The Mind of a Business Analyst

Applied Lessons for Investment Bankers and Research Analysts

Manish Chokhani

September 2004

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Agenda
Components of an average recommendation What requires to be validated First Principles of Financial Analysis Valuation Principles Valuation Shortcuts and Market Cycles Business Analysis – Circle of Competence Approach Macro Economic, Political and Social Factors Buyer Characteristics and Compulsions Slotting the Recommendation Recap the Valuation

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August 2004

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An Average Recommendation
Here are the financials
Past two years, next two years Current business trajectory is good This is the P/E , this is the EPS or something similarly cheap sounding

Here are some comparable valuations
Local, regional, global

Occasionally:
Chance to buy a good business… Unique Promoter … Great Shareholders/ Funds/Pvt Equity… Backing it

So Buy It

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August 2004

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What Needs to be Validated?
Validity of business financials
Forecast Validity
Key Business Drivers Any hidden liabilities/ subsidiaries / etc Business Competitiveness Macro factors at play Appropriate Valuation Tool

Relative validity
What else is attractive Decompose by Country / Sector / Mktcap / Promoter

What is driving the deal?
Why the deal? Why Now? Who is the intermediary? Whats in it for me?

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Understand the Business Drivers VOLUME Most loved Consumer focussed UVG stories: eg CellPhones. Metals… EFFICIENCY IMPROVING ASSET UTILISATION Usually Cyclicals – Autos. Buybacks… ENAM Securities August 2004 5 . Oligopolies Excitable Commodity swings: Cement. Retail. Engineering due to operating leverage IMPROVING COST STRUCTURE/ ECONOMIES OF TECHNOLOGY Usually Engineering. Divestitures. Hosing Loans. Textiles…) PRICE Most loved Pricing Power stories: Brands. Conglomerates… RESTRUCTURING Catalysts such as Privatisation. M&A. PSUs. Media or large addressable markets globally like ITand pharma (buzz on BPO.

Case Studies Lets Examine Sustainable Valuations for Cement Autos IT Pharma FMCG Use 5 key measures that define peak valuations… Sales / G Block W Cap / Sales Sustainable or desirable OPM% Capex requirements Volume Growth Assumptions Help us to decide what we lay out and what we get back… ENAM Securities August 2004 6 .

Now Lets Attempt a DCF ENAM Securities August 2004 7 .

Markets continuously discount all of the above…

ROE : 25% P/E=20x

Use Bond Yield Reciprocal (100/8)=12.5x as benchmark

Value

ROE : 15% P/E=12x 8% Bonds Cash Time

P/E=12x

Value multiple - Predictable - Sustainable - Scaleable

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August 2004

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Understand Market Cycles – I
Bubble “Virility” Symbols (Towers, diversification/ M&A) Bad qlty of IPOs Capex > near-future reqments Interest rates spike. Huge Credit expansion Retail euphoria Shock/ Leaders in trouble

Fair to Over valuation Capex/ IPO/ Credit cycle revives Asset & Cost inflation Tourism/ Media attention “Themes” emerge, New Valuation “Paradigms”

Correction Sharp fall followed by pull back “Left outers” jump in Leadership narrows Bear Phase

Severe Undervaluation Ignored, stagnant Cheap valuations Negative press Undervaluation Important commodities take off (Steel, Gold, etc.) Catalyst/ Regulatory (eg Privatisation, LT Cap gains exemption) Easy Liquidity

Symptoms of each hump deceptively similar -- It is the QUALITY which differs: Eg high quality IPOs & Capex at “Reasonable” Valuation stage vs flood of bad IPOs & far-out-Capex at Bubble stage

Bust

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August 2004

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Resulting in a Swing in Valuation Approaches

BEAR MARKET

BULL MARKET

BUBBLE MARKET

Value

GARP

Momentum

• • •

Dividend Yield Price/BV Replacement Cost

• • • •

Payback EV/EBIDTA P/E DCF

• • • •

Technical Charts Reflexivity PE/G Option Value

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August 2004

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Valuation Measures – CASH FLOW IS THE ONLY REALITY
DCF helps to make assumptions explicit;gives a good RANGE
Use probability – don’t fudge the discount rate! Factor in uncertainties and risks Terminal Value is the key – Is all the value residing there? Wider the Optimistic-Pessimistic range – lower the valuation!

