Wealth-insight - May 2020

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May 2020 Volume XIII, Number 11

26

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.

COVER STORY

The portfolio tonic Stocks to boost your portfolio’s immunity to the pandemic

Editor Dhirendra Kumar Senior Associate Editor Vibhu Vats Copyediting Debjani Chattopadhyay, Rachael Rajan

39

Research & Analysis Danish Khanna, Rajan Gulati and Yash Rohra

Which tax slabs are better for you?

Design Mukul Ojha

SPECIAL REPORT

From this financial year, you will have a choice between old and new tax slabs. We help you choose the right tax slab for you.

Production Hira Lal Data source for stocks AceEquity

© 2020 Value Research India Pvt. Ltd. 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

43

INTERVIEW

‘The outlook for the healthcare sector is positive over the next two-three years’ SAILESH RAJ BHAN Deputy CIO – Equity Investments, Nippon India Mutual Fund

Advertising Contact: Venkat K Naidu +91-9664048666 Biswa Ranjan Palo +91-9664075875

Subscription: 0120-4201008 / 4571008 09868891830 / 9560200520 Total pages 68, including cover

4 Wealth Insight May 2020

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Columns

7 EDIT

by

8

INSIGHT

Value all the way

DHIRENDRA KUMAR

Restarting stock selection

While only time will tell how disruptive COVID-19 will be, we already know how to pick companies that can survive this crisis

10

WORDSWORTH WISDOM

Beating volatility blues with investment greats

22

46

In the dust

EVERYDAY ECONOMICS

by PUJA MEHRA The haircuts economy

The story of IndusInd Bank’s rise and fall.

India’s unorganised haircutting market highlights the problems of reaching out to the vulnerable sections in times of distress.

24

MONTHLY AGENDA

A crude fact A fall in crude-oil prices doesn’t often result in a market gain

48 by SAURABH MUKHERJEA Knowing the unknowable

Our understanding of the present tends to be incomplete and the future is even more difficult to predict. Narrative reasoning can help.

50 STRAIGHT TALK

by ANAND TANDON Marvels of gene and genomics Genetic engineering can help fight deadly diseases but its wider applications pose many questions

STOCK ADVISOR

What changes, and what does not

12

MAINSTREET

STOCK STORY

14

MARKET COMPASS

Market Barometer Big Moves

19

ANALYST’S DIARY

Bucking the trend Bang, bank!

21

The market goes through good and bad phases. That doesn’t mean we also have to change our investment approach.

54

STOCK SCREEN

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

66

WORDS WORTH NOW

IN FOCUS

India and value investing Mrinal Singh Deputy CIO - Equity, ICICI Prudential AMC

',6&/$,0(5 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

May 2020 Wealth Insight 5

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EDIT

Restarting stock selection While only time will tell how disruptive COVID-19 will be, we already know how to pick companies that can survive this crisis

DHIRENDRA KUMAR

For the moment, the best thing for investors to do is to forget about the bigger picture and focus on the smallest possible unit of investing. What is the big picture here? The motherhood questions: the state of the world, the progression of COVID-19, the impact on China being the default source of everything to the world, the fate of the oil economy, etc., etc., etc. There is no answer to these questions that can be derived now from any information that you or I have. If you are a punter, you can trade the daily ebb and flow of fear, uncertainty and doubt in these things but you can’t invest in those things. And so what is the smallest unit of investing? Obviously, the stock itself. As I’ve said many times earlier, it’s tempting for us investors to get obsessed with big issues. From time to time, we all fall under the illusion that equity investing is about identifying and exploiting macro trends. We feel that our ability to make money from stocks can be enhanced by studying, understanding and anticipating broad trends in the economic conditions of a country or the world. Nowadays, when the world is facing the largest macro trend in decades, the temptation is all the more. Every investing decision seems subservient to the estimations of how COVID will go. This sounds logical but it’s not. The issue is the very idea that equity investors should pay attention to the large scale, macro issues and invest accordingly. The problem is that investing well and getting good returns requires a combination of skills of different kinds. Broadly, these can be broken up into figuring out which stocks will do well on the one hand and figuring out broader, marketwide or economy-wide trends on the other. After years of observing the markets and investors, I have formed a firm belief that while the former is well within the

capability of many investors, the latter is practically impossible to do on a sustained basis. I’ll explain what I mean. Do we have all the inputs required to estimate how much the world economy will slow down over the next two years? And even if we did, do we have the skills or the inputs required to translate that into specific investing actions? Clearly not. However, let’s look at the situation from the bottom up. Do we have the inputs to decide which companies are stronger than others? Which have enough stored up strengths to overcome adverse conditions better than their competitors? Whose managements have a track record of operational excellence and financial prudence? Who haven’t loaded up with beyond what they can continue servicing in bad times? Whose managements have actual skin in the game in the well being of the business? The answer to all these questions is a resounding yes! All this, and more, is visible from the way companies were run before COVID. Some of these will fall upon bad times, but we have enough clues to make informed judgement calls that we can use in our investing even in these volatile times. Our cover story of this month is a way of restarting this ‘normal’ way of investing. Ever since the pandemic broke, we have all been too guilty of focusing too much on the macros and the larger issues concerning the details of the disease itself. It’s time to get down to brass tacks and start looking at individual stocks again. Of course, as is the case with all such stories that we do, this is not a list of recommended stocks. It’s an exercise in evolving shortlisting criteria that may be suitable at this time. See this as part of a process of stock selection that we all have to start, sooner rather than later. May 2020 Wealth Insight 7

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INSIGHT

Value all the way Investors are so desperate to know where and when the market bottom will come. They don’t realize the indicator is right under their nose. “You” are one of the best market indicator out there. The day you sell in desperation is when the bottom would have been made.

Value Investor Journal

@VJ_Rabindranath

You don’t need to outperform every year to outperform over a ten or a twenty year time frame. However, ensure you don’t or lose very little in between. That’s the crux of risk management.

Followers

18.5K

Think really long-term, in decades. But take action in short-term, as soon as facts change. Till then do nothing. What’s investment? Usain Bolt won 8 gold medals in 3 Olympics & he only ran for less than 115 seconds on the track, earning $119 million. That’s economy of effort.

Why Follow

Coimbatore-based Vijay Rabindranath identifies himself as a value investor, and uses his Twitter account to share investing wisdom gleaned from years spent in investment research. He claims that he now “no longer works for money,” as instead his investments work for him. He is inspired by Warren Buffett, Charlie Munger, and Howard Marks, and this reflects in his posts, many of which are quotes from these greats.

But for those 2 minutes, he trained for 20 years. That’s investment. Think long term. Patience pays. ‘Never ask a barber’ said Peter Lynch ‘if you need a haircut’. Likewise, never ask an economist if his forecasts will be accurate and never ask a money manager if he can beat the markets. Quality merchandise at fire sale prices. Buy socks or stocks. Everyday low prices. Mega sale. Offer valid only till coronavirus lasts. Hurry up! If your investing time horizon is: 1. Less than one year, you are in the wrong place to start with 2. Less than three years, then valuations are important, damn important 3. More than five to ten years and beyond; then the quality of business is more important than valuations At last, people who were waiting for a long overdue correction has finally arrived. Never allow a crisis go waste. Events like the one we are going through now would look like a blip few years from now. Stay the course. Keep investing. Compiled by Rachael Rajan

8 Wealth Insight May 2020

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WORDS WORTH WISDOM

Beating volatility blues with investment greats The ongoing volatility in the equity markets worldwide has unnerved investors. But volatility is a part and parcel of equity investing. Indeed, it can help you boost your returns. The following quotes by some all-time investment geniuses will bring home the point.

TOLERATING VOLATILITY IS PART OF EQUITY INVESTING Unless you can watch your stock holding decline by 50% without becoming panic stricken, n, you should not be in the stock market. WARREN BUFFETT

You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.” PETER LYNCH

The stock market is the story of cycles and of the human behaviour that is responsible for overreactions in both directions. SETH KLARMAN

MIND YOUR TEMPERAMENT The most important quality for an investor is temperament, not intellect. WARREN BUFFETT

The investor’s chief problem—and his worst enemy—is likely to be himself. In the end, how your investments behave is much less important than how you behave. BENJAMIN GRAHAM

A lot of people with high IQs are terrible investors becausee they’ve got terrible temperaments. You need to keep raw, irrational emotion under control. CHARLIE MUNGER

Your success in investing will depend in part on your character and guts and in part on your ability to realize, at the height of ebullience and the depth of despair alike, that this too, shall pass. JACK BOGLE

10 Wealth Insight May 2020

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WORDS WORTH WISDOM

RECOGNISE OPPORTUNITY

AVOID FOLLIES

I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.

Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.

The intelligent investor is a realist who sells to optimists and buys from pessimists.

Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.

WARREN BUFFETT

BENJAMIN GRAHAM

A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices. WARREN BUFFETT

Generally, the greater the stigma or revulsion, the better the bargain. SETH KLARMAN

The first rule of investment is ‘buy low and sell high’, but many people fear to buy low because of the fear of the stock dropping even lower. Then you may ask: ‘When is the time to buy low?’ The answer is: When there is maximum pessimism. JOHN TEMPLETON

WARREN BUFFETT

PETER LYNCH

If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume. BENJAMIN GRAHAM

KEEP A LONG-TERM VIEW If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes. WARREN BUFFETT

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

May 2020 Wealth Insight 11

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MONTHLY AGENDA

A crude fact

A fall in crude-oil prices doesn’t often result in a market gain Returns (%)

1\UL[V6J[VILY 100

61.3 Crude oil

37000

80

12.8 Sensex

33500

60

30000

40

40500

Crude oil

Sensex

Correlation

0.86 Returns (%)

1HU\HY`[V+LJLTILY 65

96.3 Crude oil

28000

50

8.9 Sensex

25000

35

22000

20

31000

Crude oil

Sensex

Correlation

0.67 Returns (%)

+LJLTILY[V(WYPS 145

39.5 Crude oil

17000

110

68.6 Sensex

12000

75

7000

40

22000

Crude oil

Sensex

Correlation

0.74 Returns (%)

1HU\HY`[V1\S` 110

77.9 Crude oil

18000

90

56.2 Sensex

14000

70

10000

50

22000

Crude oil

Sensex

Crude oil prices are for Brent in $/barrel

Correlation

0.90

12 Wealth Insight May 2020

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MONTHLY AGENDA

I

ndia imports around 85 per cent of its total oil demand. Naturally, this makes the country a big beneficiary of falling crude-oil prices. According to CARE Ratings, with everything constant, every $1 fall in crude-oil prices leads to a saving of around $1.6 billion per year for India. Given this, logically, India should benefit from falling oil prices and vice versa. However, the reality is different, as seen in the graphs below. Whenever there

has been a sharp fall in crude, our stock market has also fallen; it has risen with an increase in oil prices. The possible reason for this could be that crude-oil prices also indicate economic expansion and contraction. Often oil prices rise due to economic expansion and fall when there is a slowdown. A case in point is the recent crash in crude-oil prices. The Indian market has also fallen in tandem. Both are driven by fears of an economic slowdown. WI Returns (%)

+LJLTILY [V(WYPS 90

-75.0 Crude oil

37000

65

-25.6 Sensex

31000

40

25000

15

43000

Sensex

Crude oil

Correlation

0.95 Returns (%)

1\UL[V1HU\HY` 140

-56.6 Crude oil

28000

100

-1.4 Sensex

24000

60

20000

20

32000

Sensex

Crude oil

Correlation

-0.20 Returns (%)

-LIY\HY`[V1\UL 135

-26.1 Crude oil

17500

120

-5.7 Sensex

16500

105

15500

90

18500

Sensex

Crude oil

Correlation

0.74 Returns (%)

1\S`[V+LJLTILY 170

-74.6 Crude oil

13000

120

-30.0 Sensex

9000

70

5000

20

17000

Sensex

Crude oil

Correlation

0.88

May 2020 Wealth Insight 13

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MARKET C MPASS

Market barometer Here are some charts that will help you make sense of the current market in terms of valuations and return potential Sensex’s movement In ’000

45

Max 41,953

39 33

Current

31,648

27 21 15 Apr ’10

Apr ’11

Apr ’12

Apr ’13

Apr ’14

Apr ’15

Apr ’16

Apr ’17

Apr ’18

Apr ’19

Apr ’20

Min

15,175

The Sensex is the most convenient indicator to tell the state of the Indian market. The 10-year graph presented alongside shows the secular run in the markets. However, this rally was punctuated by several bearish phases. The most prominent ones include the following: a bear market driven by weakening economic fundamentals in 2011, Chinese growth concerns in 2015, demonetisation blues in 2016, and the sell-off in 2018 due to US– China trade war and rise in US interest rates. Lately, the markets have tumbled due to the coronavirus spread.

Sensex’s price to earnings 30

Max

28.4

27 24 21

Median 20.0 Current

18 15 Apr ’10

Apr ’11

Apr ’12

Apr ’13

Apr ’14

Apr ’15

Apr ’16

Apr ’17

Apr ’18

Apr ’19

Apr ’20

18.3

Min 16.4

The price-to-earnings ratio of the Sensex is a simple market-valuation ratio. A general guideline to help understand the valuation is: P/E > 24

=

P/E > 20 < 24 P/E > 16 < 20 P/E > 12 < 16 P/E < 12

= = = =

Dangerously overvalued Overvalued Fairly valued Undervalued Highly undervalued (mouthwatering valuations)

Note that this graph is based on standalone data of Sensex companies. If one takes the consolidated data, the P/E will be lower.

Sensex’s price to book value Max

4.5

3.88

4.0 3.5

Median

2.99

3.0

Since book value is stable and less volatile than earnings, some consider it better than the P/E as a measure of valuation. If P/B > Median P/B = Overvalued P/B < Median P/B = Undervalued

2.5 2.0 Apr ’10

The price-to-book-value ratio tells us how many times an investor is ready to pay for a rupee of net assets.

Apr ’11

Apr ’12

Apr ’13

Apr ’14

Apr ’15

Apr ’16

Apr ’17

Apr ’18

Apr ’19

Apr ’20

2.33 Min 2.33

Current

14 Wealth Insight May 2020

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MARKET C MPASS Sensex’s dividend yield Max 1.80

2.0%

1.8

Generally speaking, when stocks are cheap, dividend yields are high.

1.6

1.44 Median 1.36 Current

1.4

1.2

1.0 Apr ’10

Dividend yield is nothing but the return an investor gets in the form of dividend on his investment. It is measured as dividend per share divided by price per share.

Apr ’11

Apr ’12

Apr ’13

Apr ’14

Apr ’15

Apr ’16

Apr ’17

Apr ’18

Apr ’19

Apr ’20

If Dividend yield > Median dividend yield = Undervalued Dividend yield < Median dividend yield = Overvalued

Min 1.03

Market cap to GDP Max 89.6

100%

90

Here we have considered the market capitalisation of all the listed companies on the BSE.

80

Median 71.0

70

60

50 2010

This measure is Buffett’s personal favourite. He said, “It is probably the single best measure of where valuations stand at any given moment.”

Current

2011

2012 2013

2014

2015

2016

2017

2018

2019

59.1

If Market cap > GDP = Market overvalued Market cap < GDP = Market undervalued

Min 57.7

10Y G-sec yield vs Sensex’s earnings yield Max 3.94

5%

4

Median

3

2.88

2

The spread between G-sec yield and Sensex’s earnings yield is another valuation measure. G-sec yield is the yield of the 10-year government bond. Sensex’s earnings yield is the inverse of the Sensex’s P/E ratio. The greater the deviation from the median in either direction, the greater the degree of overvaluation or the undervaluation of the Sensex. If

1

0.74 Min 0.74

Current 0 Apr ’10

Apr ’11

Apr ’12

Apr ’13

Apr ’14

Apr ’15

Apr ’16

Apr ’17

Apr ’18

Apr ’19

Apr ’20

Spread > Median = Overvaluation Spread < Median = Undervaluation All data as on April 20, 2020. Market cap to GDP graph is as of December 2019 as the GDP data is released quarterly.

