenue and thus lower earnings.

When looked at closely, Indiabull Real Estate’s annual report reveals that its revenue includes profit from the sale of subsidiaries and rental commercial projects

Nava Bharat Ventures Nava Bharat Ventures is a diversified company, with businesses in power, mining, ferro alloys, agriculture and healthcare. The company’s earnings have grown at a healthy pace of 27 per cent annually over the past three years on the back of good performance from the ferro-alloy and power divisions. Despite a decent show at the consolidated level, the stock is trading at a P/E of 5.3 times.

What explains the valuation Firstly, the stock is trading at a so-called ‘conglomerate discount’ as the company has multiple unrelated businesses. Secondly, while the income statement shows healthy growth in revenues and earnings, if one sees the cash-flow statement and the balance sheet, the cheap valuation looks justified. Although the company has made accounting gains, the actual cash flow from operating activities remains low. The growth has come due to an increase in debtors. In FY18, the receivables stood at `726 crore. These are more than 30 per cent of the company’s total revenue of `2,348 crore. The ratio of receivables to revenue was just 6.4 per cent in FY14 but has grown gradually over the years. Moreover, the company’s debt stands at `4,008 crore as against the net worth of `3,385 crore. The promoter’s credibility has been suspect, too. In 2014, the Directorate of Enforcement attached properties, worth `186 crore, belonging to two promoters and directors of Nava Bharat Power Projects. Two of the company’s directors were alleged to have been involved in the coal-block scam that time.

In FY18, Nava Bharat’s receivables stood at `726 crore. These are more than 30 per cent of the company’s total revenue of `2,348 crore.

Sanwaria Consumer Sanwaria Consumer is into food grains and edible-oil businesses. Earlier, it was only in the edible-oil business but later forayed into other segments like packaged rice, pulses, sugar, soya chunks, etc. The company’s revenue has grown by 25 per cent and earnings by 68 per cent annualised in the last three years. Sanwaria has opened company-exclusive stores called ‘Sanwaria Kirana’ to sell its products directly. The stock is still available at a P/E of 5.6 times.

What explains the valuation There have been multiple instances of large variations in the unaudited and audited results announced by the company. For example, in Q4 FY18, the company had declared a profit of `36 crore in its unaudited results. When the audited results came a month later, it changed the profit figure to `20 crore. In 2013, SEBI fined the company and its promoter, Anil Agarwal, `1 crore each for stock-price

manipulation. The stock price had gone up from `22.95 in February 2009 to `98 in July 2009.

There have been multiple instances of large variations in the unaudited and audited results announced by Sanwaria Consumer

Century Enka Century Enka is a part of the B K Birla Group. It manufactures nylon-tyre fabric, which is used as a reinforcement material in ‘bias tyres’ (used in heavy and off-road vehicles) and nylon yarn used mainly in the apparels industry. The company’s earnings have grown by 32 per cent annualised in the last three years, mainly on account of the rise in nylon prices. Despite this healthy growth, the stock is trading at a P/E of 6.2 times.

What explains the valuation The company derives 60 per cent of its revenue from nylon-tyre fabric, which is used to manufacture bias tyres. However, the new-age radial tyre, which is gradually replacing the bias tyre in every segment, uses polyester rather than nylon. If radial tyres dominate the industry, Century Enka’s business is likely to come under threat. On the other hand, the company’s directors and promoters, who also sit on the board of the group company Kesoram Industries, have been alleged of insider trading. Kesoram had sold stake in Century Textiles, another group company, to a firm called Camden Industries for `141 crore in March 2016. Kesoram then invested the money in another subsidiary, Cygnet Industries. Cygnet, in turn, bought back the stake of Camden for `355 crore the very next year. It was alleged that Camden made a profit of `214 crore but Kesoram shareholders lost `100 crore. It’s suspected that such transactions have happened in Centurey Enka, too.

If radial tyres dominate the industry, Century Enka’s business is likely to come under threat

Conclusion Long-term investors look for quality, growth and valuation as major factors. However, when a growth stock is available unreasonably cheap, they often forget the third aspect: quality. Make sure that you consider all three factors while picking stocks and try to find the reason for cheap valuations. At Value Research Stock Advisor, we do this all the time for our subscribers. WI Vikas Vardhan is Senior Equity Analyst at Value Research Stock Advisor

February 2019 Wealth Insight 49 Subscription copy of [[email protected]]. Redistribution prohibited.