P/e

P =d/(k-g)

=

d/e / (k-g)

d = dividend per share k = shareholder return expectation k = i + r + rp (inflation+real int+risk premium) g = growth in dividend per share

Hence Importance of payouts and cash flows for better valuation Close approximation of P/E to ROE

Other Methods are all variants for validation

EVA – Economic Value Added - Excess return over WACC quantified EVA = ROIC – (IC x WACC) CFROI – Another smart way to do a DCF

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August 2004

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MARGIN OF SAFETY Cash flow v/s Bond Valuations Growth prospects Gap between Perception and Reality Knowledge v/s Popularity Limited downside/ lots of upside ENAM Securities August 2004 12 .

UNDERSTAND “GOOD BUSINESSES” THE CIRCLE OF COMPETENCE APPROACH Manish Chokhani September 2004 13 .

BUSINESSES APPRAISAL Think long and hard about cycles Life cycles Business cycles Think about sustainability and sources of advantage Think about external pressures on profitability Where does this business fit on a profitability distribution? The financial litmus tests Think about management and the majority partner ENAM Securities August 2004 14 .

not linear! Life Cycles Business Cycles / Boom-Bust Seasonality Innovation / Schumpeter Market Cycles ENAM Securities August 2004 15 .Think of Cycles! Nature is cyclical.

LIFE CYCLE ANALYSIS JUTE SALES SOFTWARE TIME ENAM Securities August 2004 16 .

SERVICES INTERMEDIATES CAPITAL GOODS CONSUMER DURABLES ENAM Securities August 2004 17 .BUSINESS CYCLES FMCG.

BOSTON CONSULTING GROUP MATRIX MANY SOURCES OF ADVANTAGE EMERGING/ SMALL SCALE SPECIALISED/ OLIGOPOLIES COMMODITY MONOPOLY/ CONSUMER FRANCHISE FEW LOW SUSTABILITY OF ADVANTAGE HIGH ENAM Securities August 2004 18 .

PORTER’S 5 FORCE ANALYSIS NEW ENTRANTS/ IMPORTS SUPPLIERS INTRA INDUSTRY RIVALRY BUYERS SUBSTITUTE PRODUCTS ENAM Securities August 2004 19 .

PROFITABILITY DISTRIBUTION BANK RATE ROI ENAM Securities August 2004 20 .

do not deserve it Likely to be cyclical valuations and themes ENAM Securities August 2004 21 .THE FINANCIAL LITMUS Superior BUSINESSES Low asset requirements Low credit / inventory Many clients/ economic goodwill Defensible margins Pricing power ( inflation + ) Sustainable growth Free cash flows Most other businesses Capital intensive Working capital intensive Want premium valuation.

Now lets talk Micro Focus Costs Capital Efficiency People Issues “Slack” ENAM Securities August 2004 22 .

Costs Are you aware of implications of: Inappropriate Amortisation R&D Technology Marketing Requirements Training . Leadership! UNIT COSTS/ measures ENAM Securities August 2004 23 .

7 119 ENAM Securities August 2004 24 .1 7.Corporates have re-engineered costs Cost cutting in Cement Industry 100 75 50 25 0 Cost of Producing Cement Energy Consumption (Units/ton) 1998 250 200 150 100 50 0 RMC (tons per ton of Steel) Energy Consumption (GCAL/TCS) 1997 2003 2004 Labour Productivity (tons/Man years) (%) 2003 2004 Coal Consumption (kg/ton) (%) 1998 Cost of Producing Cement (Rs/tonne) Energy Consumption (Units/tonne) Coal Consumption (kg/tonne) Source: ENAM Research 2004 900 90 130 1.3 8.200 110 200 Cost cutting by TISCO 1997 RMC (tons per ton of Steel produced) Energy Consumption (GCAL/TCS) Labour Productivity (tons/Man years) Source: ENAM Research 2004 3.2 264 4.

m) 12 9 6 3 0 1995 Revenue (Rs bn) Labour Force (nos) Revenue/Person (Rs m) 900 420.000 10.000 Period (Yrs) 7 5 5 6 8 8 % of Labour Force 30 29 34 37 40 38 ENAM Securities August 2004 25 .000 8.Corporates have right-sized Restructuring by Top 10 Corporates 400 300 200 100 0 1995 Revenue (LHS) Revenue/Person (RHS) 2003 Labour Force (LHS) (%) (Rs.000 6.000 2.1 2003 2.000 6.2 Right-sizing across sectors Company BHEL Tata Motors Mahindra & Mahindra Bajaj Auto Tisco ACC Source: ENAM Research Staff shed 20.750 335.800 30.500 7.