May 2020 Wealth Insight 15

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MARKET C MPASS

BIG MOVES

Large caps Bandhan Bank With around 61 per cent of the loan portfolio tied to micro credit, the bank is vulnerable to default from low-income borrowers.

Bajaj Finance Amid the lockdown, the company reported a slowdown in its AUM growth in Q4 FY20.

ONGC The massive fall in crude-oil prices is negative for oil producers like ONGC.

Axis Bank The banking and finance sector is especially hit in the ongoing slump in the market.

Mahindra & Mahindra In the wake of the nationwide lockdown, the company suspended its manufacturing operations.

JSW Steel Weak production due to the lockdown and slowing steel demand will impact the financials.

Grasim Industries CCI imposed a `302 crore penalty on the company for abusing its dominant position in the fibre market.

Larsen & Toubro With lockdowns around the world, company’s order book growth will slow down.

Yes Bank The bank is undergoing restructuring after capital infusion by the SBI-led consortium.

ICICI Pru Life Insurance Co. A volatile stock market can impact the income from investments for insurance companies.

3M returns (%)

Price to earnings 3Y avg RoE (%)

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

-55.4

11 22.3

3,055 68.9

-45.8

25 21.3

5,492 44.9

-40.3

5 13.2

22,360 35.5

-37.0

28 5.2

4,807 9.1

-36.5

21 14.7

1,131 19.7

-36.2

8 21.6

5,320 24.5

-29.0

9 9.6

5,084 8.0

3M price (`) movement

488 217

4,262 2,308 128

76 762 480 572

363

-28.4

13 16.1

-26.5

– 14.3

-20,606 29.0

-21.3

46 24.2

1,149 -11.6

10,707 19.4

277

177

767

545

1,303

933 34 25

470

370

Our large-cap universe has 73 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 April 17, 2020.

16 Wealth Insight May 2020

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MARKET C MPASS

BIG MOVES

Mid caps Indusind Bank The bank fell on concerns of falling deposits and exposure to stressed sectors.

Canara Bank A weakening economy can slow down credit growth and elevate stress.

Tata Motors In February, JLR retail sales in China dropped by 85 per cent.

Prestige Estates Projects The real-estate sector will be further impacted due to demand slowdown and a difficult borrowing environment.

M&M Financial Services NBFCs have come under strain post lockdown due to the risk of default and inability to raise capital at desirable rates.

Aditya Birla Capital NBFCs have come under strain post lockdown due to the risk of default and inability to raise capital at desirable rates.

Jindal Steel & Power Steel companies are cutting operations due to lower demand, unavailability of labour and supply constraints.

General Insurance Corporation of India After reporting a loss of `1,556.5 crore for 9M FY20, company’s investment income would suffer because of a volatile market.

Motherson Sumi Systems The European market, which constitutes 40 per cent of the revenue, has been worst impacted by the COVID-19 outbreak.

Shriram Transport Finance S&P lowered the company’s rating as NBFCs are more prone to lockdown risks than banks.

3M returns (%)

Price to earnings 3Y avg RoE (%)

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

-65.6

7 15.0

4,502 25.1

-60.6

17 -2.5

705 14.2

221

-58.1

– -6.5

-151 -128.0

183

-51.3

14 8.9

619 24.6

372

-51.0

7 13.1

1,498 31.3

367

-50.9

13 0.2

728 -361.3

-48.1

– -7.1

-3,419 -3.8

-44.2

– 13.4

-953 -2.8

246

137

-39.0

20 25.1

1,501 -7.0

142

87

-29.9

6 16.5

3,025 29.4

3M price (`) movement

1,378 475

87

77

181

180 112 55

178

92

1,146 803

Our mid-cap universe has 160 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 April 17, 2020.

May 2020 Wealth Insight 17

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MARKET C MPASS

BIG MOVES

Small caps Future Retail High promoter debt and pledge invocation by lenders resulted in a group-wide fall in the share prices.

Future Lifestyle Fashion High promoter debt and pledge invocation by lenders resulted in a group-wide fall in the share prices.

Future Consumer High promoter debt and pledge invocation by lenders resulted in a group-wide fall in the share prices.

Varroc Engineering The stock fell in sync with other small-cap stocks.

Jaiprakash Power Ventures The stock fell amidst market-wide volatility.

PNB Housing Finance Ind-Ra downgraded company’s non-convertible debentures.

Welspun Corp An order to the company’s US facility was deferred. Its order book may deteriorate due to the fall in crude oil.

Sterling and Wilson Solar A lockdown in China has led to supply-chain issues for the company.

Indiabulls Housing Finance Moody’s downgraded certain borrowing instruments of the company amid capital-raising concerns.

Sobha The real-estate sector will be further impacted due to demand slowdown and a difficult borrowing environment.

3M returns (%)

Price to earnings 3Y avg RoE (%)

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

-75.7

6 12.9

691 264.8

334

-69.4

15 9.6

164 70.2

401

-68.8

– -1.7

10 29.2

23

-68.3

7 13.8

284 4.2

474

-67.5

– -13.2

-2,311 -18.9

-63.3

2 14.3

1,268 49.1

-61.0

5 4.7

3M price (`) movement

81

122

7

150 2

1

505

185

307 98.7

173

-60.2

3 –

– –

297

-58.2

2 27.0

3,040 3.4

300

-50.4

6 8.5

344 40.8

68

118

125

430

213

Our small-cap universe (minimum market capitalisation `500 crore) has 481 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 April 17, 2020.

18 Wealth Insight May 2020

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ANALYST’S DIARY

Bucking the trend In March, when there was blood all over due to the outbreak of COVID-19, a few stocks managed to stay in the green

N

o stock investor can forget the month of March 2020, when the markets all over the world tumbled rapidly in a fashion never seen before. Shaken by the outbreak of COVID-19, the Sensex fell almost 23 per cent, from 38,144 at the start of the month to 29,468 at the end of it. It’s still not certain when this pandemic will end and how deep its impact will run over the next many months. However, amid the bloodbath in March, a handful of stocks did give positive returns (see the table). Many of these are healthcare companies. Healthcare companies are likely to gain in the current times as people will look out for more medical and healthcare assistance. Abbott India’s parent, Abbott Laboratories, received USFDA’s approval for its five-minute coronavirus test kit. That kept the company in positive light. A few FMCG companies also registered positive returns in March 2020 as the demand for their products might not be as affected as compared to other sectors, where production has been completely stalled due to the lockdown. Though many FMCG companies are operating at reduced capacities, their continued operations are crucial for our day-to-day life. One interesting name in the list is the topper Ruchi Soya. Having been acquired by Patanjali, the company showed a secular rally. Earlier the company was undergoing insolvency proceedings. WI By Danish Khanna

5V[PTL»ZIHK[PTL In spite of market-wide fall in March 2020, the following companies managed to give positive returns Company name

Sector

Returns in Mar ’20

Ruchi Soya Industries

FMCG

164.0

India Cements

Construction Materials

15.4

Unichem Laboratories

Healthcare

11.9

BASF India

Chemicals

11.2

Dr. Reddys Laboratories

Healthcare

7.6

Cadila Healthcare

Healthcare

7.0

Hindustan Unilever

FMCG

6.5

GSK Consumer

FMCG

6.4

Indoco Remedies

Healthcare

6.0

Cipla

Healthcare

4.8

New India Assurance Co.

Insurance

3.7

Bliss GVS Pharma

Healthcare

2.1

Bharat Electronics

Capital Goods

2.0

FACT

Chemicals

1.9

Nestle India

FMCG

1.1

Panacea Biotec

Healthcare

1.1

Abbott India

Healthcare

0.4

May 2020 Wealth Insight 19

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ANALYST’S DIARY

Bang, bank! The fall in bank stocks has created opportunities. But the danger may still be lurking in the background.

T

he banking and finance sector was the worst sufferer in March 2020. The S&P BSE Bankex fell by a third. A number of reasons were responsible for this, apart from the COVID-19 crisis. First, the Yes Bank crisis resulted in erosion of trust in private banks. There were reports of some states withdrawing their funds from private banks, afraid that the Yes Bank contagion may spread. Second, the Supreme Court’s AGR ruling meant that telcos had to somehow cough up massive sums, which would jeopardise their operations. Many private banks had exposure to telcos, especially the embattled Vodafone Idea. Third, as the country went into a lockdown, it became apparent that there may be payment defaults in the future. The RBI also asked the banks and finance companies to offer moratoriums on loan payments to the customers. These payment defaults would be especially negative for NBFCs, which had in turn borrowed from banks. The tables list the publicly traded private-sector and public-sector banks. Investors are asking if they should invest in banking stocks, given the attractive levels. The table also lists the gross and net nonperforming assets (NPAs) and net interest margins of the banks. They can help make a choice. Gross NPAs are total NPAs as a per cent of advances made. Net NPAs are gross NPAs minus provisioning. The lower these figures, the better. Net interest margin is the spread between a bank’s interest income and interest paid. The higher this number, the better. However, things aren’t so simple. For instance, IndusInd Bank has suffered a massive decline in March in spite of lower NPA numbers and higher margins. See the ‘Stock Story’ section for details. Hence, research thoroughly before you decide to invest in any of these. WI By Danish Khanna

7YP]H[LIHURZ Private banks have been the major sufferer since March 2020 owing to a number of factors, which have raised a question about their future. Company Name

Gross NPAs (%)

Net NPAs (%)

NIMs (%)

Return in March (%)

3M return (%)

IndusInd Bank

2.18

1.05

4.15

-67.5

-64.9

RBL Bank

3.33

2.07

4.57

-52.2

-62.7

The Federal Bank

2.99

1.63

3.00

-50.4

-49.9

Karur Vysya Bank

8.92

4.13

3.33

-49.3

-51.8

Bandhan Bank

1.93

0.81

7.91

-48.2

-54.8

Axis Bank

5.00

2.09

3.57

-44.4

-35.1

IDFC First Bank

2.83

1.23

3.86

-43.6

-39.4

DCB Bank

2.15

1.03

3.71

-40.5

-51.3

Dhanlaxmi Bank

7.13

1.62

3.31

-40.3

-32.7

City Union Bank

3.50

1.95

3.96

-39.0

-46.0

South Indian Bank

4.96

3.44

2.72

-36.0

-46.1

ICICI Bank

6.39

1.60

3.77

-35.8

-29.2

J&K Bank

11.10

4.36

3.68

-35.8

-52.0

IDBI Bank

28.72

5.25

2.27

-34.9

-40.9

Karnataka Bank

4.99

3.75

2.83

-33.3

-35.3

CSB Bank

3.22

1.98

3.40

-30.8

-41.5

Lakshmi Vilas Bank

23.27

9.81

0.00

-30.5

-19.3

Yes Bank

18.87

5.97

1.40

-29.0

-36.1

HDFC Bank

1.42

0.48

4.20

-27.1

-28.8

Kotak Mahindra Bank

2.46

0.89

4.69

-18.9

-30.1

Data as on April 17, 2020

7\ISPJIHURZ Public-sector banks have already been hit hard due to their bad-loan problems. The recent fall again shaved a few points off their stock prices. Company Name

Gross NPAs (%)

Net NPAs (%)

NIMs (%)

Return in March (%)

3M return (%)

Indian Bank

7.20

3.50

2.91

-38.6

-54.5

Bank of India

16.30

5.97

3.45

-35.6

-50.3

Canara Bank

8.36

5.05

2.36

-34.5

-60.8

State Bank of India

6.94

2.65

3.59

-31.5

-39.2

Punjab & Sind Bank

13.58

8.71

1.74

-28.5

-21.9

UCO Bank

19.45

6.34

0.00

-27.2

-35.1

Bank of Baroda

10.43

4.05

2.88

-24.7

-48.5

Punjab National Bank

16.30

7.18

2.36

-24.2

-49.6

Union Bank Of India

14.86

6.99

2.55

-20.9

-44.7

Central Bank of India

19.99

9.26

2.92

-20.3

-26.0

Indian Overseas Bank

17.12

5.81

1.94

-19.1

-36.0

Bank of Maharashtra

16.77

5.46

2.86

-15.9

-30.3

Data as on April 17, 2020

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MRINAL SINGH DEPUTY CIO - EQUITY, ICICI PRUDENTIAL AMC

IN FOCUS

India and value investing FOCUS QUESTION India is widely thought to be a growth

market. What place does value investing have here? What are the attributes of a value stock?

V

alue is the difference between the intrinsic worth of a business and the price an investor is paying for that investment. In general, value investing is about maintaining a high margin of safety. This does not mean investing solely based on an optically low price-to-book or price-to-earnings alone. While growth remains one of the major styles of investing in India, there is room for value investors here as well. This can be seen through the long-term track record of ICICI Prudential Value Discovery Fund. Over a decade, the fund has been a wealth creator and has delivered a CAGR of 10.13 per cent and over 15 years, the fund has delivered a CAGR of 15.3 per cent (as of April 13, 2020). The difference between a value and growth investor is the point of beginning. A growth investor is interested in zones of certainty, while a value investor is interested in the margin of safety (given that they operate in the zones of uncertainty). Therefore, when value calls play out, exponential gains are made. From an investor’s perspective, in an up-trending or a momentum market, value performance is likely to take a back seat. That is why in value investing, patience is a prerequisite to reap gains. An investor should stay put with their investments whether through SIP or otherwise for at least five years plus. Rollingreturn analysis shows that if one remains invested for seven to 10

Mrinal Singh’s top 10 value bets*

years, the probability of making double-digit compounded returns is very high. As value gets unlocked, investors will be beneficiaries of exponential gains from these investments. A combination of inexpensive valuation, cash-generation capability, strong management and comfortable balance sheet are the attributes we look for when it comes to picking a value stock. Mrinal Singh manages ICICI Prudential Value Discovery Fund, the largest mutual fund (assets of `11,664 crore as of March 2020) following the value strategy. WI

Net asset (%) Market value (` cr) Infosys

9.62 1123 Sun Pharma

9.06 1057

Mahindra & Mahindra

6.86 801 NTPC

6.83 796 Bharti Airtel

6.58 767 ITC

4.32 504 PI Industries

4.11 480 Wipro

3.66 427 Indian Oil Corp

3.08 359

Grasim Industries

2.83 330

*Holdings of ICICI Prudential Value Discovery Fund. Data as of March 2020.

May 2020 Wealth Insight 21

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STOCK STORY

INDUSIND BANK

In the dust In March 2020, IndusInd Bank was the worst-hit bank, falling by 68 per cent. Here is the story of its rise and fall.

T

he massacre in the markets worldwide due to the coronavirus outbreak has spared few stocks. IndusInd Bank is one such company. However, in its case, it’s not just the virus that has caused the damage. The bank has been surrounded by a lot of negative news – decreasing deposits, rising bad loans, high exposure to telecom companies and NBFCs, exit of a long-time CEO and so on. The crisis at Yes Bank has also put a question mark on rest of the mid-size private lenders. In the month of March alone, the stock corrected by about 68 per cent. Investors are afraid that the bank might share the fate of the Indus Valley Civilisation, after which the bank has been named. WI By Danish Khanna

FEB 2008

New management team under Romesh Sobti, MD & CEO.

zOrganisational restructuring and change in business strategy zBank to increase focus on corporate and commercial loans zAdds 553 new corporate and commercial clients. Earlier the loan book was dominated by retail loans. zBank to open new branches to establish the brand and garner retail deposits to reduce the cost of funds and boost magins.

JUN 2008

Issues global depository receipts to

raise

`222 cr JUN 2004 JAN 1998

Raises `180 through an IPO

cr

Merges with Ashok Leyland Finance. Branches increase to 115 from 61 a year earlier. 2003

`39.3

Gets RBI’s permission to set up overseas branches

2008

Highest ratings for commercial deposits from ICRA and for FDs from CRISIL

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STOCK STORY Rapid expansion

Going corporate

The bank’s branches have grown at a breakneck speed.