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

50 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

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.

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

1,027

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%

601 114 106 41

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

Safe bets Company

Action Construction

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 (`)

5.2

9

2

9.6

16.9

0.31

1,128

96

204-78

7.9

8

2

10.0

18.1

0.79

2,163

321

443-257

6.9

8

3

14.2

8.2

0.82

551

65

99-38

3.4

9

0

10.5

9.1

0.58

1,297

810

1614-655

4.7

8

1

18.4

7.1

0.81

685

359

550-252

10.2

9

2

10.4

15.9

0.63

1,448

87

225-60

4.6

8

2

11.1

9.0

0.30

1,045

381

492-224

9.5

8

0

5.6

29.4

0.58

1,275

47

57-28

3.8

9

2

15.5

8.5

0.85

5,566

357

627-237

4.6

8

0

13.9

11.4

0.49

959

1,046

1125-585

Everest Industries

3.7

8

1

10.8

11.7

0.70

789

506

638-376

Excel Industries

7.7

8

1

12.0

12.7

1.11

1,724

1,374

1922-652

Construction

Ahluwalia Contracts Construction

Andhra Petrochemicals Organic Chemicals

Asian Star Company Gems & Jewellery

Beekay Steel Industries Stainless Steel

Bhansali Engg Polymers Thermoplastics

Cigniti Technologies Computer Software

Confidence Petroleum Storage & Distribution

DCM Shriram Diversified

DIL Drugs & Pharma

Cement & Asbestos Products

Pesticides

February 2019 Wealth Insight 51 Subscription copy of [[email protected]]. Redistribution prohibited.

STOCK SCREEN

Company

Stock style

Garware Polyester Plastic Films

Gujarat Narmada Valley Nitrogenous Fertilizer

HEG Welding Machinery

HIL Cement & Asbestos Products

Himadri Speciality Chem Coal & Lignite

Insecticides (India) Pesticides

International Paper APPM Paper

KNR Construction Construction

Maithan Alloys Ferro Alloys

Manali Petrochemicals Organic Chemicals

Meghmani Organics Pesticides

National Aluminium Co Aluminium

NR Agarwal Industries Paper

NRB Bearings Ball Bearings

Phillips Carbon Black Carbon Black

Quick Heal Technologies Computer Software

Sadhana Nitro Chem Organic Chemicals

Sandur Manganese Minerals

Satia Industries Paper

Altman Z-Score

Piotroski F-Score

Modified C-Score

Earnings yield (%)

P/E

PEG

Market cap (` cr)

Share price (`)

52-week high/low (`)

3.3

8

2

15.3

10.1

0.67

625

269

290-134

3.6

9

2

23.9

5.7

0.67

5,886

379

547-315

10.6

8

3

27.9

5.4

0.42

14,150

3,542 4955-2212

4.5

9

1

12.5

13.1

1.12

1,486

1,998 2606-1480

5.0

9

3

7.9

19.0

0.60

5,550

133

193-106

4.1

8

1

11.3

13.1

0.71

1,231

593

847-361

3.9

9

1

12.0

13.1

0.40

1,780

448

591-284

4.6

8

2

8.1

11.6

0.92

3,063

218

340-165

6.5

8

1

38.6

4.5

0.68

1,351

467

1026-448

4.7

9

3

26.3

6.7

0.69

511

30

56-29

3.8

9

2

23.6

7.1

0.60

1,506

59

120-52

4.0

8

2

30.0

5.3

0.43

11,623

62

90-57

3.6

8

1

17.9

6.2

0.77

654

383

616-337

3.8

8

1

7.3

18.4

0.80

2,063

215

224-131

3.0

8

1

12.1

10.4

0.44

3,498

203

287-157

35.2

8

1

15.3

15.7

0.65

1,486

211

383-178

6.2

8

2

15.2

8.4

0.71

680

731

1350-128

7.4

9

1

35.6

6.0

0.54

879

1,005

1470-771

3.2

9

2

18.4

6.0

1.02

521

521

719-202

52 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

STOCK SCREEN Company

Stock style

Altman Z-Score

Sharda Motor Industries Auto Ancillaries

Shemaroo Entertainment Media & Entertainment

Sreeleathers Footwear

Sterlite Technologies Communication Equipments

Sunflag Iron & Steel Co Finished Steel

Tata Metaliks Pig Iron

Time Technoplast Other Forms-Primary Plastic

UPL Inorganic Chemicals

VenkyS (India) Food Processing

Zee Media Corporation Media & Entertainment

Piotroski F-Score

Modified C-Score

Earnings yield (%)