Restructuring? People… ENAM Securities August 2004 26 .Capital Efficiency Are you well focussed on: Asset Turns: Gross Block. Working Capital? Lean Assets: Owned v/s Rented Flexible Structures: Outsourcing Impact of M&A.

Peak Rate of Custom Duty (%) 160 G rowth (% ) 80 60 120 80 40 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 40 20 0 -20 -40 1996 1997 Sales 1998 1999 PBIT 2000 2001 PBT 2002 2003 Working Capital / Sales (%) 12 G rowth (% ) 25 20 15 10 5 0 -5 10 8 6 4 1996 1997 1998 1999 2000 2001 2002 2003 1996 1997 1998 1999 2000 2001 2002 2003 Cap Emp Source: CMIE Borrowing GFA ENAM Securities August 2004 27 .Efficiency Saved India Inc.

of players 77 72 32 32 45 Multiple Multiple 100 85 61 38 70 3 large 4 large ENAM Securities August 2004 28 . of players No.Industry consolidation helped profitability Market share (%) Sector 1997 2004 Aluminium Tyre Cement Paper Petrochemicals Media Telecom Source: ENAM Research Top 3 players Top 5 players Top 5 groups Top 5 players Top player No.

People Issues How is the company managed? Lifetime Employment? How does it Hire? Train? Retain? Fire? How does it build skills? LEADERS? Are they Commandos? Soldiers? Mercenaries? Succession Plans? Empowerment? ENAM Securities August 2004 29 .

Company specific factors How is Product or Service Quality? Germany/Japan/China v/s India.Focus on Micro. v/s competition How is Cost & Capital Efficiency? Frugality as a mindset v/s “professionally managed” What are their Value Systems? Sugar in the milk How is their Service to the Customer? The “goodwill” earned ENAM Securities August 2004 30 .

Watch Out for Hidden Bombs Conflict of Interest Structures Pvt Businesses Inter Party relationships Split Ownerships Loans & Advances Off balance Sheet Libailities Unfunded Pensions Litigations Family Settlements … and many more creative reasons why CAVEAT EMPTOR ENAM Securities August 2004 31 .

CHOOSING “BUSINESS PARTNERS” Integrity / track record Ability (not just lucky) Understanding of key issues Ambition tempered by reality Commonality of objectives Orientation towards minority ENAM Securities August 2004 32 .

MACRO FACTORS TO BEAR IN MIND Manish Chokhani September 2004 33 .

Do you have Macro Pointers in Mind? Do you have a point of view about: Politics as it affects the business Economics as it affects the business Demographic Trends What are Capital Markets Signalling? Each powerful trend can have disruptive or tidal wave effects on any business ENAM Securities August 2004 34 .

Politics Geo Politics affects addressable markets. terms of trade. cost of doing business… Effect of SAFTA. WTO/GATT Risk Premium/Opportunity of Pakistan Emerging US-India axis . ASEAN. ML Opportunities in “emerging” economies Outcry against/trends favouring outsourcing ENAM Securities August 2004 35 . NAM.

Watson Pharma Meritor. Cisco. Auto Zone. GSK Pharma Apotex.Outsourcing to India : Brewing Trouble Company IT Services Infosys Tata Consultancy Wipro ITES Mphasis BFL Spectramind Pharmaceuticals Cipla Shashun Chemicals Lupin Laboratories Engineering Bharat Forge Tata Motors Moser Baer Essel Propack Outsourcing for Goldman Sachs. APP. Eon Labs Eli Lily. Ford. American Express. HP. Watson Pharma. Am Ex. Honda. BASF P&G. Aetna. HSBC Transco. DHL.Compacq. Capital One Ivax. Verizon GE. Caterpillar. General Motors. Unilever. Acenture. UBS. Capital One Dell. Northwestern Mutual. Toyota. Nortel. Sony Citi Group. Colgate ENAM Securities August 2004 36 . FAW (China) Rover Imation.