Over the years, the bank’s exposure to corporates has risen.

RBI imposes

`3 cr

zRetail zCorporate

2000

100 % 90 80 70 60 50 40 30 20 10 0 2008 2010 2012 2014 2016 2018 2019

1500 1000 500 0 2003 2007 2011 2015 2019 Dec ’19

`1985

DEC 2017

penalty for under-reporting of FY16 NPAs

`424

March-end data if not otherwise indicated

OCT 2017

Plans merger with Bharat

A great performer?

Financial Inclusion, a microfinance company

While the bank has reduced its NPAs and increased its margins, the numbers in the next few quarters are worth watching.

APR 2018 NOV 2016

z NPA z NIM

4.5% 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

Promoters pledge 4.5% of stake

Reports divergence in FY17 NPAs of

`1,350 cr from RBI’s estimates

SEP 2018

Discloses exposure of

`3,000 to IL&FS, a crisis-ridden NBFC

2004 2007 2010 2013 2016 2019 Dec ’19

JULY 2019

March-end data if not otherwise indicated

JUL 2015

Raises `4,200

cr

through institutional placement AUG 2009

Raises

`480 cr through institutional placements

Completes merger with Bharat Financial Inclusion JAN 2020

Posts disappointing Q3 results, provisions rise by 72%, gross NPAs more than double YoY, asset quality worsens, Sobti set to retire in Mar 2020 FEB 2020

Moody’s downgrades bank’s outlook to negative from stable RBI approves the appointment of Sumant Kathpalia as CEO, successor to Romesh Sobti MAR 2020 APR 2011

Buys Deutsche Bank’s creditcard business

Stock falls over 60% in March amidst the outbreak of COVID-19

zBank has exposure of `3,995 cr to Vodafone zReports 2% erosion in deposit base as state governments shifted deposits zYes Bank fiasco cascades to other private lenders zPromoters ask the RBI to allow them to increase stake

JUN 2009

Opens 30 new

branches

APR 2020

After domestic investors dumped the stock, FPIs raised their stake from 55.22% in Dec 2019 to 72.07% in Mar 2020. Promoters reduce pledged stake. May 2020 Wealth Insight 23

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www.valueresearchstocks.com

What changes, The market goes through good and bad phases. That doesn’t Dhirendra Kumar

I

t’s an uncertain time for stock investors. Or is it? One of the rules of investing (or rather, of anything in life) is that when everyone agrees on something, then you must consider the possibility that everyone is wrong. Contrarianism for its own sake may not be good but it’s a good mental exercise. It ensures that one does not fall into the trap of ready-made opinions. So, getting back to the question of whether it’s an uncertain time. What if it isn’t? What is certain at this time, and what is uncertain? After all, there is never any high degree of certainty in equity investing. There are never any guarantees. Since my investing life has started, we have had some huge upheaval or the other every few years. Every time, it looked like the biggest ever. And every time, it turned out to be very big in some ways but smaller than expected in other ways. Might the current global pandemic follow the same pattern? There is little doubt that this pandemic will be a huge setback for the world economy and for the lives of people. There is also little doubt now that sporadic outbreaks and lockdowns will continue for a long time, months or perhaps years. The question for us reading this magazine and for other Value Research members is how

best we can deal with this in terms of our personal savings and investments. In any upheaval, there are losers and there are winners. The question is, how can we increase the chances of enhancing our savings and returns by choosing winners? For someone who is familiar with the Value Research way, the answer should be obvious: by doing what we should always have been doing anyway. Whenever there is a crisis of any sort in the economy or in a sector, the better companies suffer setbacks but the nature and extent of their setbacks are much less than those suffered by weaker companies. This means that our recipe for success is the same as it ever was, good times, bad times, or pandemic times!

The recipe This recipe is to raise your investing game to the highest level. This can only come from knowledge, from understanding, and from having some basis for looking at the future. It cannot be obtained from just the numbers of the past. It can also not come from naive projections of those numbers into the future. Numbers can guide us to a company, but investment decisions can only be made by understanding the business of a company. At Value Research Stock Advisor, that’s exactly our approach. Our analyst team is numbers-driven, but

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and what does not mean we also have to change our investment approach.

only for part of the process. Once the numbers have done their job, our real task begins – that of understanding the business. Only then can one have confidence in the investments. However, the job continues after we recommend the companies. As I mentioned earlier, in recent weeks, we have spent – I have personally spent – hours with the CEOs of some of the companies that we have recommended. In each of these companies, we had a long conversation which was not just about the company itself, but about the sectoral environment, about competitors and about the economy in general. Moreover –and this is truly important – each of these interactions was one-to-one. Unlike the mass ‘management interactions’ that brokerage analysts have, there’s no one else in our interactions. It’s just the Value Research team and the senior managers from the companies. We have this privilege because of the repu-

tation for absolute integrity and independence that we have created and preserved by our conduct over a quarter of a century. The benefit for this goes to the subscribers of our premium service, Value Research Stock Advisor. While they get to read the interviews and watch the videos, our entire research process gets enhanced and benefits them in a variety of ways. Not just the recommendations For you, if you appreciate the process, then the right thing to do is to see our list of recommendations and our ‘Best Buys’. However, do not stop there. That’s just the endpoint of our process. As I have detailed above, for each one of our choices, we reveal our entire thought process. If you go through that, it will give you confidence to follow what we are doing, as well as learning to apply it elsewhere. In a time of uncertainty, that confidence is of greater value than anything else. WI

Unlike the mass ‘management interactions’ that brokerage analysts have, there’s no one else in our interactions. It’s just the Value Research team and the senior managers from the companies.

Value Research Stock Advisor is a premium service where you get promising stocks along with their full analyses. We also actively track the underlying companies for you and keep you posted on the major developments in them, including when to sell a stock. Additionally, members get exclusive access to a range of tools and data which they can use to study any other stock. You can subscribe to the service at www.valueresearchstocks.com. May 2020 Wealth Insight 25

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COVER STORY

The portfolio tonic Stocks to boost your portfolio’s immunity to the pandemic

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COVER STORY Danish Khanna, Rajan Gulati and Yash Rohra

A

fter suffering a historic fall in March 2020, the markets have recovered a bit. But given the uncertainty, no one can say if they have bottomed out or the disease has been contained. Amid all this, our readers have been asking us to suggest some stocks that can beat the coronavirus crisis. That’s not easy as the entire business ecosystem has been impacted and is being transformed by this crisis. Not being able to operate, businesses are forced to take strict measures, including pay cuts and laying off the staff. Some others are innovating. Almost all have realised the importance of digital. So, when we started the quest for ‘corona-proof ’ stocks, all we had was history. There are indeed some businesses that have weathered crises in the past. Such businesses have higher chances of beating the odds. Financially strong, especially cash-rich businesses, will have an

edge as in absence of operations, they are better placed to sustain themselves. The box alongside mentions the filters that we applied to arrive at the companies discussed in this article. Note that all numbers in this story are as of April 9, 2020. Given that the stocks of the companies discussed in this article have also corrected by about 20 per cent (as of April 9, 2020) from the time Sensex hit a high, they are worth considering. Our filters have ensured that they are available at reasonable valuations. While the markets will make their moves by the time you read this story, you can keep these companies on your watch list. If you can’t buy them now, you might want to include them in your portfolio whenever they dip next. However, do consider these only as ideas and not our recommendations. Research thoroughly before you decide to invest in them. Those who would like to get a list of our recommended stocks can opt for our premium Stock Advisor service at www.valueresearchstocks.com.

SELECTION CRITERIA HYGIENE CHECK Market cap greater than `5,000 crore: To remove very small companies, which may find it hard to weather the crisis. Promoter pledging less than 5%: High promoter pledging can hurt a company if the stock falls in a market downturn.

VALUATION CHECK Correction of more than 20% since January 17, 2020: This was when the Sensex hit a high. To spot companies at a bargain. Current P/E and P/B less than their 5- and 10-year medians: To ensure attractive valuations.

SOLVENCY CHECK Net debt to equity ratio less than 0: Net debt is total debt minus cash and current investments. Negative net debt means cash and investments are more than debt. Working-capital requirements less than 20% of sales: The company is running its operations efficiently and doesn’t need much capital for generating sales.

CASH-FLOW CHECK Positive cash flow from operations in each of the last 10 years: To ensure that the company generates cash from its operations. 10-year total free cash flow is at least 10% of the market cap: To assess the strength of free cash flows. Free cash flows are cash remaining after making capital expenditure.

PROFITABILITY CHECK Adjusted EPS growth positive in at least 7 out of the last 10 years: The company has been increasing its profits. 10-year median adjusted EPS growth greater than 10%: The profits are at a decent rate. ROE greater than 15% in at least 7 of the last 10 years: To ensure that the company generates good returns on shareholders’ capital. May 2020 Wealth Insight 27

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COVER STORY

EICHER MOTORS

Not just a motorcycle Eicher’s Royal Enfield motorcycles have high aspirational value, which makes them almost immune to economic downturns

E

icher Motors manufactures the iconic Royal Enfield brand of motorcycles, which owns models like the Bullet, the Classic, the Thunderbird and the Himalayan. Besides, the company sells trucks as well. Eicher was incorporated in 1948 to import trucks. In 1995, it acquired Enfield Motorcycles. In 2006, Siddhartha Lal took control of the company. Under his leadership, the group divested 13 out of its 15 businesses to focus only on bikes and trucks. In 2009, time tipped in Eicher’s favour with the launch of Royal Enfield ‘Classic’. While retaining the look and feel of old-generation motorcycles, the new version incorporated high-end technology, engine and transmission with improved reliability. The bike sold like hotcakes and had waiting periods of more than six months. In 2010, the company sold more than 50,000 bikes. The sales

increased sixfold by 2014. At present, the company is selling more than eight lakh bikes a year. For its dormant truck division, Eicher Motors has entered into a joint venture with Volvo, wherein Eicher Motors brought its distribution network and the latter its manufacturing expertise.

FINANCIAL STRENGTH Over the last 10 years, Eicher’s revenues and profits have increased by 18 and 43 per cent, respectively. Operating margins, too, headed north – from about 4 per cent to 31 per cent. Its return on equity more than doubled from 9 per cent in December 2008 to 25 per cent in 2019. However, over the last one year, the company has been facing major headwinds, owing to the slowdown in the auto sector, the added cost of new safety norms and mandatory third-party insurance that together increased the ownership cost by as much as 13–15 per cent. Its largest market,

8 lakh 43%

Motorcycles sold by Eicher in a year

10Y annualised EPS growth

Kerala, was badly hit by floods, significantly impacting its sales over the last two years. Also, the company’s stock has been under the hammer because of the increased competition from Jawa Motorcycles in the 350 cc segment, where the company has been the leader over the last decade.

WHY EICHER CAN WEATHER THIS STORM Over the years, Royal Enfield has created brand loyalty, which is not easy to replicate. In 2019, the company launched two 650 cc twin-engine cruiser bikes called the ‘Twins’. The company considers them as its next growth engine. The idea behind these launches was that customers in the 100–125 cc segment will ultimately upgrade to more powerful cruiser bikes. Also, its own 3.5 million classic 350 riders will be a potential choice for them when they start looking for an upgrade. With its presence in more than 50 countries and many under-penetrated markets in India, such as Rajasthan, Uttar Pradesh, West Bengal, among others, the company is wellpositioned to increase its volume growth.

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COVER STORY

EXIDE INDUSTRIES

Charged up A wide range of offerings, pan-India distribution and low prices of lead – the chief raw material – bode well for the company’s future

P

romoted by the Raheja Group and headquartered in Kolkata, Exide Industries is India’s largest manufacturer of lead-acid storage batteries. The company has a diversified portfolio of batteries ranging from 2.5 ampere-hour to 20,600 ampere-hour. The company caters to three segments: automotive batteries and those for inverters and gensets; industrial batteries used in power, telecom, railways, IT, etc.; and submarine batteries. In 2013, Exide ventured into the life-insurance business, which it acquired from ING Vysya Life Insurance. Exide Life Insurance generates 25 per cent of the company’s revenues. However, over the past couple of years, the lifeinsurance segment has been incurring losses and dragging down the company’s overall performance. In the automobile segment, the company’s clientele includes most of the major original equipment manufacturers (OEMs). It also has a high share in replacement batteries. The company recycles lead, the main raw material for its products, from exhausted batteries. More than 40 per cent of its demand for lead is met through recycled lead, which is

cheaper than pure lead. This helps reduce the risk from volatility in lead prices.

FINANCIAL STRENGTH Exide’s total debt stood at `185 crore (inclusive of `130 lease liabilities) as of September 2019. However, the company has been net debt-free over the last 10 years. During the same period, the company has generated an return of at least 20 per cent on its capital employed and revenue growth has been 12 per cent compounded annually. The company also has strong cash flows, amounting to `8,150 crore, over the last 10 years. Over the last one year, the

48,000

No. of direct and indirect dealers

More than 40 per cent of Exide’s demand for lead is met through recycled lead, which is cheaper than pure lead company has faced several headwinds, owing to its dependence on the auto sector, which is going through a slowdown. The company’s cash-conversion cycle earlier stood at about 17 days. It has deteriorated over the past few years to about 37 days.

WHY EXIDE CAN WEATHER THIS STORM While short-term hiccups are expected to continue, the company’s longterm story remains intact. Being the market leader, Exide boasts of a wide distribution network of over 48,000 direct and indirect dealers. Although the demand for new cars has been subdued over the last one year and may remain so for the next few months, the robust growth in car sales over the last few years has ensured the medium and long-term opportunity for replacement batteries. The prices of lead, its major raw material, continue to be soft, owing to a weak global economic outlook. This will help the company maintain or improve its operating margins. For capitalising on future opportunities for electric vehicles, Exide has launched e-rickshaws and entered into a joint venture with Leclanché, a Switzerland-based company, to build lithium-ion batteries in India.

May 2020 Wealth Insight 29

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COVER STORY

GRINDWELL NORTON

Rough and tough The company is a major producer of abrasives and silicon carbide and hence will see a faster turnaround as the situation improves

A

bout 50 per cent of India’s `3,500 crore abrasives market is controlled by only two companies: Carborundum Universal and Grindwell Norton. Abrasives, basically ceramics, are used in making cutting and grinding equipment, car brakes and clutches. This is because they have high endurance and can operate at high temperatures. Grindwell was started in 1941. Following its partnership with Norton Co. in 1971, the company was incorporated as Grindwell Norton. Later in 1990, France-based Saint Gobain took over Norton and became the promoter. Over the years, the company has diversified into several related businesses. Its business is divided into two segments: abrasives (65.4 per cent revenue in FY19) and ceramics and plastics. The latter is

Grindwell’s promoters haven’t wasted capital by venturing into unrelated businesses. Since 1997, the company’s cash flows from operations have always been positive. further divided into three divisions: silicon carbide, performance ceramics and refractories (PCR) and performance plastics (PPL). Silicon carbide is used as a raw material for manufacturing abrasives, refractories and polishing stone. The company is its largest manufacturer in India. PCR provides solutions in designing, engineering and manufacturing refractory systems for high temperature and wear applications. PPL manufactures high-performance polymer products like bearing seals, tubing, and hoses and fabrics. Grindwell faced a difficult time during 2011–

2014 due to a contraction in industrial growth, high inflation and a depreciating rupee. In March 2014, its revenue grew only by about 2 per cent, while the profit fell by about 10 per cent. To arrest falling margins, the company introduced new products, entered new markets and hiked prices. Currently, apart from the coronavirus crisis, the slowdown in the auto sector is another pain point for the company.

FINANCIAL STRENGTH Grindwell’s promoters haven’t wasted capital by venturing into unrelated businesses. Since 1997, the company’s cash flows from operations have always been positive. In the last five years till December 2019, Grindwell’s revenues grew by 8 per cent YoY, while its net profit increased by around 13 per cent on the back of stable and improving margins and an increase in other income. However, the business remains susceptible to changes in raw-material prices (imports raw material from China and Europe), economic slowdown and rupee depreciation. The company has consistently delivered an ROE of more than 15 in the last five years till March 2019.