P/E

PEG

Market cap (` cr)

Share price (`)

52-week high/low (`)

4.9

8

3

18.1

10.4

0.66

866

1,442 2700-1426

12.5

8

2

10.9

14.9

0.86

1,179

434

595-376

12.4

9

1

6.4

19.6

0.62

581

230

303-156

7.5

8

2

6.2

25.8

0.79

11,716

292

415-255

3.4

8

3

21.8

6.2

0.60

959

53

100-48

4.0

8

0

13.2

9.1

0.99

1,583

625

950-545

3.4

9

0

11.5

12.8

1.16

2,273

101

225-97

3.9

8

2

7.4

18.9

1.06

39,477

776

829-537

6.4

9

2

10.4

16.6

1.01

3,270

5.8

9

2

7.4

17.6

0.63

1,146

2,321 4725-1787 24

46-22

Data as on January 15, 2019. 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

1,027

months YoY  Π At least 20% in latest quarter YoY

204

Stocks with a P/E of less than 15

86

On fast track Company

Ashok Leyland

Commercial Vehicles

Stock style

P/E

5Y median P/E

PEG

14.1

33.3

0.14

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

37.1

76.5

5Y EPS growth (%)

Market cap Share (` cr) price (`)

94.9 27,462

94

52-week high/low (`)

168-92

February 2019 Wealth Insight 53 Subscription copy of [[email protected]]. Redistribution prohibited.

STOCK SCREEN Company

Stock style

Asian Star Company Gems & Jewellery

Balmer Lawrie Investments Misc. Financial Services

Beekay Steel Industries Stainless Steel

Bhageria Industries Organic Chemicals

Birla Cable

Wires & Cables

Century Enka Synthetic Yarn

Cigniti Technologies Computer Software

DIL

Drugs & Pharma

DLF

Real Estate

Elpro International Electronic Equipment

Empire Industries Glass & Glassware

Everest Industries

Cement & Asbestos Products

Excel Industries Pesticides

Firstsource Solutions Misc. Other Services

Gallantt Ispat Steel Wires

Gandhi Special Tubes Steel Tubes & Pipes

GNA Axles Auto Ancillaries

Godawari Power & Ispat Sponge Iron

Graphite India Welding Machinery

Gujarat Alkalies & Chem Caustic Soda

5Y median P/E

PEG

9.1

15.5

0.36

105.5

11.7

17.1

0.69

7.1

8.7

8.9

P/E

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

Market cap Share (` cr) price (`)

52-week high/low (`)

69.0

1,297

810

1614-655

42.3

40.6 149.5

877

396

485-361

0.08

41.7

70.0

30.1

689

359

550-252

8.3

0.12

92.8

81.2

68.9

637

292

365-208

13.9

14.2

0.34

492.2

961.9 109.1

563

189

229-50

6.2

8.3

0.52

28.1

24.2

29.4

572

264

385-227

8.9

29.8

0.16

387.5

127.0

79.4

1,044

381

492-224

11.4

23.2

0.10

808.4 1,321.0 155.6

959 1,046

1125-585

6.8

40.2

0.13

2,545.0 1,213.0

9.5

103.9

0.05

5,091.4 1,673.8 185.3

9.9

28.1

0.59

187.2

68.5

30.2

624 1,033 2521-1002

11.6

16.7

0.44

92.1

212.6

36.7

784

12.7

11.4

0.19

288.0

9.8

10.0

0.55

33.4

37.3

53.9

3,658

53

84-37

10.0

45.4

0.24

230.7

98.5

28.5

1,045

36

51-22

13.8

18.0

1.26

22.6

22.3

53.3

514

372

430-337

12.3

18.6

0.21

41.5

59.5

23.0

793

369

579-306

2.9

5.4

0.16

137.9

647.0

28.5

876

249

624-240

5.3

18.6

0.07

913.3 1,149.0 136.8 13,572

696

1127-596

5.5

7.1

0.20

521

929-432

54 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

63.9

103.3

5Y EPS growth (%)

