Presentation On Blue Chips and NTD - by MR Raamdeo Agrawal of MOFSL-2

www.motilaloswal.
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1
25
th
February 2012
MUMBAI
www.motilaloswal.com
2
Recap of Indias NTD Era
60 years for first US$ 1 trillion of GDP
5 years for the NTD
0.5
1.2
2.0
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0.5
1.0
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The Chinese Experience
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GDP in US$ trillion
6 years
3 years
1 year
0.5
6 years
0.5
6 years
4
Consumption Boom
Savings & Investment Boom
Indias NTD Era
5
Consumption boom in NTD Era
Poverty will fall from 93% in 1985, 54% in 2005 to 22% by 2025
6
Middle class will swell 12x from 50m in 2005 to 583m in 2025
7
Discretionary spend will rise from 52% in 2005 to 70% in 2025
8
Food will remain the biggest category (Rs B)
9
Communication will grow the fastest (Rs B)
10
Savings boom in NTD Era
At 40% of GDP, Indias savings could hit US$1 tn in 7-8 years
30
32
33
35
37
32
34
32
33
0
5
10
15
20
25
30
35
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
India's GDS (INR t)
GDS (% of GDP)
11
Savings boom in NTD Era
Huge financial intermediation opportunity for banks
18
21
26
32
38
45
52
61
11
15
19
24
28
32
39
45
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E
Deposit Credit
Deposit CAGR: 19%
Credit CAGR: 22%
12
Corporate profit boom in NTD Era
Future corporate profitability should be better than past
Aggregate profits of 100
highest profit companies
13
Winner Categories - Insights
Winner Categories see hockey-stick demand curves
Hockey-stick demand curve occurs when product price
meets affordability for a large section of customers
Time
Price,
Demand,
Affordability
14
Category Winners
Characteristics to find Category Winners -
Entry Barriers
Great Management
15
Winning Investments
We are partial to putting out large amounts of money where
we wont have to make another decision. If you buy
something because its undervalued, then you have to think
about selling it when it approaches your calculation of its
intrinsic value. Thats hard. But, if you can buy a few great
companies, then you can sit on your ass. Thats a good thing.
- Charlie Munger, co-owner of Berkshire Hathaway,
in his book Poor Charlies Almanack
16
NTD Era will be marked by sustained
boom in discretionary spend, savings
and investment.
Winner Categories and Category Winners
will enjoy exponential growth in profits.
Category Winners bought at reasonable
valuation create significant wealth over
the long term.
In Conclusion
17
10
17
42
58
77
135
174
236
246
318
410
468
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
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Mcap
INR cr
6 7
13
30
32
45
71
91
125
168
259
307
0
5,000
10,000
15,000
20,000
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30,000
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Mcap
INR cr
Two-minute salute
Asian Paints
Divd up 55x
MCap up 75x
Nestle
Divd up 51x
MCap up 82x
18
Two-minute salute
Asian Paints, HUL, Nestle, Hero MotoCorp
Dividend up 75x
Market Cap up 70x
57 79
166
321
603
1,010
1,633
2,273
2,036
2,837
2,285
4,282
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
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500
1,000
1,500
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4,500
5,000
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Divd
INR cr
Mcap
INR cr
19
Investing v/s Speculation
An investment operation is one which,
upon thorough analysis, promises safety
of principal and an adequate return.
Operations not meeting these requirements
are speculative.
Graham & Dodd in Security Analysis, 1934
Back to basics
20
Reason #1: Quality
The problem of poor quality: "The risk of paying too high a price
for good-quality stocks while a real one is not the chief hazard
confronting the average buyer of securities. Observation over many
years has taught us that the chief losses to investors come from the
purchase of low-quality securities at times of favorable business
conditions. Benjamin Graham, The Intelligent Investor
The advantage of high quality: Good quality companies
with strong dividend histories offer as much, if not more,
investment growth potential than poor quality companies; and
they do so with far less risk. Geraldine Weiss, The Dividend Connection
Why Blue Chip Investing
21
Reason #2: Longevity
Power of compounding works best over long term
US$ 10,000
US$ 40 billion
4 million times in 70 years.
Big number; but CAGR is only 24%
What is this?
?
