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Climate change

The year of scanty monsoon to incessant out-of-season rains and

thrifty giveaways giving way to generous public payout

Vol. XXX/22

Dec 21, 2015 Jan 03, 2016
: Capital Market Publishers India Pvt. Ltd.
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Dec 21, 2015 Jan 03, 2016


It took many years of persuasion, prevarication and procrastination for the world to
realize the dangers climate change posed for the survival of the human race. But, for
India, 2015 was a year of sudden changes and contrasts. It took just days for the
crescendo of infallibility and invincibility to crash into a pit of despair and dejection.
If the high point was the feeling of smugness to see the worlds most powerful man
braving smog and a drizzle to catch the Republic Day parade in the capital, the low
point was the bounce-back into the political arena of a crusader from bureaucracy, one
of the three strands choking the common man in its tentacles of quid pro quo. Not
surprisingly, the market, too, took no time to come back to reality after reaching the
zenith as the euphoria of India finally cutting the umbilical cord of giveaways to
farmers and friendly capitalists got punctured by the second consecutive deficient
southwest monsoon. Ironically, it poured and how in some coastal belts even as a
parched Maharashtra continued its tryst with famine and farmers suicides. The
trepidation in waiting for the most powerful woman on earth to act outdid the plot
line of a Hitchcock movie in its twisted suspense even as foreign equity and debt
investors suffered a spell of vertigo. Nonetheless, foreign direct investment made a
beeline on spotting of opportunities in insurance and defense and Make in India even
as China collapsed under the weight of excess capacities and unbridled speculation in
the primary market. If there was unanimity on the cause excessive leverage of
the euro regions recession, there was no such agreement on why Indias growth engine
had lost steam. The reasons ranged from those with substance (the slow pace of
reforms) to bogus (failure to build consensus with a recalcitrant opposition focused
single-mindedly on stalling legislation to trip the economy).
The confusion was evident elsewhere, too. The ghost of Hamlet haunted the Fed
as it wrestled with the dilemma to raise rates or not to without upending the emerging
markets and so also our own central banker: tame food inflation or boost industrial
output. Banks, though, shrugged off the benevolence, obsessed as they were in cleaning up their balance sheets, marked with years of generosity to customers with closeness to the movers and shakers as collateral. Squeezing margins, falling demand and
spirally food prices were not the ingredients to boost the spirits, despite falling
commodity prices proving to be a silver lining. The promise of operational autonomy
in lending was as enchanting as a rainbow. In fact, the hard times exposed the unpalatable underbelly. Despite rapid urbanization, villages held the key to savings and
consumption. No wonder, financial inclusion became a buzzword, with attractive
acronyms coined to capture the essence. Transfer of subsidy benefit and deduction of
pension and accident cover premium were believed to be the recipe to bite into the
banking habit. A welcome sign was the thrift on display, ranging from selling natural
resources through bidding to reluctance in waiving loans and ramping up a minimal the
minimum support price for crops. Yet, there was splash of indulgence. The hefty
increments recommended by pay commissions transformed government and PSUs as
sought-after employers as evident from the clamor to expand reservation quotas.
The Bihar polls demonstrated that getting the mathematics of caste and community
equation right mattered more than the combustible composition of a corruption-free
society. If the results underlined the limits of brand power and the downside of brand
dilution, they also reinforced the adage of what it means to win the battle but to lose the
war. It was triumph of parochialism (Bihari v Bahari), viewed as a legitimate concern
when practiced by one set of players but not by others (presidential campaign in the
US). Hypocrisy was perhaps the most enduring takeout of the year. For the sullen
opposition, the idea of pulling India by the bootstraps came to imply sabka saath, ek
family ka vikas. The indefatigable salesman, logging flier miles to make friends for India,
was ridiculed for being an NRI and enthralling a constituency that was not going to vote.
A 56-day sabbatical to mysterious lands, however, was considered necessary for reinvention and rejuvenation. Unwittingly, the argument exposed the chinks in the intolerant debate. The existential fear stemmed from the attack on holy cows of cronyism and
appeasement of entrenched interests and the emergence of voices that were hitherto
suppressed. There was shock and awe that many might actually like and share a new
growth trajectory based on market intervention rather than the state-knows-best trickledown economics. The climate in India surely underwent a change in 2015.

the economy, many companies
have exited non-core and
unrelated businesses to focus
on their flagship and/or to
reduce balance-sheet leverage.
Corporate restructuring can be
a long-drawn process and a
painful exercise.
Lallabh Khachara, e-mail

Branching out
If the purpose of forming
subsidiaries and associates is
to trick the minority shareholders, it is not easy to
unearth such instances as the
transactions could be buried
under layers of financial
statements (Stocks: Keeping it
simple, Nov 23-Dec 06,
2015). Such sophisticated
work is executed by professionals and tracing it is not the
small investors cup of tea.
Rajesh Gavridadh, e-mail

It is difficult to value
companies that are having a
range of businesses. A lossmaking business can be a drag
on profit-making sister
concerns. This can adversely
impact the overall valuations
of companies. Therefore,
going for de-mergers make
immense sense.
Raghuvir Pipaliya, e-mail

Companies facing headwinds

go for restructuring. This
involves exiting non-core
businesses to protect and
sustain the core business. In
particular, over the last five
years, a challenging period for

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Companies with clean balance

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can command sustainable
premium over competition over
the long term. It is easy to corelate focused businesses with
their growth drivers. Investors
can pick a trend or growth
driver and subsequently explore
companies that are likely to
benefit from it.
Gautam Vakvad, e-mail

Small bites
To ensure that the inflows of
foreign funds are spread out
across the board, it is necessary that companies expand
their capital (Editorial: Safe
and sound, Nov 23-Dec 06,
2015). An economic climate
that holds the promise of
increase in consumption can
embolden enterprises to
undertake fund-raising. It is at
a delicate juncture when the
economy is at the crossroads
of bottoming out and bouncing
back that the vacuum of retail
investors is realized.

companies the flexibility to

plan for the long term
without being bogged down
by quarterly targets. Also,
decisions are based on
domestic considerations and
company-specific events
rather than second guessing
the actions of the central
banks around the world.

fault is not because Sebi is

lacking the will to enforce
discipline. Confidence in the
economy at large and the role
of the issuer in the scheme of
things are the pivots. The
market is willing to pay a
premium to companies that
have survived and prospered
even in tough times.

Murti Talasu, e-mail

Lalit Bishnoi, e-mail

It is not that our policy makers

are not aware of the positive
impact of the small investors
on the equity
market. Market
Securities and
Exchange Board
of India keeps on
tinkering with
guidelines to address the
problems faced by the
marginalized investors. Yet the
revisions in various regulations
were not followed by a spurt in
retail participation.

Bouncing back
Indias initial public offering
(IPO) market is coming back to
life after fragile few years as the
improved macro economic
conditions have given birth to
ray of hope to the companies
that wished to take advantage of
investor ebullience (IPOs:
Blowing hot, blowing cold,
Nov 23-Dec 06, 2015). The
Indian capital market is a lot
more stable compared with
several other emerging economies such as China, Indonesia,
Brazil, Malaysia and Russia.
Demand for Indian IPOs is
coming both from domestic as
well as international investors.
This fact is cheering primary
market participants.

Tumbeshar Panda, e-mail

Ramesh Dashardhi, e-mail

There is a point up to which a

safety net can work. Investors
want transparency from
companies and swift and
visible penal action against
errant promoters from Sebi. At
the same time, it is wrong to
create an environment that
encourages small investors to
believe that there are no risks
and only gains.

As small investors take small

bites, the advance in prices
might not be as sharp but
then volatility is also low.
Many of them hold their
investments for several years
and are happy with regular
dividend payment, allowing

Apart from a secure atmosphere being a basic requirement, optimism about the
direction of the company going
ahead is more important. If
retail investors do not come
into the market in droves, the

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Keshwa Tyagi, e-mail

Capitaline is an analysts delight, yet

easy to be trained upon. Even web
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For details contact

Kishor Pithawala, e-mail

Poor record
Only six Nifty constituents had
disclosed their dividend policies
in their latest annual reports
(Dividends: Spell it out, Nov
23-Dec 06, 2015). Only four of
them have specifically given the
dividend payout ratio. The
remaining two have commented
about the dividend policy in
generic terms.
Ganesh Pai, e-mail
Send your feedback to

Capitaline CSS database gives

extensive data on Commodities,
Sectors and the related Stocks.
For details contact

Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET

08 | Cover Story

13 | IPO Centre
Narayana Hrudayalaya
Un-affordable for investors

Stocks: Time tested

The stock market is set to enter the New Year with multiple uncertainties. This will
be an opportunity to cherry pick stocks with consistently high ROE

14 | In Focus
Gold & jewelry stocks
Losing glitter

79 | Over The Counter

90 | Capitalaline Corner

Insider deals
RPower, Titan see promoter rejig holding

Elantas Beck India

Electrifying growth

A strong cast

80| Apna Money

32 | Corporate Scoreboard

Healthy and wise

69 | Market Watch

Keeping a check on inflows

60 | Consolidated Scoreboard

Edging out
The sun rises
Catching a falling knife

68 | Stock Watch

Movers and shakers

Catching cold
Sizzlers and dampeners

Why returns on equity

schemes so low?
What are the benefits of Atal
Pension Yojana?

Track stocks real-time on
Hot Pursuit captures market action tick by tick



Sample some of the captions of 16 October 2015:

66 | Bulletin
67 | Watch List
IPO Ratings


You can get all IPO ratings on our website.

Due to short lead times, we are not able to
carry some of the IPO ratings in the
fortnightly magazine. But our web site will
give the ratings of every IPO on the day it
opens for subscription.

TCS gains after winning deal from Deutsche Lufthansa AG (16-Dec, 13:33 Hrs IST) More

Keep Your Portfolio Online

REC gains after large bulk deal (16-Dec, 11:54 Hrs IST) More

Several investors maintain their portfolios

online at our site. Premium services
(ApnaMoney) include alerts on all corporate
actions like board meetings, dividends etc.
Also ready output statements segregating
short-term and long-term gains.

L&T inches up after CPPIB invests Rs 1000 cr in L&T IDPL (16-Dec, 11:01 Hrs IST) More
HDFC Bank gains after raising funds by way of debentures (16-Dec, 10:42 Hrs IST) More
Wipro drops after issuing Q3 revenue warning over Chennai floods (16-Dec, 10:09 Hrs IST) More

62 | Company Index


Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET

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Capital Market Publishers India Pvt. Ltd.
401, Swastik Chambers, Sion-Trombay Road, Chembur, Mumbai - 400 071, Maharashtra, India
Tel: 022-25229720 Email:




Time tested
The stock market is set to enter the New Year with multiple uncertainties. This will be an opportunity
to cherry pick stocks with consistently high ROE
The view of risk in equity market is largely
confined to volatility of stock prices.
Higher the volatility more is considered to
be the risk in investment. The concept of
total risk measured in terms of standard
deviation or market risk as determined by
the beta value are based on the volatility of
a stock price in isolation or in relation to
other stocks or markets.
However, this seems to be a narrow interpretation of risk. In the equity market,
there is risk of losing the entire capital. This
risk is not imaginary but real. If one looks at
the debacles of companies owing to poor
corporate governance and accounting scandals in the domestic and international markets since 2008, practically the entire capital or investment has been wiped off. Worse,
a few companies went bankrupt, leaving investors in lurch.
Now, can the risk be quantified as
money invested? This could be another way
to look at the concept of risk. Investor
putting in Rs 10000 in stocks can lose the
entire amount. Hence, the risk can be
equated to Rs 10000.
Now if the risk is nothing but the amount
of money invested in equities, it is essential
to check what kind of returns this investment is generating. Here the returns are not
about movement in the stock price but the

profit generated by a company based on the

invested capital. Equity investment is about
putting money in businesses and betting on
their prosperity.
A prospering business and outlook will
eventually result in wealth creation. This
is very much true if one ignores the shortterm movements and focus on the mediumto long-term performance of stocks. Companies that are doing well are being rewarded by the market, while those with
disappointing numbers are punished. Thus,
it makes immense sense to look at what
sort of money is being generated by businesses. The outlook, size of opportunity,
quality of management and the strengths,
weaknesses and threats to the business
matter for wealth appreciation.
The returns on invested equity capital is measured by a ratio called return on
equity (ROE). This is one of the most
important ratios for investors. Many investors can be seen placing greater emphasis on this ratio, while exploring the
world of equities. The singular figure of
ROE can provide a gist of all the business
activities carried out by an enterprise. The
ROE reflects how effectively and efficiently the management deploys capital
to yield the maximum returns on invested
equity capital.