75.4 33,147

528.7 105.1

105.5

35.5

886

186

268-142

52

70-40

506

638-376

1,724 1,374

1922-652

3,823

STOCK SCREEN P/E

5Y median P/E

PEG

11.0

8.4

0.46

58.3

109.4

37.2

2,522

219

310-173

14.3

18.3

0.93

546.3

790.0

20.3 10,211

932

975-721

5.7

8.5

0.18

78.4

93.1

38.9

5,886

379

547-315

6.9

8.5

0.41

183.0

76.9

27.3

4,475

112

166-86

11.9

16.5

1.30

82.7

40.3

46.6

9,567

170

224-156

5.4

12.8

0.04

682.1 2,580.9 196.4 14,150 3,542 4955-2212

13.1

11.8

0.33

185.5

8.1

11.2

0.16

20.4

24.3 100.6

1,246

403

836-338

6.4

14.4

0.07

197.2

237.4 277.7

1,034

334

621-282

8.0

12.4

0.27

20.6

31.0

29.2 34,505

809

1440-639

2.0

11.0

0.04

29.7

485.2

69.2

3,874

86

259-69

13.1

32.5

0.41

550.3

102.2

32.5

1,780

448

591-284

10.0

13.5

0.48

52.1

22.6

24.4

558

385

591-335

12.8

33.2

0.40

98.9

72.8

32.6

3,269

66

150-55

5.8

7.4

0.21

61.0

22.6

45.3

2,604

81

182-67

7.7

10.2

0.06

83.3

53.3 165.2

2,691

151

194-97

JMC Projects (India)

13.8

17.0

0.31

20.2

41.1

1,585

94

141-67

JSW Steel

7.6

17.8

0.06

154.5

261.4 107.2 70,522

292

428-266

Jubilant Life Sciences

14.6

19.9

0.27

63.9

43.1 185.1 11,407

720

1039-586

L&T Finance Holdings

14.9

16.5

0.75

51.5

39.3

141

190-111

Company

Gujarat Ambuja Exports Other Agri Products

Gujarat Fluorochemicals Organic Chemicals

Gujarat Narmada Valley Nitrogenous Fertilizer

Gujarat State Fertilizers Nitrogenous Fertilizer

Gujarat State Petronet Crude Oil & Natural Gas

HEG Welding Machinery

HIL Cement & Asbestos Products

IG Petrochemicals Organic Chemicals

India Glycols Organic Chemicals

Indiabulls Housing Fin Housing Finance

Indiabulls Real Estate Real Estate

International Paper APPM Paper

Ion Exchange (India) Industrial Machinery

Jain Irrigation Systems Plastic Tubes & Pipes

Jindal Saw

Steel Tubes & Pipes

JK Paper Paper

Real Estate

Finished Steel

Drugs & Pharma

Misc. Financial Services

Stock style

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

86.6

5Y EPS growth (%)

71.9

38.2

Market cap Share (` cr) price (`)

52-week high/low (`)

1,487 1,998 2606-1480

30.4 28,162

February 2019 Wealth Insight 55 Subscription copy of [[email protected]]. Redistribution prohibited.

STOCK SCREEN Company

Stock style

Maharashtra Seamless Steel Tubes & Pipes

Manali Petrochemicals Organic Chemicals

Mangalore Chemicals Nitrogenous Fertilizer

Mastek Computer Software

Meghmani Organics Pesticides

Natco Pharma Drugs & Pharma

National Aluminium Co Aluminium

National Peroxide Inorganic Chemicals

NHPC Electricity Generation

NOCIL Thermoplastics

NR Agarwal Industries Paper

Orient Paper & Industries Paper

Oriental Hotels Hotels & Restaurants

Phillips Carbon Black Carbon Black

Piramal Enterprises Drugs & Pharma

PNC Infratech Road Transport

Pokarna Granite

Polyplex Corporation Plastic Films

Prakash Industries Diversified

Precision Wires India Wires & Cables

P/E

5Y median P/E

PEG

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

5Y EPS growth (%)