How Warren Buffet has
compounded his initial
capital of US$ 10,000
22
Reason #3: Growth
Indias growth story far from over
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E
1st US$ tn
2nd US$ tn
5 years
58 years
3rd US$ tn
4th US$ tn
3 years
4 years
5th US$ tn
1.5 years
The NTD journey is on
23
Reason #4: Low risk
High return but with significantly low risk
0
1,000
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BSE Sensex Blue Chip Index (both re-based to 100)
(Mkt Cap of Asian Paints, HUL, Hero, Nestle)
24
All listed companies
Screen #1
20 years of uninterrupted dividends
Screen #2
Dividends raised in 5 of last 12 years
Screen #3
Earnings growth in 7 of last 12 years
6-Screen Quality Filter
Screen #4
Average 12-year RoE of 15%
Screen #5
At least 5 million shares outstanding
Screen #6
At least 80 institutional holders
3,000
25
Screen-tested 48 Blue Chips
Descending Order of Total Return (2000-11)
Over same period: BSE Sensex CAGR: 13% Median Total Return: 23%
26
#1 Longevity
Median age of 48 Blue Chips: 57
Blue Chip Characteristics
No. of companies
27
#2 Dominant Market Position
44 out of 48 Blue Chips
28
#3 Concentrated Business
Out of 48 27 high, 7 Medium
29
#4 Consumer-facing have an edge
Out of 48 23 Consumer, 6 Financials
30
#5 High quality of management
Reflected in above-average RoE, Payout
31
How To Overcome The High P/E Phobia
Testing the High Payout = High P/E hypothesis
Back-to-basics investing math: Classical DDM
P = D
k g
Dividing both sides by E (for earnings)
P/E = D/E = Payout
k g k g
Thus, higher the payout, and higher the
growth, higher should be the P/E
The Valuation Dilemma
32
3 Company-level Case Studies
Case Study #1: Across sectors
Infosys v/s Asian Paints v/s HUL
HULs 5-year avg P/E
higher than Asian
Paints and Infosys,
despite low growth
Only reason:
High Payout
33
Case Study #2: Within sector (Non-financial)
Cement : ACC v/s Birla Corp
Both companies EPS
CAGR is flat; Birla Corps
RoE is much higher than
that of ACC
Birla Corps Payout is
1/3
rd
of ACC
P/E is also exactly 1/3
rd
34
Key points to note:
P/Es are directly related to Payout and Growth
Dividend Yields are more structural and homogenous
Blue Chips are unlikely to trade at throwaway
prices, due to superior quality (high RoE, high Payout)
So, focus on buying at reasonable valuation,
not necessarily cheap by conventional measures
We try to invest in outstanding companies at
sensible prices rather than in average companies at
bargain prices. Warren Buffett
Blue Chips: When To Buy
35
Top Blue Chips on Buy Signals
BLUE CHIP CMP Dividend Yield (%) P/E (x)
(INR) Current Median Delta Current Median Delta
Hero MotoCorp 2,003 5.2 3.3 2.0 19 17 1
Blue Star 178 3.9 2.5 1.5 24 17 7
Infosys 2,608 2.3 0.9 1.4 22 28 -6
Wipro 378 1.6 0.9 0.7 19 29 -10
Cummins India 356 3.0 2.4 0.6 18 21 -3
Tata Steel 385 3.1 2.6 0.5 5 7 -2
Motherson Sumi 152 1.8 1.4 0.4 20 20 1
Ashok Leyland 25 4.1 3.6 0.4 11 13 -2
Bharat Forge 259 1.4 1.1 0.3 16 28 -12
Exide Industries 116 1.3 1.0 0.2 20 22 -2
36
Potential Blue Chips
Current Mkt Cap < Rs 10,000 crores
28 Potential Blue Chips
1. BGR Energy
2. Biocon
3. Coromandel Inter
4. Crompton Greaves
5. Deepak Fertilisers
6. eClerx Services
7. Emami
8. GRUH Finance
9. Guj Gas Company
10. Hawkins Cookers
11. Indraprastha Gas
12. Info Edge (India)
13. Kansai Nerolac
14. Karur Vysya Bank
15. M & M Financial
16. Mahindra Holiday
17. Manappuram Finance
18. Opto Circuits
19. Page Industries
20. Rupa & Company
21. Shriram City Union
22. Talwalkar
23. TD Power Systems
24. Thermax
25. TTK Prestige
26. Voltas
27. VST Tillers Tractors
28. Zydus Wellness
37
Floating the concept of MDO
Bringing back the long-term investor
Country Pay-out ratio (%)
Taiwan 76
Malaysia 60
Philippines 49
Pakistan 49
Thailand 45
Germany 40
Brazil 40
UK FTSE 39
Nikkei 37
Indonesia 36
Singapore 31
Hong Kong 31
Korea 28
China 26
India Sensex 23
MSCI India 21
Russia 12
38
Financials have emerged as the largest wealth creating sector for the
first time ever. Going forward, expect the sector to maintain its top slot led by
existing and new pvt banks, and eventual listing of insurance companies.
Very fast growth in stock prices creates transitory multi-baggers. In
most cases, what follows is prolonged and painful price and/or time correction.
Blue chips are fountains of dividend, and offer as much, if not more,
investment growth potential than lesser quality companies, with far less risk.
In investing, there is no profitable substitute for quality. Understanding
quality of the company doesn't stop at profits and profitability, it must extend to
dividend payouts and longevity.
Most Blue Chips enjoy premium valuation. In deciding when to buy, one
should focus not only on P/E, but also consider payout ratio, relative dividend
yield, and earnings growth potential.
In India, over last 20 years, Blue Chips significantly outperformed
benchmark indices with much lower risk.
In Conclusion
39
Thank You !
&
Happy Blue Chip Investing !!

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