Wi 2017 05

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Value Research
May 2017
Volume X, Number 11
24 COVER STORY
EDITORIAL POLICY
The goal of Wealth Insight, as with
all publications from Value
Research, is not just limited to
In the
generating profitable ideas for its
readers; but to also help them in
generating a few of their own. We
aim to bring independent, unbiased
danger
zone
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 Eight out of ten industries are
rigorous qualitative research
obtained by speaking to a wide now more expensive than average
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.
8 mid caps
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
you must
over-simplify.
Read, learn and earn and lets
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Editor
Dhirendra Kumar
Special Correspondent
avoid
Mohammed Ekramul Haque
Research & Editorial
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Design
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Production
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Columns
7 36 38 40 42 45
EDIT GENERALLY STRAIGHT OFFBEAT THE MAIN STREET
SPEAKING TALK CHARTIST
by DHIRENDRA by VIVEK by ANAND by SANJEEV by DEVANGSHU by SAURABH

KUMAR KAUL TANDON PANDIYA DATTA MUKHERJEA
The god of Hey, they The demise of The ascent Power play Pains not
growth just raised active funds of the rupee Electricity is a over yet
Growth solves all the price! Rising interest in A strengthening
hot topic in the
The impact of
Indian context
problems, but the Though many of passive investing rupee against the demonetisation is
socially,
equity investor us fret at price and the inability of dollar is likely to likely to be felt in
economically and
must be cautious hikes in the active funds to have negative Q4 also. An
politically
about valuations at times of crisis, beat their implications for expensive stock
all times this is just a benchmarks mean the economy market looks dicey
normal that the days of as well.
occurrence active investing
are numbered
8 WORDS WORTH WISDOM 22 INTERVIEW 46 COMPANIES WITH MOAT
Being Bezos The watch list

Entering into
10 CLASSROOM the league of 48 VIS--VIS
worlds biggest Cooling champs

Key financial ratios
banks
Arundhati Bhattacharya,
51 STOCK ANALYSTS CHOICE
11 MARKET COMPASS Chair, State Bank

of India
Our scorecard
Big moves
54 STOCK SCREEN
Index watch 33 INTERVIEW Quality stocks available cheap
IPO update
Attractive blue chips
The rupee impact India back on
the Rogers High dividend-yield stocks
radar Discount to book value
20 ANALYSTS DIARY
Jim Rogers, Reasonably priced growth
Sensex: The Indian Renowned
stocks
Peter Pan commodities
investor and hedge
Big boys club gets bigger fund manager 62 WORDS WORTH NOW
DISCLAIMER
The contents of Wealth Insight published by Value Research India Private Limited (the Magazine) are not intended to serve as professional advice or guidance and the Magazine takes no responsibility or liability, express or implied, whatsoever for any investment
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to the jurisdiction of Delhi courts only. ALL RIGHTS RESERVED
May 2017 Wealth Insight 5

EDIT
The god of growth

Growth solves all problems, but the equity investor
must be cautious about valuations at all times
DHIRENDRA KUMAR
This month, our cover story is a intractable problems facing the economy: bank NPAs,
negative one in the sense that we tell you what not to do. poor corporate numbers, the jobs crisis and so on. Its
By instinct, I dont like negative stories; I dont think also easy to make the argument that as far as
any equity investor does. We equity investors are manufacturing is concerned, India has missed the bus.
inherently optimistic people. Otherwise, we would have In some ways, efforts to kick-start manufacturing in
put our money into the fixed deposits of public-sector India seem to be a case of tilting at windmills.
banks. Instead, we buy stocks, which means that Critics see no clear way forward based on what the
fundamentally we believe that the future can be sharply government is trying to do. However, at a certain level,
better than the present. More importantly, we believe this government is focusing on just providing whats
that its okay to take some risk in order to create a missing and then letting things happen. Take the
chance of making big gains. highway program for instance. Minister Nitin Gadkari
However, thats the fun part. In reality, avoiding the is convinced that if we build 2 lakh km of good roads in
bad is just as important a part of investing as the next three-four years, then that itself will create an
embracing the good. In fact, it may actually be more economic boost that is unpredictable. Narendra Modis
important. No one has ever lost any serious money by power man Piyush Goyal is on a similar mission. Rail
not investing in a good stock. However, we have all lost minister Suresh Prabhu is yet another man who is on
money by investing in bad stocks or and this is much such a track.
more relevant to the current cover story by investing In India, we have a long-standing tradition of experts
in stocks that may be good but are available only at living in ivory towers and their predictions being
overly high prices. wrong on everything, whether its politics or economy
Our cover story examines the current state of the or anything else. On the other hand, those who have
Indian equity market closely in this context. Any skin in the game look at everything very differently. In
number of investors, analysts and fund managers are a way, experts are like fixed-income investors, while the
fearful that the markets are overpriced. Whether this is current leadership and the ordinary people who are
a precursor to a sharp fall or a long stagnation or some toiling to have a better tomorrow are like equity
mix of the two is a different question. However, its investors. The last three decades have proved that all
fairly clear that a lot of companies have valuations that that Indian businesses need is the basics to go right,
are apparently not justifiable. You must be wondering and we can get exponential growth.
what I mean by the word apparently. Am I trying to Im well aware that it may appear that Im going
say that these companies may actually not be overpriced? against the grain of the cover story of this issue, but
At one level, the answer is simple all such analysis Im not. Its no ones argument that a good investor
is an attempt to foretell the future and therefore comes should pay too much for any stock. However, we have to
without any guarantees. However, theres a deeper keep one eye on those playing a real growth game. Over
reason. Growth solves all problems and despite all the the last decades, there have been companies that have
current problems, India could well be poised for always been overpriced and yet investors have made
exponential growth. Its easy to make a list of seemingly money. Thats what growth does.

WORDS WORTH
WISDOM
Being Bezos
The most-insightful excerpts from Jeff Bezos
latest annual letter
A
mazon has become the second name for innova- the thing. Its always worth asking, do we own the pro-
tion and customer orientation. Much of the cess or does the process own us?
credit for this goes to its founder and CEO, Jeff
Bezos, who has made innovation a part of Amazons Be open to change
DNA. His latest annual letter to the shareholders of The outside world can push you into Day 2 [this
Amazon is a mine of wisdom. Edited excerpts. stands for being irrelevant] if you wont or cant
embrace powerful trends quickly. If you fight them,
Customer focus youre probably fighting the future. Embrace them
There are many ways to center a business. You can be and you have a tailwind.
competitor focused, you can be product focused, you These big trends are not that hard to spot (they get
can be technology focused, you can be business model talked and written about a lot), but they can be
focused, and there are more. But in my view, obsessive strangely hard for large organizations to embrace.
customer focus is by far the most protective of Day 1 Were in the middle of an obvious one right now:
[Bezos uses this term to convey Amazons culture of machine learning and artificial intelligence.
innovation and customer orientation] vitality.
Why? There are many advantages to a custom- The art of decision making
er-centric approach, but heres the big one: customers First, never use a one-size-fits-all decision-making pro-
are always beautifully, wonderfully dissatisfied, even cess. Many decisions are reversible, two-way doors.
when they report being happy and business is great. Second, most decisions should probably be made
Even when they dont yet know it, customers want with somewhere around 70% of the information you
something better, and your desire to delight customers wish you had. If you wait for 90%, in most cases,
will drive you to invent on their behalf. No customer youre probably being slow. Plus, either way, you need
ever asked Amazon to create the Prime membership to be good at quickly recognizing and correcting bad
program, but it sure turns out they wanted it, and I decisions. If youre good at course correcting, being
could give you many such examples. wrong may be less costly than you think, whereas
Staying in Day 1 requires you to experiment patient- being slow is going to be expensive for sure.
ly, accept failures, plant seeds, protect saplings, and Third, use the phrase disagree and commit. This
double down when you see customer delight. A cus- phrase will save a lot of time. If you have conviction
tomer-obsessed culture best creates the conditions on a particular direction even though theres no con-
where all of that can happen. sensus, its helpful to say, Look, I know we disagree
on this but will you gamble with me on it? Disagree
Its not the process, stupid! and commit? By the time youre at this point, no one
Good process serves you so you can serve customers. can know the answer for sure, and youll probably get
But if youre not watchful, the process can become the a quick yes.
thing. This can happen very easily in large organiza- Fourth, recognize true misalignment issues early
tions. The process becomes the proxy for the result you and escalate them immediately. Sometimes teams have
want. You stop looking at outcomes and just make sure different objectives and fundamentally different views.
youre doing the process right. Gulp. Its not that rare They are not aligned. No amount of discussion, no
to hear a junior leader defend a bad outcome with number of meetings will resolve that deep misalign-
something like, Well, we followed the process. A more ment. Without escalation, the default dispute resolu-
experienced leader will use it as an opportunity to tion mechanism for this scenario is exhaustion.
investigate and improve the process. The process is not Whoever has more stamina carries the decision. WI

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CLASSROOM
Key financial ratios

I
f you are not one who likes to
dig deep into a companys
financial statements but still
wants to make sense of its
financials, financial ratios come
to your rescue. They are
readymade tools to interpret
whats happening in a company.
Most financial ratios can be
derived from the three major
financial statements: balance
sheet, profit-and-loss statement
and cash-flow statement.
In order to put a companys
ratios in perspective, compare
them with the industry trend and
peers ratios. Again, good analysis
goes beyond ratios, and you
shouldnt make your investment
decision just in terms of ratios.
Here is a summary of the major
financial ratios and what they
mean. You can find these (and
more) for any Indian listed
company on the Value Research
website. Just type in a companys
name in the search bar. On the
company page, click on the
Financials - Annual tab and
scroll down. You will find the Key ideal, you must see the industry- Revenue growth: This ratio
Ratios section, as shown in the wide trend. As a rule of thumb, indicates how fast a company is
screenshot alongside. avoid companies where the debt- growing its revenues over a
Earnings per share (EPS): EPS tells equity ratio exceeds one. period of time. A high revenue
you the profit of a company per Return on net worth (RONW): Also growth is a positive sign and
share. It helps determine called the return on equity (ROE), shows that the company is
valuations when seen in this ratio tells us what returns a expanding.
conjunction with price. The company is generating on its EPS growth: This is a tool related
resulting metric is called the equity part. A high RONW is to EPS and tells us the growth of
price-to-earnings ratio. desirable. Good companies have EPS over a period of time. For
Debt to equity: Companies take more RONW than their peers. instance, if the EPS of a company
debt to run their business Operating margin: This ratio tells us this year has gone up from `10 to
operations. Their shareholders how much a company makes from `12, the EPS growth is 20 per cent.
also put money, called equity, in its core operations. It is derived by Good companies show higher
the business. The debt-to-equity dividing the operating profit by earnings growth than their peers
ratio tells us about this balance. the total revenues. A high in a sector. A shrinking EPS, on
A high deb-to-equity is not operating margin is a good sign, the other hand, should ring an
desirable. But to know what is but do see the industry trend. alarm. WI
Next in the series THINKING QUALITATIVELY

MARKET
BIG MOVES: LARGE CAPS C MPASS
Our large-cap universe has 102 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.
Price to earnings Net profit (` crore)
3M returns (%) 3Y avg RoE (%) 3Y earnings growth (%) 3M price (`) movement
53.0
4,607
Bajaj Finserv 32.8 3,398
The Q3 profit has gone up by 40%; the Q2 profit
improved by 30% (both YoY). 23.7 11.3 3,011
48.0
207
Rural Electrification 6.6 6,087
The governments electrification plans, clubbed with
the companys cheap valuations, have led to a rally. 23.0 11.0 140
782
47.3 32.1 962

Sun TV Network
The rally in the stock has continued since Maran
brothers were acquitted in the Aircel-Maxis deal. 25.5 11.3
531
40.9 41.1 1,702

Bajaj Finance 1,269
The stock has rebounded strongly after correcting
during the demonetisation phase. 20.4 34.4 901
35.2 57.6 747

483
Titan Company
The company is expected to gain from demonetisation
as consumers move to organised retail. 27.6 1.3
357
34.7 66.1 640

BHEL 173
Improving state of the capital-goods sector can result
in a turnaround in the companys fortunes. 4.2 -49.1 129
29.6 33.8 1,338

Cadila Healthcare 453
USFDA, the US drugs regulator, has cleared the
companys Moraiya unit. 29.8 15.7 350
25.2 15.3 29,235

Reliance Industries 1,364
The company has introduced pricing for Jio. It is
giving other telecom operators a run for their money. 11.8 10.0 1,090
24.7 61.2 180

Idea Cellular 86
The merger with Vodafone has boosted the stock
sentiment. 13.9 -52.6
69
24.2
1,090
Interglobe Aviation 21.9 1,798
A better outlook for the aviation sector, along with
depressed crude prices, has given wings to the stock. 189.3 36.2 878
Data as on April 13, 2017

MARKET
C MPASS BIG MOVES: MID CAPS
Our mid-cap universe has 247 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.
89.2
280
Future Lifestyle Fashion 163.7 32
The company has plans to raise capital by selling
stakes in some of its brands. 2.2 -46.6 148
73.6
282
Future Retail 927.1 0.7
The stock has gained on hopes of improved prospects
post restructuring. 0.7
162
70.0 22.4 737

442
IIFL Holdings
The companys Q3 profit has grown 41% YoY.
18.3 36.7 260
63.8 25.6 494 176

Edelweiss Financial Services
A rally in the stocks of listed brokers lifted the
companys stock price. 9.2 37.8
107
56.0 -2,805
Jindal Steel & Power 122
The companys foreign lenders have agreed to
restructure its loans. -2.7 -207.3 78
52.4 22.2 524 730

Gujarat Fluorochemicals
The company has plans to sell its wind-farm
business. 13.0 18.7
479
47.6 14.4 399

Spicejet 97
Low crude prices and a strong turnaround have
resulted in a stock rally. 35.0
65
46.6 51.7 131

570
Astral Poly Technik
A series of agreements and tie-ups and broker
upgrades have lifted the stock price. 20.0 18.7 389
39.6 27.5 201

336
Dishman Pharma & Chem
The stock has gained on the back of USFDA approval
to a cancer-treatment drug. 10.9 24.1 241
35.2 51.3 136

Aegis Logistics 139
Logistics companies have rallied due to a the
prospective implementation of GST from July. 25.6 35.7 188

MARKET
BIG MOVES: SMALL CAPS C MPASS
Our small-cap universe (minimum market capitalisation `400 crore) has 704 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.
86
288.9 63.0 51
Indiabulls Ventures
The company is to issue preferential shares to a
foreign investor. 42.4 -19.3 22
129.7 -573
Arshiya International 81
The stock has been rallying since the companys debt
restructuring got over. -84.1 4.6
35
124.3
1,076
Venkys (India) 15.7 99
The crackdown on illegal slaughter houses in UP is
positive for the company. 7.5 34.3
480
104.2 105.1 7
728
Agarwal Industrial Corporation
The stock has shown irrational exuberance. Investors
need to be cautious. 13.7 35.3
357
102.6 -301
Jindal Stainless 79
The company is a beneficiary of the recovery in metal
prices. -65.6 21.2 39
100.9 13.2 32
Future Market Networks 75
A rally in infra-related stocks has contributed to the
stock gains. -22.3 34.8 37
99.0 18.9 75
177
Kolte Patil Developers
Real estate and infrastructure stocks have risen on
the back of improving sentiment in the market. 12.0 -21.1 89
93.8 11.2 15 192

Crest Ventures
The companys profit has more than doubled in Q3
YoY. -0.5 100.2 99
90.6
137
Filatex India 14.2 42
The company has plans to expand its capacity and
expects a good Q4. 5.0 70.9
72
-52.4
490
Gallantt Ispat 17.0 41
The news that the UP government may buy its land for a
metro project didnt go down well with investors. 8.7 35.9
233

MARKET
C MPASS
INDEX WATCH
Nifty FMCG Index

39.71
Price to earnings
12.58
Price to book
1.56
Dividend yield (%)
9.00
Market cap
(` lakh crore)
Dynamics of the Nifty FMCG Top gainers/losers

Company name Price (`) 1-year change (%)
Nifty FMCG is at its all-time high.
Godrej Industries 528 43.1
25,000
Nifty FMCG Nifty 50 26.4
ITC 279
21,000
Tata Global Beverages 151 24.7
17,000 Britannia Industries 3,404 23.3
Godrej Consumer 1,676 21.9

13,000
Colgate-Palmolive 1,015 21.5
9,000 Marico 301 19.6
Apr 12 Apr 13 Apr 14 Apr 15 Apr 16 Apr 17
P&G Hygiene 7,389 13.2
Price/earnings is at 10.80% premium to its five-year median of 35.8.
Dabur India 288 7.5
51
Emami 1,027 5.1
42 HUL 924 2.9
33 United Breweries 754 -5.5
GSK Cons Healthcare 5,299 -12.1

24
Jubilant FoodWorks 1,013 -19.4
15 United Spirits 1,902 -20.0
Price/book value is at 3.9% premium to its five-year average of 12.1.