Hyundai LG. Bank Am IBM. Samsung Lafarge Port of Singapore. P&O Morgan Stanley. HSBC. Eli Lily COVANCE A number of CROs Domestic Market Opportunity Coke. HP Recent entrants JP Morgan. Duestche MF Fidelity MF. Templeton McDonalds. Pfizer. ABN MF Source: ENAM Research ENAM Securities August 2004 37 . GE Microsoft. Pepsi Ford. Citi IT. State Farm Amex. Maersk HSBC MF. Toyota Nokia Michelin Dubai Port. Intel GSK. CGE&Y Delphi Teva Likely entrants BPOs in throngs Deloitte Consulting Generic Pharma Cos Research Services Texas Instruments. Pizza Hut Honda. Prudential Accenture.Increasing FDI reflects “openness” Early entrants Cost Savings (Production Hubs) GE. Sun.

Ajanta Clocks .RPG Aventis (France) Dr.BT’s call centre (Ireland) Auto Parts Sundaram Fasteners .Mmore International (Holland) Atlas Cycle. Listing on LSE ONGC .Nervewire. Reddy’s .Trigenesis Therapeutics (USA) Cadila – French operations of Alpharma (USA) IT Wipro .AV Cell (Canada).Confident Indians going global Large Groups Tata -Tetley. Daewoo .Gear casting business of Dana Spicer (UK).Propack Holdings (Switzerland).Stake in: Sakhalin oil fields (Russia). Forging business of CDP (Germany) Others Asian Paints .Arista Tubes (UK) Moser Baer .Plants in China ENAM Securities August 2004 38 . Copper mines (Aus). Utilities consulting division of AMS (USA) HCL Tech . GNOOC oil fields (Sudan) Pharma Wochardt-Esparma (Germany) Ranbaxy. Plant in China Bharat Forge – Dana Corp Forging business (UK). Carbon Black (China) etc Sterlite .FLAG undersea cable.Trevira (Polyester firm in Germany) Birlas .Copper Mines in Australia.Berger International (Singapore) Essel Propack . Rover tie-up RIL .Meridian Healthcare (UK).

Inflation Cost pressures: RMC. etc Social Costs / development Competition is a given ENAM Securities August 2004 39 .Macro Economic Indicators Global and local economic cycles Capital costs Interest rates. Tarriffs. Currency rates.

Eg: Complete Reversal in India Forex reserves Re. CMIE ENAM Securities August 2004 40 . depreciation Interest rates External debt 60 40 20 0 -20 -40 01-02 02-03 94-95 95-96 96-97 97-98 98-99 99-00 00-01 03-04 `03-04 Forex reserves (US$ bn) (US$ bn) 120 100 80 60 40 20 0 Trade Balance (LHS) Capital Receipts (LHS) Invisibles (LHS) Total Reserve (RHS) Interest rates & Re. depreciation 15 12 9 6 3 0 -3 -6 (%) (%) 17 16 15 14 13 12 11 10 External debt 100 80 60 40 20 0 96-97 97-98 98-99 99-00 00-01 2-Jan 3-Feb (%) Jul-04 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Rupee/ US$ (LHS) Prime Lending Rate (RHS) Foreign Exchange Reserves as % of external debt External Debt (% of GDP) Source: RBI.

000 60.Soft interest rate bias nearing an end.. RBI.000 20.000 100.000 40.000 80. CMIE Prime Lending Rate (RHS) ENAM Securities August 2004 Jul-04 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 41 .000 0 01-02 02-03 93-94 94-95 95-96 96-97 97-98 98-99 99-00 00-01 03-04 (US$m) 15 12 9 6 3 0 -3 -6 Rupee volatility on the cards (%) (%) 17 16 15 14 13 12 11 10 Rupee/ US$ (LHS) Source: Blloomberg. Room to grow advances vs investments 50 Investment Deposit Ratio 45 15 12 9 6 3 (%) Inflation making a comeback? 40 35 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 0 Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Forex reserves at a peak 120.

Understand Market Cycles – II ENAM Securities August 2004 42 .

US Interest Rates through cycles ENAM Securities August 2004 43 .

000 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Alumina Europe Alumina Spot Price 500 400 300 200 100 0 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 (USD) Aluminium Aluminium Primary OP SPT 2.400 1.600 1.400 1.800 1.600 1.000 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 (USD) London Metals Exchange Index Source: Bloomberg ENAM Securities August 2004 44 .Rising commodity prices reflect USD weakness All Commodities 320 300 400 Gold 450 Steel 550 450 350 250 150 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 CRB All Commodity Index Gold AM Fix Prices (USD/ troy ounce) MB HR Steel Prices 280 260 240 300 350 220 200 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 250 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Non-ferrous Metals 2.000 1.200 1.200 1.000 1.800 1.