ROE, also known as return on net

worth, is calculated as adjusted net profit
minus preference dividend upon paid-up
equity capital plus reserves. This is expressed in percentage term. The paid-up
equity capital plus reserves is nothing but
the net worth of a firm.
Based on the ROE, investors can decide if the returns generated by companies
are adequate and satisfactory. Investors can
even compare one company with another
to take a call.
Investors can pick companies with
consistently high ROE for investment.
Divis Laboratories is one company with
remarkable consistency in ROE over the
last five years. In fact, the pharmaceutical
company has shown the least quantum of
variation in ROE during this period. It reported ROE of 26.37% in the fiscal ended
March 2015 (FY 2015), 28.31% in FY 2014,
25.99% in FY 2013, 27.14% in FY 2012
and 25.9% in FY 2011. Its ROE moved in a
narrow range of 25.9% and 28.31% over
the last five years with standard deviation
of mere 1. The standard deviation measures
the amount of variation or dispersion in a
given set of data values.
The stability reported in ROE is simply amazing. Investors are almost assured
of earning a certain amount of return on
Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET

the money invested in the equity capital
measured in terms of ROE. Such a well
crafted consistency in ROE cannot be coincidence. It has to be a result of a well
thought-out business strategy and its meticulous execution. It reflects the fact that
each rupee is being invested in projects
with unambiguous clarity.
Divis is a cash-rich company, with investment of Rs 660 crore and cash of Rs
62.5 crore end September 2015. In August
2015,bonus shares were issued in the ratio
of 1:1. In 2009, bonus shares were issued in
the same ratio.
Largely, the focus is on exports that contributed 87% to the top line as against an
even higher 91% in the previous financial
year. The facilities are approved by various
regulatory bodies and primarily manufacture active pharmaceutical ingredients (APIs)
and intermediates for generics, custom synthesis of APIs and advanced intermediates
for discovery compounds, building blocks
for peptides, building blocks for nucleotides,
carotenoids and chiral ligands.
Capital Market picked companies with
a consistently high ROE over the last five
years. Only fairly liquid ones were chosen.
Next, companies whose latest annual reports
were available till the period ended September 2014 were selected. Further, companies
to have reported ROE of 25% or higher in
the latest financial year were considered.
It emerged that the high ROE is a stringent criterion. There are only 183 companies with ROE equal to or in excess of 25%.
This is out of around 3,200 listed companies. Invariably, this means out of every 100
companies, only six companies have reported ROE equal to or higher than 25% in
the latest financial year.
Next, companies to have reported
ROE of minimum 25% in each of the last
five financial years were shortlisted. With
this filter, only 55 companies emerged.
Considering 3,200 companies, around two
out of every 100 firms have managed to
report ROE equal to or in excess of 25%
in each of the last five years. Last, companies with mutual fund holing of less than
1% were removed. At the end, 40 companies remained in the ring (see table:
High benchmark).
Among these 40 companies, the top five
with the highest ROE were ColgatePalmolive India (82%), Castrol India (76%),
Page Industries (58%), Hawkins Cooker
(56%) and Britannia Industries (55%).
Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET

A stable player
Divis Laboratories has shown
remarkable consistency in ROE over
the last five years, with the least
quantum of variation
Relative performance of
Divis Laboratories v BSE Sensex

Base=100 as on 14 December 2014
Face Value of Rs 2

*15 December 2015

The recent correction in the stock market, which is largely across the board, can be
the right time to explore this special set of
companies for investment. In fact, the market is likely to remain weak in the near future and provide a long enough window for
investors to weigh the pros and cons of each
of these stocks before taking the plunge.
The S&P BSE Sensex, the key stock
market barometer, has corrected by 4,705
points, or 15.7%, from its 52-week high of
30,025 reported in March 2015. Similarly,
the Nifty is down by 1,418 points or 15.5%
from its yearly high of 9,119 in March 2015.
The stocks with consistently high ROE have
also witnessed a sizable correction. Therefore, the present times can be the opportune
time to explore such stocks for investment.
The reforms process has came to a grinding halt. The government has not managed
to mend fences with the opposition. New
Delhi seems to be busy with fire-fighting
stray issues that can look pure nuisance a
few years down the line.
The end result is that the policy makers are not able to legislate at the desired
pace and in the desired quantum. Key legislations such as the Land Acquisition Bill
and the Goods and Services Tax (GST) Bill
are stuck and their fate continues to be uncertain. In November 2015, global rating
agency Moodys expressed concerns over
the failure to reform obstacles that might
hamper investment and prove a downside
factor for companies.
The global scenario continues to be hazy
and uncertain. Confused soul Janet Yellen,
the chairperson of the US Federal Reserve,
might or might not increase interest rates in

December 2015. But, as in the past, the Fed

is busy preparing ground for a possible rate
hike through sound bites and media interactions. A possible rate hike by the US Fed
remains a big uncertainty.
The apprehensions over slowdown in
China remain. This is one major factor that
will largely determine the future of commodities and players over the near term. The
manufacturing hub of the world is likely to
report economic growth 6.8% in the calendar year (CY) 2015 and 6.3% in CY 2016
compared with growth of 7.3% in CY 2014.
These figures are as per the World Economic
Outlook released by the International Monetary Fund in October 2015.
There is not much news from the European Union. The overall scenario continues
to be dismal for European countries. The
recent terrorist attacks on Paris and other
parts of the world, the ongoing war in Syria
and Turkeys downing of Russian warplane
are not helping as well and are adding to the
anxiety of investors.
In all probability, the stock market is
set to enter the New Year with multiple uncertainties that, in turn, will keep investor
sentiments jittery and shaky. This will be
an opportunity to cherry pick stocks with
consistently high ROE.
The good part is the fact that the shortlist of companies with consistently high ROE
is not dominated by any particular industry. Companies across industries are present.
These include auto ancillaries and automobiles, cigarettes, software, domestic appliances, capital goods, fast moving consumer
goods, housing finance, food and dairy products, lubricants, paints, personal care, pharmaceuticals, plastic products and textiles.
Further, investors can explore these companies based on various themes. The list includes ones with hefty cash hoardings and no
debt. Investors can opt for firms with significant institutional presence, robust growth in
the top line and the bottom line, high dividend payouts, superior operating profit margins, ambitious expansion plans and alluring
history about bonus issues. Also, investors
can go for companies with a significant increase in ROE over the last five years.
The stock market remains in a bearish
zone and sentiments are likely to remain
weak in the near future. This is the right
time to deploy the conventional wisdom of
buy low and sell high. Importantly, the plot
is about good quality stocks with consistently high ROE.

Among the select companies, Adi
Finechem is the smallest by market value
(Rs 309 crore). The specialty chemical
manufacturer garnered 75% of its revenues
from oleo chemicals and 25% from
neutraceuticals in FY 2015.
In November 2015, plans were disclosed
to invest Rs 100 crore over next five years.
The capital expenditure is to increase capacity, reduce per unit manufacturing cost,
improve efficiency, up- grade current product streams and add new products to the
portfolio. Considering the capacity expansion plans and the domestic and global economic scenario, the target is to achieve
CAGR of around 25% in sales and earnings
before interest, tax, depreciation and amortization (Ebitda) over the next five years.
Sales grew at CAGR of 23% between FY
2015 and FY 2010.
Mutual fund held 3.41% equity end
September 2015. The stock had hit an alltime high of Rs 395 in January 2015 and is
currently available at Rs 224.
Mutual funds owned 13.83% stake in
Credit Analysis & Research (Care) end
September 2015, the highest among the select companies. With no promoters, the largest public shareholders include Life Insurance Corporation (equity stake of 8.21%),
Canara Bank (7.49%), Franklin Templeton
Investment Funds (6.03%), State Bank of
India (5.87%) and IDBI Bank (5.21%).
Commencing operations in 1993, the
second-largest credit rating agency in the
country had rating volume of debt at Rs
68 lakh crore end March 2015. It offers
banks, sub-sovereigns and initial public
offer gradings.
The zero-debt company for the last several years has reported a consistent increase
in the bottom line over the last decade. The
total volume of debt rated increased 12.2%
and the total number of instruments rated
was up 18.6% in the first half of FY 2016
over a year ago. The number of active clients was 10,950 end September 2015 compared with 10,332 end June 2015 and 9,828
end March 2015.
eClerx Services is another stock popular with mutual funds, which controlled
12.11% stake end September 2015 in the
mid-cap counter. The stock scaled an alltime high of Rs 1949 in October 2015. The
knowledge process outsourcing company
incorporated in 2000 and publically listed
in 2007 reported revenue CAGR of 30%
between FY 2015 and FY 2007.


Growing at a steady pace
Credit Analysis & Research, zero-debt
company for the last several years, has
reported a consistent increase in the
bottom line over the last decade
Relative performance of
Credit Analysis & Research v BSE Sensex

Base=100 as on 14 December 2014
Face Value of Rs 10

*15 December 2015

Around 65% of the revenues come from

Fortune 500 clients. There are over 8,000
installed seats and 8,700 employees across
five delivery centers located in Mumbai,
Pune and Chandigarh. There are over 30 global Fortune 500 clients including financial
services firms, online retail and distributors,
interactive media, luxury brands and entertainment, high tech and industrial manufacturing, travel and leisure and software vendors. Business operations services are provided through operational support, data
management and analytics solutions.
The zero-debt firm had cash and cash
equivalents of Rs 286.6 crore and investment of Rs 155.3 crore end March 2015.
Early 2015, CLX Europe SPA, a creative
services firm, was acquired.
Alembic Pharmaceuticals emerges
on the top, with a robust growth of 85.7%
in net profit in the latest trailing 12 months
(TTM) ended September 2015 among the
select companies. Equally, TTM net sales
grew an impressive 30.9% over a year ago.
Established in 1907, the manufacturer and
marketer of pharmaceutical products,
pharmaceutical substances and intermediates gets 84% of its revenues from formulations. Three active pharmaceutical ingredients (API) and one solid dosage formulation unit is approved by the US Food
and Drug Administration (FDA). Primarily, there is presence in the therapeutic
segments of anti-infectives, gastrology,
cardiology, gynecology, cough and cold
and anti-diabetic.
Nine abbreviated new drug application
(Anda) approvals have been received so far
in the current fiscal. Approval was received

for two Andas and applications for three

Andas were filed in the September 2015
quarter. In aggregate, applications for 71
Anda and 75 drug master files have been
filed. There are plans to launch 10-12 Andas
each year in the US. Further, seven-nine
products will be launched per annum in the
US over the next three years. In the recent
past, capacity expansion was undertaken to
ensure future growth.
Asian Paints has not issued bonus
shares over the last one decade. However,
prior to that, bonus shares were issued on
six occasions since 1985. The last bonus issue, in 2003, was in the ratio of 1:2. The
moderately-leveraged company is highly
profitable, with ROE of 32.5% in FY 2015.
The countrys largest paint producer for almost half a century is the worlds 11th largest coating company and the second largest
paint manufacturer in Asia.
There are 26 paint manufacturing units
and operations in 19 countries. Products are
marketed in 65 countries. Income from the
domestic decorative segment accounts for
81% of the total revenues. The remaining
revenues come from international operations
(13%), industrial coatings (5%) and home
improvement solutions (1%). The network
consists of 35,000 dealers.
In August 2013, a 51% stake was acquired in Sleek International to enter the
kitchen space, part of the home improvement segment. The capital expenditure for
the current fiscal is estimated at Rs 700
crore. Expansion of the Rohtak unit to four
lakh kilo litres (kl) from two lakh kl per
annum is progressing as per schedule. The
focus is on widening of the distribution
network. A fully-automated manufacturing facility is to be set up over the next
two to three years.
One striking feature of ColgatePalmolive (India) is the stable operating
profit margins (OPM) measured by profit
before interest, depreciation and tax over the
last five years. OPM moved in the range of
20% and 23% over the period. The market
leader in dental-care products had a volume
market share of 57.6% in the toothpaste
category and 43.3% in the toothbrush segment between January and September 2015.
Key brands include Colgate Dental Cream,
Active Salt and Max Fresh. Also, a specialized range of dental therapies are sold under
the banner of Colgate Oral Pharmaceuticals.
Besides, on offer are a range of personalcare products under the Palmolive brand.
Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET



High benchmark
Only 40 companies have reported ROE of a minimum 25% in each of the last five financial years and have mutual fund
holding in excess of 1%


Tata Consultancy Services

Coal India
Asian Paints


(Rs cr)






















(Rs cr)

(Rs cr) CHG

















































Bajaj Auto














Dr Reddys Laboratories














Hero MotoCorp














Cadila Healthcare














Britannia Industries














Titan Company






















































GlaxoSmithkline Consumer













Torrent Pharmaceuticals






































Divis Laboratories

Castrol India
Procter & Gamble Hygiene
Amara Raja Batteries


















































Ajanta Pharma














GRUH Finance














Supreme Industries














Kajaria Ceramics



























Bajaj Corp













eClerx Services


























Page Industries
Alembic Pharmaceuticals

Zydus Wellness













Kaveri Seed Company













VST Industries













Vinati Organics













Mayur Uniquoters













Hawkins Cooker













Swaraj Engines













Atul Auto













Orbit Exports














Adi Finechem













CMP (current market price) is closing as on 9 December 2015. Mutual fund holding as of September 2015. FY: Financial year. Consolidated financials considered wherever available.
ROE : Return on equity. P/E : Price to earnings. TTM RPAT : Trailing 12 months reported profit after tax is for period ended 30 September 2015.
Change in TTM sales and RPAT over the previous corresponding period.
Source: Capitaline Databases

Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET


Recently, several new products were
launched including Colgate 360 Toothbrush, Colgate Total Charcoal Deep Clean
Toothpaste, Colgate Active Salt Neem
Toothpaste, Colgate Zig Zag Black Toothbrush and Colgate Sensitive Pro-Relief
Enamel Repair Toothpaste. Bonus shares
were allotted in the ratio of 1:1 in September 2015. What is special about the debtfree for the last several years is the fact
that ROE was in triple digits in six of the
last 10 financial years.
Public sector undertaking Coal India
is among the top-ranking companies by
cash hoard. The Maharatna coal miner had
cash and cash equivalent of Rs 57593 crore
end September 2015. From a 52-week high,
which also happens to be the all-time high
of Rs 447, the stock has corrected 31%.
The largest producer of coal in the
world operates through 82 mining areas
spread over eight states in the country.
There are 430 mines, of which 227 are underground, 175 opencast and 28 mixed.
Further, there are 15 coal washeries: 12
coking coal and three non-coking coal. There
are eight direct Indian subsidiaries and one
foreign subsidiary in Mozambique: Coal
India Africana Limitada.
Indeed, there is monopoly status in coal
mining, with production of around 82% of
the countrys coal output. About 78% of
the production goes to power utilities, with
97 out of 100 thermal power stations in the
country receiving the coal. Coal production
was 494.24 million tonnes (mt) and off-take
489.38 mt in FY 2015.
Kaveri Seed Company is facing
headwinds owing to multiple negative developments, with the prime being belownormal monsoon. The deficiency in rainfall has spoiled the prospects of rabi crops
as well. Also, FY 2016 has been one of the
most challenging years for cotton, with a
significant drop in volumes and acreage.
The cropping pattern has shifted unfavorably from corn and millet to pulses and
oilseeds. There is a liquidity crunch, with
farmers and dealers resulting increase in
receivables. Mirroring these negatives, the
stock plunged to the current level of
Rs 382 from a 52-week high of Rs 1077
in March 2015.
Nonetheless, ROE has increased significantly over the last five years. The next
fiscal is expected to be favorable. There is
a diversified product portfolio with cotton, maize, paddy, millet, sunflower and

Remarkable pace
Kaveri Seed Companys ROE has
increased significantly over the last
five years. The next fiscal is expected
to be favorable
Relative performance of
Kaveri Seed Company v BSE Sensex

Base=100 as on 14 December 2014
Face Value of Rs 2

*15 December 2015

vegetables. There are five owned plants

across the country, with a combined processing capacity of 110 tonnes per hour.
There is a network of more than 25,000
distributors and 350 marketing professionals. Over the next three to five years, new
products in cotton, maize and paddy suitable for northern and central India are going to be introduced.
Among the mid-cap stocks, Hawkins
Cooker tops the chart, with ROE of 56%
in FY 2015. The manufacturer and marketer of Hawkins, Futura and Miss Mary
pressure cookers and Futura cookware has
production units for pressure cookers at
Thane in Maharashtra, Hoshiarpur in Punjab
and Jaunpur in Uttar Pradesh.
Over the last decade, sales of the debtfree country at the net level increased 3.75
times and profit 8 times. To accelerate sales,
work is going on multiple fronts such as
development of new and improved products, brand building, advertisement and creation of consumer awareness and strengthening relationship with the dealer network.
Mutual funds held 10.3% equity end September 2015.
Ajanta Pharma reported the highest
increase of 32% in net sales in the TTM
ended September 2015. With branded generic business in India and emerging markets, generic business in the US and institution business in Africa and India, there are
manufacturing facilities at four locations
across the country and one in Mauritius.
One of the manufacturing facilities in India
is approved by the US FDA, UKs Medicines and Health products Regulatory
Agency, pre-qualification from World Health

Organization, apart from having approval

from FDAs of many other countries.
The new formulation manufacturing facility at Dahej in Gujarat has started taking
regulatory filing batches. Also, the process
is on to establish another formulation facility at Guwahati in Assam. Ophthalmology,
dermatology, cardiology and pain management are the focus therapeutic segments.
The debt-free company at the net level
has lately started targeting the US market.
Five Anda approvals have been received. Of
these, one product is already in the market
and the remaining four are to be launched in
the quarter starting January 2016. Another
20 Andas are in various stages of approval
with the US FDA. Of these, one has received tentative approval.
Investors can monitor change in ROE over a
period of time to determine the efficiency of
companies in deploying equity capital. Intermediate fluctuation in ROE can be ignored. But a consistently fall in ROE should
be considered as red flag.
ROE is equally focused on the profit
and loss account and balance sheet. Enterprises have to be prudent in financing of
businesses and growth plans. Among the 40
firms, 20 have no debt on the balance sheet,
while another 10 have negligible leverage. A
high ROE on a consistent basis is result of
prudent financial management and not accidental. Considering this fact, the performance
of these companies is striking.
The correction witnessed by the stock
market across the board presents compelling opportunity for investors to cheery pick
companies with robust businesses. The
market is presently facing concerns on the
twin front of liquidity and dismal corporate
earnings. The issues surrounding liquidity
are rather short term, depending on the call
taken by the US Federal Reserve. Corporate earnings are something to watch out for.
However, on the positive side, the domestic
economy is among the fastest growing
economy in the world. This will eventually
aid corporate revival.
The present gloom and pessimism in
the market is likely to spill over to the next
year as well. This means investors will get
ample time to shortlist stocks for investment. Companies reporting consistently
high ROE certainly deserve to be part of
investors watch-list.
S Khedekar
Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET

Narayana Hrudayalaya

CM Rating 40/100

Un-affordable for investors

Shares priced in line with inflated valuations of other
large listed players

working at around 45% of capacity, generating around 5% Ebidta margins. The remaining 14 hospitals are operating at negative
Ebidta and are operational for less than three
years. Typically, a hospital breaks even in
three-four years and then the operating leverage starts. Thus, there is plenty of scope
for margin improvement going forward.

Narayana Hrudayalaya Ltd (NH) was

founded in 2000 in Bangalore, by Dr Devi
Offer size (in no. of shares )
2.45 crore
Nearly 58% of the revenues came from three
Prasad Shetty, who has over 30 years of
Price band (Rs)*
major hospitals: two in Bangalore and one
medical experience including as a cardiac
Issue open date
in Kolkata end March 2015.
surgeon and has received a number of naIssue
Around 20% of the revenues were detional and international awards including the
rived from government-sponsored health
Padma Bhushan in 2012.
schemes requiring government compliances
The private healthcare service provider in
insurance coverage are leading to increase in
and some benefits to be passed on to paIndia operates a chain of multispecialty, terdemand for quality healthcare services, partients. The receivables of these services come
tiary and primary healthcare facilities. There
ticularly tertiary healthcare services.
from the state and Central governments take
is a broader network of healthcare facilities,
An asset-light model is used for expanmore than 90 days.
with 23 hospitals, eight heart centers and 25
sion of the hospital network, enabling optiConsistent negative cash flows in the
primary care facilities across a total of 31 citmum utilization of funds. The partners
four years due to investments in greenies, towns and villages in India, with 5,442
be it government or trusts own the fixed
field and brown-field acquisitions.
operational beds and the potential to reach a
asset. Investment is only in medical equipLess than 5% return on equity (ROE)
capacity of up to 6,602 beds. The facilities
ment and operates and manages the hospital
over the past five years.
provided care to over 19.70 lakh patients in
and shares a small portion of the revenues
the fiscal ended March 2015 (FY 2015).
with these partners. This calibrated apValuation
The presence is mainly in the southern
proach has allowed effective capital cost per
NH has been growing its revenues at 30%
state of Karnataka and eastern India. There
bed of Rs.25.5 lakh end March 31, 2015.
compounded annual growth rate over the
are plans to expand to Lucknow in central
The niche strategy allows healthcare serpast four years. The operating profit marIndia and Mumbai in western India, thereby
vices at affordable rates.
gins (OPM) have also been maintained
adding 623 beds under management in the
Of the 23 hospitals, six are matured,
at11% to 12% (except in FY 2015). Hownext 24 months.
operating for more than five years and are
ever, high and rising interest and depreciaThere is strong legacy in cardiac and reoperating at around 60% of capacity and
tion have left little at the net profit level,
nal sciences. As many as 51,456 cardiology
generate around 24% earnings before interwith the highest EPS of Rs 1.6 in FY 2014.
procedures, 14,036 cardiac surgeries, and
est, depreciation, tax and amortization
Net consolidated revenues grew 20% to
184,443 dialysis procedures were performed
(Ebitda) margins. The three hospitals are
Rs 1363.85 crore and the OPM at 9.5% in
in FY 2015. Cardiology and cardiac surgery
operational for less than five years and are
FY 2015. Due to acquisition of hosaccounted for 54.3% of the in-papitals and related integration and marNarayana Hrudayalaya: Consolidated Financials
tient billed revenues.
keting costs, there was consolidated
Core specialty areas have been
1203(12) 1303(12) 1403(12) 1503(12) 1509(06)
loss of Rs 10.86 crore at the profit
expanded to include four additional
Total Sales
after tax (Pat) level. Consolidated net
areas of focus: cancer care, neurolOPM (%)
sales stood at Rs 783.36 crore and
ogy and neurosurgery, orthopaedic,
consolidated Pat stood at Rs 12.49
and gastroenterology. Clinical trials
Other in.
crore in the six months ended Separe conducted for pharmaceutical
tember 2015. Given the seasonality
and medical equipment manufacturInterest
of business, H1 of FY 2016 EPS is
ing companies and certain educaPBDT
not annualized. Book value stood at
tional and training courses are ofDep.
around Rs 39 end September 2015.
fered to doctors and paramedics.
Enterprise value (EV)/ Ebidta
at 38.9, EV/Sales 3.9 and EV/
operational bed Rs 1 crore and return
The healthcare service market comon capital employed 4.6% end March
prises seven beds per 10,000 people
2015. For Apollo Hospitals, the raPAT
as against the global medium avertios stood at 26.6, 4, Rs 3.3 crore and
EPS (Rs)*
age of 27. Changing demographics,
10.2%, respectively, and for Fortis
*EPS is on latest equity capital of Rs 204.36 crore of face value of Rs 10 each.
increasing affluence, greater health
# EPS not annualised due to seasonality of business. Figures in crore.
Healthcare 43.3, 2.4, Rs 2.8 crore and
awareness, increase in lifestyle-reSource: Capitaline Database
negative 0.3%, respectively.

lated diseases, and increasing health
Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET



Gold & jewelry stocks

Losing glitter
Frequent interventions by the government and unstable policies
continue to be the biggest impediment
The gold jewelry and diamonds industry is
among the biggest in the country. India is the
largest consumer of gold and accounts for 20%
of the worlds gold consumption. Gold jewelry forms around 80% of the domestic jewelry market. The fabricated studded jewelry,
which includes diamond and gemstone studded jewelry, accounts for the rest. As per a
study conducted by the consultancy firm AT
Kearney, Indias gems and jewelry industry
is expected to double in the next five years to
reach Rs 5 lakh croreRs 5.3 lakh crore by
2018 from Rs 2.51 lakh crore in 2013.
India is the largest cutting and polishing
center for diamonds in the world. According
to the Gems and Jewelry Export Promotion
Council, the country exports around 95% of
the worlds diamonds. The gems and jewelry industry contributes around 6%-7% of
the countrys gross domestic product. The
diamond industry is referred as one of the
fastest growing sectors. It is actively supported by the government because of high
export potential and labor-intensive nature.
The gross exports of the gems and jewelry
sector stood at US$ 39.9 billion in the fiscal
ended March 2015 (FY 2015).
The future outlook for the domestic jewelry market continues to be bright. The major
growth drivers for the gold and diamond jewelry industry includes large-scale migration,
shift in business from local jewelers to organized players, increasing affluence of popu14

lation, change in mindset from savings to

adornment, explosive rise in working women
population and desire for branded jewelry.
Despite such a glittering industry profile,
the performance of several players on the trading floor is far from encouraging and can be
even termed as disastrous. There are many
reasons. Frequent interventions by the government and unstable policies continue to be
the biggest impediment for the industry.
In 2013, the 80:20-rule for gold imports
was introduced along with the abolition of
gold-on-lease. As the gold supply became
an issue, in 2015, both these policies were
reversed. Further, the customs duty on gold
was increased to 10% in the second quarter
of FY 2014. Additionally, the Department
of Company Affairs started regulating the
jewelry purchase schemes in FY 2015. These
policy changes continue to have an adverse
impact on the industry. In another revision,
the new government made the permanent
account number (Pan) card mandatory for
all transactions from Rs 1 lakh to Rs 5 lakh
to curb black money.
Globally, demand from the euro zone
has remained subdued owing to economic
slowdown and crises in Ukraine and Greece.
The biggest market for the industry, the US,
is gradually emerging as a bright spot, with
signs of economic recovery. The global gems
and jewelry market is likely to grow at a
CAGR of around 6% between 2014 and