16
Valuations
Price to Price to Dividend
Company name earnings book yield (%)
12 Britannia Industries 47.2 16.42 0.59
Colgate-Palmolive 47.4 18.78 0.99
8
Dabur India 39.6 10.17 0.79
4 Emami 69.7 13.55 0.68
GSK Consumer Healthcare 33.7 7.60 1.32
0
Godrej Consumer 46.7 11.74 0.34
Godrej Industries 50.6 5.48 0.33
Dividend yield is 11 basis points higher than the five-year median of 1.45%. HUL 45.4 28.07 1.73
2.00 ITC 33.9 8.12 2.03
Jubilant FoodWorks 74.3 7.95 0.25
1.75
Marico 50.6 14.57 2.24
1.50 P&G Hygiene & Health Care 51.8 13.55 0.49
Tata Global Beverages 20.4 1.54 1.50
1.25 United Breweries 72.5 8.54 0.15
United Spirits 104.3 13.80 0.00
1.00
Apr 12 Apr 13 Apr 14 Apr 15 Apr 16 Apr 17 Data as on April 13, 2017

MARKET
C MPASS
IPO update
The Indian IPO market has been a showstopper for much of the last one
year. Be it the bumper listing of Avenue Supermarts or the stellar
performance of RBL Bank, those who bought into the right IPOs had big
smiles on their faces. Here is the performance of IPOs over the last one year.
Initial public offers (IPOs) in the last one year
Subscription Issue size Issue Listing Listing Current Price Sensex
Company ratio (` cr) price (`) Listing date price (`) gain (%) price (`) change (%) change (%)
Shankara Building Products 41.88 300 460 05-Apr-17 545 18.5 725 33.0 -2.0
CL Educate 1.90 239 502 31-Mar-17 398 -20.7 433 8.8 -0.9
Avenue Supermarts 104.59 1,327 299 21-Mar-17 604 102.1 744 23.0 -0.4
Music Broadcast 39.67 349 333 17-Mar-17 420 26.1 346 -17.6 -1.0
BSE 51.22 870 806 03-Feb-17 1,085 34.6 1,010 -6.9 4.0
Laurus Labs 4.57 938 428 19-Dec-16 490 14.5 518 5.8 11.3
Sheela Foam 5.09 383 730 09-Dec-16 860 17.8 1,231 43.2 9.8
Varun Beverages 1.01 1,113 445 08-Nov-16 430 -3.4 467 8.5 6.4
PNB Housing Finance 29.55 3,100 775 07-Nov-16 863 11.4 1,302 50.9 6.9
Endurance Technologies 43.84 1,162 472 19-Oct-16 570 20.8 825 44.8 4.9
HPL Electric & Power 8.06 417 202 04-Oct-16 190 -5.9 133 -29.9 3.6
ICICI Prudential Life Insurance 10.48 6,057 334 29-Sep-16 329 -1.5 408 24.0 5.5
GNA Axles 54.88 130 207 26-Sep-16 249 20.0 223 -10.1 3.8
L&T Technology Services 2.53 894 860 23-Sep-16 900 4.7 738 -18.0 2.4
RBL Bank 69.62 853 225 31-Aug-16 274 21.6 570 108.3 3.2
SP Apparels 2.66 176 268 12-Aug-16 305 13.8 429 40.8 4.3
Dilip Buildcon 20.95 664 219 11-Aug-16 240 9.6 414 72.3 5.4
Advanced Enzyme 116.02 290 896 01-Aug-16 1,210 35.0 2,175 79.7 4.9
Larsen & Toubro Infotech 11.69 1,243 710 21-Jul-16 667 -6.1 721 8.2 6.0
Quess Corp 144.50 409 317 12-Jul-16 499 57.4 780 56.3 5.6
Mahanagar Gas 64.54 1,040 421 01-Jul-16 540 28.3 1,001 85.3 8.2
Parag Milk Foods 1.83 737 215 19-May-16 216 0.3 247 14.6 15.6
Ujjivan Financial Services 40.68 888 210 10-May-16 227 8.1 402 77.0 13.9
Thyrocare Technologies 73.55 479 446 09-May-16 662 48.4 727 9.8 14.3
Sensex change is for the same period as the stock-price change. Data as on April 21, 2017. All returns are absolute returns.

MARKET
C MPASS
The rupee impact

A strong rupee is both good and bad news for Indian companies
O
n year-to-date (as of April 19) basis, the Indian The sectoral impact
rupee has appreciated 5.3%. The rupees
Weight in Nifty Changes in EPS estimates (in
strength, fuelled by strong foreign fund inflows, FY18 EPS (%) %) if INR moves from 67 to 62
a weaker US dollar and favourable domestic factors, is Energy 17 -7
likely to continue in the near term, anticipate analysts. IT 14 -9
Being a net importer, the Indian economy benefits Auto exports 5 -12
as far as the impact on inflation is concerned. The Pharma 4 -9
appreciating rupee will result in lower crude oil prices Engineering 3 -4
for the Indian basket, keeping both wholesale and Metals and mining 3 -15
Total 47 -10
retail inflation under check in the near term.
Nifty 100 -4
On the flip side, Indias exports that are still
struggling to see a significant revival, will suffer. This Source: Bloomberg, CMIE, Edelweiss research
means export-oriented sectors will feel the heat, thus 6HFWRUVZLWKVLJQLFDQWIRUH[HDUQLQJV

taking a toll on overall market earnings growth.
1,91,901
With nearly half of the EPS (earnings per share) of 1HWIRUH[LQRZLQ
the companies that make up the Nifty linked to the FY16 (` cr)
global economy through exports, global subsidiaries
1,05,119
or commodity prices, a further appreciation of the
Indian rupee to a level of `62 per dollar could knock 70,634
off 4% of earnings growth in FY18, Edelweiss 27,622 17,096
Securities Ltd said in a report. UBS Securities India
Pvt. Ltds calculations show that every 1% appreciation IT Automobile Healthcare Textile Finance
in the rupee could lead to a 0.6% cut in Nifty earnings. & Ancillaries
Which sectors will benefit, which will lose? Among Source: CARE Ratings
sectors, Indian software, automobile and ancillaries,
pharmaceutical companies and textiles will be affected But not all industries have lost out due to rupee
the most since a significant portion of their revenues appreciation. Sectors like aviation and select consumer
is dollar denominated. Shares of Indian IT companies durables companies which import crude oil or crude
are already under pressure due to H1B visa issues in oil derivatives are likely to benefit from a strong
the US. Other losers include engineering and capital rupee.
goods, metals, automobile exporters i.e. companies A CARE Ratings analysis shows that in FY16,
like Tata Motors and Bajaj Auto and the energy sector, Indian oil companies (including upstream and
added the Edelweiss report. downstream) saw a net forex outflow of `345,535 crore;
Not only listed companies, a strong rupee also hurts telecom sectors net outflow was at `49,917 crore and
small and mid-sized export-oriented companies for the power sector, the outflow was to the tune of
operating in labour intensive sectors as they lose `26,208 crore.
competitive advantage over other emerging market Meanwhile, though a stronger rupee is negative for
peers. That could be a negative for employment. earnings, it is positive for the equity market. The
Kotak Institutional Equities expects the Indian Niftys performance, in both absolute terms as well as
currency to remain strong in the next 1-2 months. As relative to EM, is stronger in periods of INR
the rupee outperforms its emerging market trading appreciation. Global investors returns in USD terms
partners, it does reflect on the countrys Real Effective also get accentuated. Historically, 5%+ INR
Exchange Rate (REER). The broad-based REER appreciation in any six-month period has been
indicates that India has lost its trade competitiveness associated with average Nifty returns of around 20%,
over time. This is likely to be more pronounced in UBS Securities India said in a report. The Nifty has
labour-intensive industries such as textiles and rallied 11% so far in this calendar year. WI
leather, gems and jewellery, the brokerage firms By Harsha Jethmalani. Graphics by Subrata Jana. In
report on rupee appreciation added. arrangement with HT Syndication | Mint

VALUE GURUS
The stockbond relationship

Why comparing bond and stock yields matters while picking a stock
Mohammed Ekramul Haque
Many investors buy only stocks. These are people that If you had invested in the Sensex last year, you would
eat, drink and sleep stocks. They have no interest in have finished with a gain of 2 per cent (as of calendar
mutual funds, government bonds or provident funds as year 2016). A positive gain in a difficult year, one could
investment avenues. Yet, even if you belong to this say, but if you take into account the 5 per cent consum-
group, you need to understand the relationship er-price inflation during that period, your real gains
between bonds and stocks. There is money to be made would be negative. You would be worse off at the end
learning this. But first we need to tackle an unavoid- of the year than what you would have started with.
able factor that affects returns of both: inflation. The RBI has indicated that consumer-price inflation
could come in at 4.5 per cent in the first half and at 5
The inflation effect per cent in the second half of FY17-18 thats if the
Inflation is the general rise in prices of goods and ser- monsoons are normal. This becomes the threshold
vices. When the price level rises, you can buy only return any investor would need just to beat inflation.
fewer goods with the money you have. To maintain the
value of money, people invest in various avenues. Your Bond yields
objective as an investor is to ensure that your nest egg A bond yield is the return you can expect when you
or retirement fund is growing faster than inflation. The buy a bond. The current ten-year government-bond
consumer-price inflation today stands at 3.81 per cent yield stands at 6.85 per cent. That means you can count
(March 2017). Your portfolio has to rise by at least this on earning 6.85 per cent every year till the bond is
much just to maintain its purchasing power. redeemed at the end of the tenth year. At current infla-

VALUE GURUS
tion levels, an investor who buys the government bond ,QIRV\VERXJKWYH\HDUVEDFN

still stands to increase his purchasing power beyond Year Adjusted EPS (`) Earnings yield (%) on `600
the corrosive nature of inflation. Thus, when bond
2013 41.21 6.87
yields are higher than inflation, they become attractive
2014 46.57 7.76
to investors. Lets add stock yields to this mix.
2015 54.07 9.01
Stock yields 2016 59.78 9.96

Stocks have their own yields, too. For our purpose, a 2017 62.73 10.46
stock yield is the companys earnings divided by the
current share price. If the earnings are, say, `20 per
share and the stock trades at `200, the earnings yield Infosys bought ten years back
comes to 10 per cent. The yield on any stock therefore Year Adjusted EPS (`) Earnings yield (%) on `500
depends on the earnings and the price you pay for it. 2007 16.83 3.37
As an investor, you have two objectives: 2008 20.36 4.07
1. Find stocks whose yearly earnings yield can beat 2009 26.17 5.23
inflation. 2010 27.18 5.44
2. Latch onto an earnings stream that can beat the cur-
2011 29.87 5.97
rent yield on government bonds.
2012 36.42 7.28
Stocks become the more-attractive opportunity when
2013 41.21 8.24
they can beat both inflation and the current yield on
government bonds. If markets become heated, the num- 2014 46.57 9.31
ber of stocks that can beat the bond yield falls, indicat- 2015 54.07 10.81
ing that the time to invest in stocks is turning rough. 2016 59.78 11.96
2017 62.73 12.55
Growing stock yields EPS data as of March end
When it comes to stocks, you have an advantage that
bondholders do not enjoy. The coupon on the bond your money in a bond. Five years ago, a government
remains fixed, but for a stock, yields move up as the bond would have yielded you 8.6 per cent. That means
earnings of the company grows. you would have earned 8.6 per cent every year till
You can buy a stock with a lower yield than, say, the maturity. Buying Infosys even at a lower initial yield
government bond and still end up earning more than a and holding onto it now gives you a yield higher than
bond. How? By piggy-backing on the companys earn- the bond-yield return and as earnings continue to
ings growth, which eventually will drive your returns grow, your returns will go higher.
higher than the bond yield in a couple of years. Now lets take an even longer time frame. Continuing
Lets take the example of Infosys a troubled tech with Infosys, we assume we bought the stock ten years
company that has seen its share of ups and downs over back. The stock was trading at `500 levels and the
the past couple of years. If you had bought Infosys five adjusted earnings per share stood at `16.83 (FY07), giv-
years ago, you would have paid `600 for a share. At earning you a return of 3.37 per cent, again way lower than
ings of `41.21 per share (FY13), your earnings yield (or the government bond yield of 8.1 per cent at the time.
the return that you would earn at that price) would have The company now earns `59.78 (FY17) per share which
come to 6.87 per cent lower than the prevailing bond was bought at `500. That translates into a return today
yield of 8.6 per cent at that time. Now as Infosys has of 12 per cent, way higher than the 8.1 per cent from the
grown its earnings every year by around 13 per cent bond available at that time (see the second table).
(rupee terms, compounded annually), your return on the Infosys current earnings yield of 11 per cent marks the
initial investment has also gone up. still open opportunity in the stock.
See the first table. It illustrates the initial return of Investors should also keep in mind that the share
7 per cent that you would have earned at a price of price often follows the earnings that a company gener-
`600 that you paid for a share of Infosys. As earnings ates. A steady stream of earnings produces a steady
grew in the first year, your returns improved to 7.76 share-price growth. Therefore, while buying a stock,
per cent and so on till 2017, when the company earned keep in mind the earnings yield it gives you. Ideally, the
`62.73 for every share. This translated into a return of earnings yield should be higher than both inflation and
10.46 per cent for the shareholder who bought the the government bond rate. If you accept a lower earn-
share at a price of `600 five years ago. ings yield, keep an eye on the earnings growth that the
Now compare the returns if you had decided to put company has managed over the past and is likely to

VALUE GURUS
earn in the future. The earnings stream should be high earnings yield higher than the bond rate, with low debt
enough to start beating the bond yield in a short time. and with high returns on capital. These are rich
The table below lists out the top companies with an grounds to start searching for your next investment. WI
Earnings yields greater than bond rates

Earnings ROCE Debt to EPS growth (%) Market
Company name Sector yield (%) (%) equity 1Y 3Y 5Y cap (` cr)
KPIT Technologies IT 14.9 22.1 0.18 14.3 4.0 15.0 2,512
Hindustan Media Ventures Media & Entertainment 13.1 26.7 0.19 12.1 22.1 24.7 2,125
Novartis India Trading 12.5 25.2 0.00 -62.1 -4.6 -10.9 2,035
Polaris Consulting IT 12.5 24.3 0.00 -16.4 -12.8 -9.7 2,200
Coal India Mining 12.4 57.0 0.04 -22.1 -11.9 -6.0 1,74,025
Hindustan Zinc Non - Ferrous Metals 12.3 21.4 0.00 1.8 6.4 8.5 1,19,534
Mphasis IT 11.9 15.0 0.07 12.9 1.5 -0.2 11,387
Tech Mahindra IT 11.5 29.0 0.08 19.2 6.3 15.6 40,990
Zensar Technologies IT 11.3 30.2 0.10 -4.8 9.7 13.1 4,056
Infosys IT 11.1 31.5 0.00 4.9 10.4 11.5 2,13,076
Persistent Systems IT 10.5 25.9 0.00 10.4 9.8 18.3 4,544
eClerx Services IT 10.2 52.9 0.00 35.2 17.8 18.9 5,239
Balmer Lawrie & Co. Diversified 10.1 21.4 0.14 291.2 5.0 2.9 2,639
Mindtree IT 9.7 24.5 0.03 -30.7 -2.7 13.1 7,431
Larsen & Toubro Infotech IT 9.7 53.8 0.03 13.9 16.0 22.6 12,209
Hexaware Technologies IT 9.6 35.6 0.00 5.9 3.0 8.7 6,258
HCL Technologies IT 9.6 27.2 0.04 12.9 15.9 31.0 1,16,364
Siemens Capital Goods 9.2 66.8 0.00 344.2 146.7 33.3 46,703
TV Today Network Media & Entertainment 9.2 29.8 0.00 -1.7 18.5 46.7 1,635
Divis Laboratories Healthcare 9.0 35.2 0.01 9.7 12.7 17.1 16,740
Cyient IT 8.8 21.0 0.11 5.3 8.7 16.1 5,660
Tata Consultancy Services IT 8.4 45.6 0.00 8.2 11.0 20.2 4,58,785
DB Corp Media & Entertainment 8.3 32.7 0.11 26.6 9.4 13.1 6,920
JB Chemicals & Pharma Healthcare 8.2 18.1 0.18 12.7 37.6 -23.2 2,818
Hero MotoCorp Automobile & Ancillaries 8.0 58.3 0.03 23.9 17.7 8.8 63,928
Rallis India Chemicals 7.9 20.9 0.10 129.6 27.6 22.5 4,959
8K Miles Software IT 7.8 42.2 0.01 16.7 83.7 62.2 1,741
FDC Healthcare 7.2 22.3 0.00 9.2 1.3 6.0 3,645
Pfizer Healthcare 7.2 19.7 0.00 28.9 -0.6 1.9 8,362
L&T Technology Services Capital Goods 7.1 42.0 0.18 35.2 NA NA 7,535
Bajaj Auto Automobile & Ancillaries 6.9 43.4 0.01 17.0 9.1 3.0 81,957
Market cap and earnings yield as on April 20, 2017. EPS data based on TTM earnings. ROCE and debt to equity based on FY16 data.