Consumption trends across Asia ENAM Securities August 2004 45 .

Capital Receipts Total Expenditure -.Administrative.Defence & Subsidies -. ENAM Research % of GDP 11 10 1 15 4 4 3 1 3 4 64 Deficit of 5-6% of GDP misleading! Receipts only 11% ENAM Securities August 2004 46 .Transfer to States -.Revenue Receipts -.Interest -.Government P&L A/c AS IT REALLY IS Centre’s P&L (2004-05E) Particulars Total Receipts -. etc.Infrastructure & Capital Expenditure -. Deficit Total debt (Internal + External) Source: Government of India Interim Budget.

400 1.0 2.0 Source: RBI Fiscal Deficit (LHS) % of GDP (RHS) Power subsidies (% of state fiscal deficit) State Madhya Pradesh Andhra Pradesh Gujarat Karnataka Maharashtra Tamil Nadu Source: World Bank (%) 74 51 65 65 28 40 ENAM Securities August 2004 47 .0 3.000 800 600 400 200 0 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 E Aggregate fiscal deficit of states (Rs.States have joined the party! 1.bn) (%) 5.200 1.5 2.0 4.5 4.5 5.5 3.

costlier. less competitive> poorer! Total Central & State debt as a percentage of GDP 80% 70% 60% 50% 40% 1980-81 1982-83 1984-85 1986-87 1988-89 1990-91 1992-93 1994-95 1998-99 2000-01 2002-03 RE 1996-97 Debt/GDP Source: RBI ENAM Securities August 2004 48 .Profligate Governments…weaken us all Crowds out private sector Upward pressure on interest rates Rupee depreciation Making us “poorer”.

Demographics Income Shifts Age Group Shifts Social Shifts ENAM Securities August 2004 49 .

000 4.000 18.5 1.000 8.4 1.000 13.0 Housing EMI (Rs.000 11.6 1.6 6.) 10-year repayment / Rs.250 1.000 25.4 18.100.) (x) 6 2003 3 Increase in affordability (x) 2.000 2.000 / month Cost of (in Rs.000 12.500 4.690 1.3 All this has led to a boom in retail lending and consumption ENAM Securities August 2004 50 .Affordability has risen dramatically Falling prices and low interest rates have made products easily affordable 1994 Housing (Ratio of Hsng Price/Annual Inc.) 21" Color TV Washing Machine Refrigerator (165 Ltr) Cordless Telephone Cellular Phone Source: ENAM Research 1.000 1.

000 2002 Source: Bloomberg 7.000 2.000 Jul-04 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Market Cap gain = $75bn 2003 2004 ENAM Securities August 2004 51 .000 5.000 6.Wealth effect adds to consumer power 15 12 9 6 3 0 -3 -6 Strong rupee and low interest rates (%) (%) 17 16 15 14 13 12 11 10 Rupee/ US$ (LHS) Prime Lending Rate (RHS) Gold: 20.000 300 250 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 3.000 tonnes = $100bn gain 450 (USD/troy ounce) 400 350 4.

2003 . 2007 .Income demographics = Secular consumption growth TV: 1998 . 2007 .80m 500 Basic Telephone: 1998 – 22m.80m Cellular Subscriber: 1998 .28m. 2007 .6m. 2003 98m. 2007 – Rs1367bn 200 Cars: 1998 .130m Cable TV Sub. 2003 – Rs478bn.25m. 2007 . 2003 . 2007 . 2003 .46m.70m. 2007 . 2007 . 2003 .3m.95m Population (m) 400 300 Home Mortgage Outstanding: 1998 – Rs145bn.80m 600 2 Wheelers: 1998 .48mn.: 1998 .40m. 2003 .10mn.9m 100 0 100 1000 2003 2000 3000 1998 4000 >5000 2003 2007 Two Wheelers Cars CAGR (1994 – 2003) 2007 Value growth far exceeds volume growth Volumes 12% 13% Value 20% 20% Annual income (US$) Source: ENAM Research 1998 ENAM Securities August 2004 52 .1mn.14m. 2003 – 44m.65m Tax Payers: 1998 .

Consumers are under-leveraged 800 700 600 500 400 300 200 100 0 (USD bn) 54% 53% 34% 17% 2% India Thailand Malaysia Taiwan Korea 75% 80% 70% 60% 50% 40% 30% 20% 10% 0% USA Total consumer loans outstanding Consumer loans outstanding / GDP (%) Source: ICICI Bank ENAM Securities August 2004 53 .