WHY GRINDWELL CAN WEATHER THIS STORM The company has a strong balance sheet. As of September 2019, it had zero debt and a cash reserve of `234 crore. A stable currency, along with deteriorating crude-oil prices, should reduce the company’s input cost. Bad times for the industry often turn into good times for bigger players. Grindwell, being one of the market leaders, can further consolidate the abrasive market.

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COVER STORY

HAVELLS

Retaining its spark Havells’s brand appeal and diversified offerings insulate the company from economic headwinds

H

avells is India’s leading electric and consumergoods maker. It has a significant market share in all its segments: MCB and switchgear (14.3 per cent), cables (12.4 per cent), lighting (12 per cent) and electric appliances (14.4 per cent). Incorporated by Qimat Rai Gupta in 1958 as a small electrictrading business in Chandni Chowk, New Delhi, the company was branded as Havells in 1971. Gupta bought this brand name because of its foreign appeal. Through this brand, the company was able to differentiate its commodity-like products. Gupta focused heavily on advertising, thereby creating a positive brand image. We all remember Havells’ famous ad campaign ‘Wires that don’t catch fire’. Currently, the company is being managed by his son, Anil Rai Gupta, who has been with the company since 1992 and played a key role in transforming it into a consumer-goods company. Before 2003, Havells focused on products like switchgear, cables and wires, which were mainly industrial products. Later in 2003, the company spotted the opportunity in the retail segment

The acquisition of Lloyd in 2017 without any external support bears testimony to Havells’ cash-rich position. The company has consistently increased or kept its dividends stable in the last 13 out of 15 years.

and ventured into the electric consumer-goods segment. With this move, Havells transformed itself from an industrial to a consumer-facing company, thereby growing its revenues and profitability by five and 11 times, respectively, in a span of just four years. Thereafter, following the acquisition of Lloyd in 2017, it strengthened its presence in switchgears, cables, lighting, electrical consumer durables and air conditioners. Havells manufactures 90 per cent of its products in-house, which also helps the company maintain its product quality. It also takes care of its more than 10,500 distributors by providing them with add-on incentives like insurance, investments in mutual funds and guaranteed loans. This ensures a long-term relationship.

FINANCIAL STRENGTH A high market share has enabled the company to strengthen its financial position. Over the years, it has also reduced its debt and

become a net-cash company, thanks to its high cash flows. The acquisition of Lloyd in 2017 without any external support bears testimony to its cash-rich position. The company has consistently increased or kept its dividends stable in the last 13 out of 15 years.

WHY HAVELLS CAN WEATHER THIS STORM In 2008, Havells survived another tough phase, when its leveraged buyout of Sylvania – a European company 1.5 times its size – backfired, leading to huge operational losses. These losses and a huge debt pile almost resulted in the takeover of Havells by its lenders. But the company came out of the crisis. Currently, it has a comfortable cash position with no debt and almost negligible workingcapital requirements. Given its market-dominating position, minimal rent expense and 75 per cent of costs being variable, Havells appears to be well placed to bear the impact of this crisis. May 2020 Wealth Insight 31

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COVER STORY

HCL TECHNOLOGIES

When change is the game Transforming from a hardware company to a software one, HCL has displayed the knack of foreseeing changing times and quickly adapting to them

H

CL Technologies is the third largest Indian IT company in terms of market capitalisation, after TCS and Infosys. Like many other IT firms, the company derives a major part of its revenue from North America (63 per cent of Q3FY20 revenue). Financial-services and manufacturing industries continue to be its major customers, accounting for about 42 per cent of its Q3FY20 revenue. Unlike its peers, HCL is relatively insulated from growing visa issues as around 70 per cent of its US workforce is local. Earlier known as Hindustan Computers Limited, HCL started as a hardware company in 1976. It was founded by Shiv Nadar along with his five colleagues. Against the backdrop of IBM leaving the Indian

market in 1977 and subsequently the government providing relaxation for the import of technology, the company grew rapidly in the 1980s and 1990s. However, by the end of 2000, the company’s hardware business started slowing, while its software application and outsourcing services started gaining pace. In 2005, under Vineet Nayar, the company relentlessly focused on infrastructure management services (IMS), which were the key differentiating factor between HCL and its competitors like TCS and Infosys. During 2005–09, the company tripled its revenue and doubled its market cap. Now headed by C Vijaykumar, HCL operates in three areas: traditional businesses like IMS, application, engineering, R&D and BPO; digital and analytics, internet of things and

To reinvigorate its software business, the company acquired seven products from IBM for $1.8 billion in late 2018 cloud-related services; and IP-driven products and platforms.

FINANCIAL STRENGTH The company’s revenue grew by around 14.4 per cent per annum and profit was up by around 7.5 per cent yearly over the trailing five years ending December 2019. However, its operating margins have contracted, mimicking the sector-wide trend, owing to intense competition, more onsite work and bigger deals at lower margins. To reinvigorate its software business, the company acquired seven products from IBM for $1.8 billion in late 2018. This deal will likely diversify the business risk as the company will now compete with both service- and softwareoriented IT firms. In the last five years till March 2019, HCL generated an average ROE of 27, while its debt-to-equity ratio remained comfortable at 0.1.

WHY HCL CAN WEATHER THIS STORM In view of the coronavirus impact, on March 30, 2020, the management said that it did not foresee any significant impact of the pandemic on its Q4 FY20 numbers. Moreover, the company has a well-distributed revenue presence across sectors. It receives a sizeable chunk of its revenues from less-affected ones like technology and services (15.1 per cent of Q3FY20 revenue), telecom (9 per cent), and life science and healthcare (12.2 per cent). Also, as of December 2019, the company had cash and investments worth $1.7 billion, which are sufficient to meet its borrowings worth $0.57 billion.

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COVER STORY

HINDUSTAN ZINC

The shining star Thanks to its monopoly position and low-cost operations, Hindustan Zinc shines bright even in gloomy times

T

he second-largest zinc–lead miner and fourth-largest zinc–lead smelter globally, Hindustan Zinc Ltd (HZL) enjoys a monopoly position and controls almost 80 per cent of the India’s zinc market. It is also the ninth-largest silver producer in the world. HZL started its journey as a PSU in 1966. Now Vedanta is its major shareholder. In 2002, the Government of India sold 45 per cent of its stake in the company for just `769 crore. In 2020, its remaining 29.5 per cent stake is valued at more than `20,000 crore. This excludes the massive dividends the company has distributed during this period. Hindustan Zinc owns Rampura Agucha mine, which is one of the largest zinc–lead mines in the world. Also, it owns the entire value chain,

48,000 cr `70,000 cr

`

Dividends distributed over the last five years

HZL’s current m-cap

from extracting and smelting to generating power for its captive use. Its large-scale operations, boosted by a fully integrated process, help the company keep its cost of production in the lowest decile globally. The company is likely to remain profitable even after the fall of more than 22 per cent in zinc prices since January on the back of demand slowdown triggered by the COVID-19 pandemic. Its cost of production stands at around $1,000/tonne, which

is still significantly below the market price of $1,900/tonne.

FINANCIAL STRENGTH In FY19, zinc and lead accounted for 87 per cent of the company’s total revenue, while silver accounted for 12 per cent. Though it is a metal company, HZL’s margin profile closely aligns with that of a highmargin, service-based businesses. Its 10-year average operating and net margin stand at an exceptional 62 and 46 per cent, respectively. It also scores high on return on equity,

which averaged around 23 per cent in the last 10 years, even though it is depressed by its high cash balance. It is often said that turnover is vanity, profit is sanity and cash is a reality. This also holds true for this company, which has generated free cash flows of around 60 per cent of its current market cap in the last 10 years. In the last five years alone, the company has distributed dividends of `90 per share, which is about 55 per cent of its current market price (total of `48,000 crore as against the market cap of `70,000 crore). Its current dividend yield stands at 12 per cent.

WHY HZL CAN WEATHER THIS STORM The company is debt-free and has cash of `19,600 crore on its balance sheet, accounting for 28 per cent of its market cap and equivalent to around two years of its total expenses. Additionally, around 65 per cent of its costs are variable, which provide it sufficient liquidity to manage this lockdown. These make the company a low-cost producer. Another positive for the company is the government’s stake in it, which inspires confidence in the company.

May 2020 Wealth Insight 33

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COVER STORY

INFOSYS

The able crisis manager Time and again, Infosys and its growth story have hit roadblocks, but the company has forged ahead in spite of them

T

he second-largest IT services company in India, Infosys is known for its high corporate-governance standards and business delivery. Like other IT services companies, Infosys’s primary geographic location is North America (60.5 per cent of the FY19 revenue), followed by Europe. A majority of the company’s revenue comes from financial services, followed by retail, communications, energy and others. Focusing mainly on the US market, the company was involved in maintaining and updating its clients’ mainframe systems during its initial days. Post 1991 economic reforms, the company brought to India all the activities that did not require constant client interaction. During the 2000s, IT companies enjoyed high margins. However, these margins started to erode due to intense competition. Infosys, too, faced the heat. To arrest the fall in its

23,300 cr

`

Cash on Infosys’s balance sheet

business, in 2014, the company ventured into digital services, such as AI, cloud, mobility and analytics. These services have gained momentum and now account for 40.6 per cent of the total revenue compared to 31.5 per cent in December 2018. In 2014, when Vishal Sikka joined the company as the CEO, it was the first time that a non-founder held that position. But accusations of corporate misgovernance and payment of hush money paid to former CFO Rajiv Bansal forced Sikka to end his three-year stint in August 2017. In 2018, Salil Parekh from Capgemini joined as the CEO. In October 2019, the company was again hit by whistleblower

complaints against the CEO and CFO. However, this time, the internal audit committee and the SEC, the US market regulator, found no merit in the complaints and the gave a clean chit to the management.

FINANCIAL STRENGTH As of March 2020, the company’s revenue stood at `90,791 crore. Over the last five years till March 2020, the company’s revenue grew by 11 per cent, while the net profit grew by 6 per cent on the back of deteriorating margins. The company has won large deals in the recent past and continues to grow its digital business. However, an attrition rate of around 20 per cent, heightened competition and visa restrictions in western markets remain some concerns.

WHY INFOSYS CAN WEATHER THIS STORM The company has a history of emerging out victorious from crises. As of March 2020, the company had cash and current investments of about `23,300 crore. It is debt-free. The management expects zero or negative growth for the IT sector in FY21 and its presence in sectors like financial services (31.5 per cent of Q3FY20 revenue) and retail (15.3 per cent) are likely to impact the business negatively. However, long-term business relations with clients, an annuity-based business, depreciating rupee and settled management should provide some cushion to the revenues.

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COVER STORY

ITC

The budding FMCG behemoth The company’s growing presence in the FMCG space, coupled with its cash-rich balance sheet, should expedite its recovery

A

dominant cigarette player in India, ITC commands a market share of more than 80 per cent by sales. It is also the country’s largest buyer, processor, consumer and exporter of Indian leaf tobacco. Established in 1910, this over 100-year-old company has survived two world wars and multiple recessions. Over the years, it has diversified its business in the Indian FMCG market (with its brands like Aashirvaad Atta and Sunfeast), stationery (with its Classmate brand) and others. Also, it has emerged as a prominent player in Indian paperboard used for packaging. Collectively, its FMCG brands are touching the lives of 124 Indian million households on the back of a direct and indirect retail network of six million retailers. Besides, its e-Choupal

initiative, which touches the lives of over four million farmers, helps the company procure its raw material directly from farmers. Further, the company has presence in the hotel business, with presence in 70 locations and 110 properties operating under brand names ITC Hotels, Fortune, Welcomhotels and WelcomHeritage. ITC’s strength lies in its fully backwards-integrated process, starting right from the procurement of raw materials from farmers to manufacturing products and then packaging them.

FINANCIAL STRENGTH ITC’s core cigarette segment is a cash cow, with a return on capital employed (ROCE) of more than 300 per cent. This segment is the primary driver of the company’s exceptional free cash flows. Even after incurring a capital expenditure of

300% `61,000 cr ROCE of ITC’s cigarettes business

10Y free cash flow

`25,000 crore in the last 10 years, the company has generated a free cash flow of more than `61,000 crore. This capital expenditure has helped the company increase the revenue share of its non-cigarette businesses from 34.5 per cent in 2010 to 53.5 per cent in 2019. However, the cigarette business still accounts for around 85 per cent of its profitability, which has often been a concern for its investors. Lower volume growth of cigarettes, growing penetration of illegal cigarettes, lower profitability of the company’s other businesses, and an inability to find high-yielding businesses to deploy its cash have led to the underperformance by its stock price. The stock continues to trade near its decade-low P/E of 14 times, which is at more than 50 per cent discount to its 10-year median. Overall, the company has generated a return on equity of more than 23 per cent every year in the last 10 years.

WHY ITC CAN WEATHER THIS STORM ITC has a debt-free balance sheet with a cash balance of over `17,000 crore, which should be sufficient to pay salaries and meet its fixed obligations during the lockdown period. Additionally, its plants manufacturing essential products, like biscuits, soap, sanitisers under the Savlon brand, aata, snacks and noodles are still operating partially. This should further help the company cushion the financial impact of the ongoing lockdown.

May 2020 Wealth Insight 35

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COVER STORY

MARICO

The power of innovation Time and again, Marico has leapt ahead through radical innovations. The present times call for yet another round.

M

arico is India’s leading FMCG company. It is the owner of Parachute brand of coconut oil, which is the world’s largest. Marico has a 61 per cent share in the Indian coconut-oil market. The company also has a number of other well-known brands such as Hair & Care, Revive, Saffola, Livon, Mediker, Set Wet, etc. Harsh Mariwala, who joined his family business Bombay Oil Industries in 1971, conceived the idea of branded coconut and refined edible oil. This resulted in the Parachute brand. He later founded Marico in 1990. In 2013, the company went through a massive restructuring. It merged its domestic and international businesses and demerged the loss-making skincare business Kaya into a separate entity. This move boosted Marico’s profitability. Over the years, the the company’s management hass

adopted the strategy of diversifying into different product lines and countries. Its India business contributed around 78 per cent to its revenue in FY19, with the international business making up the rest. Bangladesh alone accounted for 46 per cent of the international revenue in FY19. The company enjoys a market share of 82 per cent in the coconut-oil market of Bangladesh. Besides, it has a presence in Vietnam (26 per cent of its international business), the Middle East and North Africa and South Africa. Marico’s strength lies in its ability to innovate. Its famous blue Parachute bottle exemplifies the fact. From tin cans, the company switched to plastic bottles. This was a great move as it helped the company gain market share. In villages, Marico introduced onerupee mini bottles against sach traditional sachets. These again proved to be a game changer.

61%

Marico’s share in India’s coconut-oil market

The introduction of plastic packaging and one-rupee mini bottles for Parachute coconut oil helped the company increase its market share FINANCIAL STRENGTH Marico generates high cash flows – a result of its limited workingcapital requirements. It is also debtfree and has significant cash balances. However, due to its dependence on copra, which is its key raw material, its margins tend to be volatile. To reduce its dependence on the coconut-oil business, the company is now focusing on its Saffola portfolio and diversifying its operations across countries. Besides, it is eyeing greater share in the rural market. The company has delivered an average return on equity of more than 35 per cent in the last 10 years. Its earnings per share have also grown at 19 per cent per annum over the same period.

WHY MARICO CAN WEATHER THIS STORM Marico has cash of `1,175 crore, which is enough to meet its expenses during the lockdown period. The company is also operating its plants partially, producing edible oil and oats, which qualify as essential items. It also has a significant presence in countries like Vietnam and Bangladesh, which are relatively less affected by this pandemic. This may further expedite the company’s recovery.