ANALYSTS
DIARY
Sensex: The Indian Peter Pan

The median age of the Sensex constituents is on the
decline, signalling the end of legacies
Youngest companies in Sensex
W
hen J. M. Barrie, a Scottish novelist, created
the character of Peter Pan a mischievous
young boy who never grows up he didnt Company Incorporation Year
have the Indian market on his mind. Indeed, the Adani Ports & SEZ 1998
Sensex has epitomised Peter Pan by staying young Bharti Airtel 1995
over the years. HDFC Bank 1994
The average age (since the time of incorporation) ICICI Bank 1994
of S&P BSE Sensex companies has risen by just
Axis Bank 1993
seven years over the last 15 years. If we look at the
median age of the constituent companies median
being a better measure than the average it has
Oldest companies in Sensex
fallen by three years, from 44 years in 2002 to 41 years Company Incorporation Year
in 2017. While Peter Pan didnt grow up, the Sensex State Bank of India 1806
has actually become younger over the years! What Tata Steel 1907
has caused this? Two factors stand out. ITC 1910
Hindustan Unilever 1933
Getting liberal
Cipla 1935
Over the last 15 years, many companies have thrived
due to the opening up of the Indian economy in 1991.
Hail entrepreneurship
For example, amongst the five youngest companies in
The second factor which has kept the Sensex young
the Sensex, three are private-sector banks; banking
is the emergence of first-generation entrepreneurs.
was opened up for private players for the first time in
Sun Pharmaceutical, founded in 1993 by Mr Dilip
1991. Private-sector banks have grown so fast that
Shanghvi, and Bharti Airtel, founded in 1995 by Mr
they are now part of the Sensex, which represents
Sunil Bharti Mittal, took place of GSK Pharma and
the largest listed companies in India. Another
MTNL in the Sensex over a period of time. WI
example is Adani Ports, which benefitted from the
opening up the ports sector to private players. Vikas Vardhan vikas@valueresearch
Anti-aging Average age Median age
55 56 55
54 54 54 54
51 52 52
50 49 50 49 50
48
45 45 46 45 46 44 45 45
40 44 44 62
41 42 40 41
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

ANALYSTS
DIARY
Big boys club gets bigger

The number of listed large caps is on the rise
S
ince 2014, the number of listed large caps has Top 10 large caps in 1999
seen a marked rise, from 67 to 102. This number Company Market cap (` cr) Weight in top 10 (%)
fluctuated in the period 19992013, dipping to as Hindustan Lever 49,711 28.9
low as 54 in 2009 and touching the high of 79 in 2001.
ITC 23,633 13.7
What has caused this rise in the number of listed
Wipro 18,439 10.7
large caps? If you thought, it is the bull market that
ONGC 16,869 9.8
started in 2014, sorry, that isnt the right reason.
At Value Research, we have a dynamic method of Reliance Industries 12,176 7.1
determining market cap. The companies that Indian Oil 11,345 6.6
comprise the top 70 per cent of the total market cap SBI 11,231 6.5
are termed as large caps. Those that comprise the MTNL 11,126 6.5
next 20 per cent are tagged mid caps. And those that Infosys 9,673 5.6
comprise the final 10 per cent are categorised under Ranbaxy 7,707 4.5
small caps. This means that market conditions alone
themselves dont determine the market cap as cut-
offs simply shift upward or downward in bull or
Top 10 large caps in 2017
bear markets.
The increase in the number of listed large caps Company Market cap (` cr) Weight in top 10 (%)
can be attributed to the reduction in dominance of a TCS 4,79,031 16.3
few companies in the Indian market. The tables Reliance Industries 4,28,909 14.6
mention the top ten large caps in 1999 and 2017. The HDFC Bank 3,69,596 12.5
distribution of weights of the top ten listed ITC 3,40,673 11.6
companies (as per cent of the total market cap of the HDFC 2,38,627 8.1
top ten listed companies) has become more uniform ONGC 2,37,479 8.1
over time. While in 1999, Hindustan Lever alone
Infosys 2,34,472 8.0
accounted for about 30 per cent of the total market
SBI 2,33,305 7.9
cap of the top ten listed companies, now TCS makes
Hindustan Unilever 1,96,902 6.7
up about 16 per cent. This indicates reducing
concentration in the Indian market. WI Indian Oil 1,87,802 6.4
Vikas Vardhan vikas@valueresearch Data as on April 17, 2017
Number of listed large-cap companies
59 39 79 37 80 46 64 77 74 70 54 77 73 75 70 67 82 85 102
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

INTERVIEW
O
n 1 April, State Bank of
India (SBI) merged its
five associate banks and
Bharatiya Mahila Bank
with itself, a union which will cata-
pult it to the ranks of the top 50
lenders in the world.
Post merger, SBIs growth will
not necessarily be in the top line
but in increased efficiency, produc-
tivity and better ratios, said its
chair, Arundhati Bhattacharya.
In an interview, she also talked
about how credit growth is likely to
rebound to 7-8% by the middle of
the current fiscal, and called upon
the government and the Reserve
Bank of India (RBI) to participate
more in stressed asset resolution.
Edited excerpts:
Do you think your growth will slow

post this consolidation with associate
banks?
It depends on which areas we grow.
While we may not be growing in
certain areas, we may grow in
areas where we are still small, like
wealth management. Its an area
ARUNDHATI BHATTACHARYA
Chair, State Bank of India
where I am small; so I am going to
grow fast there. We dont have any
Entering into the

compulsion to simply increase the
top line. The idea (behind the
merger) is to increase efficiency,
increase productivity, better the
ratios that we have in various
areas. Growth will come not neces-
sarily in the top line.
league of worlds
What will be the integration cost for
SBI due to the merger?
Integration cost is only in respect
of VRS (voluntary retirement
biggest banks
before that. The data merger of locate to other places, move people
scheme) cost. Other than that, banks expected to finish by end- and all of that takes a bit of time.
there are some re-branding costs. May. Once the data merger is fin-
The additional provident fund pro- ished, thereafter, there is nothing Credit growth has shrunk to 3.3% in
vision for employees of associate which is left over. After that, there February. Will credit growth be muted
banks will not be more than `25 is only the question of doing ratio- next year as well?
crore. There is nothing very nalization, which will take place On growth, I dont see things hap-
substantial. over a period of time. It will not pening quickly. The first two quar-
happen very quickly. So, we should ters will go trying to resolve
Do you expect to wrap up the merger give 18 months time for all of that stressed assets. It is only from the
by October, before you retire? because there is the question of next busy season that we can hope
It should be wrapped up well relocating branches. You have to to see things growing well. We also

INTERVIEW
Private sector banks have that freedom.

Their commercial decisions are not ques-
tioned. I think its important for all of us to
be on the same playing field.
when you are looking at resolving sion. So, I think, thats what people
systemic issues. This time, the are looking for. Private sector banks
NPA (non-performing assets) cycle have that freedom. Their commer-
has been systemic. Its not a ques- cial decisions are not questioned. I
tion of one or two or three corpo- think its important for all of us to
rates getting hit. Its a question of be on the same playing field.
a large number of corporates in a
few identified sectors which have Is it the only reason stopping banks
been hit. With that kind of a prob- from going ahead with resolution of
lem, it is important to have a sys- stressed assets?
temic answer to these issues. A lit- There are other issues in respect
tle more participation from the of smaller banks. When you are
government and regulator is war- looking at things like needing to
ranted and required. meet large provisions, they will not
have the wherewithal to do it at
Do you think the government is doing one time. That is another area that
enough to protect bankers for their needs to be looked at. So, either
decisions? they have to be given capital so
We are looking to come up with that they can do it all at one time,
valuations (for resolving NPAs) or need to be given more time so
that will pass scrutiny. The diffi- that they can earn and pay.
culty even when you are putting up While we are asking for this, it is
an asset for resolution is the vari- apparent that these will be quite
have a caveat: the monsoon should ety of bids that come in: somebody transparently disclosed. So there is
be normal or near normal because says they want to buy it all out. nothing that the stakeholders will
the busy season growth is very Somebody says they want to come not be able to understand. What it
much dependent on agriculture in in as a strategic investor. will do is enable these banks to func-
our country. So, that is also very Somebody says they want to come tion while they assimilate the provi-
much there. in as a financial investor. sions that need to be taken. So some
Overall, I think a lot of projects With the variety of bids that amount of flexibility is sought.
are beginning to take shape. Demand come in, its difficult to compare What could be done is instead of
is growing no matter what we say. one with the other in order to deter- making these provisions in one
We had a little bit of blip in between. mine which one is the best. That is quarter, we can spread them out
Most of the industry is back on where the controversy comes in. over a year, a year-and-a-half, so that
track. Credit growth should be Whats required is for somebody provisions come at a later date. But
around 7-8%, driven by sectors such to say in the circumstances this is my own feeling is that the quicker
as roads, railways, transmission, the best that could have been done. we get this behind us, the better it
fertilizers, renewable energy, afford- So, that is what bankers are looking will be. The world is an evolving and
able housing and some amount of for. Something that will give them challenging place today, whether it
work in smart city projects. the confidence to go ahead with the be (owing to) technology, competi-
best of their abilities to ascertain tion or risk awareness.
Are bankers taking any steps to resolve what is good for this particular We need to have the bandwidth to
stressed assets, or are they waiting for unit, without it being checked by address these issues instead of get-
regulatory or political support? hindsight to say well, this could ting stuck with one issue. WI
Some amount of support from gov- have been a better decision or By Gopika Gopakumar. In arrange-
ernment and regulator is required that could have been a better deci- ment with HT Syndication | Mint

COVER STORY
IN THE
DANGER
ZONE Eight out of ten industries are now
more expensive than average

COVER STORY
TTM EPS TTM revenue

Mohammed Ekramul Haque Industry Current P/E growth (%) growth (%) Total
5-yr median P/E 1Y 3Y 5Y 1Y 3Y 5Y m-cap (` cr)
A
130
s investors celebrate the Industrial Gases 22 -30 -25 -20 9 4 5 14,249
new highs hit by the 92
markets, the current Retailing 59 -85 0 0 27 18 0 35,125
trend hides a dangerous secret. 91
Other Non-Ferrous Metal 40 -24 -25 -13 -2 -6 0 1,29,496
Close to eight out of every ten
industries now trade higher 88
Dairy Products 49 -12 -2 7 10 1 5 95,589
than their own historic premi-
ums. In this cover story, we 81
Hotels & Restaurants 55 -46 -13 -3 8 8 6 26,961
look at the precarious situa-
tion brewing and what it 67
Liquors 59 -55 -3 -5 7 4 7 31,194
means for investors.
62
The Sensex hit its lifetime ACs & Refrigerators 40 28 40 29 12 12 7 51,419
highs of 30,000 in early April
57
this year. This was accompa- Courier Services 48 23 6 8 7 19 0 13,661
nied by a general sense that the 50
markets have only one way to Vegetable Oils 38 12 17 18 -1 8 9 38,462
go up. In an example of how 49
the optimism has taken root in Domestic Appliances 30 8 37 0 5 6 8 18,096
the minds of investors, consid- 49
Footwear 35 -23 10 14 3 10 13 13,229
er this: a chartered accountant
this writer visited at the close 48
Cloth 31 20 11 0 11 10 11 32,482
of the previous financial year,
commented coolly, market toh 47
Other Machinery 42 1 9 -18 14 13 1 11,658
abhi upar hi jaega. When
asked why, his response, a 47
Bakery & Milling Products 34 17 31 36 9 11 12 40,458
blank smile.
47
The more optimistic active Cosmetics & Toiletries 40 10 12 12 4 7 12 4,28,967
market participants, though,
46
are not as clueless as the aver- Food Processing 41 25 5 13 20 6 13 15,845
age investor as to why the mar- 46
kets will go up. Normalisation, Paints & Varnishes 38 26 21 19 8 8 11 1,56,986
and even higher economic 43
growth, post the Media & Entertainment 37 -1 7 3 9 13 12 1,36,735
At the time demonetisation
42
of the dot- hiccup, the roll- Thermoplastics 39 20 23 23 8 10 13 36,606
com bubble, out of GST, and a 42
the Sensexs stable govern- Cement 25 59 14 2 4 6 8 3,15,598
P/E was ment at the 41
30x. Today Centre going well Castings & Forgings 15 -9 -1 22 2 35 22 23,168
it is around into 2019 are 38
Ceramic Tiles 30 16 27 25 10 12 15 16,151
23x. among the chief
38
factors behind the enthusiasm. Industrial Machinery 31 7 16 6 -1 10 3 26,805
What has also helped keep the
38
optimism going is an improve- Auto Ancillaries 32 24 18 8 9 6 4 2,01,030
ment in the global economy 37
that is coming out of a defla- Ball Bearings 31 7 15 2 6 6 4 15,846
tionary position. When global 37
markets rally, Indian stocks go Gems & Jewellery 28 -4 3 3 5 10 4 51,476
up, too. 36
Synthetic Yarn 15 -42 -315 4 14 6 9 10,917
This general sense of opti-
mism has turned valuations up. 34
Tobacco Products 20 7 5 5 8 7 9 3,49,294
The markets, in general, and

COVER STORY
TTM EPS TTM revenue

Industry Current P/E growth (%) growth (%) Total many investors, in particular,
5-yr median P/E 1Y 3Y 5Y 1Y 3Y 5Y m-cap (` cr)
31
are now more comfortable pay-
Pesticides 27
37 8 26 9 4 11 33,099 ing a higher premium for
30 stocks, especially considering
Storage Batteries 11 12 23 12 12 14 34,717
25 past premiums. Before the dot-
29 com bubble collapsed in the
Real Estate 26
1 -4 -2 -6 7 2 1,03,352
year 2000, the Sensex P/E was
Commercial Vehicles
28 31 55 9 11 12 9 2,38,750 close to 30x. Before the global
26 financial meltdown of 2008, the
27 169 0 -6 1 6 4 59,123 P/E was close to 27x. Those
Aluminium 19
were market peaks. Today it
27 17 8 10 9 10 14 7,69,787 trades at 23x.
Drugs & Pharma 24
What could turn a party
24 30 25 10 12 11 6 50,021
Electronic Equipment 17 pooper? There are two kinds of
risk in the market:
Organic Chemicals
23 20 25 7 4 5 4 21,772 It is time
13 the known and the
to turn
unknown. Among
Construction
23 16 7 1 1 9 6 68,333 cautious
19 the known, corpo-
when
22 rate earnings
Misc. Financial Services 17 9 5 24 22 22 1,89,720 markets
16 growth and the
see only
20 state of the mon-
Inorganic Chemicals 11 4 5 7 11 15 39,426 one way to
10 soons could impact
go up.
Equipment Leasing
20 -1 1 11 15 10 19 63,049 the optimism in
15 the markets. Whats more dis-
19 20 15 15 20 20 19 3,49,386 concerting is the unknown
Housing Finance 13
risks that the market usually
19 16 12 13 8 7 10 21,308 never discounts. Will the crisis
Books & Newspapers 16
in Syria spiral out of control?
16 11 7 7 23 24 22 89,792
Investment Services 15 The war-torn country may be
far away from India, but any
16 -8 -18 -16 -1 -2 0 1,28,247
Minerals 9 escalation, especially between
16
the US and Russia, could pose
Power Projects -47 0 1 11 1 5 47,300 serious threats to global stabili-
15
16 ty and growth.
Nitrogenous Fertilizers -152 2 -2 -9 1 8 17,609
8 An overwhelming majority
16 of major industries (see the
Air Transport -9 -172 -188 12 0 8 49,704
11 table) is now more expensive
15 27 15 -175 6 5 14 21,907 than their own historic trading
Cotton & Blended Yarn 10 averages. Following is the
15 -15 -11 -7 5 2 1 1,84,093 advice of many reputable fund
Coal & Lignite 12
managers, including that of
14 -6 22 20 4 3 5 61,299 Howard Marks, the co-founder
Tyres & Tubes 9
of Oaktree Capital
13 -2 5 7 7 8 6 2,57,217
Electricity Generation 11 Management, which manages
$101 billion in assets: it is time
13 24 4 0 -6 -8 0 11,99,181
Crude Oil & Natural Gas 12 to turn cautious when markets
13
see only one way to go up.
Electricity Distribution 11 3 10 6 7 9 1,31,069 Also keep in mind, just because
12
12 the markets are becoming
Soda Ash 70 243 16 -2 2 5 18,294
11 expensive, it doesnt mean a fall
11 may come any time soon. The
Banking 13 -23 -21 0 5 10 15,19,711
8 markets can remain expensive
11 41 -108 -103 -1 -6 0 12,473 for more time ahead.
Sponge Iron 10
Data as on April 6, 2017.

COVER STORY
8 MID CAPS
YOU MUST
AVOID
Mid-cap stocks have seen
a dream run in the current
market rally. The only
problem is that many of
the most expensive
mid caps have no
legs to stand on
no revenue growth,
no earnings growth to
match and little cash.
This section looks at
some of the most
expensive mid-cap
stocks and the
earnings profile of
these stocks.

COVER STORY
WOCKHARDT BASF INDIA
Drugged! C
Chain reaction
O A
perationally on a weak number of vital announcements have boosted
wicket with ongoing ng the stock price in recent times. The parent
issues with the announced that the company will invest `22,000
USFDA, the American cr
crore in the Asia Pacific region over the next five
drugs regulator, the mar-- years and a fair share of that investment will likely
ye
ket appears to be betting g on co
come into India. Later last month, the company
the success of Wockhardts dts new announced that it had entered into an agreement with
an
antibiotic drug WCK 5222, which the Stahl, a Netherlands-based company, to divest its
USFDA has approved for abridged phase- leather and chemical business
busin to the latter. Taking
III clinical trials. That could take two-three years to into account these announcements,
an there is no
complete. If things go well, the company is looking to other
othe trigger for the stock to
launch the product in the US in 202021. Wockhardt hold up the current valuations,
has a pipeline of five antibiotic drugs that the compa- especially
espe when you look at the
ny sees driving fortunes ahead. The promise of for- companys
com earnings growth
tunes ahead has kept the stock bubbling. over
ove the last couple of years.
EPS growth (%) 1Y -92.46 3Y -72.97 5Y -50.03 5-yr P/E EPS growth (%) 1Y -112.58 3Y -47.03 5Y -28.20 5-yr P/E
Max 391.11 Max 1000
2400 1600
Current 380.66
Price chart
1800 1300
1200 1000
Current 285.16
600 700
0
Price chart Median 26.43 400 Median 25.11
Apr12 Apr13 Apr14 Apr15 Apr16 Apr17 Min 2.58 Apr12 Apr13 Apr14 Apr15 Apr16 Apr17 Min 16.77
INFIBEAM INCORPORATION HATSUN AGRO PRODUCTS
e-xpensive Ah, nuts!