2019, according to Global Gems & Jewelry

Market Forecast & Opportunities 2019.
Unfortunately, it is not only industryrelated factors that are responsible for the
current disappointing state of affairs. There
are several other company-specific concerns
barring a handful of players. In a few cases,
the situation is a complete mess. There are
defaults. In turn, banks are turning back on
jewelry companies. Worse, there are corporate governance and accounting issues. A few
companies have turned defunct.
A total of 37 diamond and jewelry companies have market value of Rs 65181.8
crore in aggregate. If the top two most valuable industry players, Titan Company
(market cap Rs 31920.9 crore) and Rajesh
Exports (Rs 20158.7 crore), are removed,
the remaining 35 companies are valued at
mere Rs 13102.3 crore. Individually, Titan
and Rajesh Exports are more valuable compared with the remaining 35 companies in
the sector.
Of the 37 companies, 11 have touched
their historic bottoms in 2015. Out of these
11 companies, seven have lost over 80% in
market valuable, considering the current market price and the all-time high. These seven
firms include Tara Jewels (84.1%), Shree
Ganesh Jewellery House (96.7%), Goenka
Diamond & Jewels (95.8%), C Mahendra
Exports (99.2%), Winsome Diamonds &
Jewellery (99.4%), Classic Diamonds (100%)
and SB & T International (99.3%).
Mutual funds have little interest in the
industry. Mutual fund investment is nil in
25 companies and negligible in six companies. Thangamayil Jewellery, with holding
of 7.51%, is most popular with mutual funds,
followed Titan Company (2.18%) and Tara
Jewels (2.11%).
Classic Diamonds is a negative net worth
company. Sans Classic Diamonds, 22 are
available below their book values (BVs).
This again reveals the mix of disappointing
performance, dismal outlook and poor corporate practices. Seven companies reported
losses, while another 10 reported decline in
profit in the latest financial year
Considering the latest trailing 12 months
(TTM), 18, or over 50% of the companies,
recorded a decline in turnover. Growth in turnover was in single digit in case of five firms
and four registered losses and around 15 companies have reported insignificant profits.
Nine firms reported decline in profit in the
latest TTM. Four showed a turnaround,
while one plunged into red in the latest TTM.
Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET

Three companies made losses in the last two
years considering the TTM performance.
Five stocks have touched all-time highs
in 2015, including Titan Company, Rajesh
Exports and PC Jeweller. Lypsa Gems &
Jewellery is an interesting case. The stock
marked an all-time high as well low in the
current calendar year. From its all-time low
of Rs 57.6 in July 2015, it is up 115.3% to
the current level of Rs 124.1. The company
is in the business of trading, importing, exporting, making and polishing diamonds,
gems and other precious stones. In terms of
price to earnings (P/E) ratio, the stock is
moderately valued at 12.3. However, considering the price to BV (P/BV) ratio of five
times, it is among the most expensive stocks.
The small-cap stock is finely leveraged, with
debt of Rs 38.1 crore and a debt-to-equity
ratio of 1.03 times end March 2015. Turnover increased 4.5% and profit by 65% in
the TTM ended September 2015.
The debtors-to-turnover ratio points to
potential trouble. For instance, there are six
companies with debtors-to-turnover ratio
below one. This ratio is determined as turnover divided by trade receivables or debtors.
An abnormally low ratio indicates inordinate
delay in realizing money from debtors. This
could be even owing to manipulation of the
top line to keep investors in good mood.
The statutory auditors have highlighted
a hefty quantum of debtors that might be
doubtful and require provisioning. In fact, the
audit report can provide glimpse of concerns
and apprehensions surrounding a stock.
The auditors of Gitanjali Gems have
drawn attention to overdrawn position of
Rs 70.3 crore in working capital borrowing
from a consortium of bankers, mainly on
account of non-servicing of interest. The total
outstanding balance of working capital borrowing from the consortium of bankers stood
at Rs 4357.4 crore end March 2015. The
facility carries interest ranging from 5% to
14.5% per annum. The working capital borrowings are secured against immovable properties of the company and its subsidiaries.
In 2013, changes were made in the Reserve Bank of India (RBI) policy on issuance of bank guarantee and letter of credit
for purchase of gold. According to Gitanjali,
due to this restriction, there was a sudden
and severe impact on cash flows that continues till date. In FY 2015, there were delay in servicing the interest on working capital borrowing and repayment of principal
amounts. To reschedule external commerDec 21, 2015 Jan 03, 2016 CAPITAL MARKET

Going back on obligation

Gitanjali Gems issued 12% nonconvertible debentures totalling
Rs 125 crore to LIC in June 2009 but
failed to repay the NCDs
BSE Sensex


Gitanjali Gems

D J'15

Base=100 as on 11 December 2014

Face value: Rs 10

D *

* 11 December 2015

cial borrowings (ECB) and to provide additional margin for working capital borrowing, Gitanjali provided for additional security of property of subsidiaries and second
charge on certain property and pledged
shares of the promoters. Additionally, the
promoters provided interest-free unsecured
loan of Rs 64.2 crore.
Gitanjali had issued 12% non-convertible debentures (NCDs) for an aggregate
amount of Rs 125 crore to Life Insurance
Corporation (LIC) in June 2009. The NCDs,
with five-year tenure, are secured by first
pari passu charge over immoveable properties in Hyderabad belonging to subsidiary
Hyderabad Gems SEZ. As the company
failed to repay the NCDs, the terms of the
debentures were revised. Gitanjali has not
paid overdue principal of Rs 2.4 crore. Further, it has not created cash deposit as required by circular issued in February 2013
by the Ministry of Corporate Affairs for
debenture installments maturing in FY 2015.
As per the company, its business and the
cash flows continued to be affected due to
the changes effected last year in the RBI
policy on gold import. Considering the cash
flow constraints, cash deposit of Rs 2.1 crore
was not created.
The auditors drew attention to non-payment of self-assessment tax of Rs 21.6 crore
for assessment year 2013-14 (FY 2013).
Gitanjali incurred cash losses in FY 2014
but not in FY 2015.
Similarly, Thangamayil Jewellery incurred cash loss in FY 2015 and in FY 2014
as well. The auditors of Renaissance
Jewellery have drawn attention to the litigation relating to service tax of Rs 1.8 crore
payable on lease rent of immovable properties for which no provision has been made.

The matter is pending with pending with

the Supreme Court. As per the annexure to
the audit report, physically verification of
inventories of one subsidiary needed to be
conducted at reasonable interval rather than
annually. Further, in case of one subsidiary,
the auditors noticed material discrepancies
on physical verification of fixed assets and
have expressed their inability to comment
on the discrepancies.
Shree Ganesh Jewellery House
(SGJHL) adjusted fixed deposit (FD) of Rs
30.3 crore (Rs 22.9 crore in FY 2014) pledged
as security with Axis Bank as against cash
credit balance in the books of accounts on
maturity of the FD. However, as per the cash
credit account statement furnished by the
bank, the FD was not adjusted with the cash
credit account balance. Therefore, the cash
credit balance, as per bank confirmation,
showed excess by Rs 30.3 crore. Further, as
per confirmation received from the bank, the
matured amount was transferred to a separate account. The bank is yet to provide explanations for such transfers made.
Cash credit balance of Dhanalaxmi Bank
was shown less, as per SGJHLs books, by
Rs 91.6 lakh. Cash credit balance, as per the
books, was Rs 18.3 crore and balance, as
per bank confirmation, was Rs 19.2 crore.
The company contested the excess amount
claimed by the bank in the High Court of
Kolkata and received a stay order. However,
as per the order passed by the court in March
2014, pendency of the writ petition should
not preclude the bank to proceed strictly in
accordance with the master circular of the
RBI on willful defaulters. The amount remained unresolved till date.
Further, one cash credit account balance
of Rs 986.4 crore end March 2015 in which
the impact of Rs 18.2 lakh debited by the
bank in January 2014 and Rs 2.9 crore credited by the bank in August 2014 in the account was not considered. These are subject
to reconciliation.
SGJHLs short-term borrowings of Rs
446.5 crore were not confirmed end March
2015. The auditors were unable to comment
on the consequential impact without confirmation and reconciliation of balances. The contingent liability included demand raised by the
sales tax authorities for Rs 48.1 crore (FY 2014
Rs 47.2 crore), whose outcome is uncertain.
SGJHL prepared the financial statements on a going-concern basis despite facing financial crunch, with inability to meet
financial obligations. It had applied for com15

posite corporate debt restructuring with the
banks. The banks decided to withdraw their
support for restructuring the credit facilities offered to the company in the consortium meeting held in January 2015. The company again requested for reconsideration of
restructuring proposal by all the lenders in
February 2015.
SGJHL incurred cash losses in FY 2015
and FY 2014. The current liabilities are more
than the current assets and there are negative cash flows. The management is in the
process of restructuring and is confident that
measures taken by it are expected to result
in sustainable cash flows. Thus, accounts
were prepared on a going-concern basis.
C Mahendra Exports is one peculiar
case and can be even treated as case study.
Statutory auditors RH Modi & Co have refused to sign the audit report. The auditors
have approached capital market regulator
Securities and Exchange Board of India (Sebi),

Without backup
Renaissance Jewellery made no
provision for litigation relating to
service tax of Rs 1.8 crore payable on
lease rent of immovable properties

Renaissance Jew.


BSE Sensex


D J'15

Base=100 as on 11 December 2014

Face value: Rs 10.

D *

*11 December 2015

the National Stock Exchange (NSE) and the

Bombay Stock Exchange (BSE), stating the
company had sent the annual report for FY
2015 without its consent. In fact, in October
2015, the auditors issued a public notice in

newspapers informing all and sundry that they

have not signed the auditors report.
The feud between the promoters
Chairman Mahendra Shah and Managing
Director (MD) Champak Mehta seems
to be the reason for the awkward situation.
According to the clarification issued by the
company, the MD has refused to sign the
accounts due to his personal dispute with
the chairman. The accounts were then signed
by the chairman. Anyway, almost the entire
audit report for FY 2015 seems to be drafted
in red ink by the auditors. The company has
released unaudited results for the half year
ended September 2015.
The auditors of C Mahendra have expressed a qualified opinion on the preparation of the books of accounts on a goingconcern basis. The operating results were
materially affected due to various factors
including non-availability of finance considering that the consortium bankers re-

Fading charm
Considering the latest trailing 12 months ended September 2015, 21, or over 50% of the companies, recorded a decline in turnover.
Growth in turnover was in single digit in case of four firms and 10 registered losses




(Rs cr)

52-WEEK (Rs)






Titan Company













Rajesh Exports
PC Jeweller













Vaibhav Global












Asian Star Company










Tribhovandas Bhimji Zaveri














Shrenuj & Company













Gitanjali Gems











Thangamayil Jewellery
Lypsa Gems & Jewellery













Renaissance Jewellery












Goldiam International













Mahadushi International
Tara Jewels













Kanani Industries












Shree Ganesh Jewellery











Swarnsarita Gems
Goenka Diamond & Jewels













SJ Corporation










White Diamond Industries












Golkunda Diamonds













C Mahendra Exports











Orosil Smith India






CMP: Current market price. MF: Mutual fund holding as on 30 September 2015. Consolidated financials considered wherever available. P/E: Price to earnings. BVPS: Book value per share. TTM RPAT:
Trailing 12 months reported profit after tax. LP: Loss to profit. TTM: Trailing 12 months ended September 2015. Change in TTM net sales and RPAT is over the corresponding previous period.
Source: Capitaline Databases


Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET

called the financial facilities and took symbolic possession of the premises and due
to stoppage of work at factory. These
events cast significant doubts on the ability of the company to continue as a goingconcern as the volumes of business have
also drastically dropped. The firm needs
to raise adequate funds and recover money
from debtors to meet its short-term and
long-term obligations and to establish consistent business operations. As per the auditors, in absence of any convincing audit
evidences, no positive steps have been taken
by the management, there is non-recovery
of trade receivables and non-payment of
liabilities including income tax dues. Hence,
they were unable to determine the possible
effects on the financial statements. Also,
the auditors were unable to conclude about
the ability of the company to carry on as a
C Mahendra defaulted in payment of
loans to banks and incurred cash losses in
FY 2015. Most banks have not provided
balance confirmations. The auditors were
unable to confirm the bank balances including working capital facility and overdraft and
interest as the accounts are frozen by the
consortium of banks. The company has received notice under Section 13(2) of The
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. No provision for interest
amounting to Rs 91.5 crore was made as all
the bank accounts have become non-performing assets (NPAs).
C Mahendras trade receivables amounting to Rs 1194.9 crore are outstanding for
more than one year. This amount is significant considering the turnover of Rs 583.5
crore in FY 2015 and Rs 4030.4 crore in
FY 2014. The recoveries from these trade
receivables have been almost negligible.
There have been defaults on the payment
obligations by the debtors. As informed by
the management, no reply was received
from any parties to whom legal notices were
sent. No confirmations were obtained. Despite the realizations of the debtors being
in doubt, no provision was made in the
books of accounts.
In the absence of audited or unaudited
results of subsidiaries and step-down subsidiaries of C Mahendra, the auditors were
unable to obtain sufficient audit evidence
about the carrying amount of investment in
various subsidiaries end March 2015. Investments continued to be valued at cost.
Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET

In the dark
SGJHLs short-term borrowings of
Rs 446.5 crore were not confirmed end
March 2015. The auditors were unable to
comment on the consequential impact
BSE Sensex


Shree Ganesh Jewellery House


D J'15

Base=100 as on 11 December 2014

Face value: Rs 10

D *

* 11 December 2015

For inventories, no valuation was carried out by an independent appraiser as done

in the earlier years. The valuation was carried out by the management of C Mahendra.
It had inventory of Rs 163 crore in the books
end March 2015.
The factory has ceased to carry on manufacturing activity since October 2014. The
management has not carried out impairment
of assets test, as required by Accounting
Standard-28 on impairment of assets. As for
the advances of Rs 1.2 crore, the auditors
were unable to ascertain whether balances
were fully recoverable.
C Mahendra continues to provide depreciation on fixed assets as per the old
Companies Act, 1956, instead of the new
Companies Act, 2013. There were disputes
among promoters. The management has confirmed that no financial adjustment is required to be made on account of various allegations among promoters and defamation
notice received by the managing director of
the company. Last, the auditors were not

Reverse flow
Both the subsidiaries of Tribhovandas
Bhimji Zaveri incurred cash losses
on a standalone basis last fiscal
and in FY 2014
BSE Sensex



D J'15

Base=100 as on 11 December 2014

Face value: Rs 10

D *

* 11 December 2015

happy with the way records for fixed assets

and inventories were maintained.
Even before the opening of the Pandoras
Box by auditors of C Mahendra in October
2015, the stock was in trouble and a significant amount of wealth had already been
eroded. A 52-week high of Rs 8.88 was in
January 2015. Since then, the stock plunged
to a historic low of Rs 1.27 in December
2015. The stock has witnessed massive
wealth destruction considering the all-time
high of Rs 171 touched in April 2011.
C Mahendras turnover declined a whopping 85.5% to Rs 583.5 crore in FY 2015,
while it plunged in red with loss of Rs 133.9
crore in FY 2015 as against profit of Rs
122.6 crore a year earlier. Owing to losses,
no dividend was paid in FY 2015. It had
paid a token dividend of 1% in FY 2014 as
against 10% in FY 2013.
The auditors of Vaibhav Global have
drawn attention to identification of specific
item of inventory and determination of net
realizable value, based on the judgment of
the management and supported by evaluation of independent expert. The auditors gave
this comment as an emphasis of matter.
Both the subsidiaries of Tribhovandas
Bhimji Zaveri - Tribhovandas Bhimji
Zaveri (Bombay) Ltd and Konfiaance
Jewellery Pvt Ltd incurred cash losses on
a standalone basis in FY 2015 and FY 2014.
Konfiaance is non-operational, while
Tribhovandas Bhimji Zaveri (Bombay) reported turnover of Rs 15.1 crore and loss of
Rs 2.9 crore in FY 2015. SRSs auditors
have noted slight delay in payment of undisputed statutory dues in a few cases.
Apart from industry-wide factors, company-specific issues surrounded gem and
jewelry stocks have resulted in wealth destruction. Ironically, this has spoiled the
prospects offered by a once -promising sector. The trouble may be no news for seasoned investors. However, the small and
retail individual investors should tread cautiously. This is considering their eternal
love for low-priced stocks.
There are 14 stocks currently trading
in single digits. Moreover, 17 counters trading below Rs 20. This means half of the
37 companies are trading at absolute low
price. This could be open invitation to
small and retail individual investors to
burn their valuable cash.
S Khedekar



Edging out
Banks are losing out to niche, well managed and profitable
NBFCs as investment option
The business and revenue model of commercial banks is far superior as compared
with that of non-banking financial companies (NBFCs). This is a widely held view.
Probably, it is undeniable. However, the
scenario is fast changing. The prevalent perception might turn out to be wrong if one
looks at hardcore numbers and developments
in the last few years.
Gruh Finance outperformed HDFC
Bank, the countrys most valuable bank in
each of the last 10 years on the parameter of
return on equity (ROE). The NBFCs latest
numbers are superior compared with HDFC
Banks. Gruh reported ROE of 31% in the
financial year ended 31 March 2015 (FY
2015) and 32% in FY 2014 as against HDFC
Banks ROE of 19.94% in FY 2015 and
21.63% in FY 2014. Even Indiabulls Housing Finance (IHFL) has delivered higher ROE
compared with HDFC Bank at 30.8% in FY
2015 and 28.4% in FY 2014.
ROE measures returns generated on the
equity capital contributed by the shareholders, the real owners of an enterprise. Thus,
ROE is among the vital ratios while analyzing and comparing businesses.
Over the last five years, Gruh reported
robust growth of 2.96 times in profit after
tax (PAT) which is lower compared with
HDFC Bank, which has achieved superior

growth of 3.56 times. However, the difference is not much. Gruh was ahead with a
growth of 3.44 times in turnover as against
HDFC Banks 3.12 times during the last five
years. But HDFC Bank deserves praise as
the growth in on a higher base.
On asset quality, HDFC Bank reported
net non-performing assets (NPAs) to net
advances ratio of 0.25% in FY 2015 and
0.27% in FY 2014. These numbers are
among the lowest and finest among the

Racing past
Gruh Finance outperformed HDFC Bank,
the countrys most valuable bank,
in each of the last 10 years on the
parameter of ROE
Relative performance of
Gruh Finance v BSE Sensex

Base=100 as on 11 December 2014

Face value: Rs 2

* 11 December 2015

banking industry marred with problem of

bad loans. Interestingly, Gruh is far better
placed with nil net NPAs in the last two
financial years. Gruh reported gross NPAs
to loan assets ratio of 0.28% in FY 2015
and 0.27% in FY 2014. This is significantly
better compared with HDFC Banks gross
NPAs to loan assets of 0.93% in FY 2015
and 0.98% in FY 2014.
HDFC Banks net interest margins
(NIMs) at 4.4% in each of the last two financial years (FY 2015 and FY 2014) is
among the highest in the banking industry.
Gruh is closer to HDFC Bank, with NIMs
of 4.18% in FY 2015 and 4.21% in FY 2014.
Gruh is a subsidiary of Housing Development Finance Corporation (HDFC), while
HDFC along with its group companies held
21.57% stake in HDFC Bank end September 2015. Gruh has a unique business model.
It offers home loans to individuals and families in the self-employed category where
formal income proofs are not easily available and the repayment capacity are appraised based on their cash flows.
Based on the financial numbers, Gruh is
at par with HDFC Bank and may be even
one step ahead. Certainly the scenario of
commercial banks performing better than
NBFCs is fast changing or may have already
changed. Focused NBFCs seem to be doing
better compared with commercial banks.
Even from the customers perspective,
NBFCs are offering value deals that are at
par with the leaders in the commercial banking space. Countrys largest commercial
bank in terms of balance sheet and market
reach State Bank of India (SBI) offers home
loans at an interest rate of 9.5% per annum. The public sector bank (PSB) claims
this to be the lowest interest rate in the
home loan segment. Now, as against this,
IHFL offers home loans at an interest rate
of 9.55% per annum.
The obvious question is what kind of
strategic advantage the countrys leading
commercial bank enjoys over a NBFC just
incorporated in 2005? SBI is in the business of commercial banking for the last six
decades. More importantly, it is SBI that
influences the interest rates in the market
owing to its dominate market share. Similarly, Dewan Housing Finance Corporation (DHFC) offers home loans at 9.55%
per annum.
Home loan is among the biggest and
most lucrative business segments for banks
and for NBFCs as well. NBFCs have made
Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET

rapid inroads into this important segment
and are challenging the deeply entrenched
commercial banks. May be the banks are
not feeling the pinch yet as the housing
finance market is too gigantic. Ironically,
though the real estate market is facing
headwinds, housing finance companies and
banks are doing brisk business owing to
the buoyant resale market.
The pertinent question is whether
NBFCs are better bets for investors than
banks? Consider the following facts.
HDFC is the second most valuable company among banks and NBFCs. Only
HDFC Bank and SBI are ahead of HDFC.
HDFC is seven times more valuable than
Punjab National Bank (PNB). PNB is
among the oldest PSBs, with one of the

largest branch and ATM networks in the

banking industry. The placement might
sound apple-to-orange comparison considering the stature of HDFC.
Take Capital First (market value Rs
3329.8 crore), a new-age NBFC that is ahead
of Vijaya Bank (Rs 2904 crore), State Bank
of Travancore (Rs 2856 crore), South Indian Bank (Rs 2619 crore), Dena Bank (Rs
2636 crore), Karnataka Bank (Rs 2282
crore) and DCB Bank (Rs 2156 crore). Capital First is a far bigger player by market
value compared with State Bank of Mysore,
United Bank of India, Lakshmi Vilas Bank
and Punjab & Sind Bank.
In all probability banks are losing their
charm. Niche, well managed and profitable
NBFCs are emerging as a better option for

Changing times
Brokers are expanding their portfolio to derisk from market volatility
The traditional stock broker business is
pass. There is a too much of competition with miserable rewards. No need to
mention the fact that the stock broking
witnesses wild swings mirroring the
movement in the stock market. Online
brokers and competition from wellheeled banks has added to the woes.
Ever-dropping brokerage means
revenues remain vulnerable.
The palpable solution is to diversify
and enter into new business segments.
Brokers such as Motilal Oswal Financial
Services (MOFSL), Edelweiss Financial
Services and IIFL Holdings (formerly
known as India Infoline) have precisely
done this. These three companies have
undergone significant changes in their
business profile.
Apart from the traditional capital
market business, which includes retail
and institutional broking and distribution, wealth management and investment banking, MOFSL has forayed
into the businesses of private equity,
asset management, wealth management
and home finance. Its most recent
business diversification includes
housing finance. The loan book stood
at Rs 990 crore across 9,700 accounts
end September 2015. There are 37
branches across four states.
After its IPO in 2005, IIFL entered
the financing business in 2006. This

Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET

business now contributes around 70% of

the total income. In 2009, the company
was registered with National Housing
Bank for housing finance business. It
had assets of Rs 1970 crore end March
2015 and is confident about achieving a
bigger scale.
One of the guiding principles of IIFL
was to de-risk business from the volatility
of the stock market. Today, the diversified
businesses include financing, asset and
wealth management, capital markets and
distribution of financial products,
investment banking, institutional equities
and realty services through various

Broadening the base

Apart from the traditional capital
market business, IIFL has forayed
into asset management, wealth
management and home finance
Relative performance of
IIFL v BSE Sensex