Age profile points to secular growth in demand Increasing consuming/producing age group Total 1.6m 400 0 2001 0 to 19 20 to 34 2013 35 to 60 & above Source: Census 1991 ENAM Securities August 2004 54 .200 800 246.8m Growth 34.7% The rising consumer class World Age Population Projected To Decline 1.012.4% 331.6m Total 1.211.4m Overall growth 19.

BRICs : The growth engine of the world Source: Goldman Sachs BRICs Report ENAM Securities August 2004 55 .

Caveats Leadership! Macro economic stability Infrastructure and Institutions Openness Education (and Health) ENAM Securities August 2004 56 .

Political Contradictions reflect Social flux CPM Muslim League RJD BSP SP DMK CONGRESS NCP JD Samta party Telgu Desam AIADMK BJD BJP Shiv Sena National Conference ENAM Securities August 2004 57 .

Capital Markets Be aware of shifts In sectors In Leadership In Valuations? Where we are in the cycle? ENAM Securities August 2004 58 .

Flat markets cloud sectoral shifts! Sectors (% of Nifty) 1998 Banking Commodities Cyclicals FMCG Pharma TMT Total Source: CMIE 1999 6 32 15 27 5 15 100 2000 5 22 8 16 7 43 100 2001 7 23 7 19 6 38 100 2002 8 25 9 21 8 29 100 2003 10 34 9 15 7 25 100 (July) 2004 12 37 15 9 6 21 100 8 42 19 19 4 8 100 Share of corporate profit / GDP Share of sector profit % v/s Share of market cap Should always be at the back of the mind ! ENAM Securities August 2004 59 .

1 1.8 1.3 RoE (%) 2002 12 18 27 15 10 6 7 5 16 2003 14 21 25 14 12 9 9 11 21 2004 15 24 27 18 13 11 10 15 23 EPS Growth (%) 2002 14 34 53 (5) 14 (23) (19) (9) 86 2003 11 13 (7) (7) 20 50 37 124 35 2004 6 16* 10 33 9 30 12 29 9 Source: The Economist.1 7.5 9.0 3.Similarly.8 0. Variety and Growth P/E (x) 2002 China India Indonesia Korea Malaysia Phillipines Singapore Taiwan Thailand 15 18 8 11 20 26 25 43 16 2003 14 15 9 12 16 17 18 20 12 2004 13 13 8 9 15 13 16 15 11 Interest rates (%) NA 4. Citi group. be aware of relative country valuations High and Stable RoE (EVA +ve). Size and Scalability.9 3. * Currently witnessing upgradation and growth to be sustained in 2005 ENAM Securities August 2004 60 .

Tata Motors Ltd. Ltd. Infosys Technologies Ltd. Bharat Petroleum Corpn. Ltd. Reliance Industries Ltd. State Bank Of India I T C Ltd.Churn in Top 20 reflects underlying reality shifts Company Name Oil & Natural Gas Corpn. Bharti Tele-Ventures Ltd. Ltd G A I L (India) Ltd.270 ENAM Securities August 2004 61 . bn) 927 625 464 354 354 286 278 253 222 194 187 151 144 141 131 122 121 119 113 110 5. Indian Oil Corpn. Ltd. Maruti Udyog Ltd Bharat Heavy Electricals Ltd. Ltd. Steel Authority Of India Ltd. G A I L (India) Ltd. Ltd. Bajaj Auto Ltd Bharat Petroleum Corpn. Hindustan Lever Ltd. bn) 402 278 272 163 158 153 129 110 106 86 77 73 63 63 56 51 50 46 43 39 2. I C I C I Bank Ltd Ranbaxy Laboratories Ltd Housing Development Finance Corpn. National Aluminium Co Total Market Cap Source CMIE Note: Names in red indicate exits. Indian Oil Corpn. I T C Ltd. Industrial Development Bank of India Hindalco Industries Larsen & Toubro Tata Iron & Steel Co. State Bank Of India Hindustan Petroleum Corpn. Tata Iron & Steel Co.418 Company Name Oil & Natural Gas Corpn. Bharat Heavy Electricals Ltd. Ltd. Tata Motors Ltd. Hindustan Petroleum Corpn. in blue indicate new entrants 1998 Mkt Cap (Rs. Mahanagar Telephone Nigam Ltd Reliance Industries Ltd. Castrol India Steel Authority Of India Ltd. Ltd. Ltd. Wipro Ltd Hindustan Lever Ltd. Ltd. Ltd. Total Market Cap As ofJune2004 Mkt Cap (Rs.