O T
nline e-commerce company Infibeam here are a lot of things going for Hatsun. It is the
Incorporation trades at a market cap of `5,270 largest private-sector dairy in the country; it is
crore. The company made a princely net profit the market leader in ice creams in the South;
of `8.6 crore in FY16. On a TTM basis, the company and it is billed as the Amul of South India. Some bro-
has earned a bottom line of `32 crore. Even taking kerage houses are even betting that Hatsun can take
into account the higher profit, the company still over Amul in the future. This boiling optimism could
trades at a P/E of 162x. Infibeam made headlines in be a stretch. Amuls sales of `23,000 crore in FY16
recent days after it announced that it had invested compared to Hatsuns sales of a little over `3400 crore
`150 crore to acquire a 7.50 per cent (FY16)
Y16) tell a different tale. Also, the companys EPS
stake in CCAvenue a payment growth
owth for the last one year and three years
aggregator that has over 1 lakh mer- have
ve been in the red. Current triple-digit
chants and tie-ups with over 48 uations, therefore, appear
valuations,
banks. Like other expensive stocks, unfounded.
founded.
Infibeams pithy earnings do not jus-
tify current valuations.
EPS growth (%) 1Y NA 3Y NA 5Y NA 5-yr P/E EPS growth (%) 1Y -14.76 3Y -4.66 5Y 23.63 5-yr P/E
Max 415.48 Max 115.09
1600 600 Current
Price chart Price chart
1300 450
1000 300
Median 256.64
700 150
Median 49.95
400 Current 177.50 0
Min Min 20.31
Apr16 Jul16 Oct16 Jan17 Apr17 155.51 Apr12 Apr13 Apr14 Apr15 Apr16 Apr17

COVER STORY
BEML COFFEE DAY ENTERPRISES

RPRISES
Privatisation party st-ing

Interest-ing
T A
he market is holding onto BEMLs higher valua- nother scalding
calding
tions on news that BEML has received govern- stock is Coffee Day
ment approval to sell 26 per cent stake out of the Enterprises,
ses, which
governments 54.03 per cent holding. The company, runs the Cafe Coffee Day
present in defence, mining and construction machin- chain. Astronomical
mical expec-
ery and rail- and metro-coach manufacturing, recently wth in a
tations of growth
bagged a `1,421 crore order from the Bangalore Metro just-developing g cafe culture
Rail Corporation, which has kept market sentiment in India appearr to hold the
for the stock buoyant. Other than the new develop- stock at these valuations. Alls
ment, the companys latest earnings momentum does not hunky dory though. The cafe business is bleeding
not support current valuations. money at the net level since 2012. High interest and
EPS growth (%) 1Y -38.71 3Y 26.26 5Y -17.95 5-yr P/E lower average daily sales compared to other chains
Max 883.76 have resulted in a number of closures. Interesting
1600
Price chart fact: interest eats up about half of the companys
1200
operating profit.
800
EPS growth (%) 1Y -52.13 3Y NA 5Y NA 5-yr P/E
400 Current 109.18 Max 273.00
Median 96.49 320
0
Min
Price chart
Apr12 Apr13 Apr14 Apr15 Apr16 Apr17 26.93 280
240
200 Median 94.27

Current 91.42
160 Min 76.84
Nov15 May16 Nov16 Apr17
TV18 BROADCAST BLUE DART EXPRESS
Adverse times In blues

T A
V18s flagship channels CNBC-TV18 and CNBC slowdown for e-tailers like Amazon, Flipkart
Awaaz, along with Colours, the Hindi general-en- and Snapdeal has meant less business for Blue
tertainment channel of Viacom 18 (50 per cent Dart. Even business-to-business volumes are
owned by TV18 Broadcast), are at the top of their down. This has resulted in Blue Dart cutting growth
game. Yet the company is struggling with lower ad plans to size. Higher employee costs and handling
sales growth. The conclusion of elections in UP, Goa charges have put pressure on margins that now trade
and Punjab is also expected to result in fewer political at 10 per cent levels. With the consolidation in the
ads going forward. A buoyancy in the stock
s market e-commerce space continu-
slowdown in other
and a spate of IPOs could offset the slo ing, Blue Darts woes
oes
advertising
adverti areas. That could continue into o the
still
s does not near term, raising
a
appear to justify doubts as to why
the
t 88x earnings the company
t company
the should command a
trades
tra at. premium of 80x.
EPS growth (%) 1Y -54.90 3Y 3.07 5Y -184.35 5-yr P/E EPS growth (%) 1Y -16.33 3Y 4.71 5Y 4.94 5-yr P/E
Max 992.17 Max 146.24
50 9000
Price chart Price chart
40 7000
30 5000
20 3000 Current 74.97

Current 79.52
Median 67.96
10 Median 44.18 1000
Min Min 31.48
Apr12 Apr13 Apr14 Apr15 Apr16 Apr17 23.98 Apr12 Apr13 Apr14 Apr15 Apr16 Apr17

INTERVIEW AJIT DAYAL
Founder, Quantum Mutual Fund
How did Quantum start? did receive the approval for an off- reflected the task ahead: to take
I was privileged to have met Mr shore fund with Hemendra Indias financial markets on an
Ashok Birla, who is actually the Kotharis DSP and Merrill Lynch orbit from a lower level of controls
father of the Indian mutual fund as the placement and marketing and inward-looking policies to a
industry. He was the first person to agent. I transferred my efforts into higher orbit of financial openness
propose the idea of raising money assisting foreign investors in eval- and integration with the global
from NRIs and overseas investors uating the Indian economy and economy.
via a structured mutual fund identifying sectors and companies
route. UTIs popular Unit Scheme to invest in.
64 was really a Ponzi scheme In some sense, Quantum was the
because its NAV (net asset value) outcome of a systematic blockage
was not linked to market prices of the Ashok Birla-pioneered Birla-
and yet its payout was a known Warburg funds. If UTI had not
amount. It eventually imploded on stepped in, there may not have
the back of guaranteed payouts been a Quantum, but there would
and lack of transparency on how have been a very successful Birla
investments were made and val- Warburg fund launched by the late
ued. A bureaucrat in New Delhi Ashok Birla, a visionary and a
told me that the Birla idea would man of great foresight!
never see the light of day because The name Quantum came from
UTI was blocking it. Finally, UTI my love for physics in school and it
Earnings for
2017 are likely
to be lower
than earnings
in 2014
Call him a maverick but the truth is Ajit Dayals
views about the investing world are bold and
border on provocation. A fund manager with the
distinction of managing equity assets on a
global platform, including the lead manager of
the $2 billion Vanguard International Value
Fund at one time, Ajit went on to start Quantum
AMC. Ajit also worked with value investor Tom
Hansberger and received the backing of
billionaire Prem Watsa. In an interview with
Kumar Shankar Roy, Ajit discusses the journey
of Quantum, Indian stock market evolution and
his own investment approach.

INTERVIEW
When did you think of setting up a firms by offering them a combina- partially triggered by a family situ-
money-management firm? And how tion of integrity and competence. ation, I left my guru and returned
did this business evolve? It is worth noting that SEBI, under to India to find a partner.
When we partnered Jardine the chairmanship of Mr Bhave and In 2004, six of my friends gave
Fleming in 1992, it had a general then Mr Sinha, has done a lot to us the capital to start Quantum
manager for India but my role was help clean up the muck in the AMC. Between 2004 and 2016, over
to identify key people to head every mutual fund industry. that 12-year period, my friends
silo and ensure that the businesses and well-wishers left us alone to
were moving in the right direction. How and when did you come about build one of the most-respected
But the field of finance was pop- venturing into domestic asset-man- investment firms in India. The
ulated by local brokers with ques- agement business? dream was finally there. In 1990, I
tionable practices prior to the 1991 The Birla Warburg proposed ven- sat with Dr Dave (former chair-
liberalisation of the Indian econo- ture in 1984 was for a fund man of SEBI) and some of the
my. Since then, the dress code of launched outside India to invest in team from IDBI that was seconded
people working in the industry has India. My first tryst with the to the nascent SEBI to help write
changed (from dhotis to suits), as domestic industry was during the the rules for the birth of mutual
has the intensity of suspect prac- Jardine Fleming Quantum days, funds in India. In 2006, 26 years
tices. The field of finance in when we got our AMC license in later, we finally launched
India and globally has failed to 1994. But then I left JF in 1995. Quantum Mutual Fund.
focus on what is good for their cus- So, by 1996 I was AMC-less
tomers. They have focused on what How would you rate Quantum Asset
is good for their business. And Management as a business?
they seem to be proud of it. If you We follow some of We really dont see ourselves as a
head to a doctor and ask for ten business. We are professionals. We
shots of morphine, we think it is the basic tenets of invest your hard-earned savings,
the doctors job to warn you of the Gandhi: focus on your capital. But, yes, we have to
consequences of taking those ten pay salaries, so we need revenues.
shots and refuse to give you what
what is good for the For this, we need to be good at our
you want. Financial geniuses think customers, be hon- work. In Quantum, we have assem-
otherwise. As financial doctors,
they are willing to give you what-
est, be transparent, bled a team of people who have
worked hard and have comfort in
ever level of spice you may ask for, be simple. the knowledge that they will never
even if you dont understand the be asked to do anything against
product or the consequences of what the research and investment
trying to digest such spicy food! again. SEBI required a sponsor to processes tell us. The sales and
So, the Quantum that you see have a net worth of `3 crore to marketing team will never mis-
today is a by-product of two states apply for an AMC licence. I did not lead to sell.
of reality in our industry: firstly, have that. Then we were fortunate Since our launch, we have not
for our competitors, customers can to meet Tom Hansberger, the been able to work with the distri-
be acquired or squeezed at will. co-founder of Templeton, bution channels because they did
Secondly, we are firm believers in Galbraith, and Hansberger (now not reveal the commissions they
processes and teams that oversee known as Franklin Templeton) in earn to their clients. Quantum
research and investments to 1997. Tom had started his own firm Mutual Fund refused to work with-
ensure that our investors have very in 1994 (Quantum, it should be in the opaque commission struc-
predictable outcomes when they noted, was founded four years ture. But the rules have changed
invest in our mutual funds. before that in 1990) and from 1997 now and IFAs (independent finan-
All of us at Quantum are not till 2003 I lived mostly in Florida, cial advisors) and RIAs (registered
vegetarians, but we follow some of learning from a master the basics investment advisors) will need to
the basic tenets of Gandhi: focus of value investing. However, Tom disclose the commissions they
on what is good for the customers, was also meant to give us capital earn from each fund house to their
be honest, be transparent, be sim- by being a 50 per cent shareholder clients. Therefore, we are now
ple. We wish to help investors in Quantum so that we could apply ready to work with the IFAs and
break free from the clutches of the for the AMC licence. That did not RIAs. Quantum has even launched,
existing practices of financial happen. So, in a sad twist of fate for the first time, a regular plan

INTERVIEW
which allows the distributors who Your view seems to be that people in list of promoters or founders that
recommend our plans to earn 0.15 financial markets are generally crook- we will not invest with.
to 0.25 per cent per annum for ed. With this premise, how do you go
bringing in the client. about investing? How would you describe your invest-
As a trustee of others capital, we ment approach?
How have things changed in the stock have to worry about two things: the We are bottom-up, long-term,
market since the 80s? lack of transparency in the finan- value investors. What this means
The daily trading volume used to cial-distribution channels and then is that we focus on managements,
be about `5 crore then; today, it is the lack of integrity amongst the businesses they run, the com-
`25,000 crore a jump of 5,000 many founders or promoters of petition that exists and that is
times. Stocks were priced on con- companies. There is crookedness likely to emerge, and the dynam-
nectivity with governments. Today which may distort how you allo- ics of the sector. Long-term per-
there is some of that still, but there cate your savings. And there is spective means that we have zero
are many companies whose future crookedness in the companies your interest in what happens in one
is a function of what choices and money is invested in. quarter or even in one year. Our
decisions the consumer makes. In Many years ago, before I started focus is looking out five years.
the 1980s, there was no computer Quantum, I met a banker from However, we recognise that it is
trading, so brokers who had access South Africa. When I told him I fuzzy and hazy to have a view of
to the rarely working Department wanted to start an investment-ad- numbers five years out. So, while
of Telecom lines had an edge in visory firm, he told me to remem- we visualise what a company or a
pricing. That arbitrage was shut business will look like five years
down when communications from now, we tend to look at valua-
improved. However, the allegation tions of the business two years
that a few people got to trade on out. If the current share price of
the NSE a few milliseconds ahead the stock is above what we think
of everyone else shows that faster is the value price level at which
speeds will not necessarily change we are willing to buy, then we will
the ethical behaviour of people. not buy the stock. We will wait
patiently for the market price to
As an investor, how has your approach decline below the value-deter-
changed in the way you view Indian mined buy limits. That takes disci-
stock investments over the years? pline and an immense faith in the
We learn every day. We learn new processes we have built and in the
things from the mistakes we have team that manages the process.
made. Jardine Fleming was a ber one rule: When you shake
momentum, bull manager. They someones hand, count how many Tell us about your personal invest-
taught me how to place India on fingers you have left. If its less ments and what is the approach
the global map relative to other than five fingers, then dont shake behind them?
emerging-market countries and their hand again! It is a rule that My personal investment is in a
the developed world. But their I have followed and ensured that range of Quantum Mutual Funds.
analysis, in hindsight, lacked my colleagues have understood. We eat what we cook. If it is not
rigour. Tom Hansberger, as a leg- Many Indian founders have this good for me, it is not good for you.
endary value investor, taught us to view that they are doing us a
compare the Indian companies in favour by giving us an opportuni- What are your views on the current
our universe with peers in the ty to invest in their great idea. If valuation in the market?
developed world. As the Indian the idea turns out to be good and The earnings of the index in
economy integrates more and is the company is profitable, the pro- March 2017 are likely to be lower
more open to foreign goods, we moters believe they have the right than the reported earnings of
will need to be aware of sectoral to limit the profit the external December 2014. So, share prices
trends globally. Tom Hansberger investors make. If the idea is bad, have risen on hope, not on earn-
taught us patience and showed us then tough luck to both but the ings growth. We continue to like
why working as a team is far bet- founder may have milked the com- India for the long term but have
ter than creating a brilliant pany or extracted his capital out advised our clients to keep India
shooting star. in the meantime. So, we do have a as an underweight. WI

INTERVIEW
India back on
the Rogers
radar
JIM ROGERS
Renowned commodities
investor and hedge fund
manager
C
ommodities trading guru and hedge fund manager Jim Rogers, who had sold his holdings
in Indian companies and exited the country in late 2015 on the grounds that the National
Democratic Alliance (NDA) government led by Prime Minister Narendra Modi had failed to
live up to investors expectations, said he was reconsidering entering India. With Indian markets
sustaining a record-breaking rally, Rogers admitted that he may have missed the bus on India.
Edited excerpts from an interview.
In September 2015, when we last WaitIndia passed the GST and some stuff, I am not aware of any
spoke, you said you had sold all your that astonished me. I am surprised big steps to boost FDI. Yes, I am
holdings in Indian companies and that Mr Modis government got impressed, and I see that the mar-
exited India because the NDA that through. It is a historic move kets are at an all-time high; curren-
government had failed to live up to as this has been a very contentious cy is going upthey are making
investors expectations. But since issue among Indian politicians for new highs without me, and that
then, the Indian markets have rallied several years. does not make me happy.
and are at record highs, and reforms You say FDI flows into India are This has made me realize that
are on track, including the passage of at record highs, and it is certainly something is happening in India.
GST. Foreign direct investment (FDI) not me. I am surprised with the FDI When GST was passed, I reconsid-
into India touched an eight-year high inflowswhile Modi has undertak- ered investing in India, and I
of $46.4 billion in 2016. en small reforms, and cleaned up thought, wait a minutethis is

INTERVIEW
going to work. I am positively

impressed, but I am not back to
investing in India yetthe markets
The markets are at an all-time high, but I
are at an all-time high, but I dont dont want to jump on to a moving train. When
want to jump on to a moving train. you jump on to a moving train, youll get hurt.
When you jump on to a moving
train, youll get hurt.
I missed the bus in India. If Modi and making friends everywhere. politician will do anything to win
continues doing stuff like GST, As a politician, Mr Modi is one elections. Mr Modi is in a position
then not just me-everybody has to of the most successful and excep- to do a lot of stuff. I am not too
pay a lot more attention to India. tional of this generationno ques- worried about what is happening
This does not mean that I wont tion about that. No surprise that he internally in India as the Modi-led
have another chance to enter-India has picked up all states in the government has momentum and
is currently on my list of some- recent elections. Seventy years everything going for it. The world
thing to do. since independence, he is cleaning situation is more worrying. Mr
up the gigantic mess with moves Trump has now bombed Syria.
When you look at emerging markets as like GST, which no on else has been Many American presidents love
an investor, where do you see India? able to do so far. war, and Mr Trump had said he
India still has a lot of debt, unlike was a non-interventionist.
Russia that has a convertible cur- Finance minister Arun Jaitley recently Now look at him! He is involved
rency and does not have much debt. said Indias economy is expected to with Syria, and also saying he is
I am invested in Russia. One reason grow at 7.2% in 2017 and 7.7% in going to get involved with North
why Russia does not have a high 2018. What is your view? Korea. These can potentially not be
level of debt is that no one was will- Most people dont trust these num- good for the world. If the Middle
ing to lend them moneyand that is bers, including me. I used to say East blows up in the next year or
not necessarily a good thing. Indian that what India does is to wait for two, it wont help the markets. It
politicians have been saying for a China to announce its numbers and will help Russia and oil. It wont
while now that the country will then top them. I am skeptical of help India or China. Mr Trump has
address this situation of debt, but Chinese numbers and I am skepti- promised to have trade wars with
nothing has been done. Some stud- cal of Indian data. I am skeptical of Mexico and China. He has not done
ies say Indias debt-to-GDP ratio is at American numbers, too. Ive learnt it so far and so, maybe, is just
90% now. It is difficult to grow at a over the years that if you are sitting another lying politician. But he
rapid pace when you have such high and watching government num- said the same of Syria and then he
levels of debt, because you are drag- bers, and do your investments based intervened. He has said North
ging along interest rate payments. on that, you are not going to make Korea better watch out. He met
But India is still on my list, espe- much money. Not too long ago, they with the Chinese and did not get
cially if Mr Modi can continue caught the Germans faking num- anything. Power corrupts. Interest
doing some of the stuff that he said bersthe Germans of all people! rates are going higher no matter
he would do, and especially if the what happens. The French and
government makes the currency When you look at India, what are the German elections are coming up
convertible and opens up the mar- risks? Could it be populist steps they could be disruptive. These
kets. I am more impressed by Mr leading to 2019, the reforms process worry me more than what Mr Modi
Modi as a politician than as some- not continuing, or rising oil prices? is doing inside India.
one who is executing reformsyes, I am more worried about the world See, first I was interested in
GST was extraordinary. But your because that will impact India. Yes, India because of his (Modis)
prime minister is a great politician; India has elections coming, and record and what he said he planned
he is travelling around the world normally when that happens, any to do. Then I invested. But he did
nothing much for two years, and I
sold. Unfortunately, I sold too soon.
I am more impressed by Mr Modi as a politi- Modi will not do anything foolish
cian than as someone who is executing before next electionsbut the glob-
al situation can have an impact on
reformsyes, GST was extraordinary. India, irrespective of what Modi
does. On the (farm) loan waivers,

INTERVIEW
while I would say it is terrible eco-

nomics, it is also brilliant politics.
Not just India, the global markets have

rallied since Trump took over. So where
can one invest in times like these?
America is at an all-time high, and
be it Japan or Germanytheir mar-
kets are all doing well. There is a lot
of money floating around. I had
expected it all to slow down by now,
but it has not. The Americans say
they are going to be cutting back-
but nobody has really done that in
that past year or two. The only
place I am looking to invest right
now is Russian government bonds
because the yields are very high
the rouble is down a lot. For what-
ever reason, Russia, which has been
the most hated market in the world,
is becoming less hatedmore coun-
tries and politicians are reconsider-
ing Russia. Ive learnt in my life
that if you buy things that are
hated, they will make a lot of money
even if takes a couple of years. Four of the most dangerous words in the
India is at an all-time high.
I own a lot of US dollars, and the financial markets are: its different this
reason I own it is because of the time. It is very dangerous when you hear
turmoil that I see coming, and peo-
ple look for a safe haven in times
people say that.
like that and the dollar, rightly or
wrongly, is considered a safe haven. in a few years from now and say ple continue to get older. When inter-
But it is not-America is the largest that in 2015, 2016 and 2017, crude est rates go higher, they are going to
debtor nation in the history of the made its bottoming pattern. I will make bonds go lowerit is going to
world. What will happen is the US not sell crude now, especially if help the US dollar. Historically, in
dollar will get overpriced and may Trump is going to throw some more the US, if the Fed raised interest
even turn into a bubble, depending bombs around. rates four times, it meant the stock
on where the turmoil is, and I hope market would go down and go down
that at that time, I am smart enough The Fed has said they will raise rates substantially for a whileit is clear
to sell the US dollar and put my again this year. Whats your view on that the Fed will raise interest rates
monies elsewhere. Conceivably, it that? four times, and it does not mean that
will be gold. Often, when the US The Fed will continue to raise inter- it has to happen that way. One could
dollar is very strong, gold goes est rateswe cannot continue like counter and say, rates going up from
down. I own gold, but Ive not been thisnegative interest rates in most zero to four times is not such a big
buying gold in recent years. But if parts of the world are destroying a deal and, therefore, it is different
gold goes down sufficiently, I will lot of people. Many pension plans, this time. Four of the most danger-
sell my US dollars and buy gold. I insurance companies and trusts are ous words in the financial markets
expect the dollar to go substantially suffering badly nowyou are going are: its different this time. It is
higher, and I hope I can sell then. to have some pension plans in very dangerous when you hear peo-
Crude is in the process of mak- America go bankrupt, or not earn ple say that. WI
ing a bottomit is a complicated any money. They have the obliga- By Joji Thomas Philip. In arrange-
bottomwe are going to look back tions to meet their promises as peo- ment with HT Syndication | Mint

GENERALLY
SPEAKING
Hey, they just raised the price!