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COVER STORY

MARUTI SUZUKI

The people’s carmaker Selling one out of every two passenger cars, Maruti Suzuki has always been the car buyer’s first choice

M

aruti Suzuki sells one out of every two passenger cars in India. The company is the leader in the mid and small segments, which attract masses and first-time buyers. Despite being in a highly competitive industry, Maruti commands a market share of more than 50 per cent. It has a total annual capacity of 1.75 million cars at its three plants in Manesar, Gurgaon and Gujarat. The company’s history dates back to 1981, when it was incorporated as Maruti Udyog, a joint venture between the Government of India and Suzuki Motor Corporation of Japan, with an aim to import and sell cars manufactured by Suzuki. Later, the government disinvested its holding in the company and now, it is owned by Suzuki, with a 56.2 per cent stake. In 1983, the company launched its first car, the iconic Maruti 800

and more than 2.8 million units of this model were sold. The subsequent years witnessed the launch of a slew of blockbuster products, including Omni, Gypsy, Esteem, Zen, Wagon R, Swift and Dzire. Through these launches, the company created one of the most successful portfolios of car models in India.

FINANCIAL STRENGTH Over the last five years, Maruti’s cash flows from operations have been more than `43,000 crore. It has a strong balance sheet with zero debt on its books. However, the stock has been under stress primarily because of the ongoing slowdown in the auto sector caused by the increasing cost of fuel and vehicle insurance and because of the company’s exit from the diesel segment. Now, potential buyers are deferring their plans to purchase new cars owing to the economic slowdown, the transition from BS-IV to BS-VI and confusion over the electric vehicles.

43,000 cr 1.75 million `

Maruti’s 5Y cash flows from operations

Maruti’s annual car-making capacity

WHY MARUTI CAN WEATHER THIS STORM Several factors set Maruti apart from its peers. Over the years, the company has established its brand on the back of its distribution and service network, which provides its buyer cheaper spare parts and service costs. It has earned a reputation for producing cars with better fuel efficiency, lower maintenance costs, better interiors and higher resale value. Hence, the company may see continued high demand for its products driven by the low penetration of cars in India, higher disposable income and rising aspiration of the middle class to own a car. The company has been a lowcost car maker, catering to the masses and depending on volumes to drive growth. And therefore, it is not tapping much into the EV segment for now, where the cost of owning a car is relatively high. Nevertheless, the company has recently entered into the premium segments such as sedans and SUVs. With people showing more interest in purchasing these, Maruti is now keeping pace with its peers. May 2020 Wealth Insight 37

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COVER STORY

TATA CONSULTANCY SERVICES

A safe pair of hands Being the second largest listed company of the country with capable management, TCS is one of the safest havens in market turmoils

T

CS is India’s largest IT services provider. Catering to over 2,400 clients across sectors and geographies and having a market cap of more than `6.6 lakh crore, it accounts for around 72 per cent of the combined market cap of all listed companies of the Tata Group. The company offers IT solutions, infrastructure services, consulting and BPM (business process management) services. BFSI (banking, financial services and insurance) continues to be its biggest business segment, accounting for about 40 per cent of the FY19 revenue, while retail and consumer products, TMT (telecom, media and technology) and manufacturing are some other major segments. In terms of geographical distribution, the Americas contributed the most (53 per cent) to its FY19 revenue, followed by Europe (29.7 per cent), India (5.7 per cent) and others (11.6 per cent). The company has a first-hand experience of handling crises. In 2008-09, the company was badly hit by the global financial crisis as around 55 per cent of its revenue used to come from the banking and financial sector. From double-digit

revenue growth rate, the top line growth fell to single digits. To counter this, the company followed some aggressive steps like the reorganisation of the business into smaller units, pay and job cuts, hiring freeze, etc. TCS has been run by strong managements. In its 50-year history, the company has witnessed leadership changes only thrice. The latest one came in 2017 when company veteran Rajesh Gopinathan took over the reins.

35,000 cr

`

Cash and investments on TCS’s books

In its 50-year history, the company has witnessed leadership changes only thrice

FINANCIAL STRENGTH Over the last five years till March 2020, TCS’s revenue increased by around 11 per cent, while its net profit grew by around 10 per cent. With an increase in its client count, the revenue garnered per client also increased. Over the last five years, TCS cumulatively generated free cash flows of around `1 lakh crore. Of this, around `88,000 crore was paid to the shareholders in form of dividends and buybacks. The company is debt-free and in the last five years, its ROE has averaged at 36.

WHY TCS CAN WEATHER THIS STORM As of March 2020, the company had cash and investments worth about `35,000 crore. Its receivable days improved to 65 days in March 2019 from 75 days five years back. The company’s major fixed cost is employee expense (about 50 per cent of the revenue). In its last investor call, the management indicated that the major impact of the lockdown will be seen during Q1FY21 and things should stabilise by Q3. The management expects the current crisis is going to accelerate the growth of digital services, including cloud and automation. A diversified client base with long-term relationship, strong leadership and the ability to scale up business rapidly provide TCS with a unique advantage. WI

38 Wealth Insight May 2020

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SPECIAL REPORT

Which tax slabs are

better for you? From this financial year, you will have a choice between old and new tax slabs. Here’s how you can choose the one suited to you.

May 2020 Wealth Insight 39

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SPECIAL REPORT

T

he start of the new financial year has brought with it the new tax slabs. The old ones also remain. You have to choose between the two. While the older ones allow you to avail many exemptions and deductions, which can bring down your overall taxable income, the new tax slabs have lower rates of taxation but you will have to forgo your exemptions and deductions. In such a scenario, many are wondering which tax slabs they should choose. Before we start, have a look at both the old and new tax slabs:

;H_ZSHIZ!6SKHUKUL^ While the new slabs have lower tax rates, they don’t have any deductions or exemptions Slab (`)

Existing tax rates

New tax rates

0–2.5 lakh

Exempt

Exempt

2.5–5 lakh

5%

5%

5–7.5 lakh

20%

10%

7.5–10 lakh

20%

15%

10–12.5 lakh

30%

20%

12.5–15 lakh

30%

25%

Above 15 lakh

30%

30%

Why the new slabs? In her Budget speech, the finance minister said that simplification was the main motive behind the new tax slabs, apart from easing the tax burden. She said, “Currently, the Income Tax Act is riddled with various exemptions and deductions which make compliance by the taxpayer and administration of the Income Tax Act by the tax authorities a burdensome process. It is almost

impossible for a taxpayer to comply with the Income-tax law without taking help from professionals.” She highlighted that over the past several decades a number of tax exemptions and deductions got incorporated in the income tax legislation. She said, “It was surprising to know that currently more than one hundred exemptions and deductions of different nature are provided in the Income Tax Act. I have removed around 70 of them in the new simplified regime. We will review and rationalise the remaining exemptions and deductions in the coming years with a view to further simplifying the tax system and lowering the tax rate.” In the new tax structure, while some 70 exemptions have been removed, about 50 do stay. These include the deduction for agricultural income, leave encashment on retirement, standard deduction on rent and some other miscellaneous items. However, all those exemptions and deductions that are generally the mainstay of tax-planning are gone in the new tax structure. Fortunately, the new tax structure is optional. If the existing slabs and exemptions save you more tax, you can very well adhere to them. What’s more, the salaried can choose between the original and the new tax structures every year. But businesspersons don’t have this flexibility. They have to follow the same taxation system in the future after they have chosen between the two options.

Which should you choose? The new tax slabs are indeed simpler. You don’t have to worry about documentation or last-minute tax planning. For those who want more money in hand, such as those in lower income brackets or those who want to take control of their finances rather than let the government decide where to invest, these could be useful. However, this simplicity

comes at a cost. The first cost is that you don’t really pay less tax with the new tax structure, as claimed by the finance minister. The table ‘New vs old: Which is more beneficial?’ shows that if you claim the basic exemptions and deductions – `1.5 lakh under Section 80C, `50,000 under Section 80CCD(1B) and `25,000 under Section 80D, apart from the default standard deduction of `50,000 – you can pay less tax than that in the new system. Of course, if you include other exemptions and deductions, such as house-rent allowance, you could be paying even less tax. Even if you exclude the `50,000 NPS contribution in the table, still you save more than that in the new system. The second cost is that if you follow the new tax slabs, you may compromise on savings. No matter if tax-planning is pesky for some of us, it forces us to save. If not

40 Wealth Insight May 2020

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SPECIAL REPORT For the stock lovers

5L^]ZVSK!>OPJOPZTVYLILULMPJPHS& If basic exemptions and deductions are claimed (as stated in the footnote of this table), the existing tax system beats the new one hands down. Income

Deductions*

TAXABLE INCOME Old regime New regime

Old regime

TAX PAYABLE New regime Gain/Loss

7,50,000 2,75,000

4,75,000

7,50,000

0

39,000

-39,000

10,00,000 2,75,000

7,25,000

10,00,000

59,800

78,000

-18,200

12,50,000 2,75,000

9,75,000

12,50,000

1,11,800

1,30,000

-18,200

15,00,000 2,75,000

12,25,000

15,00,000

1,87,200

1,95,000

-7,800

17,50,000 2,75,000

14,75,000

17,50,000

2,65,200

2,73,000

-7,800

20,00,000 2,75,000

17,25,000

20,00,000

3,43,200

3,51,000

-7,800

22,50,000 2,75,000

19,75,000

22,50,000

4,21,200

4,29,000

-7,800

25,00,000 2,75,000

22,25,000

25,00,000

4,99,200

5,07,000

-7,800

27,50,000 2,75,000

24,75,000

27,50,000

5,77,200

5,85,000

-7,800

30,00,000 2,75,000

27,25,000

30,00,000

6,55,200

6,63,000

-7,800

32,50,000 2,75,000

29,75,000

32,50,000

7,33,200

7,41,000

-7,800

35,00,000 2,75,000

32,25,000

35,00,000

8,11,200

8,19,000

-7,800

37,50,000 2,75,000

34,75,000

37,50,000

8,89,200

8,97,000

-7,800

40,00,000 2,75,000

37,25,000

40,00,000

9,67,200

9,75,000

-7,800

42,50,000 2,75,000

39,75,000

42,50,000

10,45,200

10,53,000

-7,800

45,00,000 2,75,000

42,25,000

45,00,000

11,23,200

11,31,000

-7,800

47,50,000 2,75,000

44,75,000

47,50,000

12,01,200

12,09,000

-7,800

50,00,000 2,75,000

47,25,000

50,00,000

12,79,200

12,87,000

-7,800

1,00,00,000 2,75,000

97,25,000 1,00,00,000

31,23,120

31,31,700

-8,580

2,00,00,000 2,75,000

1,97,25,000 2,00,00,000

68,53,080

68,62,050

-8,970

All numbers in `. *We have assumed the following deductions: standard deduction of `50,000; `1.5 lakh under Section 80C, `50,000 on investment in NPS under Section 80CCD(1B); `25,000 on payment of health insurance premium under Secion 80D.

forced to, many of us may not save enough. This can result in financial complications in the future, including during retirement. For the young generation especially, the new tax slabs can result in higher spending and less saving. With rising consumerism, there are many avenues to spend and with the new tax slabs, one major saving avenue will be gone. Everyone will have their own set of deductions and exemptions. Hence, We have worked out equilibrium points for various income groups. These represent the amount of deduction that brings the old and new tax structure at par in terms of the tax payable.

Any further deductions from these equilibrium points will make the old system beneficial as your tax outgo would reduce. If your tax-admissible expenses and investments (not just 80C and 80D ones but also your HRA, donations under Section 80G, etc.) are more than the given equilibrium level, you can stay with the old tax structure. Otherwise, the new one’s for you.

Those who want to invest in stocks for their tax-saving requirements have the following options: tax-saving funds, National Pension System (NPS) and unit-linked insurance policies (ULIPs). Even the Employees’ Provident Fund invests part of its corpus in index ETFs. All these come under the Section 80C of the Income Tax Act. Let’s see them one by one. ULIPs provide you insurance cover and invest your premiums in the stock market. This sounds like a great deal but it isn’t. Neither the insurance cover nor the returns are optimal. The costs involved are high and there is often a lack of transparency. At Value Research, we advise investors to keep their insurance and investments separate. For life insurance, buy a good term plan. Next comes the NPS, which is a retirement-investment vehicle. It provides auto and active options. The auto option has a pre-decided equity and fixed-income mix that keeps tapering with your age in favour of fixed income. The active choice lets you decide your equity-debt mix subject to some age-related upper limits. The NPS is especially useful to avail an additional tax deduction

May 2020 Wealth Insight 41

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SPECIAL REPORT ;OLLX\PSPIYP\TWVPU[Z If you claim the deductions mentioned across various incomes, your tax outgo in the old and new tax systems will be the same. To save tax in the old system, go beyond your equilibrium point. 6.00 lakh

50,000 75,000

6.50 lakh

1,00,000

7.00 lakh

1,25,000

7.50 lakh

1,37,500

8.00 lakh

1,50,000

8.50 lakh

1,62,500

9.00 lakh

1,75,000

9.50 lakh 10.00 lakh

1,87,500

10.50 lakh

1,87,500

11.00 lakh

1,87,500

11.50 lakh

1,87,500 1,91,667

12.00 lakh

2,08,333

12.50 lakh

2,16,667

13.00 lakh

2,25,000

13.50 lakh

2,33,333

14.00 lakh

2,41,667

14.50 lakh

2,50,000

15 to 50 lakh* All numbers in `. Equilibrium points include the standard deduction of `50,000.

;VW[H_ZH]PUNM\UKZI``LHYYL[\YUZ The recent market turmoil has resulted in artificially low returns for most equity funds. Scheme name

10Y*

RETURNS (%) 5Y* 10Y#

5Y#

Axis Long Term Equity Fund

13.67

4.20

17.06

9.70

Invesco India Tax Plan

10.26

2.99

13.70

8.10

BNP Paribas Long Term Equity Fund

9.67

1.45

12.68

6.35

Tata India Tax Savings Fund

9.56

3.30

12.97

8.69

DSP Tax Saver Fund

9.31

3.36

12.98

8.71

Canara Robeco Equity Tax Saver Fund

9.19

3.33

12.51

7.75

Aditya Birla Sun Life Tax Relief 96

8.72

2.69

11.82

7.51

ICICI Prudential Long Term Equity Fund (Tax Saving)

8.57

1.20

11.66

5.34

Franklin India Taxshield Fund

8.19

-1.00

11.87

4.80

L&T Tax Advantage Fund

8.02

1.54

11.50

6.82

of `50,000 under Section 80CCD(1B). Its low-cost is another plus. However, since it’s a retirement tool, the NPS locks in your money until you turn 60, though there are some avenues when you can make partial withdrawals. On maturity, you must use 40 per cent of the proceeds to buy an annuity. The rest 60 per cent can be withdrawn as a lump sum. NPS proceeds are tax-free but annuity payouts are taxable as per your slab. Tax-saving funds are the most efficient way to save tax and build a long-term corpus. They invest in equity and can invest in companies of all sizes. They are transparent, have the shortest lock-in period of three years among 80C investment options and can be most rewarding if held for the long run. The competition between the ELSS schemes of various fund houses ensures that the fund managers are on their toes to deliver. You can find an elaborate coverage of tax-saving funds on www. valueresearchonline.com. If you type the name of such a fund in the search bar, you will get a page full of information about that fund, including its rating, returns, portfolio, expense and so on. The table lists top 10 tax-saving funds over the last 10 years. Because of the recent fall in the market, their returns may appear subdued but if you see their returns until February 2020, they are not just ahead of inflation but also highly rewarding. For Wealth Insight readers, who are enterprising stock investors, tax-saving funds are the best choice to save tax and build a corpus for a long-term goal. Systematic investments in them throughout the year don’t just help you efficiently save tax but also help you average your investment cost. WI

* As on April 15, 2020. # As on February 29, 2020.