Market cap Share (` cr) price (`)

52-week high/low (`)

10.3

17.0

0.37

160.4

105.2

63.6

3,243

486

548-407

6.7

9.7

0.22

83.4

143.4

60.1

511

30

56-29

7.7

16.6

0.28

41.7

129.9

63.8

527

45

81-36

11.7

18.0

1.05

41.8

53.6

26.4

1,001

422

645-365

7.1

11.9

0.10

22.4

74.9

80.3

1,509

59

120-52

14.4

40.8

0.23

103.5

51.4

55.4 12,725

693

1043-636

5.3

12.5

0.21

117.4

180.4

57.6 11,623

62

90-57

14.6

18.8

0.47

192.7

212.3

55.9

11.6

11.8

2.85

32.5

55.9

13.9

12.7

0.32

38.0

67.5 104.0

6.2

8.1

0.06

41.7

12.1

32.7

0.26

9.4

104.8

10.4

2,289 3,982 5539-1800 26

32-22

2,781

168

233-139

66.9 104.9

651

383

616-337

101.4

76.4

46.1

901

42

53-25

0.14

2,406.2

881.5

91.3

786

44

68-34

23.7

0.22

112.6

94.9

43.6

3,498

203

287-157

8.9

21.6

0.12

20.2

234.1

75.6 42,994 2,346 3308-1795

11.4

12.5

0.26

110.8

118.1

20.4

3,912

153

199-122

9.9

12.1

0.19

63.3

46.9

52.9

539

175

256-125

6.3

11.0

0.07

151.3

52.9

81.8

1,638

512

668-406

2.7

8.9

0.08

30.3

109.0

66.6

1,581

97

276-71

13.0

13.9

0.58

32.9

42.1

22.3

532

230

345-182

56 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

24.8 26,161

STOCK SCREEN Company

Ramkrishna Forgings Auto Ancillaries

Reliance Capital Equipment Leasing

Renaissance Jewellery Gems & Jewellery

Rico Auto Industries Auto Ancillaries

Sadhana Nitro Chem Organic Chemicals

Sandur Manganese Minerals

Sanwaria Consumer Soyabean Products

Sarda Energy & Minerals Finished Steel

Satia Industries Paper

Seshasayee Paper Paper

Shriram Transport Fin Co Equipt.Leasing

Sonata Software Computer Software

SREI Infra Finance Equipt.Leasing

Stovec Industries Industrial Machinery

Sunflag Iron & Steel Co Finished Steel

Take Solutions Misc.Other Services

Tata Metaliks Pig Iron

Tata Power Company Electricity Generation

Tata Steel Finished Steel

The Inv Trust of India Hire Purchase

Stock style

P/E

5Y median P/E

PEG

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

13.8

25.5

0.16

4.3

10.1

0.23

8.2

5.1

0.29

30.7

14.8

16.9

0.22

50.1

8.4

11.9

0.07

6.0

11.0

0.29

22.2

5.5

10.6

0.14

4.8

8.1

6.0

39.3

5Y EPS growth (%)

Market cap Share (` cr) price (`)

52-week high/low (`)

166.7

92.8

1,685

517

875-505

271.8 1,423.5

65.6

5,604

222

606-195

32.2

42.4

584

309

412-254

51.3

99.2

961

71

102-61

3,318.0 3,278.1

96.8

680

731

1350-128

65.5

29.9

883 1,005

1470-771

104.7

105.0

36.6

745

10

31-9

0.39

58.6

56.8

25.8

955

264

627-227

5.9

0.04

76.3

69.6

37.7

521

521

719-202

8.7

10.7

0.18

91.7

25.4

54.6

1,318 1,049

1348-792

14.8

17.3

2.49

22.6

25.5

21.0 26,947 1,188

1669-902

14.2

11.5

0.40

37.1

36.0

70.8

3,192

305

429-255

3.6

18.2

0.19

29.0

68.1

38.3

1,680

33

109-25

13.6

19.0

0.47

49.6

53.3

71.1

522 2,489 3350-2211

6.2

10.4

0.09

43.2

101.7

91.6

956

53

100-48

11.1

15.3

0.46

44.6

22.3

38.7

2,234

151

308-127

9.1

9.3

0.19

41.7

39.2 151.2

1,578

625

950-545

5.1

26.4

0.04

88.5

345.1

93.0 20,313

75

98-60

3.4

13.4

0.08

218.2 1,534.7

37.6 57,214

475

754-467

13.3

90.3

0.38

117.1

27.7

149

285-141

77.2

760

February 2019 Wealth Insight 57 Subscription copy of [[email protected]]. Redistribution prohibited.