Though many of us fret at price hikes in the times of crisis, this is just
a normal occurrence, as economics tells us
VIVEK KAUL
Imagine this situation: its raining cats raining through the day, the demand for cabs is more
and dogs and you need to get to a friends birthday than the supply. Hence, taxi drivers have already made
party on time. The friend has already called twice to in six hours what they had expected to earn in ten
check if you have left from your home. But you havent hours. This has prompted them to end the day early
simply because its raining heavily and there is no and not drive in the lousy weather. Given this, there
transport available. You cant see any auto-rickshaws arent enough cabs going around.
lined up from your balcony. No buses have crossed for But there are enough people who want to go out
a while. You have tried telling your friend that its even during the heavy rains. Hence, the demand for
pouring, but he is in no mood to listen to you. He has cabs is greater than the supply. In this scenario, the
offered to drive down and pick you up for the party. Of price of travelling is bound to be higher. Also, the cab
course, you want your friend to enjoy the party and company feels that by offering a higher price, it can
not spend time in a car trying to ferry motivate more drivers to drive and in the
you to the party. Given this, you have told process, the supply of cabs will increase
him that you will somehow manage to ECONOMICS and the high price will come down as
get to his place. HELPS supply starts to meet the demand.
At that point of time you decide to This is the basic competitive-market
book a cab through a mobile-phone app.
Those who have model that is taught to students studying
The app has been there on your phone studied economics economics for the first time. At the same
for a while, but you seem to favour the have a better time, the act of raising prices to a level
local autos and taxis because that is your
way of keeping their employment going.
understanding of the which is considered unfair and exploitive
is referred to as price gouging.
As you get ready to book a cab, you are competitive-market So, is the situation wherein a cab
surprised to see that the price of the ride model and dont company wants three times the normal
which is offered upfront is three times fare when its raining cats and dogs an
the normal fair.
object to price rises impact of the basic competitive-market
Not surprisingly, you feel cheated. You in the times of crisis model of economics working well or is it
want to tell someone that this is why you an act of price gouging? Or does it even
dont use these taxi services because matter?
their fares keep changing. But there is no one around While making a distinction is a difficult task, the
to listen to you and you must get to the party. So, you issue clearly matters. As James Kwak writes
book the cab and move on. You feel the cab company is in Economism: Bad Economics and the Rise of
taking advantage of the fact that it is raining and Inequality, There is a reasonable argument in favour
ripping you off. of price gouging because supply is rarely perfectly
But is it? The cab company had offered an fixed. When a natural disaster strikes, it may be
explanation in the past for higher prices during rains. possible to bring in additional supplies of water,
It feels that this is basic economics. Since its been flashlights, batteries and other necessities but only at

GENERALLY
SPEAKING
a high cost; store owners will only make Hence, people who have studied
the effort if they are allowed to raise
WHAT economics clearly think differently from
prices. Alternatively, if they have the INEQUALITY? the normal people. The bigger question
opportunity to earn high profits during The competitive- though is why normal people think the
an emergency, they may keep larger way they do. It seems, what is a competitive-
inventories on hand, which would be market model of market model for people who have studied
good when the disaster does occur. economics is not economics is basically price gouging for
This is similar to the logic offered by bothered about normal people. Why is this the case? As
app-based cab companies which charge Kwak writes, What the controversy over
higher fares than usual, when the inequality, and hence price gouging really illustrates is the
demand for their cabs is greater than the at times it is difficult fundamental tension between efficiency
supply. Despite sound economics behind to differentiate it and fairness The resulting outcomes,
it, price gouging doesnt sound to be however, may not seem fair according to
right, especially when it happens to us. from price gouging ordinary peoples intuitions. As Paul
Daniel Kahneman, Jack Knetsch and Samuelson wrote in his influential
Richard Thaler carried out an experiment in which textbook, John D. Rockefellers dog may receive the milk
they asked randomly selected people if it was fair for that a poor child needs to avoid rickets. Why? Because
a hardware store to increase prices of snow shovels supply and demand are working badly? No. Because they
from $15 to $20 in the aftermath of a snowstorm. 82 per are doing what they are designed to do, putting goods in
cent of the people thought it was unfair for the the hands of those who can pay the most. And this is
hardware store to do so. At the same time, the answer where the problem lies.
was different from people who had studied economics. The competitive-market model of economics is not
As Kwak writes, But thats not what people think bothered about inequality, and hence at times it is
after studying economics. When Thaler asked his difficult to differentiate it from price gouging. Indeed,
students at the University of Chicagos business this is something worth thinking about. WI
school, 76 per cent thought it was fine for stores to Vivek Kaul is the author of the Easy Money trilogy. He can be reached
boost prices after storms. at vivek.kaul@gmail.com.

STRAIGHT TALK
The demise of active funds

Rising interest in passive investing and the inability of active funds to beat
their benchmarks mean that the days of active investing are numbered
ANAND TANDON
It seems strange to speak of disruption moved over $30 billion from active management to a
in asset management at a time when foreign inflows into quantitative approach.
Indian markets are booming and domestic inflows to With markets delivering subdued returns, high-cost
asset managers, especially in the form of SIPs, resemble fund managers are finding it difficult to beat the market
a tsunami. Hiding under the large accretion to funds is a after costs. Millennials prefer to use passive funds, there-
shift in the way the industry works a function of a new by saving on the fees paid. Asset managers have reacted
tech-savvy generation beginning to gather assets, by offering passive and quasi-active funds through the
regulatory changes and greater technology use. use of quantitative methods that help replicate some of
the functions of an active fund manager.
A shift to passive Low fees have led to mutual fund revenues stagnating,
From 2007 onwards, many actively managed equity even as assets increase. With little product differentia-
funds in the US have shut, with only about 51 per cent of tion, a race to the bottom can be witnessed in the indus-
those in 2007 surviving up to 2016. Worse, over 80 per try, and a no-fee fund may not be very far away. ETFs,
cent underperformed their benchmarks. The despite their rapid growth, are still a small part of the
performance of debt funds is similar. This has not led to industry (see Figure 1), but higher indexation increases
a reduction in fund inflows just that flows to passive the danger of reduced market efficiency over time as
funds have increased. passive investments become a larger part of the market.
The worlds second largest mutual fund Vanguard
gathered over $277 billion in 2016. Vanguards strategy Death of equity research
of growth of offering low-cost index funds to investors Regulations are typically meant to improve markets and
is resonating with investors tired of paying high costs make them more transparent but they sometimes have
for poor investment outcomes. Investors invested over
$505 billion in index funds in 2016, while withdrawing
Table 1: Global assets under management
$340 billion from costlier, actively managed funds.
This trend is not new. In 2014, PWC forecast for the Products 2004 2007 2012 2020 (est)
fund-management industry in 2020 had laid out the Global AUM ($ trillion) 37.3 59.4 63.9 101.7
data as shown in Table 1. of which mutual funds 16.1 25.4 27.0 41.2
An interesting data point is the expectation that the of which active investments 15.1 23.3 23.6 30.8
ratio of active to passive investments would change from of which passive investments 1.0 2.0 3.4 10.5
7:1 in 2012 to approximately 3:1 in 2020. The trajectory of which mandates 18.7 28.8 30.4 47.5
seems to be holding out.
of which active investments 17.6 26.5 26.6 35.3
BlackRock, the worlds largest asset manager with
of which passive investments 1.2 2.3 3.9 12.2
$5.1 trillion, uses exchange-traded funds, called iShares,
of which alternatives 2.5 5.3 6.4 13.0
to offer low-cost options. These too gathered $140 billion
Source: PwC analysis. Past data based on Hedge Fund Research, ICI, Preqin,
net in 2016, while the active-management business lost Towers Watson and The City UK.
$19.3 billion. Under a new leader, BlackRock recently Note: Differences in sums are due to rounding. Mandates exclude alternatives.

STRAIGHT TALK
Fig 1: ETF and mutual fund fee ecosystem Fig 2: Shrinking research budgets
unintended consequences. European regu- Crowd-funding platforms can make

lators have mandated that MiFID II be THE TECH alternative investments more democrat-
operational from the year 2018. This ic and open them up to a wider class of
requires that brokerages charge their cli- FACTOR investors.
ents separately for research and execution. The use of
This service, thus far bundled, forces asset technology and India both behind and ahead of the
managers to show research costs separate- curve
ly to clients and consequently pushes down social media will Institutional investment in India has still
these costs. open up the market not become the norm, with many retail
Importantly, it also severely restricts for mid- to low-net- investors continuing to prefer to invest
access to research to smaller fund manag- by themselves. Only over the past couple
ers who cannot afford to pay large sums. worth investors who of years, as market volatility has reduced
One large brokerage is reported to have have thus far been and mutual fund performance improved,
demanded $10 million per annum for access
ignored by asset have flows to active mutual funds become
to its research. This may be a small change larger and more meaningful. Even now,
for managers like BlackRock but can be managers investment in equities forms a small part
back breaking for small managers. of the average financial holdings of sav-
Importantly, the revenues for brokers will fall dramati- ers. Institutionalisation of investment flows seems to
cally as execution commissions are already under pres- be a given.
sure and managers will negotiate hard on research fees. Internationally, the trend points towards more passive
European asset managers are expected to cut spend- investing through ETFs and index funds. As these
ing on outside research by as much as 30 per cent (see trends converge on the Indian market, it appears possi-
Figure 2). While this will partly be offset by larger inter- ble the investors will use a mix of active investment
nal teams and perhaps specialised inputs from outside funds, passive investing and direct investments to create
units, it may make research less easily available to their portfolios.
smaller institutions and retail investors. ETF flows are not discerning when it comes to valua-
tions of individual companies. It is not surprising to see
Technology the great leveller that overpriced companies continue to remain so in a
The use of technology robo-advisory, artificial intel- market where ETF allocations form a large part of the
ligence and network of payment technology providers inflows. Such pricing disparities will provide opportuni-
will open up the market for mid- to low-net-worth ties for outsized returns. Whether institutional inves-
investors who have thus far been ignored by asset tors will benefit from these or remain bound to the index
managers. The use of social media and crowd sourc- and thereby not add value to their investors (as in the
ing of information will also provide tools to the retail case of global funds), only time will reveal. WI
investor, which can lower information arbitrage. Anand Tandon is an independent analyst.

OFFBEAT
The ascent of the rupee

A strengthening rupee against the dollar is likely to
have negative implications for the economy
SANJEEV PANDIYA
I am amazed that few people are So who is correct, the market or the analyst? Lets
talking about it, and I certainly dont see enough noise examine how this happened, and what it indicates.
being made about it. If the dollarrupee parity were 12 Most of the money came bunched up, with a
per cent undervalued, I am sure that it would be on the spectacular $19 billion in three months, $8.7 billion in
cover page of Femina. March and $2.47 billion in the first few days of April.
Lets start at the beginning. Raghuram Rajan used Theres a crack in the charts, a gap that is usually
to say often that cycles of rupee overvaluation have taken in all charts as an irrational, emotional surge in
always led to a subsequent currency crisis. This was the market, which should get reversed. In most deep
seen thrice in recent memory, in 2008, followed by 2011, markets, it usually does get reversed.
then 2013. Each time, the rupee went into a cycle of Theres a sharp increase in volatility, as knock-on
overvaluation about 1215 months prior effects have triggered panic among
to the crisis. exporters. Clear indication of some RBI
Rajan used to insist that these carry RUPEE CYCLES intervention is seen, with evidence of
trading flows (my words, not his) caused Cycles of rupee reserve accumulation. But the reserves
mayhem when they reversed and that have not been to the same extent of the
banks should be hedging most of their
overvaluation have capital flows because of concerns over
clients dollar payables, against which always led to a injecting too much liquidity in the
India Inc was hedged only about 15 per subsequent currency domestic money markets.
cent of its total payables. Shockingly, the RBI did not do much
In 2014, he said clearly that we he
crisis. This was seen to soak up the excess liquidity in its 6th
was comfortable with the rupee trading thrice in recent memory, April credit-policy meeting.
at 6062.5 against a real effective in 2008, followed by None of the above indicates an
exchange rate (REER) of `60 in 2014, the orderly discovery of the correct value of
time of the first Modi Mania, in May
2011, then 2013 the rupee. We have other indicators of
2014. If we add structural inflation frothiness in other markets, particularly
differentials to that, moderated by estimated equities, where about half the money went.
productivity growth (of around 1.5 per cent), we find Anecdotally, D-Mart is trading at a market cap of
that the rupee is way overvalued. `300 crore per store. Looking at the size of the store,
Based on a simple interpretation of the trajectory there is no way it justifies a valuation so steep. RBL
of differential inflation vis--vis the dollar, most Bank has a P/E of 75. On a particular day, 313 stocks hit
analysts were projecting `69-70 as the target value of the upward filter on the BSE, and P/Es are at levels
the dollarrupee exchange. Not a single analyst saw exceeded only four-five times in history.
the coming mayhem, when the rupee would appreciate Normally, the rupee underperforms the forward
almost 9 per cent from those levels, this at a time when curve in the dollar by a small margin on the belief that
the Chinese yuan is at 6.9, up 9 per cent from its pre- Indias productivity growth will allow its exporters to
crisis level of 6.3. survive at the lower dollarrupee prices. But a 10 per

OFFBEAT
cent drop from those prices is inconceivable. There is What are these flows betting on? That the current
no historical precedent for such a steep overvaluation BJP government is going to stay around for a long time
of the rupee. and that would give India a reformist government for a
Could it be that this is a repeat of the same phase of substantial period of time and that this would raise
equity bullishness that we saw in 200708, accompanied productivity growth to justify such steep currency
with those grandiose notions of our economys overvaluation. While the underlying premise is
greatness (remember the decoupling argument). In probably true, it is simply not possible that such
November 2007, in the middle of the equity peak, there productivity gains can be justified.
were those projections of then-prominent industrialists And thats the nub. Stocks can be undervalued for
that the rupee would reach `35 to the dollar and we long periods of time, and you depend on market forces
know what happened thereafter. to correct them. But a currency cannot be overvalued
Quite obviously, fundamentally, the rupee is grossly like this because the economy can develop serious
overvalued. Technically, the crack in the charts is distortions if capital flows are allowed to distort
suggesting a wave of irrationality which must reverse currency valuations.
in the not-too-distant future. In the last 32 years, the rupee has dipped below its
So what should an investor do? Most equity investors 200 DMA (daily moving average) only when it is
look for the last bear markets valuation in the current returning from a previous currency crisis and, of
bull market. They wont find it, but the seeds of the next course, the Greenspan years. This is the first time,
bear market are already sown in the current bear when it is being driven by overexcitement about the
market in the dollarrupee exchange Indian economy. These flows have to be
rate. I dont think that equity markets are sterilised in the same manner that
yet in a bubble, although anecdotal
WHAT TO BUY? Raghuram Rajan very deftly did in 2014,
evidence of overvaluation in some The biggest value just when he accumulated reserves very
markets is available. So markets will now is to buy the dollar aggressively to communicate to the
underperform over the short and medium markets that the RBI would follow a
term, and the best they will do is to time-
against the rupee. visible forward curve, allowing both
correct, maybe not price-correct. There is significant importers and exporters to plan their
So the biggest value just now is to upside left if the rupee hedging levels year to year.
buy the dollar against the rupee. Even Why has the RBI allowed the rupee to
after paying the forward premia, there is
corrects back to the pierce those levels? Does it really believe
significant upside left if the rupee fair value. that expectations of such productivity
corrects back to the fair value. If the gains are justified and that the rupee
reversion is quick, the carry cost will be deserves such a valuation premium.
just about a rupee, while the upside is about `4. How can that be, when inflation targets were hiked in
Go back to 2007, when the Nifty was at 6,300 and the the same meeting that RBI stayed mute on liquidity
dollar was at 42, going down to 40. A year later, the Nifty hardening measures.
was at 2,300 and the dollar was (with a time lag) at 52. If This is no longer a valuation issue, but an issue on
a person had exited the equity market at that time and macro management, which has the potential to
bought dollars, he would have been a very rich man. seriously distort the competitiveness of Indian
This time, if theres a crisis, it will come from exporters, especially in an environment when our
global cues, particularly an American recession. most important trading partner is actually seeing a
Strong domestic flows will put a bottom to the Indian softer currency. Going by the technical indicators
equity markets, and this caps the downside to about 10 above, this is the first time that the RBI has
per cent. The rupee also wont go into crisis, but it will communicated to the currency markets that it is
certainly be bearish. comfortable with serious rupee overvaluation, eroding
Brazil had talked of a Tobin tax on the kind of its own credibility in managing the dirty float of the
irrational flows that went into the real (the Brazilian rupee. The credibility will not be easy to retrieve, and
currency) and created a 36 per cent appreciation in the India will be targeted for more such currency attacks,
currency. Can you imagine what would happen to which will increase volatility in the rupee, exactly
India if similar irrational flows came into Indian what the RBI is trying to prevent. WI
rupee just now? The author teaches, trades and writes at spandiya.blogspot.com