42 Wealth Insight May 2020

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SAILESH RAJ BHAN

INTERVIEW

Deputy CIO – Equity Investments, Nippon India Mutual Fund

‘The outlook for the healthcare sector is positive over the next two-three years’ T he recent market crash has hit almost all sectors. But the healthcare sector didn’t suffer much damage, with the BSE Healthcare Index sporting a year-to-date return of over 12 per cent (as on April 22, 2020). After underperforming the market for a few years, the sector has come back on investors’ radar due to the outbreak of COVID-19. We speak to Sailesh Raj Bhan, who manages Nippon India Pharma Fund, regarding what’s changing in the sector and whether it is poised to regain its lost charisma. Please note that the graphs in this interview are based on Nippon India Pharma Fund.

In the fall of March 2020, the pharma sector was least affected. Why did it happen? The pharma sector was resilient in the recent fall, given that the sector is one of the least-impacted sectors in the current environment. The earnings of the sector have also been on the mend over the last 12 months, while valuations were inexpensive. The profit share of the India business, which is more lucrative, has also increased in the last five years for most Indian companies. The outlook for healthcare as a sector is positive over the next two-three years

0UJYLHZPUNKLJYLHZPUNJVU]PJ[PVU Top companies in which his investments have gone up/down in the last one year (TV\U[`JY

(TV\U[`JY

Aurobindo Pharma

45

Abbott India

-120

Narayana Hrudayalaya

36

Divis Laboratories

-110

Syngene International

32

Alkem Laboratories

-81

Thyrocare Technologies

23

6DQRÀ,QGLD

-60

Dr. Reddys Laboratories

23 Mayy 2020 M Ma 2020 20 2200 Wealth Weaal We alth t IInsight n iigght ns ht 43 43

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INTERVIEW

when compared to most sectors of the economy, which will undergo slowdown on account of the economic impact of the lockdown.

Many investors have difficulty understanding the pharma sector, given the nature of business. Can you help our readers understand the kinds of businesses Indian pharma companies operate in? Which are most lucrative? Which are laggards?

Indian companies primarily are operating in three categories: (1) branded markets like India and emerging markets; (2) generic markets like the US and Europe; and (3) hospitals and diagnostics businesses. MNCs in India operate in branded generic market, while Indian companies operate in large scale in both markets. The branded markets are like consumer businesses with demand coming from rising per capita income, leading to more awareness and diagnostics, new product introductions to meet disease needs and better compliance. India can be called the chronic disease capital of the world. It has among the largest patient base in diabetes, cardiac, thyroid, etc. Rising new patient population creates an ever-increasing need for pharmaceuticals, thus fuelling demand. While India has a young demography, it also has one of the largest senior population in the world, whose per capita consumption of drugs rises disproportionately with age. Companies in this category generate high returns on equity and strong cash flows, have all consumerbusiness characteristics and are highly lucrative. Most emerging markets have similar characteristics and economics as Indian markets. As for the generics markets, India is the pharmacy to the world. Among the largest manufacturers of pharmaceuticals, India sells to over 150 countries with a high market share in developed markets. No other industry from India has this type of scale and credibility in developed markets. India’s manufacturing scale and regulatory capabilities have enabled this success. This is one of the markets where India leads China by a huge margin in selling formulations to the world. India manufactures nearly 40 per cent of all oral generics and nearly 20 per cent of all injectable generics sold in the USA, which explains the degree of success India has achieved. Given that this market is highly competitive and

;VWOVSKPUNZ

;VWLX\P[`Z[HRLZ

Companies that form biggest part of the portfolio

Companies in which he holds highest equity stakes

Many global pharma giants are vying to develop the vaccine for the coronavirus. Where do Indian companies stand? Where is the opportunity for investors? Global research to develop a vaccine is progressing very fast with a large amount of resources being deployed. India is significantly ahead in pharmaceutical manufacturing, but it lags in core research and development efforts, given the large scale funding of these programmes. Global players have a clear edge in terms of vaccine development, while India can scale its manufacturing processes to meet global demand post the development of the vaccine.

After being a laggard for the last three-four years, when do you see the sector coming in the forefront? What are the key opportunities and threats for the sector’s reemergence? The pharma sector’s revenues and profitability are already on an uptrend in many sub-segments like domestic branded business and diagnostics. Post many measures to course-correct on the R&D and other operating costs, improvement in the profitability of US generic business is also visible. The annual 8–10 per cent price declines in US markets have now normalised to a much more muted level of 3–4 per cent, which is manageable through productivity and cost changes. Pharma as sector is firmly set on an earnings-growth trajectory even in these difficult circumstances.

% of assets

` cr

242

% of equity

` cr

Thyrocare Technologies

4.4

Indoco Remedies

2.6

Narayana Hrudayalaya

1.2

68

Fortis Healthcare

1.1

115

Healthcare Global Ent

1.0

8

Syngene International

0.9

96

Aurobindo Pharma

0.8

186

115

6DQRÀ

0.7

113

5.1

113

Cipla

0.6

211

5.1

112

Dr. Reddys Laboratories

0.5

242

Dr. Reddy’s Laboratories

11.0

Sun Pharmaceutical

10.1

Divi’s Laboratories

10.0

Cipla

9.7

Aurobindo Pharma

8.5

Abbott India

6.0

Thyrocare Technologies

5.6

Fortis Healthcare

5.2

6DQRÀ Lupin

222 219 211 186 132 122

122 47

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INTERVIEW

“Among the largest manufacturers of pharmaceuticals, India sells to over 150 countries with a high market share in developed markets. No other industry from India has this type of scale and credibility in developed markets.” consolidated, margin pressure has remained high in the last three years. Indian companies have reorganised costs and capital allocation to adjust to this level of profitability. India also has some of the best contract-manufacturing and services companies, with global cost competitiveness, serving the world’s largest pharmaceutical companies. Hospitals are significantly underpenetrated in India on a per-bed basis. This segment suffers from high upfront investment and continuous investment in the upgrade of technology. On the other hand, diagnostics companies have a very high return on capital and are highly profitable. These markets are also underpenetrated and have years of growth ahead.

Two-three years ago, Indian pharma companies had suffered due to USFDA observations. What is the situation now? Have they come of age? Indian companies have scaled their businesses multifold in the last decade but faced some challenges in continuously upgrading all their processes to rising regulatory scrutiny. Huge investments in people training, equipment and technology have allowed many companies to meet the rising demands of global regulatory agencies. While routine observations will be the norm, critical observations have started to come down in the last couple of years, which reflects the effort Indian companies have made in the recent years.

Healthcare is a varied lot. How do you pick stocks? Which sub-segments look most promising from a growth perspective?

5L^LU[YHU[Z His new bets over the year % of assets

Apollo Hospitals

0.5

Astrazeneca Pharma

0.1

*VTWSL[LL_P[Z Companies from which he has exited in the last one year Max % of assets over last 1 year

Max India

2.1

Torrent Pharmaceuticals

2.0

FDC

1.4

Over the last 15 years, Nippon Pharma Fund’s (erstwhile Reliance Pharma Fund) focus has always been on sustainable business models which have some right to win the marketplace. For example, in branded markets, the focus is on sizing the market opportunity and mapping the brand potential with emphasis on chronic therapies. For US markets, it’s primarily the investment in pipeline ability to generate sustainable profits either through backward integration or scale. Indian pharma markets continue to have a high degree of under-penetration, attractively profitable business models and decades of growth ahead, which make them very lucrative. International businesses present a huge opportunity to scale but require much disciplined capital allocation. Diagnostics are high ROE businesses with strong growth prospects, while hospitals are capital-intensive businesses, which require disciplined capital allocation to generate returns. Nippon Pharma Fund is roughly 85 per cent invested in the pharmaceutical sector with a near equal mix of domestic and export businesses. The rest 15 per cent is invested in hospitals and diagnostics companies.

The Indian listed space has quite a few multinational pharma names, such as Abbott, Pfizer, Sanofi, etc. Do these companies offer some special opportunity to investors? Some of the largest global companies in pharma have their Indian businesses listed for investors to capitalise upon. Most of these businesses have high profitability and strong long-term growth prospects due their dominant brands and marketing prowess and the ability to launch new products.

What is the situation on the domestic front in terms of price regulation and the move towards generics in place of branded medicines? How will that impact the sector? Pharma pricing has always been under regulatory pressures, given the need to push accessibility and reduce healthcare burden. The role of generics is increasing in India, with the government’s effort in this area. Given the current state of the market, both branded as well as generic drugs have a long journey of growth ahead and it is not likely to be an ‘eitheror’ market. Rising incomes and better compliance and testing are expanding the market. Indian pharma products are among the cheapest in the world already. WI May 2020 Wealth Insight 45

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EVERYDAY ECONOMICS

The haircuts economy India’s unorganised haircutting market highlights the problems of reaching out to the vulnerable sections in times of distress

PUJA MEHRA

The growing video library of bad-

cheerfulness, and when times are hard, hemlines fall, in character with the uncertainty and dreariness. It’s hair accidents on the internet is a rare lighter side of the same with hair. Upkeep of short hair involves more the awful coronavirus crisis. The lockdown to control frequent trips to the salon and requires more sprays the spread of the virus has shut down the country. This and gels. It’s definitely more expensive than letting has spawned a do-it-yourself (DIY) economy. From your tresses down. cleaning to cooking and medication to AC servicing, Fewer trips or more, everybody needs to see their every activity has turned into a DIY project. Homehairstylist sooner or later, which often makes the hairbound people with no skill or practice in cutting hair styling business a recession-proof industry. When even giving themselves a trim can have funny outcomes. recession-proof industries have to shut down, then Men missing sizeable tufts or with just a tiny bit of hair that’s a worrying indicator of how uniquely bleak the left on the crown and fashionable women with sloppy economy is. bangs – it is all happening. The hairstyling industry portrays India’s complex Although entertaining, these flicks are no laughing economic structure well. Barbers under trees and by matter for the economy. Each of the DIY haircuts reproadsides are part of the unorganised sector. Their resents lost income for a hairstylist and that says a lot incomes are typically unstable and depend on the numfor the economy’s suffering due to the lockdown. The ber of days they work. They do not have the benefits of hairstyling industry is normally recession-proof. paid leave, minimum legal wage, pensions, etc. Work Even at the peak of the Great Recession in 2008, when conditions are harsh – often made tougher by bullies the US economy lost more than a million jobs, the US and rent-seekers. The mom-and-pop salons are less vulspas and salons industry beat the downturn and added nerable and also part of the unorganised sector, as they 75,000 jobs. are usually too small to have to register for income tax Many market watchers watch the length of women’s or GST unlike the upmarket chains with thousands of hair closely for tell-tale signs of the economy’s health. employees and hundreds of stores and Japanese researchers studied years of haircare boutiques. data on women’s hairstyles in advanced Even at the peak of luxe Every haircut adds to the economy’s countries and came up with a bellweththe Great gross value added (GVA), but should the er for the economy’s health. They found Recession in 2008, GVA of the roadside barbers and momthat when economies do well, women when the US econ- and-pop salons be measured? Unlike the wear their hair long; and when there is a slump, they keep it short. Another omy lost more than organised-sector haircare stores, there are no financial statements to look at. popular offbeat indicator is the hemline a million jobs, the so, the statisticians use various index that the US economist George US spas and salons And extrapolation and survey-based techTaylor introduced in the 1920s. industry beat the niques. There’s no knowing how accuAccording to Taylor, when the economy downturn and rate these might be. Just like they pose is good, women’s skirts get shorter, added 75,000 jobs challenges for GVA estimation, the comreflecting all-round optimism and 46 Wealth Insight May 2020

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EVERYDAY ECONOMICS

plexities make policy-making quite difficult. The haircare sector illustrates the pressing question: how can the government, should it decide to, deliver relief in times of distress? Once the lockdown gets over, a cut in corporate tax or GST on hair colour and gels, etc., subsidies for the wage bill could be announced. But only the organised industry will be able to take advantage of it. How should the government reach the barbers and mom-and-pop stores? The tax channel of delivering relief is ruled out. The individuals are unlikely to have pensions, scholarships, NREGA or PM-KISAN accounts into which cash could be transferred. The government has very few delivery channels through which relief can be reached to this segment other than PDS food through ration cards. MUDRA loans are another option but sanction and transmission cannot be carried out urgently. The mom-and-pop stores can be given one-time relief on water or electricity user charges. Like barbers and the mom-and-pop stores, there are scores of informal labourers across industries suffering due to the coronavirus crisis and lockdowns. But they do not have recourse to relief from the government because of the nature of their work. A universal social-security system in which government could transfer income support could have helped them. Is the differentiated nature of the haircare industry a good thing, though? It is good for consumers since they have a variety of options to pick from. Any num-

ber of barbers and mom-and-pop stores can start operations with small sums of money, which keeps a check on inflation in prices of hair trims. But rarely can they grow and size and improve their own quality of life. Irregular and low incomes from these odd jobs can buy food and basic necessities to keep off starvation but quality education and vocational training for children. These are normally not sustainable livelihoods or scalable businesses. The microeconomics of a barber shop are such. One chair allows for a fixed number of clients. Client volume can fluctuate on a day-to-day basis, but there is a ceiling on the maximum number of clients and, therefore, income a chair can yield. This is why successive generations fail to break out of the trap of low-income, low-security informal labour. People that are not poor often don’t understand these constraints. “Why can’t poor people work hard to break out of poverty,” is a common refrain. A miniscule number of gifted people study under streetlamps and crack open opportunities. But the masses remain poor generation after generation because they cannot set up scalable businesses or acquire skills that labour markets value highly. One way to disrupt these socio-economic rigidities is to have a robust public-education and vocational-training system that will allow the children of the non-rich to get into the fast lane. WI Puja Mehra is a Delhi-based journalist and the author of The Lost Decade 2008–18: How the India Growth Story Devolved into Growth Without a Story

May 2020 Wealth Insight 47

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MAIN STREET

Knowing the unknowable Our understanding of the present tends to be incomplete and the future is even more difficult to predict. Narrative reasoning can help.

SAURABH MUKHERJEA

As the coronavirus crisis raged, hundreds of investors reached out to my colleagues at Marcellus seeking assurance that all is not lost for the Indian market. As the panic in the market intensified through March, we realised that at the core of all of these investors’ queries is the same underlying question: ‘What will happen in the financial year that lies ahead of us?’ By and large, our response is that neither we nor anybody else knows what the future will bring. But through the year, especially during the corona crisis, we realised that not many clients like this answer. That led us to ask ourselves why it is that intelligent people want us to become latter day descendants of Nostradamus. At one level, it is easy to see and say that man has always wanted to know the future. That is why the pseudoscience of astrology is the second-oldest profession on this planet. Great kings and ordinary mortals have for many millennia needed the services of a local soothsayer. However, that did not make such people any less able than they naturally were. For example, Julius Caesar’s glory as a great Roman ruler was not dimmed by his use of the druids for astrological forecasts. So, why then today are we rendered vulnerable by our grasping need to know the future? The answer, we believe, lies in the way the free market abuses our basic

(SS[OH[^LJHURUV^PZ[OH[^LRUV^ UV[OPUN(UK[OH[PZ[OLZ\T[V[HSVM O\THU^PZKVT – Leo Tolstoy, War and Peace (1867)

needs. Let’s illustrate by using our dietary and exercise habits as an example. Nobody needs to be given an FY21 GDP growth estimate for India or a forecast of how many people will contract the coronavirus globally to know what we have to eat in FY21. We know that regardless of how the economy or COVID-19 pans out, we need to get our basics right, i.e., eat healthy foods like fruits and vegetables, avoid sugary and fatty foods, and get regular exercise so that we can build a robust physique. All of this sounds like commonsensical stuff. However, unfortunately, things rarely stay as simple as that. As we become more prosperous as a society, more propaganda is pumped into our heads as to what constitutes a good diet (is it keto, Atkins, intermittent fasting, Dubrow, endomorph?). Rationality is thus suspended as we hire dieticians who tell us what to eat knowing full well that they have to come up with something different in order to build a following/client base. The more prosperous we become, the more dieticians the free market supplies to us. Soon elementary eating decisions are no longer elementary (is more ghee/clarified butter good for me or bad for me?). Conversely, decisions that seemed crazy once are made to come across as the way to go (for example, should I fast every day for the entire length of my working day and then stuff myself twice a day?). Thus, something which was a basic skill – how to eat a relatively healthy diet – has become an industry characterised by moral hazard, i.e., most of these dieticians have a conflict of interest with us. They are interested in building their differentiated brand and hence their franchise. On the other hand, you and I are interested in a healthy and easy-to-follow diet, which our grandmothers could have taught us.