STOCK SCREEN Company

Stock style

Thirumalai Chemicals Organic Chemicals

Torrent Power Electricity Distribution

Ultramarine & Pigments Dyes & Pigments

West Coast Paper Mills Paper

WPIL Pumps & Compressors

5Y median P/E

PEG

5.7

11.8

0.12

32.4

73.9

49.0

1,106

108

242-101

12.1

15.4

0.18

29.8

38.9

63.8 12,828

268

307-212

13.3

14.0

0.37

22.1

34.4

55.5

710

244

408-211

6.5

12.7

0.06

85.2

55.2

67.1

1,898

290

415-229

9.7

22.5

0.23

659.7

288.6

58.7

820

837

987-501

P/E

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

5Y EPS growth (%)

Market cap Share (` cr) price (`)

52-week high/low (`)

Data as on January 15, 2019. 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

1,027

Companies must have a five-year 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

820 577 445 18

Bargain hunt Company

Stock style

Bharat Road Network Construction

BSE Misc. Fin ancial Services

Eros International Media Media & Entertainment

Gujarat Alkalies & Chem Caustic Soda

Hinduja Global Solutions Misc.Other Services

Hindustan Media Ventures Books & Newspapers

P/B

P/E

0.71 25.8

PEG

Dividend yield (%)

Debt-equity ratio

RoE (%)

Market cap (` cr)

Share price (`)

52-week high/low (`)

0.13

0.5

1.0

11.5

831

97

210-82

0.91 14.1 -0.19

6.1

0.0

22.4

3,074

594

958-574

0.32

3.0

0.31

0.0

0.3

11.0

791

83

248-60

0.97

5.5

0.20

1.2

0.1

14.9

3,823

521

929-432

0.89

7.5

1.40

1.5

0.4

13.6

1,384

654

1038-591

0.69

8.8

6.32

0.9

0.1

14.8

931

126

271-119

58 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

STOCK SCREEN Company

Stock style

P/B

HT Media Books & Newspapers

Indiabulls Real Estate Real Estate

Indian Metals Metal Tanks & Fabrications

Kiri Industries Dyes & Pigments

NLC India Electricity Generation

Polyplex Corporation Plastic Films

Prakash Industries Diversified

Redington India Computer Hardware

Sandesh Books & Newspapers

Sarda Energy & Minerals Finished Steel

Srikalahasthi Pipes Pig Iron

Thomas Cook (India) Tourism

P/E

PEG

Dividend yield (%)

Debt-equity ratio

RoE (%)

Market cap (` cr)

Share price (`)

52-week high/low (`)

0.45

6.8 -3.18

0.8

0.5

15.0

1,110

48

114-36

0.88

2.0

0.04

0.0

0.9

39.4

3,874

86

259-69

0.53

4.9

0.14

6.4

0.7

16.4

633

238

730-217

0.89

4.0

0.19

0.0

0.1

11.2

1,427

458

682-383

0.74

8.0

0.95

6.7

1.0

15.4

9,353

68

109-65

0.59

6.3

0.07

7.8

0.3

11.7

1,638

512

668-406

0.49

2.7

0.08

0.0

0.3

14.5

1,581

97

276-71

0.85

7.0

1.27

2.9

0.4

14.5

3,266

84

196-78

0.90 10.0

1.50

0.6

0.0

12.8

621

829

1358-719

0.65

4.8

0.39

1.9

0.9

14.0

955

264

627-227

0.73

7.0

0.15

3.2

0.3

14.8

875

188

431-165

0.98

1.5

0.01

0.2

0.0

120.8

8,715

233

303-193

Data as on January 15, 2019. New entrants.

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

No. of companies that cleared the filters

THE FILTERS Market cap greater than `500 cr

Stocks with a current dividend yield of more than 3%

Dividend payout ratio of less than 40%

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

1,027 895 24 16

February 2019 Wealth Insight 59 Subscription copy of [[email protected]]. Redistribution prohibited.