THE CHARTIST
Power play
Electricity is a hot topic in the Indian context
socially, economically and politically
DEVANGSHU DATTA
No modern society can survive and attention. Second, state electricity regulatory
grow without reliable, affordable power. This gives the commissions were set up to control tariffs; there is
power sector a social dimension as well as a purely also a Central Electricity Regulatory Commission.
economic role. Unfortunately, it also means that political Accounting was made more transparent so that it
parties use cheap power as a lever for winning votes. became a little clearer how much subsidy states were
The sector faces continuous political interference. handing out. States were offered incentives to reduce
The Centre, states and private players co-exist. Many losses under programmes like the APDRP, Accelerated
states offer free or highly discounted power to farmers Power Development and Reforms Programme.
and households. These freebies are cross-subsidised by Central power utilities, such as NTPC and Power
charging very high tariffs from industry. In addition, Grid Corporation, were also guaranteed payments by
there is rampant power theft, with units consumed states, which made tripartite agreements with the
being written off as transmission and utilities and the RBI. This was one form
distribution losses (T&D losses). of temporising. At least some payments
Over the years, huge losses have POWER DOWN were made to the PSUs.
accumulated. The sectors accumulated The power sectors But losses continued to rise. Private
losses are equivalent to about 4 per cent of accumulated losses power producers are also often owed a
GDP. In addition, bulk of all non- backlog. Players in other areas such as
performing assets bad bank loans and are equivalent to about manufacturers of cables, transmission
bad debts sourced from other lenders 4 per cent of GDP. equipment, etc., ended up with large
are in the power sector. State utilities owe State utilities owe the collectibles from state units. And, of
the equivalent of 3.5 per cent of GDP to course, state units lack the resources to
sundry creditors. Banks have more or less equivalent of 3.5 per invest in much-needed improvements.
stopped lending to power-sector companies cent of GDP to sundry Other reforms like open access, where
and power projects. creditors. consumers can buy their power from
Successive governments have tried, in anywhere have not been implemented.
half-hearted fashion, to correct the Open access would reduce the power of a
situation. When a political party is in power (at the given state to charge high industrial tariffs since
state level), it may try to cut losses. When a party is industry could then buy from elsewhere.
campaigning, it promises more freebies! The latest scheme for cleaning up losses is the
UDAY (Ujwal DISCOM Assurance Yojana) plan. This
Reforming the sector allows states to directly take over debt owed by state
Despite this push and pull, some reforms have gone utilities to banks. By late 2015, banks were owed `5.8
through. First, state electricity boards were split up, lakh crore by the power sector. Thats about 22 per
usually into three separate companies that handled cent of all outstanding bank debt. About `4.3 lakh
generation, transmission, distribution and collection. crore was owed by state utilities. Another `1.34 lakh
This helped figure out which stage of the business in loans to private players was also reckoned to be
suffered maximum losses and hence needed most high risk by CRISIL.

THE CHARTIST
UDAY conceptualised splitting cause a problem. There are many

outstanding state utility debts. Respective
POWER WOES assembly elections through the next two
states would directly take over a large part Much of the installed years, culminating in the general
(maximum of 75 per cent) of the loans and capacity is loss making election in 2019. Chances are the UDAY
issue bonds to repay and refinance those reform process may stall or deteriorate.
loans. Discoms (distribution and collection
and barely used. Fuel State governments will go slow on hiking
utilities) would also issue bonds to refinance. linkages are messed up. power tariffs if we go by history. Even
UDAY sets reform targets. Transmission There are long power the BJP, which seems most committed to
and collection losses are to be reduced from reforms, recently waived over `36,000
around 22 per cent (average) to 15 per cent
cuts and shortages. crore of farm loans in UP.
by 201819. Also by 201819, negative gaps Consumers have got The mismanagement over years has
between the average tariff realised (this used to not paying. led to a strange situation. India has, on
accounts for transmission and distribution paper, far more installed capacity than it
losses since total revenue is divided by the needs. In reality, much of that capacity
units generated) and the average cost of supply will be is loss making and barely used. Fuel linkages are
eliminated. messed up. There are long power cuts and shortages.
This is important. Unless utilities hit breakeven at Consumers have got used to not paying.
the least, losses will mount. Then UDAY would just kick
bad-loan problems further down the road. Setting Come the renewables
reasonable tariffs also implies politicians will not But theres another aspect to the power sector. While
interfere too much with tariff-setting (or they will investors have been understandably cautious about
allocate necessary subsidies from state resources). conventional plays in power, theres been huge
UDAY has, over 18 months, led to significant savings investments, mostly through private equity in
in interest costs (states can issue bonds at lower interest renewables. Whats more, a combination of fast
rates). The revenuecost gap has also been reduced. But technological developments, economies of scale and big
high operational losses are still being logged by discoms. subsidies have meant that the dynamics of the
Better discom finances would in turn lead to better renewables sector have changed quickly.
private-sector power finances as well. But politics will The development of wind and solar could change

THE CHARTIST
many equations. Five years ago, solar tariffs were in the Solar requires water to keep panels clean. While
range of `15.518 per unit. The most-recent auctions thermal plants also require water, the water demand for
saw tariffs in the range of `3.15/unit. Wind tariffs are solar is often a catch-22 situation: solar works well in
now in the `3.45/unit range. This is roughly competitive sunny desert locations, which are short of water.
with thermal power current coal-based tariffs are in Renewables equipment also requires rare earth metals
the `2.503 per unit range. and China is the only source for them at present. India
If the JNN Solar Mission targets are fulfilled, solar would be vulnerable to any embargo imposed by China.
capacity will grow from 12 gigawatt in 201718 to 100 But there are also major advantages of renewables.
GW in 2022. Wind capacity is around 32 GW and the Wind and solar are both convenient off-grid options. Its
target is 60 GW by 2022. (This is deceptive. An efficient relatively easy to set up installations anywhere. This
thermal plant routinely hits plant-load factors of 95 per reduces grid dependencies. There have been a series of
cent of rated-generation capacity. In renewables, a PLF breakthroughs in storage technologies and generation
of 1520 per cent is good. So the 160 GW of solar plus efficiency. There will be more developments on both of
wind renewables is equivalent to about 3540 GW of these fronts. Lab demonstrations suggest that battery
thermal capacity. ) technology could become 30 times as
Economies of scale and improvements efficient, which would help solve the
in technology will lead to lower renewable POWER intermittency problem. Other lab
tariffs. Thats inevitable. California, for
instance, often has zero/near-zero solar
REVOLUTION demonstrations indicate that new all-in-
one thin-film panels plus storage could be
tariffs at noon, when solar generation
There are pockets the same size and weight as current
exceeds grid demand. Denmark and around the world standalone panels. Many nations are
Germany also see near-zero tariffs at peak California, Denmark, exploring rare earth mining options, so
generation. Whats more, the final product, diversification of sources may be possible.
solar power/wind power, is clean (the
Germany where What does the renewables revolution do
manufacture of the wind and solar renewables already to the power industry? It disrupts. The
equipment is not). meet close to 50 per value chain would change as renewables
Thermal depends on fossil fuels like become bigger. Industry, which is reeling
coal, gas, naphtha or bagasse and alcohol.
cent of the overall power from high tariffs and unreliable power can
Apart from being polluting, fossil fuels demand. Theres no set up captive sources. So can households.
have cyclically variable prices. These are reason why this wouldnt The badly run state utilities lose effective
likely to get more expensive since those monopolies.
commodity cycles are at lows. India is
happen in India as well. This changes the investment
dependent on fossil imports. This means perspective. As of now, the renewables
thermal power will get more expensive at some stage, sector has little in the way of listed options and those
even as solar and wind get cheaper. At the peak of the companies arent necessarily doing well. There are
next commodity cycle, fossils could easily cost over huge amounts of investment required. Every gigawatt
twice as much. Meanwhile, levelised wind and solar of capacity will cost about `6 crore (the estimates could
costs could easily drop to half the current levels. drop radically). But at this stage, the ordinary investor
Renewables are not magic. There are plenty of cannot participate in the investment process. But it
problems. Generation is intermittent. Issues with would be wrong to ignore whats happening in
voltage can make it hard to wheel onto grids. Storage is renewables. Most investors, including banks and
also expensive. Otherwise, solar could generate excess NBFCs in this space, are misreading the situation
power during daylight to be stored to use at night. because they see conventional and renewables as
There are environmental impacts, though these are separate entities.
less than those with thermal. The thermal value chain I also suspect policymakers are unaware of how fast
involves mining, making equipment (involving cement, things could change. As of now, thermal provides about
steel and other metals) with huge environmental 75 per cent of grid power in India. There are pockets
impact, and generating power with toxic smoke as a around the world California, Denmark, Germany
waste product. Wind and solar have no polluting fuel where renewables already meet close to 50 per cent of
needs. But wind power and solar can kill birds (apart the overall power demand. Theres no reason why this
from hitting turbines, birds lungs can explode due to wouldnt happen in India as well. WI
pressure differences if they fly close to a turbine). The writer is an independent financial analyst.

MAIN STREET
Pains not over yet

The impact of demonetisation is likely to be felt in Q4 also.
An expensive stock market looks dicey as well.
SAURABH MUKHERJEA
As 86 per cent of the currency in channel stuffing by manufacturers who found

circulation in a cash-driven economy was outlawed on themselves besieged by dealers and distributors who in
November 8, 2016, the activity in both the formal and turn wanted to get rid of their old currency notes.
informal sectors came to a standstill. As the economy Second, postponement of bad news by lenders who
recovers from the shock of demonetisation and as (sensibly) slowed the pace of lending radically in light
remonetisation takes place, a recovery from the lows of demonetisation. They did not have to recognise the
seen in Q3FY17 is obvious. However, what is critical to incremental impairment caused by demonetisation in
note is that the large informal economy will shrink Q3FY17 thanks to the 90-day past-due delinquency rule.
rapidly as the government makes it difficult for I believe that the impact of the black-money
businesses to operate in the informal sector without crackdown and demonetisation is likely to show up in
paying taxes. Our travels to the interiors of tier-2 and the Q4FY17 results season. Cement volume growth for
tier-3 Indian cities suggest that the informal sector is the whole quarter is likely to be down, around 8 per
shrinking rapidly and hence downsizing its workforce. cent, and the pricing is expected to remain weak for
Moreover, throughout the country, small and medium most of the regions on a QoQ basis. The indigestion in
enterprises (SMEs) are struggling to adjust to the new the distribution channel will lead to a slowdown in
normal, with less cash and more tax compliance. demand (which is already evident in the FMCG and
A historical mandate earned by the NDA at the two-wheeler spaces) as asset-quality-impairment
Centre in May 2014 and a pro-business prime minister related challenges catch up with lenders. On the positive
have not been able to revive corporate earnings side, however, demonetisation seems to have had a
materially. Over FY1416, the benchmark Sensex index temporary impact on sectors like passenger vehicles
EPS growth stood at a measly 1.7 per cent on an (PVs) and other consumer discretionary as low-ticket
annualised basis. At 3-4 per cent, the story for FY17 item categories like apparel/multiplexes witnessed
doesnt look to be turning out any different. A large part steady revenue recovery. Most of the consumer-
of the blame for such lacklustre earnings growth discretionary companies in our coverage universe
resides with the banking sector, which forms a chunky should report double-digit growth. Similarly, under
32 per cent of the index weight. A continuously capital goods, execution across sub-sectors is likely to
increasing stress on banks balance sheet, combined be strong, led by a pick-up in the infrastructure-led
with a muted credit growth, has led to a decline of 35 demand (and possibly low base).
per cent in banks aggregate earnings over FY1416. Valuations of the Indian equity markets have run
Going into FY18 as well, we expect EPS growth for way ahead of the underlying fundamentals and any
Sensex to be at best 10 per cent. Ambits banking team negative surprise with respect to earnings is likely to
remains one of the biggest bears on the banking space lead to a significant correction. The Indian stock
(we have a sell on all the 14 banks under our coverage). markets misery could be compounded if the US Federal
From a quarterly standpoint, we reckon that the EPS Reserve continues hiking rates repeatedly (which it has
hit will be even more pronounced in Q4FY17 than it was promised to do). WI
in the December quarter given that the results in the Saurabh Mukherjea is CEO - Institutional Equities at Ambit Capital and
quarter gone by were flattered by two factors. First, the author of The Unusual Billionaires and Gurus of Chaos.

COMPANIES
WITH MOAT
The watch list

Being near-monopolies, these companies have high chances
of delivering consistent returns
T
he concept of moats was popularised by Warren In the last anniversary issue of Wealth Insight, we
Buffett. In business, a moat means a competitive had presented the latest list of moat companies in
advantage or a barrier to entry. Companies that India. The following watch list gives moat companies
enjoy moats have a near-monopoly. They ensure with their updated numbers. Many of these companies
consistency of returns. Hence, moat investing is a have high valuations, which may not make them an
sophisticated form of fundamental investing. ideal buy currently. WI
Companies with moats

Company name Sector ROE (%) Price to book Price to earnings 5Y median P/E Price (`) 52-week high-low (`)
AIA Engineering Capital Goods 19.4 5.43 30.3 20.1 1,529 1641-915
Amara Raja Batteries Automobile 25.8 5.94 30.3 28.1 867 1077-821
Asian Paints Chemicals 34.4 13.81 54.8 46.8 1,078 1230-850
Bajaj Auto Automobile 29.5 4.83 19.5 19.5 2,837 3122-2366
Bajaj Corp FMCG 40.5 12.80 29.0 27.9 429 436-340
Bajaj Finance Finance 21.1 7.63 41.0 17.4 1,269 1291-677
Bayer CropScience Chemicals 15.9 6.43 39.1 27.7 3,800 4627-3627
Bharat Electronics Capital Goods 15.9 4.10 24.4 17.6 170 178-108
Blue Dart Express Logistics 53.5 23.80 76.5 68.1 5,015 6406-4162
Bosch Capital Goods 15.0 6.68 51.1 43.8 23,246 25650-18005
Britannia Industries FMCG 53.5 16.42 47.2 34.2 3,400 3575-2524
Castrol India Automobile 114.7 35.79 31.6 33.4 431 495-354
Colgate-Palmolive FMCG 64.4 18.78 47.4 40.1 1,011 1033-788
Container Corporation Logistics 10.1 3.31 43.2 24.7 1,176 1235-844
CRISIL Ratings 36.2 15.06 43.6 43.8 1,996 2490-1865
Cummins India Automobile 22.2 7.33 37.2 29.5 993 1005-747
Dabur India Diversified 34.1 10.17 39.6 36.9 287 320-259
Divis Laboratories Healthcare 28.6 3.35 15.4 25.0 649 1380-612
Emami FMCG 27.2 13.55 69.7 38.2 1,023 1261-937
Essel Propack Plastic Products 21.0 3.53 19.8 13.9 237 264-171

COMPANIES
WITH MOAT
Company name Sector ROE (%) Price to book Price to earnings 5Y median P/E Price (`) 52-week high-low (`)
Exide Industries Automobile 17.7 3.91 27.3 23.1 227 235-133
FAG Bearings India Automobile 14.2 5.33 39.7 32.4 4,650 4998-3780
GSK Consumer Healthcare FMCG 30.1 7.60 33.7 37.2 5,297 6584-4650
HCL Technologies IT 22.5 3.78 14.4 16.1 811 890-707
HDFC Bank Bank 18.6 4.34 26.5 24.0 1,439 1478-1072
Hero MotoCorp Automobile 42.1 6.01 18.5 19.5 3,225 3740-2829
Hindustan Unilever FMCG 103.5 28.07 45.4 40.0 923 954-783
HDFC Finance 16.6 4.09 20.5 19.5 1,475 1536-1076
Indraprastha Gas Inds. Gases & Fuels 17.9 5.06 26.5 13.3 1,030 1071-556
Infosys IT 22.7 3.11 14.9 18.1 931 1278-900
ITC FMCG 30.7 8.12 33.9 30.7 280 292-204
Marico Agri 37.7 14.57 50.6 38.4 301 308-235
Maruti Suzuki Automobile 17.8 5.35 27.2 26.4 6,089 6356-3654
MRF Automobile 41.5 3.11 16.7 10.2 60,614 62248-30464
Navneet Education Media & Entertainment 22.1 5.06 25.0 15.9 164 175-85
NBCC Realty 21.9 9.56 49.8 39.9 178 199-118
Nestle India FMCG 19.9 20.61 67.1 50.6 6,444 7390-5490
Oracle Fin. Services Software IT 32.9 6.72 27.0 24.2 3,740 4089-2796
Pidilite Industries Chemicals 30.0 10.67 42.7 39.6 712 770-569
Power Grid Corporation Power 14.8 2.15 14.5 14.0 199 209-140
P&G Hygiene & Health Care FMCG 30.9 13.55 51.8 48.6 7,372 7611-6025
Siemens Capital Goods 49.2 6.86 15.8 56.6 1,299 1355-1011
SKF India Automobile 17.2 4.61 34.1 29.3 1,534 1622-1170
Sun Pharmaceutical Healthcare 20.5 4.32 22.3 33.8 692 855-572
Sundaram Finance Finance 14.7 4.96 38.1 29.3 1,640 1725-1089
TCS IT 42.0 5.51 17.6 22.5 2,328 2740-2055
Titan Company Diamond & Jewellery 21.0 10.34 57.4 39.6 483 495-296
Zee Entertainment Media & Entertainment 26.6 9.57 51.9 32.7 522 589-396

Vis--vis
Cooling champs
Here is how the top two air-conditioning solution providers, Blue Star and
Johnson Controls, stand in comparison to each other
Blue Star Johnson Controls-Hitachi
Blue Star was founded in 1943 by a three-member The company was initially incorporated as Acquest
team led by Mohan Advani. Initially, the company Air Conditioning Systems in 1984. It launched
was engaged in refurbishment of ACs and Hitachis, a Japanese firm, ACs in India in 1991.
refrigerators. Later it acted as distributor for many Thanks to its global joint venture with Johnson
international AC makers. Today it controls 12 per Controls and Hitachi, in 2015, the company changed
cent of Indias AC market. Its higher revenues, in its name to Johnson Controls-Hitachi Air
spite of having a similar market share as Johnson Conditioning. Currently, it controls 11 per cent of
Controls, are due to its industrial segment. the Indian AC market.
Financials All numbers in ` cr Financials All numbers in ` cr
Operating Net Net Total Cash from Market Operating Net Net Total Cash from Market
Revenue profit profit worth debt operations cap Revenue profit profit worth debt operations cap
4,125 249 98 490 365 242 6,546 1,809 156 69 358 160 62 4,859
Price chart P/E chart

1400 Blue Star Johnson Controls - Hitachi 120 Blue Star Johnson Controls - Hitachi
1050 90
700 60
350 30
0 0
Apr 2012 Apr 2017 Apr 2012 Apr 2017
5.9
7.9 64.9 9.1 1.0 0.7
2.3
3.5 70.4 11.7 0.1 0.5
Price to earnings Price to book Dividend yield (%) Debt to equity
Net margin (%) Operating margin (%)
Five-year annualised growth
22.9 60.3
18.9 48.7
40.2
16.3 14.9
18.3
8.3 11.1
Revenue (%) Operating profit (%) EPS (%)
Return on capital employed (%) ROE (%) FY16 and TTM data. Price-related data as on April 21, 2017.
!
Indias AC market is highly under-penetrated. Its current size is just 3.75 million units, with 3 per
cent penetration. Estimates point that the AC industry is growing at over 25 per cent CAGR and
should touch a market size of 10 million units, with 11 per cent penetration, by 2020. This will still be
much lower than the global size of 100 million units, with 30 per cent penetration.