Base=100 as on 11 December 2014

Face value: Rs 2

* 11 December 2015

investment. In fact, it is the banks that are

feeding and nurturing NBFCs. Banks seem
to be indirectly encouraging competition. For
instance, for highly profitable SKS
Microfinance, the banking industry is the
biggest source of funding.
Check these numbers. For SKS, term
loans and short-term loans including cash
credit from banks accounted for 69% of the
funding end September 2015 as against 88%
a year ago. With the average interest of
22.84% and the average effective cost of
borrowing of 13.16%, SKS earned NIMs of
9.68% in FY 2015 and 7% in FY 2014.
With their thousands of branches, banks
are collecting low cost funds and lending
these funds to NBFCs such as SKS that are
making neat profit. Viewed from the other

subsidiaries. In the crucial financing

business, the company offers loan secured
against collaterals of home, property, gold
medical equipment, commercial vehicles,
shares and other securities. As per the
annual report for the fiscal ended March
2015 (FY 2015), since listing in 2005 till
March 2015, the stock had appreciated
32% per annum.
Similarly, Edelweiss has transformed itself from mere capital market
advisory services to credit and financial
services institution. Over the last
decade, profit appreciated by compounded annual growth rate of 30%.
The company is in financing, life
insurance, capital market services, asset
management and commodities. Financing has emerged as its bread-and-butter
business. In this segment, it is into a
variety of products such as mortgages
(housing finance, loan against property
and real estate finance), structured
collateralized credit, distressed assets
credit, small and medium enterprises
and agricultural financing, loan against
securities and rural finance.
The end result of the diversification
is robust profit. Banking on the diverse
set of businesses, IIFL and Edelweiss
reported the highest-ever profit and
revenue in FY 2015. MOFSLs
performance has been volatile over the
last one decade. However, it has
certainly achieved scale over this
period. It reported a historic high total
income in FY 2015


side, it appears that banks are working as
collecting agents of NBFCs. It is not that
banks are not making money by offering
loans to NBFCs. Indeed, they are making
good profit by onward lending. However,
they are losing money elsewhere, particularly in wholesale banking.
SKS is valuable compared with several
PSBs and old private sectors banks (PVBs).
It is ahead of Indian Overseas Bank, Karur
Vysya Bank, City Union Bank, UCO Bank,
Oriental Bank of Commerce, Allahabad
Bank, Andhra Bank, Jammu and Kashmir
Bank, Corporation Bank, State Bank of
Bikaner and Jaipur and Bank of Maharashtra
by market value.
It is clearly the profitable business model
and robust outlook that is giving an edge to
SKS over banks that are in the business for
several decades with unmatched branch and
ATM network. Sans a few banks, it is a
sorry state of affairs for the banking industry. The bad loan menace faced by PSBs is
of historic dimension. It is not only government-owned banks that are in a mess. Professionally-run private sector banks, too,
have started feeling the heat.
The norms for overseas borrowings have
been liberalized by the Union government
and the Reserve Bank of India (RBI). The
overseas market has turned out to be a major source of funding for NBFCs. The lower
interest rates foreign loans is one key benefit for NBFCs. IHFL has fully utilized and
drawn down the RBI-approved external
commercial borrowing (ECB) limit of US$
200 million. Like SKS, for IHFL, the banking industry is key source of funding. Its
132 lenders include 26 PSBs, 17 PVBs and
foreign banks and 89 mutual funds, provident funds, pension funds, insurance companies and others. Its outstanding bank loans
stood at Rs 28138 crore end March 2015 as
against Rs 21710 crore end March 2014.
DHFC is another prime case. It availed
ECBs of US$ 125 million from Asian Development Bank for seven years and US$
50 million from Deutsche Investitions-und
Entwicklungsgesellschaft (DEG-Germany)
for eight years in FY 2015. The principal
amount has been hedged by way of currency swaps to protect from foreign currency risk and converted into rupee liability of Rs 784.2 crore and Rs 311.3 crore,
respectively, as per the statutory stipulation. DHFC had availed ECB of US$ 70
million from IFC Washington for a period
of eight years in FY 2014. This was con20

Sweet and sour

SKS Microfinances profit guidance for
FY 2016 was revised up to Rs 290 crore.
However, it did not get the small
finance banking licence
Relative performance of
SKS Microfinance v BSE Sensex

Base=100 as on 11 December 2014

Face value: Rs 10

* 11 December 2015

verted into rupee liability of Rs 418.2 crore.

Banks and financial institutions account for
58.3% of DHFCs borrowings.
Further, there is ample liquidity in the
international market. This is a huge positive
factor for NBFCs. On the contrary, this is a
major source of worry for domestic commercial banks.
Also, efficient operations offer edge to
NBFCs over banks. Employee cost as percentage of total income works to mere 3.32%
for Gruh, 3.28% for DHFC and 3.9% for
IHFL. This is far lower compared with SBIs
13.45% and HDFC Banks 8.27%. Moreover, a few stock brokers have diversified
into several segments of lending and financial services to de-risk their business model
and over-dependence on the broking business (see box: Changing times).
In the recent past, a few big names of
India Inc such as Tata Sons and Mahindra
& Mahindra have backed out from the race
for commercial banking license. Banking licence is considered a prized asset as the
banking model is considered to be as safe,
secure and the most lucrative way to mint
money. However, thanks to the RBI, it is a
restricted club.
But the scenario is fast changing. While
PSBs and PVBs are reeling under the gigantic problem of bad loans, focused NBFCs
are doing brisk business and are highly profitable. Over the medium term, NBFCs can
continue to outperform banks.
Capital Market picked 10 NBFCs based
on a variety of parameters such as sterling
financial performance, niche business operations and revenue model.

SKS Microfinance, classified as an

NBFC-micro finance institution, primarily
provides micro finance services to women
in rural areas who are enrolled as members
and organized as joint liability groups. Operations are spread across 16 states with
1,268 branches and 2,16,723 Sangam centers. Also, distribution channels are used to
provide certain other financial products and
services to the members. Interest rates were
reduced to 20.75% from 22% on income
generating loans in October 2015. This is
among the lowest interest rates in the micro
finance industry.
The balance sheet is strong. There was
cash and cash equivalent of Rs 834 crore,
net worth of Rs 1203 crore and capital
adequacy ratio of 24.6% end September
2015. The profit guidance for FY 2016
was revised up to Rs 290 crore from the
earlier guidance of Rs 235 crore. Profit was
Rs 188 crore in FY 2015. Profit increased
31% to Rs 139 crore in the first half of FY
2016. In a disappointment, the RBI declined the small finance banking licence in
September 2015. Mutual funds held
15.46% stake end September 2015, one of
the highest in NBFCs.
Gruh Finance was promoted in 1986
and commenced operation in 1988. Recognized by NHB for its refinance facility, around 3.1 lakh units have been financed since inception. Cumulative disbursement is Rs 16,966 crore, with the
average loan per unit of Rs 6.75 lakh.
There is a network of 171 retail offices
across eight states including Gujarat,
Maharashtra, Karnataka, Madhya
Pradesh, Rajasthan, Chhatisgarh, Tamil
Nadu and Uttar Pradesh.
Apart from housing loan, loans for repair and renovation of houses are available.
Loans for purchase and construction of nonresidential properties and mortgage loans
against existing residential and commercial
properties are also given. Loans are offered
to developers on a selective basis.
The loan portfolio stood at Rs 9913 crore
end September 2015, a jump of 25% over
the previous year. The gross NPAs were
0.58% and net NPAs 0.20% end September
2015. Individual housing loans accounted for
92.2% of the loan portfolio, followed by
non-residential properties 4.5% and developer construction 3.3%. The capital adequacy ratio was a healthy 15.73% end September 2015 compared with 16.71% a year
ago. Of the total liability, loan funds
Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET

amounted to 92% and shareholders fund
the remaining 8%.
Indiabulls Housing Finance (IHFL)
is the second largest private housing finance
company in the country and is one of the
most alluring success stories among the
NBFCs. Since July 2013, the stock has appreciated 2.6 times. On a cumulative basis,
loans have been offered to 7.96 lakh retail
customers, with cumulative loan disbursement of Rs 117319 crore end September
2015. The loan book increased at a six
CAGR of 26% and loans outstanding were
at Rs 58225 crore end September 2015.
There are 220 branches in 110 towns
and cities across the country and two representative offices in Dubai and London. These
offices offer home loan products to nonresident Indians and persons of Indian origin. In terms of assets, mortgage loans accounted for 76%, corporate mortgage loans
23% and commercial vehicle loans 1% end
September 2015, with net NPAs of 0.35%
and gross NPAs of 0.84%. Bank loans comprised 47% of the funding mix, followed by
bonds (33%).
A qualified institutions placement (QIP)
was concluded in September 2015, collecting Rs 3996.8 crore at Rs 702 per share including premium of Rs 700. The net worth
was Rs 10367 crore end September 2015,
the second highest among private housing
finance companies and NBFCs.
Dewan Housing Finance Corporation
(DHFC) is on a secular growth path. It reported growth of 20.4% in turnover in FY
2015 and 22.3% in FY 2014. Profit grew
17.4% in FY 2015 and 17% in FY 2014.
The stock reported an all-time high of Rs
285 in March 2015.
The focus of the housing finance company established in 1984 is on low- and
medium-income groups, which are among the
largest- and fastest-growing mortgage segments. Also, there is presence in the education loan segment. A joint venture, DHFL
Pramerica Life Insurance, has been formed
with Prudential Financial for the life insurance business. Other products include loan
against property, lease rental financing, financing of commercial premises and small
and medium enterprise loans.
The loan portfolio was Rs 56312 crore
end September 2015. The distribution network consists of 361 company-operated
locations and 357 locations through alliances with emphasis on tier II and tier III
towns and cities. The gross NPAs ratio
Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET

Robust show
Over the last decade, LIC Housing
Finance reported a growth of 8.5 times
in total income and 6.7 times in profit.
NPAs are down
Relative performance of
LIC Housing Finance v BSE Sensex

Base=100 as on 11 December 2014

Face value: Rs 2

* 11 December 2015

stood at 0.81% and net NPAs nil in the

second half of FY 2016. The capital adequacy ratio stood at 15.27% end September 2015 as against 16.17% a year ago.
Some of the investors in DHFC include
Rakesh Jhunjhunwala, Acacia Partners,
Government of Singapore, Jupiter India
Fund, Lazard Asset Management and Morgan Stanley Asia.
Over the last decade, LIC Housing Finance (LIC HFL) reported a robust growth
of 8.5 times in total income and 6.7 times
in profit. Promoted by the Life Insurance
Corporation (LIC) (40.31% equity) in 1989
and listed in 1994, the profit-making and
dividend-paying housing finance company
since 1990 has serviced over 18 lakh customers with cumulative disbursements Rs
1.83 lakh crore since inception. Total loan
assets were Rs 114000 crore end September 2015 and 97% of the loan assets are in
the retail category.
The distribution network consists of
450 centres, seven regional offices, 16 back
offices and 234 marketing offices. There are
representative offices in Dubai and Kuwait
to cater to non-resident Indians in Bahrain,
Dubai, Kuwait, Qatar and Saudi Arabia.
Gross NPAs were at 0.60% and net
NPAs at 0.32% end September 2015 compared with 0.63% and 0.33%, respectively,
a year ago. The capital adequacy ratio stood
at 15.51% end September 2015 as against
16.54% in the previous period. As for incremental sanctions, the loan-to-value ratio was 48.09% in the first half of FY 2016
as against 50.94% in FY 2015 and 54.52%
in FY 2014.

Incorporated in 1987, Bajaj Finance

(BFL), a 57.53% subsidiary of Bajaj
Finserv, is a diversified player in lending
and financial services, with a large customer
franchise of 12.8 million. The product portfolio includes consumer lending, small business lending, commercial lending, rural lending and distribution services. A wholly
owned subsidiary, Bajaj Housing Finance,
was set up to commence the housing finance business. The subsidiary received
certificate of registration in September
2015. The company has 193 consumer
branches and 272 rural locations with over
18,000 distribution points.
The assets under management grew a
healthy 36% to Rs 37964 crore in the first
half of FY 2016, with SME lending accounting for 47%, followed by consumer lending
41%, commercial lending 10% and rural lending 2%. The SME lending includes business
loan, professional loan, loan against property, home loan for self-employed and lease
rental discounting. The consumer lending
product portfolio includes financing for consumer durables, digital products, lifestyle
products, two and three-wheelers. It also
includes e-commerce financing, personal
loans and home loans for salaried. Well capitalized to support future growth, the capital adequacy ratio was 20.49% end September 2015. The gross NPAs were 1.67% and
net NPAs 0.46%, end September 2014.
Mahindra & Mahindra Financial
Services (MMFSL), a subsidiary of
Mahindra and Mahindra, is among the
countrys leading NBFCs focused on the
rural and semi-urban sector. The primary
business is financing purchase of new and
pre-owned auto and utility vehicles, tractors, cars, commercial vehicles (CVs), construction equipments and SME financing.
This apart, other revenue streams include
personal loans, mutual fund distribution,
insurance broking and housing finance. There
are 1,158 offices covering 25 states and five
Union territories, with over 3.8 million customer contracts since inception.
Banks accounted for 43% of the funding, followed by mutual funds 18% end
September 2015. In terms of assets under
management, utility vehicles comprised the
lions share of 31% followed by cars 23%,
tractors 18% and CVs and construction
equipments 12%. Expanding reach, diversifying product portfolio and leveraging
existing customer base are integral to the
growth strategy.