STOCK SCREEN

Dear dividend Company

Stock style

Andhra Sugars Diversified

BSE Misc. Financial Services

Deepak Fertilisers Inorganic Chemicals

Gujarat Ind Power Company Electricity Generation

Gujarat Mineral Dev Corp Coal & Lignite

IRB Infrastructure Construction

KSE Oil Cakes & Animal Feed

Moil Minerals

NLC India Electricity Generation

ONGC Crude Oil & Natural Gas

PTC India Electricity Distribution

Reliance Capital Equiptment Leasing

Reliance Infrastructure Electricity Distribn.

Srikalahasthi Pipes Pig Iron

Sutlej Textiles & Industries Synthetic Yarn

VST Tillers Tractors Other Machinery

P/E

PEG

Dividend per share (`)

7.7

1.33

10.0

3.0

23.3

17.1

899

332

715-302

14.1 -0.19

36.0

6.1

27.0

78.6

3,074

594

958-574

1.77

6.0

4.2

32.5

9.4

1,361

143

425-134

17.4 -0.89

2.7

3.5

24.6

23.2

1,179

78

137-67

19.4 -0.98

3.5

4.0

31.5

24.0

2,771

87

169-81

6.4

0.63

5.0

3.2

19.1

13.3

5,542

158

286-117

8.4

0.19

60.0

3.5

27.6

21.1

9.5

8.70

5.5

3.3

36.0

32.9

4,285

166

257-155

8.0

0.95

4.5

6.7

35.2

9.4

9,353

68

109-65

7.3

1.25

6.6

3.0

38.3

14.3 1,86,210

145

213-135

9.6

0.72

4.0

4.4

33.3

3.7

2,691

91

121-64

4.3

0.23

11.0

5.0

21.2

13.7

5,604

222

606-195

8.1

-0.61

9.5

3.1

18.7

24.6

8,163

310

561-275

7.0

0.15

6.0

3.2

19.0

26.2

875

188

431-165

11.5 -0.98

1.3

3.1

18.8

8.4

686

42

112-41

50.0

3.2

38.6

10.6

9.2

15.4

2.34

Data as on January 15, 2019. New entrants.

60 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

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

Market cap (` cr)

Share price (`)

52-week high/low (`)

555 1,734 4000-1640

1,365 1,569 3095-1537

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%

319 263 204 89 48 24 10

Solid foundation Company

Aarti Industries Organic Chemicals

Aurobindo Pharma Drugs & Pharma

Hero Motocorp Two & Three Wheelers

Hexaware Technologies Computer Software

Minda Industries Auto Ancillaries

Natco Pharma Drugs & Pharma

Rajesh Exports Gems & Jewellery

Sun TV Network Media & Entertainment

Sundram Fasteners Fasteners

Tata Elxsi Computer Software

Stock style

P/E

PEG

Debt-equity Interest ratio coverage ratio

5Y avg RoE (%)

5Y EPS growth (%)

Market cap (` cr)

Share price (`)

52-week high/low (`)

32.8

1.3

1.3

4.3

22.8

46.2

12,699 1,566 1582-1000

21.0

0.6

0.4

42.7

31.0

37.8

46,008

15.9

1.3

0.0

171.2

36.6

28.1

58,036 2,911 3825-2648

16.4

1.5

0.0

429.3

28.2

54.4

9,513

320

558-294

23.8

0.4

0.4

12.6

20.4

58.7

8,050

309

459-292

14.4

0.2

0.1

58.6

21.9

55.4

12,725

693

1043-636

12.3

0.5

1.2

3.5

20.9

22.8

17,066

578

874-542

17.4

1.3

0.0 1,570.4

25.6

47.3

22,871

580

1098-553

27.6

0.9

0.5

15.8

20.9

59.6

11,150

529

689-480

21.1

0.6

0.0

456.5

39.1

37.3

6,103

979

1491-922

787

830-527

Data as on January 15, 2019. EPS growth rates are annualised. New entrants.

February 2019 Wealth Insight 61 Subscription copy of [[email protected]]. Redistribution prohibited.