500 2.500 5.000 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Media & Auto 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Infosys Wipro Satyam Ranbaxy Cipla Dr Reddy's Sun Pharma HDFC HDFC Bank All Figures indexed 100= price in 1994 ENAM Securities 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Zee Hero Honda August 2004 62 .000 15.000 3.500 Indexed Sensex (LHS) Sensex (RHS) IT 20.500 4.200 1.000 2.500 3.000 2.500 6.600 1.000 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1.000 800 600 400 200 0 Banking 6.… and the Index hides more than it shows! 200 180 160 140 120 100 80 60 40 20 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 6.000 5.000 5.000 1.200 800 400 0 Pharmaceuticals 1.000 4.000 10.000 4.

Always disaggregate the market Many Emerging Business Sources of Advantage Telecom Media Retail Global Outsourcers IT Pharmaceuticals Engineering Global Commodities Oil Metals Domestic Demographics FMCG Auto Banking Low Sustainability of Advantage Low High Note : Companies may change characteristics over time! ENAM Securities August 2004 63 .

000 10.000 40.000 20.PSS companies outperform markets over time! RIL Vs Sensex 500 400 300 200 100 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 50.000 30.000 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Infosys Vs Sensex 600 500 400 300 200 100 0 1994 1995 1996 HDFC Vs Sensex 1997 1998 1999 2000 2001 2002 2003 Reliance Industries (LHS) Sensex (RHS) Infosys Sensex (RHS) HDFC Sensex (RHS) HLL Vs Sensex 600 500 400 300 200 100 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 MICO Vs Sensex 500 400 300 200 100 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 HLL Sensex (RHS) MICO Sensex (RHS) ENAM Securities August 2004 2004 64 .

Adjusted for bonuses and stock splits. NIFTY constituents only ENAM Securities August 2004 65 .Multibaggers of the last 10 years Price as on 14/7/94 Price on 15/7/04 CAGR (%) Satyam Computers Infosys Technologies Wipro Sun Pharmaceuticals Hero Honda Cipla Ranbaxy Zee Telefilms HDFC Dr Reddy's 3 13 6 21 33 41 214 30 161 248 326 1443 525 351 460 231 976 126 550 749 62 60 56 33 30 19 16 15 13 12 Source: Bloomberg.

Adjusted for bonuses and stock splits.Multibaggers since 9/11 : The REAL BSE-30! Company Price as on 15/7/04 Oriental Bank Mahindra & Mahindra SAIL Tata Motors ONGC Shipping Corp Of India Ltd Tata Iron & Steel Co Ltd BHEL IPCL Grasim GAIL Reliance Energy ABB Bajaj Auto Tata Chemicals Limited 240 476 33 407 654 117 327 527 157 952 182 571 730 841 121 Price on 11/9/01 34 68 5 75 136 24 84 135 40 274 53 176 225 266 39 CAGR (%) 92 91 87 76 69 68 57 57 57 51 51 48 48 47 45 National Aluminium Co Ltd HPCL Tata Tea Hero Honda Tata Power Sun Pharma Ranbaxy ICICI Bank SBI Bank Glaxo Indian Hotels BPCL Satyam Computers ACC Gujarat Ambuja Company Price as on 15/7/04 139 288 386 460 254 351 976 238 431 603 370 314 326 232 275 Price on 11/9/01 48 111 150 183 101 141 415 103 187 282 175 159 175 128 155 CAGR (%) 43 38 37 36 36 35 33 32 32 29 28 26 23 22 21 Source: Bloomberg. NIFTY constituents only ENAM Securities August 2004 66 .

AOL. Time Warner merger – A lesson to remember 100 80 60 40 20 0 1996 Stock Price of Time Warner: now AOL Time Warner (US$) Announcement of Merger 1997 1998 1999 2000 2001 2002 2003 ENAM Securities 2004 August 2004 67 .

May run out of luck.Lets Summarise TILL THIS POINT Value is created through an interplay of: Macro Trends Micro Focus Subtler Nuances Business Leaders must constantly be on top of these . Real winners understand this and play to create enduring value. never out of wisdom ! ENAM Securities August 2004 68 . good leaders and investors continuously value these.