Deterioration in the asset quality is a
matter of concern, with gross NPA ratio at
9.4% (6.3% in the previous period) and net
NPAs 4.6% (3.1%) in the first half of FY
2016. However, the capital adequacy ratio
remained at a comfortable level of 18.2%
(17.9%). Consolidated total income increased 8.4%, while profit declined 32% in
the first half of FY 2016.
Established in 1979 and listed in 1984,
Shriram Transport Finance Company
(STFCL), the flagship company of the
Shriram group, is among the largest asset
financing NBFCs. Offerings include affordable finance on pre-owned CVs with expertise in loan origination, valuation and collection. Commanding leadership position, with
a market share of 25-27% in the pre-owned
CVs market, the distribution network covers 770 branch offices, 765 rural centers and
9,400 field officers. There is established
partnership with over 500 private financiers.
Piramal Enterprises held a strategic 9.96%
stake end September 2015.
The expanded product portfolio includes
financing of tractors, small commercial vehicles, three-wheelers, passenger-CVs and
construction equipment. There was a customer base of 1.2 million end June 2015.
The total assets under management consisted of pre-owned CVs (Rs 55810 crore),
new CV (Rs 4680 crore) and others (Rs 36
crore) end June 2015. The gross NPAs remained almost stagnant at 3.8% in FY 2015
compared with 3.9% in FY 2014. The net
NPAs remained static at 0.80% in FY 2014
and FY 2015. The capital adequacy ratio
was placed at a comfortable level of 20.05%
end June 2015.
Cholamandalam Investment & Finance
Company, incorporated in 1978, commenced
business as an equipment financing company.
The comprehensive product profile includes
vehicle finance, home loans, home equity
loans, SME loans, investment advisory services and stock broking. Operating from 534
branches, with assets under management of
over Rs 29,100 crore and cumulative customer
base of 7.5 lakh, 90% of the branches are
located in tier-II, tier-III and tier-IV towns.
Key subsidiaries include Cholamandalam Securities and Cholamandalam Distribution Services (CDSL), which has been granted in-principle approval by the RBI to set up a payments bank.
The capital adequacy ratio was 20.80%
as against the regulatory requirement of 15%


Good health
Cholamandalam Investment & Finance
Companys capital adequacy ratio
was 20.80% and net NPAs 3% end
September 2015
Relative performance of
Cholamandalam Investment v BSE Sensex

Base=100 as on 11 December 2014

Face value: Rs 10

* 11 December 2015

and net NPAs 3% end September 2015. The

1% compulsorily convertible preference
shares, amounting to Rs 500 crore, were
converted into equity shares of Rs 10 each
in September 2015 at a conversion price of
Rs 407 per share. Term loans from banks
accounted for 49% of the funding, followed
by debentures (25%), end first half ended
September 2015.
Repco Home Finance reported an alltime high of Rs 785 in August 2015 and
continues to remain on firm ground. The
stock is popular with mutual funds, which
held 16.24% stake end September 2015. The
two revenue segments are individual home
loans and loans against property, with contribution of 81% and 19%, respectively, to
the loan book. Home loan products are offered to individual borrowers in both the
salaried and non-salaried (self-employed
professional and self-employed non-professional) segments.
Home loans sanctions grew at CAGR of
25% and disbursements 24% between FY
2015 and FY 2011. The loans outstanding
stood at Rs 6848.8 crore end September
2015, with the average loan per unit of Rs
13 lakh. Tamil Nadu accounted for 62.5% of
the loan book. The gross NPAs were at 1.8%
(1.65% in the previous period) and net NPAs
0.92% (0.81%) end September 2015. The
capital adequacy ratio remained at the elevated levels at 20.3% end March 2015 compared with 24.5% a year ago. The NIMs
were 4.4% in the first half of FY 2016 as
against 4.5% in FY 2015. Commercial banks
are major sources of funding, with contribution of 68%, followed by NHB 17%.

The financial services industry encompasses
a diverse set of businesses, with lending being the major revenue segment. This is a significant business opportunity, with enough
space to grow, for incumbents and new comers as well. Despite so many new entrants,
a few segments such as home loans are growing at a decent pace. In India, mortgage penetration is still extremely low at 8% of the
gross domestic product compared with
Thailands 17%, Chinas 20%, Koreas 26%,
Malaysias 29%, USAs 69% and United
Kingdoms 81%.
Additionally, the automobile finance
market is expected to report significant
growth over the next five years, between
FY 2015 and FY 2020. As per estimates
given by MMFSL, new vehicle finance disbursements are likely to grow 18%-20%
for utility vehicles, followed by cars 17%19%, CVs 15%-17% and two-wheelers
14%-16%. In addition, in India, ownership
of car is low 17 per thousand individuals as
against 39 in China, 93 in Thailand, 147 in
Brazil and 196 in Mexico. This spells huge
opportunity for NBFCs operating in extending vehicle finance.
On the flip side, like commercial banks,
the deteriorating asset quality is a spot of
bother for NBFCs as well. Among these select NBFCs, MMFS is witnessing mounting bad loans.
Risk-averse investors can evaluate
NBFCs that are focused on segments such
as housing finance, while those with
higher loss-bearing capacities can access
NBFCs that are diversified, fast growing
and ambitious for investment. Select diversified NBFCs are as good as commercial banks for all practical purposes and
can deliver robust growth over the medium to long term.
Moreover, certain niche plays such
as micro finance, home loans to unorganized sector and financing of old vehicles
are interesting themes for investment.
The specialized players have developed
expertise in their own businesses that
may look easy to replicate but could
prove to be a hard nut to crack. In all,
NBFCs seems to be emerging as a highly
profitable business model and can be seen
challenging the traditional banking industry. Nimble-footed NBFCs can generate
greater wealth than age-old banks weighed
under mounting NPAs.
S Khedekar
Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET



The sun rises

Emphasis on alternative transport modes, outsourcing, drop in oil
prices and imminent-roll out of GST are expected to be positives
India is one of the most populous countries
in the world, with an estimated population
of 1.2 billion, that is, approximately 17% of
the total global population. It is also one of
the largest economies on a purchasing-power
parity (PPP) basis, with a GDP of approximately US$ 1.9 trillion.
In 1991, the government of India, with a
view to promote economic stability and
growth, adopted a series of comprehensive
macroeconomic and structural reforms focused on deregulation of industry, accelerating foreign investment and implementing a
privatization program for disinvestment in
public sector units. Consequent to the reforms, Indias economy registered robust
growth over the last decade.
Infrastructure development is a critical enabler to economic growth. Logistics infrastructure, covering the road, rail, waterways and air
network of a country, is the backbone on which
the nation marches ahead. Although the urgency
to develop Indias logistics infrastructure has
been realized in the past decade, the task at
hand is daunting. Indias logistic infrastructure
is insufficient, needs to be upgraded and modernized to support the expected growth rates
of 7-8% over the next decade.
India has the opportunity to address
this issue. Over two-thirds of the infrastrucDec 21, 2015 Jan 03, 2016 CAPITAL MARKET

ture network capacity of the future has not

yet been built. Learning from the past and
adopting global best practices, India should
pursue a logistics infrastructure strategy that
minimizes investment, maximizes cost efficiency, reduces losses for users and is energy-efficient.
India is expected to become the worlds
fifth largest consumer market by 2025 from
its twelfth position in 2010. One of the key
drivers for the growth in consumption are
expected to be higher affordability. The rapid
growth in the size of Indias middle income
and high income groups is expected to result
in doubling of the Indian household consumption by 2015.
The second driver will be greater consumer acceptance of newer products driven
by factors such as younger population, faster
urbanization, increase in the number of
working women and lifestyle changes, along
with other socio-economic factors is expected to result in a transition of the consumption pattern of the Indian consumer.
Further, the growing international exposure
among Indians has led to awareness of international cuisines resulting in increased acceptance and demand for such products.
The third will be greater availability.
Deeper penetration, particularly of FMCG

products, spurred by better distribution

channels, coupled with spread of organized
retail have increased availability manifold.
The last driver will be greater awareness. Greater media reach and penetration
has, amongst others, resulted in a more
aware and discerning consumer. Pertinently,
this phenomenon is also no longer restricted
to urban areas.
Indias services sector that remained resilient even during and immediately after the
global financial crisis buckled under the pressure of continued global and domestic slowdown, resulting in sub-normal growth in the
last two years. However, early shoots of
revival were visible in the financial year
ended March 2015 (FY 2015) with signs of
improvement in worlds GDP and trade
growth, which are also reflected in pick-up
in some key services like transport logistics
and retail trading.
India has witnessed an attractive growth
story in the transport and logistics sector
on the back of factors such as rapidly growing economy, increase in outsourcing of logistics, steady supply side changes, significant government investment in core infrastructure projects and landmark changes in
tax and regulatory politics. The sector is
experiencing a number of supply and demand side changes, which are carving a way
for innumerous opportunities.
The growing emphasis on alternative
transport modes, thrust on outsourcing
driven by growing business complexity, significant drop in oil prices and imminent roll
out of goods and services tax (GST) are expected to be positive enablers for the sector.
From a policy and regulatory perspective,
the integration of various logistics ministries,
the governments Make-in-India campaign
and the launch of mega-infrastructure initiatives in the sector are expected to lay the
foundation for growth of the sector.
Indias logistics sector is poised for accelerated growth, led by GDP revival, ramp
up in transport infrastructure, e-commerce
penetration, impending GST implementation, and other initiatives such as Make in
India. This offers opportunities across the
spectrum for companies in transportation,
storage, distribution, and allied services.
Empirical evidence suggests the Indian logistics industry grows at 1.5-2 times the
GDP growth. Moreover, infrastructural
bottlenecks that have stifled sectors growth
and promoted inefficiency are being addressed by the government.

Logistics is the backbone of the
economy, providing the efficient, cost-effective flow of goods on which other commercial sectors depend. The logistics industry in India is evolving rapidly and it is the
interplay of infrastructure, technology and
new types of service providers that will
define whether the industry is able to help
its customers reduce their logistics costs and
provide effective services.
Despite weak economic sentiments, the
logistics and warehousing industry continued to witness growth largely due to growth
in retail, e-commerce and manufacturing sectors. The global logistics sector is expected
to grow at around 10%-15%. With this forward-looking attitude and a promise of growth
and improvements, the service oriented logistics industry is all set to expand beyond
the horizons in the latter half of this decade,
utilizing this fiscal year as its launch pad.
The key challenges faced by logistics industry include a highly fragmented market
along with below par infrastructure and low
IT penetration, resulting in acute operational
The Indian logistics industry is characterized by an unfavorable modal mix, which
is skewed towards road as a major mode of
transportation, along with under utilization
of other modes such as rail, coastal shipping
and ports.
Lack of unified regulatory logistics body
for integrated planning at a national level
across shipping, road, aviation and warehousing segments somewhat slows the Indian logistics growth.
One of the critical issues faced by companies today is that of insufficient integration of transport networks, IT, warehousing and distribution facilities.
Regulations exist at a number of different tiers, imposed by national, regional and
local authorities. Regulations often differ
from city to city, hindering the creation of
national networks.
Trained manpower in both the third
party logistics sector and the manufacturing
and retailing sectors is very weak at a practical level, i.e., IT, driving and warehouse as
well as at a higher strategic level.
The disorganized nature of the logistics
sector in India, its perception as a manpower-heavy industry and lack of adequate
training institutions has led to a shortfall in
skilled management and client service personnel. There is lack of IT standards and
poor systems integration and equipment.

Good storage facilities essential

Lack of modern warehousing and storage facilities and management are to blame
for high levels of loss, damage and deterioration of stock, especially in the perishables sector. Part of the problem is insufficient specialist equipment, i.e. proper refrigerated storage and containers, but it is
also partly down to lack of training.
Although both the practitioners and the
academicians are increasingly aware of the
importance of logistics and supply chain,
however the field is still under penetrated
as far as research is concerned. It is important to prioritize research and development
so that various weaknesses in the industry
could be identified and improved.
Regulatory challenges include lack of
policies to push development in coastal shipping, inland waterways and ports to develop
these modes, which are not fully used. The
delay in the implementation of GST has been
impacting the readiness of the logistics service providers and end users.
Needless to say, infrastructure is the
backbone of every countrys growth and
prosperity and for the logistics industry to
flourish in the developed countries, special
emphasis has to be laid on the enhancement
of the infrastructural facilities. Particular focus needs to be given on building world-class
road networks, integrated rail corridors, modern cargo facilities at airports and creation of
logistics parks which need to be given a status equivalent to special economic zones.
Focus on infrastructure development in the
logistics industry to help organize the sector, boost private investment and accelerate
the supply chain. Developing time-bound
action plans decongest airports and seaports,
shift cargo-clearance activities to inland ports
or airport locations, in addition to providing
hinterland connectivity.