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MAIN STREET Investment implications As in dieting, so in the world of investing. As the Indian rich leave behind the wreckage of their residential real-estate investments, the financial-services sector is throwing at them an array of fund managers. As a result, high-risk portfolio constructs are presented to affluent Indians as being conservative/safe investments. For example, a very popular product in India is a ‘balanced’ portfolio of stocks and bonds, which promises to give you a 1 per cent dividend every month and therefore a 12 per cent dividend per annum (in a country where a decent corporate bond has a 9 per cent yield and a high-dividend-yielding stock has a 5 per cent yield). In contrast, straightforward portfolio constructs – like investing in a dozen or so clean companies selling essential products/services with little or no competition – are, as we discover every day at Marcellus, sometimes considered to be debatable investments. After all, as the critique of our Consistent Compounders Portfolio goes, who knows what will happen to Nestle or Divi’s Labs or Abbott India or Dr Lal Pathlabs in FY21? Maybe people will stop using these products/services due to COVID and run away into the forest, never to be seen thereafter. So, in these uncertain times, how we can we maintain our rationality? Several answers to this question lie in a new book from our guru John Kay and his distinguished friend and co-author Mervyn King. In Radical Uncertainty: Decision Making Beyond the Numbers (2020), the authors take the reader on a riveting tour of contemporary areas of decision analysis, behavioural economics, finance, and policy studies to show what is wrong with the conventional reasoning in the world of business and policymaking. What is their panacea to the pseudoscience of quantitative analysis and management jargon that pervades many investment banks, asset-management houses and boardrooms? This ‘radical uncertainty’ of the title of the book refers to: (a) the fact that our understanding of the present is incomplete; and (b) our understanding of the future is even more fragmentary. As a result, say the authors, we must understand ourselves and explain the world to others by way of “narrative reasoning…the most powerful mechanism for organizing our imperfect knowledge,” creating stories about the world that assimilate our experiences, the experiences of others, and whatever reliable data we are able to collate in a “world of uncertain futures and unpredictable consequences.” An example that John and Mervyn use several times in the book is the probabilistic assessment Barack Obama received when determining whether to launch the raid that killed Osama bin Laden. It wasn’t 100 per cent clear that bin Laden was in that Pakistani com-

0HTUV[PU[OLI\ZPULZZVMWYLKPJ[PUN NLULYHSZ[VJRTHYRL[VYI\ZPULZZMS\J [\H[PVUZ0M`V\[OPUR0JHUKV[OPZVY[OPURP[ PZLZZLU[PHS[VHUPU]LZ[TLU[HWYVNYHT`V\ ZOV\SKUV[ILPU[OLWHY[ULYZOPW Warren Buffett’s Partnership Letter (1966, source: https://bit.ly/3b3rHRT)

pound and a messed-up operation might have meant war with Pakistan. Before he greenlighted the operation, Obama used not only the assessment given to him by his generals but also his basic assessment of the downside risk (which wasn’t very high compared to the upside of getting bin Laden). With the far more modest resources available to us, we have and will continue to do something similar in India. In both Consistent Compounders and Little Champs, we will invest in Indian companies that: (a) do not cook their books; (b) provide essential products/ services; and (c) build impregnable barriers to entry. Such a style of investing limits downside risk – we have fallen half as much as the market over the past three months – whilst creating abundant upside opportunity. We will then continue to use narrative reasoning to explain this portfolio construct to our audience. Disclosure: Nestle, Divi’s Labs, Abbott India and Dr Lal Pathlabs are part of most of Marcellus Investment Managers’ portfolios. WI Saurabh Mukherjea is the author of The Unusual Billionaires and Coffee Can Investing. He’s the founder of Marcellus Investment Managers, a SEBI regulated provider of portfolio-management services.

May 2020 Wealth Insight 49

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STRAIGHT TALK

Marvels of gene and genomics Genetic engineering can help fight deadly diseases but its wider applications pose many questions

ANAND TANDON

“Biology will be the next great computing platform, DNA will be the code that runs it, and CRISPR will be the programming language.” This is a quote from Hacking Darwin: Genetic Engineering and the Future of Humanity, a fascinating book on possible future developments in genomics written by Jamie Metzl, investor, writer and futurist. In the context of COVID-19, where scientific manpower across the globe is focused on developing a cure for the virus, developments in biology and, in particular, genetic engineering offer exciting opportunities and threats.

among the more accurate thus far is ‘CRISPR’. This opens up wide-ranging and fascinating options of what can be achieved by changing DNA – human beings are already playing ‘God’.

From eliminating disease to ‘improvements’

Initial use of genetic editing was to eliminate single gene diseases like Huntington’s disease and Marfan syndrome. Most people will likely agree that if you could identify and correct the genes of a cell that otherwise has a high probability of causing a painful life-threatening disease, it would be perfectly acceptable to do so. In fact, in his book, Metzl argues that to not do so would soon put you into the category of the Understanding the DNA luddite who doesn’t inoculate his children with, say, Human understanding of genetics took a major leap measles vaccine – putting the child and society at risk forward when in 1953, Watson and Crick determined of an avoidable disease. Would you draw a line at makthe double-helix structure of the human DNA. Only a ing genetic ‘improvements’ though? Is an edit that is decade had passed since the role of DNA in determinlikely to help increase longevity by a few ing genetic inheritance had been estabyears an acceptable improvement? lished. The next big step forward was Recent Clearly ‘grey’ dominates these issues. when the human genome project was set developments have Metzl explains how it is now possible to up to map and sequence all the genes of enabled humans to create over 10,000 fertilised eggs for a our species. The project that started in human couple (something not possible 1990 was finally completed in 2003 now ‘write’ the naturally), and map each egg’s propensity (https://www.genome.gov/human-gelanguage in the for developing certain characteristics – nome-project). form of ‘edits’ to largely genetic ones like skin colour or If you think of the genetic code as a the DNA. One such height or even combination features (in language in which nature expresses itself, decoding the genome was the equivalent technology, among combination with environment) like propensity for sports or social likeability. of learning to read the language. Recent the more accurate Parents could then choose to take one or developments have enabled humans to thus far is more to term – essentially helping their now ‘write’ the language in the form of ‘CRISPR’. progeny along in their life. Would we be ‘edits’ to the DNA. One such technology, 50 Wealth Insight May 2020

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STRAIGHT TALK

‘Cultured meat’ has been discussed for comfortable in making these ‘improveIn a few years, it is several years now. Technologically feasiments’? What is the ethical dilemma of expected that a ble, the issues that hold back its commerchoosing a child based on ‘design’ paramehigh-school kid with cial production revolve around regulatory ters? It’s important to remember that the some understandviews, market acceptability and, most child is in no way less ‘natural’ than one birthed from a normally fertilised egg. ing of programming importantly, commercial viability. it’s likely a matter of time before Assume that a society does not use this will be able to use However, companies come up with meat that is new technology to make these changes. the latest version of indistinguishable from the one got from Would it not be at a significant disadvana CRISPR-like tech- slaughtering animals. GM or ‘genetically tage against another society that does? A modified’ food and seeds have been around 15 per cent improvement over a generanology to make a years. These changes are now not far tion could compound over a few generavirus within a week for away – indeed, they are upon us. tions to create a difference between a superhuman and a ‘normal’ individual. The technology described above would also allow this And the risks inter-generational improvement to be compressed As tools to manipulate and edit the genome become within a single birth period. better and more ubiquitous, that also brings with it risks. In a few years, it is expected that a high-school kid with some understanding of programming will be Genetic engineering in manufacturing able to use the latest version of a CRISPR-like technolModifying DNA has other far-reaching applications ogy to make a virus within a week. With 3D printing too. Catalog (https://www.catalogdna.com/) is a comfacilities already widely available, it will be possible to pany engaged in using DNA to store data – with a claim make and release a COVID-like virus into the world. that it can store a million times more data in a DNA per Weaponisation of these technologies by governments is cubic metre than current storage technologies allow. an ever-present threat. Manufacturing based on genetics can ‘reprogram’ a A clear implication of all this is disruptions of busimicrobe to convert sugars into the desired output via nesses and the process will come through at a faster fermentation. Alcohol that is produced by this process rate than we have ever imagined. Investing in such a is one such ‘naturally’ manufactured product. However, world will require both imagination and speed. Will there is no reason why other products could also not be valuations permanently compress to compensate for produced in similar manner. Zymergen (https://www. the higher uncertainty (risk)? Only time will tell. zymergen.com/) claims to have developed a bio-based Interested readers can watch a short TedX talk of polymide film that can be used in electronics. Be preMetzl’s thesis here: https://bit.ly/2VAtKGK WI pared to have your phone (and maybe your computer) come as a foldable film! Anand Tandon is an independent analyst. May 2020 Wealth Insight 51

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STOCK SCREEN

Ideas to delve deeper

S

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

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

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

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

54 Wealth Insight May 2020

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STOCK SCREEN

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

Π At least 20% in the trailing 12

779

months YoY  Π At least 20% in latest quarter YoY

61

Stocks with a P/E of less than 15

26

On fast track Stock style

Company Industry

P/E

5Y median P/E

PEG

Quarterly EPS growth (%)

TTM EPS growth (%)

5Y EPS growth (%)

Market cap (` cr)

Share price (`)

52-week high/low (`)

145

225-98

Advanced Enzyme Tech

12.4

19.7

0.99

37

23

41

1,620

APL Apollo Tubes

11.9

21.3

0.41

451

83

27

2,888 1,161 2219-1030

Bannari Amman Sugars

12.9

21.1

0.35

79

49

35

1,117

900 1600-639

Bombay Burmah Trading

5.6

9.8

0.27

3,233

220

34

6,080

871 1388-535

Caplin Point Laboratories

11.0

30.6

0.24

28

33

47

2,369

314

467-176

Dredging Corporation

5.0

19.9

0.13

220

345

38

609

217

444-121

E.I.D. Parry

5.6

20.6

0.25

86

6,834

26

2,602

147

245-102

Fertilisers & Chem Trav

3.1

15.4

0.09

2,075

226

21

2,689

41

55-21

Hindustan Oil Exploration Co

2.9

43.8

0.11

41

318

27

508

38

136-31

Huhtamaki PPL

9.4

36.0

0.44

280

387

21

1,596

211

305-162

Ion Exchange

9.5

26.5

0.14

216

62

70

961

Kama Holdings

5.2

6.9

0.17

106

38

23

Food Processing

Steel Tubes & Pipes

Sugar

Tea & Coffee

Drugs & Pharma

Transport Support Services

Sugar

Other Fertilisers

Crude Oil & Natural Gas

Paper prod.

Industrial Machinery

Synthetic Yarn

656 1071-360

2,693 4,173 6390-3100 May 2020 Wealth Insight 55

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STOCK SCREEN Stock style

Company Industry

P/E

5Y median P/E

PEG

Quarterly EPS growth (%)

TTM EPS growth (%)

5Y EPS growth (%)

Market cap (` cr)

Share price (`)

52-week high/low (`)

Kei Industries

10.2

20.9

0.24

49

25

71

2,573

288

615-208

Kingfa Science & Tech

13.7

57.0

0.29

43

153

37

500

415

770-302

Manappuram Finance

6.5

11.4

0.20

62

57

33

8,625

102

195-74

12.6

29.0

0.33

312

257

37

7,369

497

905-426

PNC Infratech

5.0

15.3

0.18

491

45

38

3,168

123

219-80

Raymond

5.0

32.2

0.45

393

110

26

1,656

249

869-210

Satia Industries

7.2

7.4

0.20

48

31

43

752

75

810-50

11.9

20.8

0.28

112

130

42

1,410

146

231-113

Torrent Power

9.7

13.1

0.30

77

35

32

14,262

297

333-231

Transpek Industry

9.8

13.3

0.18

107

149

56

769 1,377 2032-1077

Voltamp Transformers

8.2

15.6

0.24

58

51

34

901

Welspun Corp

5.0

21.8

0.16

655

169

50

1,725

Wires & cables

Plastic Resins

Hire Purchase

Motilal Oswal Fin Services Misc. Fin.services

Road Transport

Cloth

Paper

Supreme Petrochem Crude Oil & Natural Gas

Electricity Distribn.

Inorganic Chem.

Transformers

Steel Tubes & Pipes

891 1483-739 65

Data as on April 22, 2020. EPS growth rates are annualised. Median P/E is for less than five years if five-year data are not available. New entrants.

For the list of ‘quality stocks available cheap’, visit www.valueresearchonline.com/stocks/ 56 Wealth Insight May 2020

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234-60

STOCK SCREEN

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

No. of companies that cleared the filters

THE FILTERS

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

Market cap greater than `500 cr

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

779 650 86 62

Dear dividend Stock style

Company Industry

Allcargo Logistics Transport Support Services

Andhra Sugars Diversified

Apollo Tyres Tyres & Tubes

Automotive Axles Birlasoft Computer Software

Cochin Shipyard Shipping

Cyient Computer Software

DCM Shriram Diversified

Deepak Fertilisers Inorganic Chem.

Edelweiss Fin Services Invest.Services

Excel Industries Pesticides

The Federal Bank Banking

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

Share price (`)

52-week high/low (`)

1,763

72

123-49

38.5

569

209

417-117

27.3

9.3

5,400

94

217-73

4.0

24.8

13.8

743

2.0

3.1

18.9

24.2

1,789

65

106-47

PEG

7.0

1.45

3.5

4.9

35.5

15.8

3.4

0.16

10.0

4.8

14.2

11.2 -0.88

3.3

3.4

0.44

19.5

8.1 -3.60

11.4

Auto Ancillaries

Dividend per share (`)

P/E

Market cap (` cr)

490 1235-336

5.7

0.27

13.0

5.1

35.8

97.9

3,344

254

492-209

5.0

0.58

15.0

7.0

34.6

36.9

2,364

215

637-210

5.2

0.27

9.8

3.6

16.9

21.7

4,224

271

639-173

11.2 -0.55

3.0

3.5

37.4

9.7

778

88

160-57

37

211-30

7.9

0.68

1.4

3.8

12.5

16.7

3,431

6.4

0.12

18.8

3.3

15.4

23.0

725

5.2

0.38

1.4

3.2

21.3

113.0

8,788

575 1159-376 44

110-36

May 2020 Wealth Insight 57

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STOCK SCREEN Stock style

Company Industry

Gateway Distriparks Transport Support Services

GHCL Soda Ash

Graphite India Welding machinery

Gujarat Industries Power Co Electricity Generation

Gujarat Mineral Dev Corp Coal & Lignite

Gujarat State Fertilizers Nitrogenous Fertilizer.

HIL Cement & Asbestos prod.