NOW: BUYER BEHAVIOUR Manish Chokhani September 2004 69 .

Understand Fund Manager Behaviour! Approaches to Portfolio Construction Top Down v/s Bottom Up Value v/s Growth Think of Where we are in the Market Cycle! Client Requirements Match Needs. Requirements and Abilities Your OWN Portfolio? ENAM Securities August 2004 70 .

Elements of Valuation Top Down Value Growth Momentum Bottom Up ENAM Securities August 2004 71 .

Banks / Pension Funds / Macro Funds/ Fund of Funds Asset Allocation Country Allocation Regional Funds Sector Allocation Country Funds/ Mutual Funds Large Cap Small Cap Absolute HNW / PMS / Absolute Return Funds/ “Hedge” Funds ENAM Securities August 2004 72 .KYC and Thyself! Relative Pvt.

UTI Country Funds • Fund Manager • Technician Absolute Return Funds • Stock Picker SLOANE ABERDEEN ARISAIG EMIC OPPENHEIMER ENAM Securities August 2004 73 .Key Success Factors : Match Your Pitch! • Institutional Marketing • Deployment of Large Pools • Capital Preservation CAPITAL UBS. HDFC. Bankers / Pension Funds / Macro Funds Regional Funds • Marketing Scale & Scope • Economist PICTET JANUS GMO LLYOD GEORGE HSBC. . CIBC. ADIA Pvt. JF ICICI. GAM GSIC.

Decomposing Approaches Top Down Asset Class Country Sector • • • • • Equities Bonds Currencies Property Commodities – Oil – Precious metals – Natural Resources • • • Developed Markets Emerging Markets Regional markets • • • • • • FMCG Pharma Services TMT Manufacturing Cyclicals ENAM Securities August 2004 74 .

Valuation – MegaCap bias Category 30 Largest Remaining S&P 500 1980 9 9 9 1990 15 14 15 1999 46 23 30 ENAM Securities August 2004 75 .

Down and Bottom up ENAM Securities August 2004 76 .Some Lessons from History Japan V/s UK in 1944 Korea V/s India in 1950 Singapore! Hero Honda V/s Kinetic Honda Bharti V/s IDEA Infosys V/s HCL HDFC Bank V/s SBI There is NO trade-off between Top.

Valuation Approaches based on Sentiment Swings Value Growth Momentum • • • • Illiquid Misunderstood Hated/Uncovered Appraised value • • • • Institutional Favorites UVG Stories Imagine it! DCF or Option value • • • • Max Volume News Flow Volatile Technicals In Reality. there is no distinction. Growth and Momentum are LongTerm/Short Term Value catalysts ENAM Securities August 2004 77 .

Think Client Management WHO is the CLIENT? WHAT does he want from you? HOW are you shaping his expectations & mindset? WHY should he stick to you? “Most clients would rather have their fund manager fail conventionally than succeed unconventionally.” — Marc Faber ENAM Securities August 2004 78 .

Decompose | Decompose | Decompose Sectors FMCG Pharma Banks IT Telecom Media Engg Autos Commodities Total Large Cap Medium Cap Small Cap Total ENAM Securities August 2004 79 .

SUMMARY UNDERSTAND YOURSELF OBJECTIVELY Everybody is not Schumacher or Tendulkar: TAKE HELP. Micro. BE SELF AWARE UNDERSTAND THE INVESTMENT LANDSCAPE A grip of Macro. Accounting and Street Smartness is REQUIRED UNDERSTAND THE UNDERLYING INVESTMENT What will make it tick or explode? UNDERSTAND THE MARKET PARTICIPANTS Who are you playing against and how does he play? FOLLOW BASIC PRINCIPLES AND STICK TO THEM! BE HAPPY! ENAM Securities August 2004 80 .

How is your Portfolio Tilted? OWN INTERESTS PROFESSIONAL COLLEGUES WORK COLLEAGUES CLIENT TIME FAMILY BUILD A CONSCIOUS LIFESTYLE ! ENAM Securities August 2004 81 .

HEAVEN AND HELL AMERICAN SALARY ENGLISH HOME GERMAN CAR CHINESE FOOD INDIAN WIFE AMERICAN WIFE ENGLISH CAR GERMAN FOOD CHINESE HOME INDIAN SALARY YOUR REAL WEALTH = YOUR HAPPINESS = YOUR STATE OF MIND = WITHIN YOU ENAM Securities August 2004 82 .

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