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STOCK ANALYSTS
CHOICE
Our scorecard
O Performance
ver the years, we have analysed and recommended sever-
al stocks. The table below shows our performance since
July 2011. Yes, we have a few failures, but we also have Total returns* since July 2011
25.0% 12.2%
many successful picks. A portfolio comprising the stocks below
has delivered an IRR of 24.97 per cent, including dividends,
assuming one had invested `10,000 in each of the stocks at the
time of the recommendation. In all one would have invested
`10,10,000. The current value comes to `27,39,055 (including divi-
dends) on April 17, 2017, whereas investing the same amount in Stock Analysts Choice Nifty 50 Index
the Nifty would have generated `16,90,523 (including dividends),
yielding 12.19 per cent, as per the total returns index. WI *As on April 17, 2017
Recommended Current Value of `10K

Recommendation date price (`) price (`) invested (`) Total return (% per annum)
Jul-11 Asian Paints 295 1,064 36,035 25.7

Bosch 6,917 23,200 33,540 24.0
Castrol India 244 431 17,613 12.1
Colgate-Palmolive 458 1,005 21,934 16.4
CRISIL 693 2,004 40,070 21.8
Cummins India 481 964 20,048 15.1
Exide Industries 149 227 15,196 8.6
ITC 123 282 22,867 17.4
Larsen & Toubro 1,095 1,680 15,338 8.7
Nestle India 3,888 6,330 16,281 10.0
NMDC 258 128 5,004 -7.3
Pidilite Industries 159 712 44,665 30.4
Titan Company 229 485 21,185 14.0
Aug-11 Lupin 461 1,419 30,803 22.3
Opto Circuits 213 11 493 -40.3
Sep-11 Bank of Baroda 152 177 11,661 3.4
Castrol India 254 431 16,924 11.6
Power Grid Corporation 103 201 19,601 14.6
Rural Electrification 87 200 23,094 21.3
Tata Coffee 70 125 17,788 11.2
Torrent Power 211 214 10,147 1.5
Zee Entertainment Ent. 123 522 42,268 29.9
Oct-11 CMC* 858 2,032 23,674 25.7
Graphite India 78 125 16,129 12.0
Zylog Systems 197 4 224 -48.2
Nov-11 Godrej Consumer Products 397 1,670 42,119 30.8
Returns for less than one year are absolute. Total returns include dividend income. Returns as on April 17, 2017. Transactional fees not taken into account.
*
CMC merged with TCS with effect from September 29, 2015. Its current price is the last traded price.

STOCK ANALYSTS
CHOICE
Tata Consultancy Services 1,087 2,304 21,205 17.8

Transformers & Rectifiers 197 453 22,970 16.4
Dec-11 Gujarat State Petronet 92 175 18,947 13.4
Noida Toll Bridge 23 12 5,043 -1.5
Tata Motors 180 451 27,357 20.2
Jan-12 GAIL 291 390 13,383 7.8
Mahindra Lifespace 245 408 16,656 12.5
MRF 6,859 61,601 89,753 51.3
Mar-12 Bajaj Finance 83 1,269 170,084 72.0
Gabriel India 23 124 54,374 40.5
Opto Circuits 221 11 475 -44.4
Apr-12 Shriram Transport Finance 581 1,051 18,078 13.6
TTK Prestige 2,647 6,327 23,905 19.3
May-12 Bata India 423 572 13,532 6.9
GSK Consumer Healthcare 2,770 5,229 18,876 14.8
Swaraj Engines 395 1,472 37,275 35.6
Jun-12 Ajanta Pharma 75 1,760 233,455 91.4
Elecon Engineering 53 63 11,850 5.8
Kirloskar Pneumatic 470 1,275 27,131 24.3
Aug-12 Hero Motocorp 2,082 3,240 15,562 13.0
Supreme Industries 237 1,087 45,911 40.5
VST Industries 1,695 3,180 18,765 17.0
Sep-12 Amara Raja Batteries 195 856 43,889 38.4
Redington India 71 115 16,095 12.5
Oct-12 Lupin 567 1,419 25,005 22.9
MindTree 172 437 25,425 25.8
Solar Industries 197 826 42,015 37.8
Nov-12 Grindwell Norton 130 381 29,309 28.9
KPIT Technologies 120 129 10,745 2.6
Mcleod Russel 306 180 5,895 -9.6
Dec-12 City Union Bank 53 150 30,560 28.1
Petronet LNG 158 438 27,787 27.1
Wockhardt 1,647 758 4,601 -15.4
Feb-13 Balkrishna Industries 290 1,407 48,477 45.9
KEC International 64 215 33,717 34.0
Torrent Pharmaceuticals 365 1,452 39,745 42.0
Mar-13 Emami 410 1,022 24,916 25.8
Gruh Finance 108 374 34,672 36.2
Returns for less than one year are absolute. Total returns include dividend income. Returns as on April 17, 2017. Transactional fees not taken into account.

STOCK ANALYSTS
CHOICE
Apr-13 Berger Paints India 69 243 35,382 37.1

Innoventive Industries# 103 4 407 -62.8
May-13 Kaveri Seed Company 252 548 21,761 22.3
Navneet Education 57 165 28,779 33.4
V-Guard Industries 35 180 51,938 51.9
Aug-13 Cairn India 296 289 9,770 1.7
Indraprastha Gas 309 1,046 33,882 40.3
Nesco 730 2,480 33,978 39.2
Nov-13 Bajaj Corp 237 400 16,839 20.5
HCL Technologies 581 816 14,047 13.1
Dec-13 Voltas 89 406 45,383 57.2
Feb-14 J&K Bank 135 78 5,802 -14.3
Tata Consultancy Services 2,213 2,304 10,410 3.6
Mar-14 Cummins India 433 964 22,242 32.1
Swaraj Engines 622 1,472 23,682 36.2
Apr-14 AIA Engineering 560 1,525 27,237 39.9
Godrej Consumer Products 764 1,670 21,864 29.5
May-14 Rallis India 167 248 14,841 15.3
Titan Company 256 485 18,971 24.6
Jun-14 Finolex Cables 164 545 33,231 52.2
NBCC 40 179 45,290 69.6
Aug-14 Gateway Distriparks 232 280 12,073 9.7
GMDC 154 123 7,979 -5.7
V-Guard Industries 47 180 38,351 63.7
Sep-14 Finolex Industries 297 570 19,213 30.2
Hindustan Media Ventures 155 291 18,797 27.6
Oct-14 Mahindra Holidays & Resorts 299 446 14,922 17.8
Tata Coffee 93 125 13,435 13.1
Nov-14 Infosys 966 926 9,579 0.4
Tata Motors 482 451 9,763 -2.7
Jan-15 Apollo Tyres 208 229 11,008 5.0
Mar-15 Ipca Laboratories 681 609 8,940 -5.0
Voltas 256 406 15,824 24.4
Apr-15 Astral Poly Technik 449 565 12,585 11.8
VST Tillers Tractors 1,380 1,830 13,262 15.6
May-15 Just Dial 1,253 507 4,044 -36.2
Shriram Transport Finance 1,099 1,051 9,562 -1.3
PORTFOLIO TOTAL 26,47,216 25.0
#
Stopped trading since Jun 13. Returns for less than one year are absolute. Total returns include dividend income. Returns as on April 17, 2017.
Transactional fees not taken into account.

STOCK
SCREEN
Ideas to delve deeper

S
ound investment methods outlast cycles and them to your portfolio. Each stock screen explains the
fads and generate profits over the long run. reason behind the stock and its suitability to investors,
Value Research presents stock screens based on which over time will help you develop your own
time-tested principles that have been validated investing rules. As we will be evolving such models and
for every type of investor. implementing changes to the methodology to be in line
In each issue, we share a listing of attractive stocks with economic and market cycles, the list will be
based on the objective principles of sound investment. dynamic and updated periodically.
We apply stock filters carefully crafted by Value In the following pages of Stock Screen, we present
Research analysts on the universe of Indian stocks to five stock ideas that collectively list 67 unique stocks
identify these attractive stocks. The filters are devised that have strong reasons to find a way into your
to identify stocks of the following kind: portfolio. With these, you will be well-equipped to
Quality stocks available cheap select stocks to build your own portfolio. If you think
ttractive blue chips
A that this is a lot of hard work, you can get started with
Stocks available at a steep discount to book value the stock screens and with time understand the way
High dividend-yield stocks the ideas are shaping to make your own judgement on
Growth stocks available at reasonable prices stock selection. Great investments are not easy to
We believe that stocks listed in this section are a good find, but practice, patience and sound principles are
starting point to start a close scrutiny before adding all that you need.
Glossary
Current ratio It is the ratio of a companys current assets (the most liquid assets, Debt-equity ratio (DE Ratio) The debt-equity ratio is calculated as the ratio of
such as cash and cash equivalents, account receivables, etc.) to its current liabil- total outstanding borrowings of the company to its total equity capital. The DE ratio
ities (liabilities that are closest to maturity and hence need to be paid back first). essentially tells which companies use excessive leverage to achieve growth.
By comparing the latter with the former, an investor can get an idea of how liquid Conventionally, the DE ratio of less than two is considered safe.
a companys assets are. Return on equity (RoE) This is measured by taking profit after tax as a percent-
However, in certain circumstances, a high current ratio could be due to the fact age of net worth of the company. It indicates how efficiently the company has been
that the company is facing problems in recovering its receivables. Alternatively, it able to utilise investors money.
could be facing a problem in selling its inventory, which is why the current ratio may Net worth Net worth is the net value of the company that shareholders can claim
be unusually high. in case of a bankruptcy. It is composed of broadly the equity capital and the
Universe companies (930) We have revised our universe. We checked if the reserves held by a company. One risk in using this indicator is that companies
companies traded on all the days for the last two quarters. We considered the could potentially inflate this figure by issuing more equity at regular intervals.
companies with a market capitalisation of more than `400 crore. Stock return (stk return) Stock return is calculated by taking the percentage
Price to book value (P/BV) Price to book value is the ratio of the price of a change in the price of the stock adjusted for bonus or split.
stock to the book value per share of the company. It shows how much premium Dividend yield (yield) This is defined as the percentage of the dividend paid per
investors are willing to pay for the underlying net assets of the company. share to the current market price of the stock. Since the denominator in this ratio
Price to earnings (P/E) The price-to-earnings ratio, or the P/E ratio, is simply is the market price, a stocks dividend yield changes every day.
the ratio of the price of a stock to its earnings per share. It shows in multiples how Price-earnings to growth (PEG) This ratio demonstrates how high a price we are
much investors are willing to pay for the earnings. The thumb rule of valuing a stock paying for the growth that we are purchasing. It is the ratio of price to eanings to EPS
is that a high-growth stock will have a high P/E ratio, while a value stock will have growth of the stock. In all our analyses, we have taken five-year historic EPS growth.
a relatively lower P/E ratio.
Dividend payout ratio (DPR) This is the total dividend paid to the shareholders
Earnings per share (EPS) Earnings per share, or EPS, is calculated by dividing as a percentage of net profit
the companys net profit with the total number of outstanding shares.
Operating profit margin (OPM) OPM is operating profit as a percentage of net
Earnings yield EBIT divided by enterprise value. Enterprise value is market cap sales.
added to total debt and less cash and equivalents.
Net profit margin (NPM) NPM is the net profit as a percentage of total
Net sales This is simply the income that a company derives by income (sales plus other income)
selling the goods and services that it produces.
Stock style It indicates the style of Growth Value
The downside of taking sales as an indicator of growth is that it may not be the stock. It is derived from a combi-
matched by a similarly scintillating bottom-line performance. A company may be nation of the stocks valuation Large
earning revenue at a high rate. But if it is doing so by incurring a very high cost, growth or value and its market
the bottom line may not grow in proportion to the growth in the top line. capitalisation large, mid and small. Mid
Interest coverage ratio (ICR) This indicator is generally used to gauge whether a For example, on the right we have
company has the ability to service its debt. The interest coverage ratio is calculated as shown the stock style of a large-cap
the ratio of operating profit to interest outgo. A company with ICR of more than two growth stock. Small
implies that it can service more than twice its current interest charges.

STOCK
SCREEN
Quality stocks available cheap

I
n the stock market, what The list given below has been
matters most is safety of capital. obtained by applying the four filters
While generating returns is listed above. Banking and finance
indeed the ultimate goal, companies were removed from this
prudent investors first ensure that analysis as the metrics dont apply REASONS TO INVEST
their principal is not at risk. How to them. There is one new entrant Safety
do you ensure whether the company in the list as compared to the list
you want to invest in is sound or last month: Pokarna. Soundness
not? You can use the essential- In order to understand how the Good performance
checks feature available on the four metrics work, visit Value
Reasonable valuations
stock pages on Value Research Research Online stock pages. WI
website.
The feature has the following
underlying metrics:
Altman Z-Score: Predicts the likelihood
of financial distress THE FILTERS
Modified C-Score: Tells the probability Z-Score greater than 2.99
of creative accounting F-Score greater than or equal to 8
Piotroski F-Score: Highlights financial C-Score less than 4
performance as compared to that in PEG less than 1
the previous year
P/E to median P/E less than 1.5
Reasonable valuations: Valuation
Earnings yield greater than 5%
filters (PEG and P/E) are listed in
the box The Filters.
Companies that clear all the essential checks

For updated numbers, visit: www.ValueResearchOnline.com
Stock Altman Piotroski Modified Earnings Market Share 52-week
Company style Z-Score F-Score C-Score yield (%) P/E PEG cap (` cr) price (`) high/low (`)
Ahluwalia Contracts 6.41 8 2 7.5 24.2 0.14 2,237 334 354-240

Construction - Real Estate
Allsec Technologies 20.66 9 2 11.4 9.9 0.28 563 369 464-135

BPO/ITeS
Apar Industries 3.67 9 2 10.8 17.7 0.42 3,013 787 822-460

Electric Equipment
Bharat Petroleum 3.89 8 3 10.4 12.1 0.25 105,693 731 741-441

Refineries
Century Enka 4.38 8 0 14.8 10.9 0.34 951 435 454-188

Textile
Essel Propack
Plastic Products 4.60 8 1 7.4 19.8 0.55 3,727 237 264-171
Firstsource Solutions
BPO/ITeS 4.67 8 1 11.3 9.4 0.31 2,771 41 54-31

STOCK
SCREEN
For updated numbers, visit: www.ValueResearchOnline.com
Stock Altman Piotroski Modified Earnings Market Share 52-week
Company style Z-Score F-Score C-Score yield (%) P/E PEG cap (` cr) price (`) high/low (`)
GE Shipping
Shipping
3.77 9 1 14.6 8.0 0.36 6,375 423 447-297
Harita Seating
Auto Ancillary
4.33 9 1 5.5 20.0 0.38 550 708 790-480
KEI Industries
Cable
3.47 9 2 12.5 17.1 0.41 1,492 192 204-95
KPIT Technologies
IT - Software
8.40 9 2 14.7 9.3 0.55 2,552 129 197-121
Maithan Alloys
Ferro & Silica Manganese
5.35 8 3 15.2 8.8 0.49 1,241 426 482-155
Maruti Suzuki India

Automobiles - Passenger Cars
12.05 8 2 5.1 27.2 0.84 183,947 6,089 6356-3654
Nitin Fire Protection

Engineering-Industrial Equipments
3.07 9 3 14.0 6.9 0.71 696 24 39-21
NOCIL
Chemicals
5.93 8 1 10.2 13.9 0.46 1,631 100 103-47
OCL India
Cement & Construction Materials
4.11 9 0 12.4 14.1 0.41 5,707 1,003 1037-456
Pokarna
Ceramics//Granite/Sanitaryware
3.22 8 1 9.5 14.6 0.14 838 1,352 1383-710
Srikalahasthi Pipes
Castings/Forgings
3.72 9 3 13.5 9.9 0.11 1,533 386 399-226
Stovec Industries
Textile - Machinery
6.08 8 0 6.9 20.6 0.47 515 2,466 2580-1860
Sunflag Iron & Steel
Steel & Iron Products 3.08 8 2 14.7 10.2 0.58 688 38 42-21
The Byke Hospitality
Hotel, Resort & Restaurants 27.24 9 1 5.8 27.0 0.40 814 203 209-151
Thirumalai Chemicals
Chemicals 5.06 9 2 13.4 12.0 0.22 908 887 984-205
Torrent Pharmaceuticals
Pharmaceuticals & Drugs 4.64 8 0 5.6 22.7 0.84 24,619 1,455 1768-1186
Ultramarine & Pigments
Chemicals 10.33 8 2 9.1 16.5 0.84 527 180 212-118
Vadilal Industries
Consumer Food 3.69 9 2 6.3 32.8 0.90 663 923 1015-450
Venkys
Agriculture 3.43 8 2 11.6 15.3 0.73 1,515 1,076 1159-362
Data as on April 13, 2017. Indicates new entrants.