Himatsingka Seide Silk Textiles

Hindustan Aeronautics Air Transport

Housing & Urban Dev Corp Housing Finance

IIFL Finance Invest.Services

IRB Infrastructure Dev Construction

Jagran Prakashan Books & Newspapers

Jamna Auto Industries Auto Ancillaries

Jindal Saw Steel Tubes & Pipes

JK Paper Paper

Kalyani Steels Finished Steel

Kirloskar Industries Industrial Machinery

Dividend per share (`)

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

Share price (`)

52-week high/low (`)

983

90

154-71

31.6

988

104

277-69

31.6

40.2

4,455

228

459-103

5.0

17.2

40.7

878

58

87-44

2.0

5.0

28.9

31.2

1,269

40

84-29

44

111-30

P/E

PEG

2.5

0.16

4.5

5.0

13.4

10.4

2.3

0.09

5.0

4.8

14.0

7.3

0.08

55.0

24.1

2.5

0.19

2.9

4.4 -0.34

Market cap (` cr)

11.8

1.56

2.2

5.1

17.8

10.5

1,719

5.1

0.14

25.0

3.4

18.4

15.8

553

4.4

0.38

5.0

8.6

25.0

14.4

572

58

228-43

6.4

0.43

19.8

3.7

29.2

18.8

18,092

541

896-470

2.9

0.17

0.8

3.8

14.0

10.5

4,404

22

47-18

3.4

0.27

5.0

6.4

23.1

14.1

2,510

79

456-67

3.5

0.41

2.5

3.3

10.3

15.7

2,699

77

139-46

3.9

0.48

3.5

7.8

37.8

31.2

1,268

45

124-32

14.9

0.46

1.0

3.6

27.5

12.1

1,048

26

62-21

3.1

0.05

2.0

3.9

7.5

12.5

1,650

52

103-40

3.3

0.07

3.5

3.8

14.6

34.3

1,642

92

154-62

4.0

0.22

5.0

3.6

16.6

49.0

612

140

269-92

6.7

0.60

21.0

4.0

24.3

-54.4

506

511

922-398

58 Wealth Insight May 2020

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738 2030-518

STOCK SCREEN Stock style

Company Industry

Kirloskar Oil Engines Auto Ancillaries

Lumax Industries Auto Ancillaries

Magma Fincorp Equipt.Leasing

Maharashtra Seamless Steel Tubes & Pipes

Mahindra Lifespace Dev Real Estate

M&M Financial Services Misc. Fin.services

Mastek Computer Software

National Peroxide Inorganic Chem.

Nava Bharat Ventures Diversified

NCC Construction

NOCIL Thermoplastics

NRB Bearings Ball Bearings

Nucleus Software Exports Computer Software

Phillips Carbon Black Carbon Black

Piramal Enterprises Drugs & Pharma

PNB Housing Finance Housing Finance

PTC India Electricity Distribn.

Rane Holdings Auto Ancillaries

Dividend per share (`)

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

Market cap (` cr)

Share price (`)

52-week high/low (`)

1,598

111

205-76

P/E

PEG

7.4

1.56

5.0

4.5

33.0

37.2

14.2

1.36

35.0

3.3

31.5

8.9

3.6 -0.91

0.8

4.0

7.1

12.4

534

20

138-16

5.0

0.38

6.0

3.1

17.2

29.3

1,279

191

485-185

16.1 -0.39

6.0

3.1

25.7

3.7

995

194

455-182

990 1,059 1848-678

6.1

0.56

6.5

4.3

21.9

12.3

9,316

151

442-128

5.4

0.15

8.5

3.7

20.1

33.5

554

229

509-166

33.2

1.07

65.0

3.5

24.3

4.5

2.4

0.22

1.5

3.9

7.5

22.1

677

39

115-32

3.6

0.03

1.5

5.6

15.6

31.4

1,628

27

119-16

9.1

0.18

2.5

3.1

22.4

15.2

1,322

80

142-45

19.1

0.72

2.6

3.6

23.3

7.3

693

71

198-48

8.2

1.87

9.0

4.1

35.1

27.4

638

219

399-156

5.0

0.11

3.5

4.3

15.7

20.8

1,414

82

167-54

8.7 -1.62

28.0

3.3

35.1

11.6

18,949

1,075 1,871 2949-821

840 2586-607

2.8

0.14

9.0

4.3

12.6

11.5

3,490

208

886-146

3.1

1.85

4.0

9.8

27.8

12.8

1,208

41

74-32

22.0 -0.12

19.0

5.0

26.2

10.1

539

387 1603-280

May 2020 Wealth Insight 59

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STOCK SCREEN Stock style

Company Industry

Seshasayee Paper Paper

Shriram City Union Finance Equipt.Leasing

Siyaram Silk Mills Cloth

Sobha Real Estate

Srikalahasthi Pipes Pig Iron

Sterlite Technologies Communication Equipt.

Sun TV Network Media & Entertainment

Tata Power Company Electricity Generation

Tata Steel Long Products Sponge Iron

Tata Steel Finished Steel

Welspun Enterprises Construction

West Coast Paper Mills Paper

Zensar Technologies Computer Hardware

P/E

PEG

Dividend per share (`)

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

Market cap (` cr)

Share price (`)

52-week high/low (`)

131

226-80

4.1

-

4.0

3.1

13.1

46.3

822

4.3

0.32

22.0

3.0

14.5

16.5

4,838

11.0

1.53

4.4

3.3

20.8

10.9

617

131

424-109

6.2

0.94

7.0

3.1

22.4

22.5

2,120

223

588-121

3.6

0.18

6.0

4.5

23.8

47.3

629

135

236-96

7.1

0.09

3.5

3.8

25.0

17.3

3,702

92

217-59

10.3

0.75

12.5

3.3

34.4

16.1

14,804

376

610-260

13.4 -3.14

1.3

4.0

16.0

10.0

8,791

32

74-30

729 1845-693

–

–

12.5

4.8

15.5

-23.3

1,006

221

769-164

6.0

0.51

13.0

4.8

14.6

10.4

32,337

268

562-251

8.8

0.09

2.0

3.8

23.4

35.7

788

53

143-33

2.8

–

5.0

3.6

11.2

43.0

913

139

297-100

7.3

2.76

2.8

3.1

20.1

23.0

2,028

89

271-64

Data as on April 22, 2020. EPS growth rates are annualised. New entrants.

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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 Five-year average ROE of more than 20% 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%

237 199 156 74 17 9 5

Solid foundation Stock style

Company Industry

Aarti Industries Organic Chemicals

Godrej Consumer Products Cosmetics & Toiletries

Hindustan Petroleum Crude Oil & Natural Gas

Procter & Gamble Health Drugs & Pharma

Vinati Organics Organic Chemicals

Debt-equity Interest ratio coverage ratio

5Y avg RoE (%)

Market cap (` cr)

Share price (`)

52-week high/low (`)

25

15,874

911

1071-668

27

20

54,341

531

772-425

12.6

23

44

32,412

213

334-150

0.0

0.0

23

30

6,830 4,126 5121-2891

0.0

196.2

26

25

9,005

P/E

PEG

29.4

1.08

0.9

4.4

24

24.7

1.35

0.5

9.8

12.0

0.30

0.9

43.0

1.45

26.4

1.04

5Y EPS growth (%)

877

1256-651

Data as on April 22, 2020. EPS growth rates are annualised.

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STOCK SCREEN

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

779

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

641 468 294 55

Bargain hunt Stock style

Company Industry

Andhra Paper Paper

Andhra Sugars Diversified

Balrampur Chini Mills Sugar

Bodal Chemicals Organic Chemicals

Capacite Infraprojects Real Estate

Century Textiles & Ind Diversified

Cochin Shipyard Shipping

Cyient Computer Software

Dalmia Bharat Sugar & Ind Sugar

DCB Bank Banking

Delta Corp Media & Entertainment

P/E

P/B

5Y EPS growth (%)

4.0

0.8

123

3.4

0.5

3.9

Dividend yield (%)

Debt-equity ratio

RoE (%)

0.0

0.0

30.1

30

4.8

0.3

1.0

136

2.5

6.7

0.7

33

5.3

0.6

5.2

Market cap (` cr)

Share price (`)

52-week high/low (`)

727

182

464-112

15.9

569

209

417-117

0.8

30.5

2,221

101

195-69

1.5

0.2

18.7

634

52

129-34

10

1.1

0.3

12.2

594

88

295-70

0.9

191

2.6

0.9

22.1

3,181

285

1067-219

5.7

0.9

16

5.1

0.0

14.5

3,344

254

492-209

5.0

0.9

13

7.0

0.1

19.3

2,364

215

637-210

2.9

0.3

125

2.6

0.7

11.5

505

62

135-40

7.5

0.9

13

1.1

0.9

12.0

2,735

88

245-74

8.9

0.9

61

1.8

0.0

10.9

1,907

70

250-54

62 Wealth Insight May 2020

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STOCK SCREEN Stock style

Company Industry

Dhampur Sugar Mills Sugar

Excel Industries Pesticides

Future Supply Chain Sol Transport Support Services

Gallantt Ispat Finished Steel

Gateway Distriparks Transport Support Services

GHCL Soda Ash

Graphite India Welding machinery

Gujarat Alkalies & Chem Caustic Soda

Gujarat Industries Power Electricity Generation

Gujarat Narmada Valley Nitrogenous Fertilizer.

HEG Welding machinery

HIL Cement & Asbestos prod.

Hindustan Oil Exploration Crude Oil & Natural Gas

Indiabulls Real Estate Real Estate

India Glycols Organic Chemicals

Indian Oil Corporation Crude Oil & Natural Gas

Jindal Saw Steel Tubes & Pipes

Jindal Stainless (Hisar) Stainless Steel

5Y EPS growth (%)

Debt-equity ratio

RoE (%)

Share price (`)

52-week high/low (`)

6.4

1.5

22.5

678

102

246-66

49

3.3

0.0

24.9

725

575

1159-376

0.7

72

1.0

0.4

12.5

552

126

711-81

10.9

0.7

55

0.3

0.3

15.2

558

20

44-16

2.5

0.7

17

5.0

0.6

25.8

983

90

154-71

2.3

0.5

27

4.8

0.7

19.8

988

104

277-69

7.3

1.0

92

24.1

0.1

84.1

4,455

228

459-103

4.9

0.5

30

2.4

0.1

17.0

2,408

328

596-180

2.5

0.3

13

5.0

0.2

10.3

878

58

87-44

5.9

0.4

20

5.1

0.0

15.5

2,135

137

326-96

3.8

0.9

108

8.8

0.2

107.0

3,498

907

2020-410

5.1

0.8

70

3.4

1.1

16.9

553

738

2030-518

2.9

0.8

27

0.0

0.0

33.6

508

38

136-31

7.9

0.7

10

0.0

1.4

17.0

2,676

59

151-37

7.1

0.8

23

2.1

1.0

14.8

872

282

397-175

6.1

0.7

21

11.1

0.9

14.0

78,232

83

171-74

3.1

0.2

60

3.9

0.9

13.0

1,650

52

103-40

2.8

0.5

55

0.0

1.3

20.7

1,057

45

95-30

P/E

P/B

3.1

0.5

48

6.4

1.0

-

Dividend yield (%)

Market cap (` cr)

May 2020 Wealth Insight 63

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STOCK SCREEN Stock style

Company Industry

JK Paper Paper

J Kumar Infraproject Construction

Kalyani Steels Finished Steel

KCP Cement

Kiri Industries Dyes & Pigments

LT Foods Other Agri.prod.

Maithan Alloys Ferro Alloys

Mastek Computer Software

National Aluminium Co Aluminium

NCC Construction

NHPC Electricity Generation

Parag Milk Foods Dairy products

Phillips Carbon Black Carbon Black

Polyplex Corporation Plastic Films

Rail Vikas Nigam Construction

Ramkrishna Forgings Auto Ancillaries

Siyaram Silk Mills Cloth

Take Solutions Misc.Other Services

5Y EPS growth (%)

Debt-equity ratio

RoE (%)

Market cap (` cr)

3.8

0.8

23.1

1,642

92

154-62

11

2.7

0.4

11.1

633

84

182-65

0.6

18

3.6

0.0

15.7

612

140

269-92

14.3

0.7

20

2.3

0.7

13.9

559

44

97-35

4.1

0.6

59

0.7

0.1

10.8

973

290

611-190

4.7

0.5

12

0.7

1.3

11.0

713

22

37-13

4.8

0.9

86

1.6

0.0

25.8

1,087

373

699-289

5.4

0.7

13

3.7

0.1

16.4

554

229

509-166

23.3

0.6

30

17.1

0.0

16.5

6,278

34

55-24

3.6

0.3

128

5.6

0.6

13.3

1,628

27

119-16

6.9

0.8

19

6.9

0.8

12.1

21,245

21

29-15

6.7

0.8

36

1.1

0.3

15.7

765

91

276-49

5.0

0.8

45

4.3

0.5

25.3

1,414

82

167-54

3.5

0.4

88

12.7

0.3

21.9

1,281

401

657-288

5.2

0.7

31

5.1

0.7

14.6

3,649

18

30-10

15.5

0.7

63

0.8

1.1

14.8

633

194

524-133

11.0

0.8

10

3.3

0.6

13.8

617

131

424-109

5.3

0.6

21

1.6

0.3

12.6

924

63

160-36

P/E

P/B

3.3

0.7

45

3.0

0.4

4.0

Dividend yield (%)

Share price (`)

64 Wealth Insight May 2020

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52-week high/low (`)

STOCK SCREEN Stock style

Company Industry

Tata Chemicals Soda Ash

Tata Steel Finished Steel

Technocraft Industries Steel Tubes & Pipes

Time Technoplast Other Forms-Primary Plastic

Triveni Engineering & Ind Diversified

Varroc Engineering Auto Ancillaries

Welspun Enterprises Construction

West Coast Paper Mills Paper

5Y EPS growth (%)

Debt-equity ratio

RoE (%)

Market cap (` cr)

Share price (`)

52-week high/low (`)

5.0

0.5

11.0

6,365

250

780-197

12

4.8

1.5

14.2

32,337

268

562-251

0.6

11

0.0

0.8

15.5

540

218

530-144

3.9

0.5

15

2.5

0.5

13.3

803

35

104-22

3.4

0.8

34

1.9

1.5

18.8

934

38

88-29

6.7

0.6

52

2.8

0.8

14.1

1,930

143

580-120

8.8

0.5

39

3.8

0.4

10.2

788

53

143-33

2.8

0.7

114

3.6

0.3

30.6

913

139

297-100

P/E

P/B

5.1

0.5

33

6.0

0.5

5.3

Dividend yield (%)

Data as on April 22, 2020. EPS growth rates are annualised. New entrants.

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May 2020 Wealth Insight 65

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WORDS WORTH NOW Nobody in America’s ever seen anything else like this. This thing is different. Everybody talks as if they know what’s going to happen, and nobody knows what’s going to happen… Of course we’re having a recession. The only question is how big it’s going to be and how long it’s going to last. I think we do know that this will pass. But how much damage, and how much recession, and how long it will last, nobody knows. Charlie Munger Investor, WSJ.com, April 17, 2020

We’re only down 15% [S&P 500] from the all-time high of February 19. It seems to me the world is more than 15% screwed up… It took seven years to get back to the 2000 highs in 2007. It took fiveand-a-half years to get back to the 2007 highs in late 2012. Is it really appropriate that, given all the bad news in the world today, we should get back to the highs in only three months? That seems inappropriately positive. Howard Marks Co-founder, Oaktree

It is a crisis like no other. In scope, we are now in the worst recession since the Great Depression. We are experiencing a 3 per cent contraction of global GDP, and 170 countries are going to see income per capita falling versus what we expected three months ago for 160—for them to go up. Kristalina Georgieva MD, IMF, Business

High wages to the top management results in weakening the generation of internal resources. It is necessary for all businesses including dealers, vendors and small companies to understand the importance of building internal resources which means keeping salaries of top management as low as possible, minimizing dividend payments and putting money back into the company. R C Bhargava Chairman,

Standard, April 17, 2020

Maruti Suzuki India, Mint, April 13, 2020

Capital Management, markets.businessinsider.com, April 21, 2020

Anything to do with the online medium will be significant in the post Covid world. Whether it is e-learning or online shopping or digital payments or even virtual events and launches. As the lockdown gets extended, this behaviour will get pronounced and companies will have to pay greater attention to this trend… Harsh Mariwala Chairman, Marico, Business Standard, April 15, 2020

It is true that many smaller and younger NBFCs are at higher risk than the more established and larger ones. These NBFCs must shore up their capital requirement, keep additional liquidity, and maintain conservatism in their lending practices. These are prudent business practices that companies forget in good times, and in a race to grow or show early success, forget that strong businesses are built over multiple growth and credit cycles. Sanjiv Bajaj Chairman & MD, Bajaj Finserv, Business Standard, April 22, 2020

66 Wealth Insight May 2020

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