WORDS WORTH NOW

The global economy is strong enough... If a slowdown happens, it will be mild, shallow and short. The fundamentals of oil demand are sufficiently strong and the oil market won’t be impacted. On the supply side, we are vigilant to take appropriate response if there’s an impact on demand. Khalid al-Falih Energy minister, Saudi Arabia, Financial Express, January 15, 2019

[Speaking about the rejection by the parliament of the Brexit deal] We are living through a historic moment...following the referendum that divided our nation... We dearly need to bring our country back together, and last night’s vote showed that we do have a long way to go.

Gandhiji had led the movement against political colonisation. Today, we have to collectively launch a new movement against data colonisation. In this new world, data is the new oil. And data is the new wealth.

Theresa May British PM, Mint,

Mukesh Ambani Chairman,

January 17, 2019

Reliance Industries, BusinessLine, January 19, 2019

In the 5G space, we can leapfrog inadequacies which we have in the physical world, all of which can be overcome with use of information and communication technologies... There is a serious concern that while people are talking of 5G as a slogan, it won’t happen unless we put a lot of investment in fibre. Without fibre, 5G will not happen. R S Sharma Trai chairman, Financial Express, January 18, 2019

I respectfully submit that unless my shareholding goes below 10% and/or my group is not represented on the board, I would continue to be held out as a promoter, and be faced with the attendant exposures/ risks of being a promoter. Naresh Goyal Promoter, Jet Airways, Financial Express, January 18, 2019

62 Wealth Insight February 2019 Subscription copy of [[email protected]]. Redistribution prohibited.

I am of the belief that it is not the big that will beat the small or the small that will beat the big, but the fast that will beat the slow. I also believe that disruptors are often overplayed and that adaptability is underplayed. An incumbent, if agile and resilient, can be a formidable force for anyone. The other thing to keep in mind is that FMCG is not a zero-sum game. There is room to grow. As a company, we keep a hawk’s eye on what is happening in the market. We do not have to be the first to enter a category, we could be second or third, but be better. Sanjiv Mehta Chairman & MD, HUL, Business Standard, January 21, 2019

Small Is Powerful A little investment every month goes a long way. Systematic Investment Plan (SIP) is a facility offered by Mutual Funds which enables investors to invest a fixed amount at a specified interval into a particular fund.

1+1+1+1+1+1+1+1+1+1+1+1+1+1+1+1+1+1+1+1

+1+1+1+1+1+1+1+1 +1 +1 +1+1+ 1+1 +1 +1 ++1+1 +1 +1 +1 +1 +1 +1 +1+1 +1 +1+1+ 1+1 +1+1+1+1+1+ 1+1+1+1+1+1+1+1+1+1 +1 +1+1+1 +1 +1 +1 +1+1+ +1+1+1+1+1+1+1+1+1+1+1+1+1+1+1+1+1 +1 +1 1 +1 +1+1+1+1+1+1+1+1+ 1+1+1+1+1+1+1+1+1+1 1+1+1+1+1+1+1+1+1+1+1+1+1+1+1+1+1+1+1+1+

Contact your Financial Adviser or give us a missed call on +91 98104 92222

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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

25 YEARS OF HELPING YOU REACH FOR BETTER

N

IN L K

TEMP

LE

FR

N

F

E

RS

AL

TH

YEA O

CRE

Franklin India Bluechip Fund

Franklin India Prima Fund

Investments In Predominantly Large-Cap Companies

Investments In Predominantly Mid-Cap Companies

"MUFSOBUJWF
UP

Suitable for: Retirement Corpus

Education Corpus

T

O

A

FRANKLIN INDIA BLUECHIP FUND FRANKLIN INDIA PRIMA FUND

Long Term Wealth Creation

AT

ING

W

PRODUCT LABEL These funds are suitable for investors who are seeking*: t
-POH
UFSN
DBQJUBM
BQQSFDJBUJPO t
"
GVOE
UIBU
JOWFTUT
JO
MBSHF
DBQ
TUPDLT
 Franklin India Bluechip Fund t
"
GVOE
UIBU
QSJNBSJMZ
JOWFTUT
JO
NJEDBQ
TUPDLT

Franklin India Prima Fund *Investors should consult their financial distributors if in doubt about whether these products are suitable for them.

Follow us at :

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