STOCK
SCREEN

B
lue-chip stocks are shares in wealth can be created without taking REASONS TO INVEST
the largest, consistently much risk. This months list of blue Liquidity
profitable and the most- chips has three new entrants. WI Large companies in
prestigious companies. respective businesses
These stocks command a valuation
premium because of their consistency Strong balance sheets
in performance and because of the THE FILTERS Liked by institutions
fact that these stocks have already Companies with a capitalisation of
been discovered. above `4,150 crore
There is a belief that such stocks Annualised earnings growth of more
are less risky as compared to smaller than 20 per cent over the past five
stocks. This is true to a certain extent years
as the intrinsic risk with blue chips Debt-equity ratio of less than two
is low; many of these have large Interest coverage ratio should be
market shares and strong balance more than two
sheets. In a bear market, blue chips
Five-year average return on equity
tend to fall less than mid and small
above 20 per cent
caps do. Hence, they provide a solid
foundation to your portfolio. Average ROE should not have fallen
If an investor invests in a basket more than 20 per cent in any year
of blue chips that are doing well, over PEG of less than 1.5
a period of time, a large amount of

Stock Debt-equity Int coverage RoE avg EPS growth Mkt cap Share 52-week
Company style P/E PEG ratio ratio 5Y (%) 5Y (%) (` cr) price (`) high/low (`)
Ajanta Pharma
Pharmaceuticals & Drugs
31.22 0.58 0.08 112.94 36.15 54.30 15,584 1,771 2150-1400
Alembic Pharmaceuticals
29.34 1.08 0.08 219.95 40.28 27.29 11,775 625 709-516
Amara Raja Batteries

Batteries
30.34 0.81 0.04 1490.06 27.92 37.59 14,804 867 1077-821
Atul
Chemicals
25.96 0.83 0.24 15.54 23.18 31.29 7,374 2,486 2532-1704
Eicher Motors
Automobile Two & Three Wheelers
46.07 1.22 0.02 233.13 33.24 37.73 71,040 26,105 26602-18006
KRBL
Consumer Food
23.92 0.48 0.71 7.78 20.85 49.49 9,624 409 432-203
Larsen & Toubro Infotech

IT - Software
13.30 0.59 0.03 73.82 41.99 22.59 12,261 719 726-595
Mindtree
IT - Software
15.59 0.76 0.02 2592.33 26.18 20.45 7,441 443 758-400

STOCK
SCREEN
Stock Debt-equity Int coverage RoE avg EPS growth Mkt cap Share 52-week
Company style P/E PEG ratio ratio 5Y (%) 5Y (%) (` cr) price (`) high/low (`)
Motherson Sumi Systems

Auto Ancillary
35.37 0.76 1.50 9.65 32.48 46.85 52,822 376 386-248
Rallis India
Pesticides & Agrochemicals
16.32 0.72 0.10 12.64 21.21 22.53 4,874 251 265-180
Relaxo Footwears
Household & Personal Products
48.69 1.38 0.49 8.76 26.36 35.34 5,916 492 526-373
Sun Pharmaceutical
22.28 0.93 0.27 15.19 24.02 23.83 166,103 692 855-572
Sundaram-Clayton
Auto Ancillary
52.30 1.31 1.10 6.64 25.76 39.81 8,043 3,975 4000-1925
Syngene International
Miscellaneous
37.95 0.82 0.86 31.74 22.48 46.06 10,452 523 663-358
Tata Consultancy Services

IT - Software
17.58 0.85 0.00 1598.37 41.62 20.64 458,686 2,328 2740-2055
Torrent Pharmaceuticals
22.69 0.84 0.70 13.72 36.83 26.88 24,619 1,455 1768-1186
Tube Investments of India

Cycles
15.96 0.44 0.43 2.41 30.26 36.14 12,683 677 730-402
Vakrangee
BPO/ITeS
36.06 0.73 0.21 11.84 26.39 49.62 17,679 334 338-160
Data as on April 13, 2017. EPS growth rates are annualised.
High dividend-yield stocks

F
alling markets give little
room for capital appreciation. THE FILTERS
However, investors can Stocks with sustained per share
benefit by investing in dividend and amount over the past
companies that pay dividends. But five years
picking a stock that boasts of the Dividend payout ratio of less than 40
highest dividend yield does not per cent
always help. You need to go deeper
Stocks with a current dividend yield of
and examine the reasons behind the
more than 3 per cent
high dividend payout. Many times a
company that pays healthy dividends invest in. So, blindly chasing the
REASONS TO INVEST
can have weak fundamentals, which current yield would be a recipe for Cushion against volatility
will keep the stock price in check. For disaster. Higher total return
instance, the company could have We have shortlisted companies
Generate regular
been distributing the profits because with sustained per share dividend,
tax-free income
there is dearth of profitable keeping in mind that yield shoots up
opportunities or new projects to when the share price drops. WI

STOCK
SCREEN
High dividend yield
Stock Dividend Dividend Dividend pay- Avg div Mkt cap Share 52-week
Company style P/E PEG per share (`) yield (%) out ratio (%) 5Y (%) (` cr) price (`) high/low (`)
JSW Energy
Power Generation/Distribution
11.69 0.27 2.00 3.08 23.50 17.00 10,644 65 86-54
PFC
Finance Term Lending
6.32 0.33 13.90 4.27 29.67 90.00 42,941 163 169-78
REC
Finance Term Lending 6.71 0.39 17.10 4.13 29.67 106.10 40,840 207 211-76
SJVN
Power Generation/Distribution 10.28 1.74 1.10 3.14 32.31 10.06 14,499 35 37-26
GE Shipping
Shipping 7.98 0.35 13.50 3.19 20.03 95.00 6,375 423 447-297
Discount to book value

E
veryone loves a good
bargain. Book value is a
measure of shareholder THE FILTERS
equity and is derived by Price at least 10 per cent below the
book value
subtracting debt and other liabilities
from assets. A stock trading near or Return on net worth of more than 10
REASONS TO INVEST
below book value is of most interest per cent in the most recent year
Really cheap
as such a company can be bought for
Debt-equity ratio of less than 1.5 per Relatively undervalued
close to or less than what it is worth.
The idea of value can differ from
cent Companies with assets
person to person. For instance, for
Companies must have a five-year
some investors, 30 per cent less than
earnings growth of more than 10 per
the book value would seem to be a
cent
discount while many may find our 10
per cent figure conservative. Famed Dont be surprised by the fact that
investors like the late Benjamin there is just one company given
Graham used book value as a gauge below. The current market has got so
of liquidation value. Buying a stock overvalued that there are hardly any
below book can provide what Graham bargains remaining as far as this
called a margin of safety. metric is concerned. WI
Discount to book value

Stock Dividend Debt-equity Mkt cap Share 52-week
Company style P/B P/E PEG yield (%) ratio (%) RoE (%) (` cr) price (`) high/low (`)
GE Shipping Company
Shipping
0.76 7.98 0.35 3.19 0.70 13.23 6,375 423 447-297

STOCK
SCREEN
Reasonably priced growth stocks

G
rowth at a reasonable The criteria that we have
price (GARP) is a employed for it combines both high
combination of both earnings growth rates and low
growth and value P/Es. This will ensure that you get
investing. This strategy was the companies that are growing REASONS TO INVEST
popularised by Peter Lynch. While their earnings fast at low valuations.
All-weather style
a growth strategy is more focused This takes care of the margin of
on a companys earnings growth safety. While buying fast-growth Companies with strong
and value investing seeks companies companies, make sure that you fundamentals
having their prices below their dont pay exorbitantly for them. In Greater stability vis-a-vis
intrinsic value, growth at a small caps and smaller mid caps, value or growth
reasonable price, as a strategy, especially fast growth could be
hunts for stocks that have both quite ephemeral and may vanish in
growth potential and are also a couple of quarters.
trading at a reasonable price. A This months list has no new
typical GARP investor seeks to entrants. Tube Investments of India
invest in companies that have had a is one company that has exited from
positive performance over the past the previous list. WI
few years and which also have
positive projections.
A solid benchmark to spot a
THE FILTERS
GARP stock is the PEG ratio or the
Earnings growth of:
price/earnings growth ratio. PEG

At least 20 per cent in the past
five years
shows the ratio between a companys
P/E ratio (valuation) and its

At least 20 per cent in the trailing 12
months YoY
expected earnings growth rate over
the next several years. A GARP

At least 20 per cent in latest quarter
YoY
investor would seek out stocks that
have a PEG of one or less, which Stocks with a P/E of less than 15
helps find reasonably priced stocks.
Reasonably priced growth stocks

Stock Industry Quarterly EPS TTM EPS EPS growth Mrkt cap Share 52-week
Company style P/E P/E PEG growth (%) growth (%) 5Y (%) (` cr) price (`) high/low (`)
Ajmera Realty & Infra 12.22 27.44 0.53 175.9 68.6 22.9 758 214 224-95
Construction - Real Estate
Aksharchem 12.29 16.19 0.20 246.5 222.7 62.3 602 824 854-196
Dyes & Pigments
Balaji Amines 13.35 27.21 0.54 47.5 83.1 24.7 1,215 375 400-184
Chemicals
Bhageria Industries 14.20 16.19 0.09 162.5 128.8 161.4 527 331 453-71
Dyes & Pigments
Borosil Glass Works 11.26 27.39 0.15 1013.3 382.4 75.4 1,513 6,550 8703-2819
Glass

STOCK
SCREEN
Stock Industry Quarterly EPS TTM EPS EPS growth Mrkt cap Share 52-week
Company style P/E P/E PEG growth (%) growth (%) 5Y (%) (` cr) price (`) high/low (`)
Century Enka
Textile
10.91 25.28 0.34 75.5 114.0 31.8 951 435 454-188
Chennai Petroleum
Refineries
5.11 13.70 0.15 1488.1 31.0 33.1 5,752 386 405-179
Dalmia Bharat Sugar

Sugar
6.80 7.18 0.10 181.0 544.2 70.6 1,362 168 202-84
Excel Industries
Pesticides & Agrochemicals
10.31 37.53 0.47 933.3 67.7 21.8 492 391 496-263
GHCL
Chemicals
7.55 27.21 0.25 21.1 53.6 29.7 2,662 268 299-124
Gloster
Textile
13.40 25.28 0.49 107.5 80.7 27.1 604 577 624-201
Gujarat Ambuja Exports

Solvent Extraction
11.48 38.00 0.55 42.8 72.4 20.9 1,778 129 132-46
IG Petrochemicals
Chemicals 13.20 27.21 0.15 284.1 40.8 85.5 1,128 366 385-119
Indiabulls Housing Finance

Finance - Housing 14.76 25.36 0.24 23.8 21.3 60.8 40,468 955 1002-616
Intrasoft Technologies
BPO/ITeS 11.38 20.34 0.34 26.1 491.8 33.9 547 371 584-306
Kalyani Steels
Steel & Iron Products 10.95 14.99 0.19 31.2 36.2 57.4 1,618 371 413-155
MRPL
Refineries 6.83 13.70 0.24 92.2 219.5 28.9 20,856 119 123-63
Nocil
Chemicals 13.92 27.21 0.47 24.0 59.3 29.8 1,631 100 103-47
OCL India
Cement & Construction Materials 14.08 37.46 0.41 111.1 150.5 34.5 5,707 1,003 1037-456
PNB Gilts
Finance - NBFC 6.18 26.98 0.09 606.8 258.6 65.1 983 55 65-22
Sarda Energy & Minerals
Steel & Iron Products 7.65 14.99 0.31 1540.8 258.1 24.6 945 262 297-98
Sunteck Realty
Construction - Real Estate 7.66 27.44 0.05 269.2 395.0 140.7 2,572 408 421-174
Tamil Nadu Newsprint
Paper & Paper Products 7.47 11.30 0.33 39.2 31.9 22.4 2,218 320 392-229
Thirumalai Chemicals
Chemicals 11.99 27.21 0.24 248.8 60.0 50.1 908 887 984-205
Data as on April 13, 2017. EPS growth rates are annualised.

WORDS WORTH
NOW
Its time for taking a long jump towards

building a new India... We have done a lot of
work but it is not adequate. We have to awaken
our purusharth and work in mission mode.
NARENDRA MODI Prime minister, Mint, April 17, 2017
I think we have a healthy economy The good news is that after six years
now... Whereas before we had our foot of disappointing growth, the world
pressed down on the gas pedal trying economy is gaining momentum as a
to give the economy all the oomph we cyclical recovery holds out the
possibly could, now allowing the promise of more jobs, higher
economy to kind of coast and incomes and great prosperity
remain on an even keel... thats going forward. Cooperation
a better stance of monetary means working together to
policy. We want to be ahead of ensure that countries
the curve and not behind it. observe a level playing field.
JANET YELLEN Chair, US Fed, CHRISTINE LAGARDE IMF MD,
Mint, April 12, 2017 Financial Express, April 13, 2017
...What is important for us to understand is that the economy gets

reflected through your currency... Although strengthening of the rupee
upee
by itself will be worrying today [from the exports perspective] I will
ill
contextualize it in the Indian economys overall strengthening position.
ition.
NIRMALA SITHARAMAN Commerce minister, Mint, April 17, 2017
I used to ask central bankers [in India] why dont you have a deep enough credit market
here... They explained to me that the real reason they dont have it is
because they dont have a bankruptcy code here... So I met with
Prime Minister Modi... and I said you dont have a bankruptcy
code. He was surprised and he said what do you mean?.. So we
put a paper together and sent it over to the Prime Ministers office
and I have never seen a government move so fast... He (Modi) was
back in New York 6-9 months later and he told me were doing it.
And now what I hear from the lawyers is that it is a pretty damn
good code.
HENRY KRAVIS Co-chairman, KKR, The Economic Times, April 13, 2017

wi
th
00
s little as `5
HOW CAN I PARTNER A SUCCESS STORY

a
IF I SPOT ONE EARLY?

Being able to spot a good opportunity is a skill. And when you partner with one that has great potential and watch
it grow over time, it can bring you a lot more than you imagined. Which leads to one big question.
So what do I do with my money?

Gain from the strategic approach of investing in stocks of companies with the potential to become blue chips in
the future and remain invested in them, to potentially benefit from greater returns over the long-term.
SMALL AND MID CAP FUND

FOCUSED INVESTMENT APPROACH: Invest in stocks of companies beyond
top 100 by market capitalization
GROWTH POTENTIAL: Gain from the high return potential of under-owned

and under-valued stocks
TAX FREE: Save tax on capital gains when you stay invested for
more than 12 months
To know more, speak to your investment advisor

or visit dspblackrock.com/smc
RISKOMETER
THIS OPEN-ENDED EQUITY GROWTH SCHEME IS SUITABLE FOR INVESTORS SEEKING^
Long-term capital growth
Investment in equity and equity-related securities in companies beyond top 100 companies by market capitalization
^Investors should consult their financial advisors if in doubt about whether the product is suitable for them.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.


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Subscription copy of [pkjupj@gmail.com]. Redistribution prohibited.

Subscription copy of [pkjupj@gmail.com]. Redistribution prohibited.

Data source for stocks

Complex, Chitra Vihar, Delhi 110 092.

4 Wealth Insight May 2017

by DHIRENDRA by VIVEK by ANAND by SANJEEV by DEVANGSHU by SAURABH

8 WORDS WORTH WISDOM 22 INTERVIEW 46 COMPANIES WITH MOAT

Being Bezos The watch list

worlds biggest Cooling champs

11 MARKET COMPASS Chair, State Bank

May 2017 Wealth Insight 5

The god of growth

May 2017 Wealth Insight 7

8 Wealth Insight May 2017

Name (Mr/Ms) Phone

Subscription copy of [pkjupj@gmail.com]. Redistribution prohibited.

Key financial ratios

Next in the series THINKING QUALITATIVELY

47.3 32.1 962

40.9 41.1 1,702

35.2 57.6 747

34.7 66.1 640

29.6 33.8 1,338

25.2 15.3 29,235

24.7 61.2 180

May 2017 Wealth Insight 11

70.0 22.4 737

63.8 25.6 494 176

52.4 22.2 524 730

47.6 14.4 399

46.6 51.7 131

39.6 27.5 201

35.2 51.3 136

Data as on April 13, 2017

12 Wealth Insight May 2017

93.8 11.2 15 192

May 2017 Wealth Insight 13

Nifty FMCG Index

Dynamics of the Nifty FMCG Top gainers/losers

17,000 Britannia Industries 3,404 23.3

Godrej Consumer 1,676 21.9

33 United Breweries 754 -5.5

GSK Cons Healthcare 5,299 -12.1

Price/book value is at 3.9% premium to its five-year average of 12.1.

14 Wealth Insight May 2017

May 2017 Wealth Insight 15

The rupee impact

means export-oriented sectors will feel the heat, thus 6HFWRUVZLWKVLJQLFDQWIRUH[HDUQLQJV

16 Wealth Insight May 2017

The stockbond relationship

May 2017 Wealth Insight 17

tion levels, an investor who buys the government bond ,QIRV\VERXJKWYH\HDUVEDFN

Stock yields 2016 59.78 9.96

18 Wealth Insight May 2017

Earnings yields greater than bond rates

Polaris Consulting IT 12.5 24.3 0.00 -16.4 -12.8 -9.7 2,200

Mphasis IT 11.9 15.0 0.07 12.9 1.5 -0.2 11,387

Tech Mahindra IT 11.5 29.0 0.08 19.2 6.3 15.6 40,990

Zensar Technologies IT 11.3 30.2 0.10 -4.8 9.7 13.1 4,056

Infosys IT 11.1 31.5 0.00 4.9 10.4 11.5 2,13,076

Persistent Systems IT 10.5 25.9 0.00 10.4 9.8 18.3 4,544

eClerx Services IT 10.2 52.9 0.00 35.2 17.8 18.9 5,239

Mindtree IT 9.7 24.5 0.03 -30.7 -2.7 13.1 7,431