Overcoming the skill gap in Indian logistics industry requires establishing training institutions. It is necessary to realize
the benefits which best practice in logistics can bring to the companies so that the
overall service quality of the sector is improved. Gaps in training have to be filled
not only at the entry level but also in the
management cadre which could be made
possible through specialized graduation and
post graduation courses focused on operations and supply chain management. Augment the current skill development initiatives by focusing on transportation, warehousing and the cold chain sector. This
would include setting up of aeronautical and
maritime universities that focus on providing sector-specific knowledge and exposure
to individuals.
Good storage and warehousing facilities are essential to the growth of the logistics industry. With the increase in the transportation of perishable products, agencies
associated with logistics will have to give a
lot of importance to enhancing the warehousing facilities. Warehousing will also
need to go to the next level taking into account the changing dynamics of manufacturing, global procurement and new models of sales and distribution.
Emphasizing on R&D is essential mainly
because it encourages the use of indigenous
technology which can make the industry
more cost competitive and it also leads to
the improvement in services due to the use
of better and more streamlined services. Particular focus needs to be given on research in
process excellence which can help eliminate
inefficiencies and bring Indian logistics on
par with global practices.
The Indian logistics sectors growth depends on the growth of its soft infrastructure like education, training and policy
framework as much as the hard infrastructure. To support Indias fast paced economy
growth of logistics industry is very essential. It is estimated that the Indian logistics
sector will continue to show robust growth
of 10-15% annually, leading the pace of
growth of the economy at large.
There is need to formalize a regulatory
logistics body by uniting key policy stakeholders across ministries for an integrated
approach towards project planning and development. Also, there should be focus on
improving the ease-of-doing- business in
the transportation sector by easing licensing requirements.
Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET

Policy driven promotion of the publicprivate partnerships and engineering, procurement and construction models for infrastructure development in the transport sector are needed for robust growth of the logistics industry.
Thrust has to be provided to the transportation sector in tandem with the Makein-India program that promotes innovation,
investment and skill development in the
country, across sectors.
Clarity is required on various direct tax
issues such as procedural tax assessment for
regular and occasional shipping business and
transfer pricing on the outbound and inbound legs of freight forwarding transactions,
which are currently bunged in litigation.
The global economic outlook and indeed
that of India is expected to significantly improve as India Inc begins to tackle the economic downturn. With the government implementing many policies giving fresh impetus
to Indias growth engine particularly in the
corporate and small and medium enterprise
(SME) sector which in turn will expand demand for the logistics sector. The biggest boost
to the growth of the industry is coming from
the increasing consumer demand, particularly
in the tier 2 and 3 sections of the country.
This is being further fueled by the revolutionary growth being seen in e-commerce
which is leading to logistics companies responding with new innovations in service
since logistics is the most critical ingredient
in the success of an online business.
Indias e-commerce retail market is
booming at an expeditious pace. According

E-tailing grew by CAGR 56% over 2009-14

to the latest Transport & Logistics Pulse

report by KPMG, the market is expected to
be worth US$36.5 billion by 2020. The ecommerce sector has seen unprecedented
growth in 2014. The growth was driven by
rapid technology adoption led by the increasing use of devices such as smart phones
and tablets, and access to the internet
through broadband and 3G, which led to an
increased online consumer base. Furthermore, favored demographics and growing
internet user base helped aid this growth.
The growth shown by homegrown players such as Flipkart and Snapdeal and the
huge investor interest around these companies displayed the immense potential of the
market. With the entry of international ecommerce behemoths such as Amazon and
Alibaba, the competition is expected to fur-

ther intensify. Both these international players come with deep pockets and the patience
to drive the Indian e-commerce market. Also,
their strong domain knowledge and best practices from their international experience give
them an additional edge.
Both Amazon and Alibaba have grown
in size and influence to such large levels,
that currently both of them are larger than
Wal-Mart in terms of market capitalization.
Amazon is valued at US$300 billion, Alibaba
is valued at US$200 billion, whereas WalMart is valued at US$190 billion. Some of
the key market drivers influencing growth encompass a rapid rise in internet and digital
device penetration, favorable shifts in user
demographics, easing market regulations and
compelling propositions offered by the ecommerce retail companies.
Indian companies realize this and, therefore, are aiming to continue their focus on
expanding sellers and selection on their platforms, innovating on multiple customer touch
points, and providing seamless and rapid delivery services in order to compete with the
international entities. While the market is still
in a nascent stage, it has made a discernible
impact on the countrys logistics sector and
is among the fastest growing markets. There
is a growing recognition of the role of logistics in enabling this sector as well as catering
to the rising demand more efficiently and profitably. As a result, many of the e-commerce
retail companies are also investing in building
their logistics networks and capability.
In India, the e-commerce retail industry
is presently witnessing approximately six

Untouched by slowdown
Despite weak economic sentiments, the logistics and warehousing industry continued to witness growth largely due to growth in retail,
e-commerce and manufacturing sectors


(Rs cr)

(Rs) (FY 2015)

(FY 2013)

(FY 2015) (FY 2014) (FY 2013)











Container Corporation



Blue Dart Express












Allcargo Logistics












VRL Logistics












Gateway Distriparks












Transport Corp.












Snowman Logistic

































Sical Logistics


(FY 2014)

* CMP and market cap are as of 10 December 2015. Year end March.
Source: Capitaline Databases

Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET


to seven lakh transactions per day, led by
categories including apparel (43%), electronics (24%), books (22%) and home furnishings (8%). With rapidly rising scale of operations, e-commerce retailing players have
been strategically opting for viable operating models depending on the nature of products and operations.
As the e-commerce industry is fast rising, changes can be seen over a year. The
sector in India has seen CAGR of 34% since
2009 to touch US$16.4 billion in 2014 as
per Internet and Mobile Association of India. The sector is expected to be in the range
of US$22 billion in 2015.
Currently, e-travel comprises 70% of the
total e-commerce market. e-tailing, which
comprises of online retail and online marketplaces, has become the fastest-growing
segment in the larger market having grown
at a CAGR of around 56% over 2009-2014.
The size of the e-tail market was pegged at
US$6 billion in 2015. Books, apparel and
accessories and electronics are the largest
selling products through e-tailing, constituting around 80% of product distribution. The
increasing use of smart phones, tablets and
internet broadband and 3G has led to developing a strong consumer base likely to increase further. This, combined with a larger
number of homegrown e-tail companies with
their innovative business models has led to
a robust e-tail market in India rearing to expand at high speed.
An analysis of the demographic profile
of internet users further testifies that ecommerce will rise rapidly in India in coming years. Around 75% of Indian internet
users are in the age group of 15 to 34 years.
This category shops more than the remaining population. Peer pressure, rising aspirations with career growth, fashion and
trends encourage this segment to shop more
than any other category and India, therefore, clearly enjoys a demographic dividend
that favors the growth of e-commerce. In
coming years, as internet presence increases in rural areas, rural India will yield
more e-commerce business.
A sustained growth of over 50% in the
Indian e-commerce retailing industry underlines the need for efficient and sustainable
logistics operations for all sizes of e-commerce retailers in India. The market place
model is expected to continue to gain prominence and a combination of delivery speed,
upgraded warehousing infrastructure, better service capabilities, technological ad26

Boom in online retail is a booster

vancements and innovations could be some

must-haves for the e-commerce logistics service providers in the longer run. In India, the
common business operating model is the
consignment/inventory lead model, wherein
the inventory is owned and maintained by
the e-commerce retailer. However, with the
scale that the e-commerce players rapidly
adopting the market place model, wherein
products are shipped from the sellers warehouse. Products bought online undergo a
range of processes before they finally reach
the customer. The supply chain for e-commerce retail ranges from procurement of
goods from a vendor, bar-coding for tagging
the inventory and registering it in a warehouse management system, followed by a
quality check, before it is finally moved for
storage to the warehouse. This process constitutes the first-mile logistics activity.
The rapid growth of e-commerce retailing and associated logistics challenges is an
opportunity for e-commerce companies and
logistics providers to step-up and work in
coherence for inclusive growth. The emerging trend of outsourcing e-commerce retail
fulfillment centers to logistics providers
would depend on commodity wise preference to outsource and vendor preferences.
Scale of operations shall play an important
role in maintaining cost efficiency, and at
the same time addressing delivery related
challenges for e-commerce retailers. Henceforth, logistics providers could expand strategically and functionally to capture the
emerging opportunities from e-commerce.
Thus, the Indian e-commerce retail market continues to grow and evolve. In its initial years, e-commerce retailers were dealing
with low product volumes, with limited geo-

graphic reach and, hence, managing operations in-house was relatively less complex.
Moreover, higher costs and limited external capability in case of outsourcing fulfillment also drove several e-commerce retailers to manage their fulfillment in-house.
However, with increase in scale of business and emergence of mid-tier e-commerce
retailers, the industry seems to be undergoing a modular shift towards outsourcing
the fulfillment process.
Shift to the market place model and convenience to vendors are expected to drive
the demand for outsourced fulfillment centers. Category-specific focus and concerns
are further driving e-commerce retailers towards outsourcing fulfillment.
Online retailers jostling for a chunk of
Indias US$13 billion e-commerce trade are
so desperate to avoid snarled roads and inefficient railways that they fly their packages in the passenger cabin of costly commercial flights.
Indias largest domestic e-tailer Flipkart
India Pvt Ltd as well as bigger global rivals
like Amazon and eBay Inc. are widening their
supplier networks or racing to build multimillion dollar logistics networks to circumvent crumbling infrastructure, keen to attract customers by shrinking delivery times
to same-day or even as short as nine hours.
With a population exceeding 1.1 billion, a
burgeoning middle class and better Internet
access, Indias e-commerce potential is huge.
Online retail sales are expected to surge to
US$76 billion by 2021, according to consultants Forrester.
The biggest advantage of e-commerce
is the instant nationwide reach it enables
sellers of all sizes. However, it is the delivery of that opportunity that requires significant focus and investment from the industry. With Indias perennial infrastructure failings far from being resolved, most
e-tailers are focusing their investment on
setting up their own capital-intensive logistics businesses.
Flipkart, founded by two former Amazon executives in 2007, is aggressively growing its logistics arm E-Kart. Amazon, the
worlds biggest online retailer, is pumping
up the capacities at Amazon Logistics. Thats
in addition to existing partnerships with
third-party logistics firms including Gati,
Blue Dart Express and FedEx Corp. Having
its own network now means Flipkart can
handle delivery rescheduling requests better, manage product returns faster and help
Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET

customers exchange products, services that
are time-consuming when handled by a
third-party operator.
Amazon is using a similar strategy. In
addition to building its own warehouses, it
is trialing using neighborhood grocery stores
and petrol stations as delivery points. It
also struck agreements with the Indian
Postal Service to reach far-flung places in
the country.
eBay, by contrast, is working with external logistics firms to cut back on multiple
state taxes for products shipped by road
and the excessive documentation required
to move every parcel. It is also intensively
training its 45,000-strong supplier base,
which holds all the inventory eBay sells on
its platforms, to improve efficiency.
The anticipated boom in online retail is
encouraging logistics firms to better their
services, but it will take several years before
India gets an efficient network.
For many Indian e-tailers that lack the
deep pockets of Amazon and Flipkart, air
freight and couriers are not an option. Instead, they are altering their packaging and
product lines to ensure they can reach customers via road and rail. Pepperfry, one of
Indias largest online furniture and home
products retailer, is training suppliers to
make knock-down, foldable products, similar to Ikea furnishings. Flat-packaged goods
reduce shipping costs. The company also
provides carpenters to assemble the items
once delivered.
Industry consultants say companies like
Pepperfry that are able to adapt their business to the ailing infrastructure are better
placed to take advantage of the expected ecommerce boom. Indias roads and railways
are not going to get better any time soon,
and commercial airlines can only carry so
much cargo.
Building of dedicated rail freight corridors will promote efficient haulage of containerized cargo by rail. One key advantage
of the dedicated freight corridor is that
freight trains could be run on time tables
similar to passenger trains, and the frequency
can be theoretically increased to one train in
10 minutes. Also, setting up of various industrial corridors along the dedicated freight
route will metamorphose the warehousing
business, from small warehouses spread
across the country to large, global-size warehouses concentrated in a few hubs.
The proposed GST regime and e-commerce will alter the landscape in warehousDec 21, 2015 Jan 03, 2016 CAPITAL MARKET

Railways losing market share in freight

ing, supply chain management and third

party logistics business. GST implementation will be a game-changing event for
businesses and particularly for organized
logistics players. The logistics requirement
for e-commerce will grow as exponentially
as e-commerce.
The Indian logistics sector is estimated
to have grown at a healthy 15% in the last
five years. However, growth in sub-sectors
varies, with the lowest being in basic trucking operations and highest in supply chain
and e-tailing logistics. Some studies estimate
the share of Indias logistics spend in GDP
at 13% (versus 7-8% in developed countries), implying overall size of US$180-220
billion (direct costs plus wastages from inefficiencies). A comparison with other countries shows inefficiencies are high in the Indian logistics sector.
Infrastructural bottlenecks across modes
(rail, road and waterways) have stifled the
sectors growth. Capacity constraints and
inefficiencies can be noted from the high transit time in rail as key train routes operate at
more than 110% utilization, thus leading to
an average speed of 25 km per hour. The
road sector is fraught with inadequate and
low-quality highway availability, thereby
limiting the trucks size and impacting economies of operation.
Despite being an economical mode of
transport, railways has lost market share in
freight movement to roads in the last few
decades due to capacity constraints. Compared to other countries, Indias rail share in
goods transport is 31%, which has come
down from 60% in 1980s and 48% in 1990s.
Another key constraint is administrative
delays. Despite being a relatively low-cost

country, logistics cost in India is higher due

to administrative delays led by paper work,
leading to huge inventory investments and
wastage, and a complex tax structure.
Also, low penetration of new technology in the supply chain process is resulting
in damage of goods. India has the least warehouse capacity with modern facilities, and
given the fragmented industry state (large
share with unorganized players), investment
in IT infrastructure is almost absent at required scale.
Logistics encompass a wide array of
services like transportation (air, surface, internal waterways and sea), storage (warehousing, logistics parks, container depots
and cold chains), distribution (courier service and e-tail deliveries), and integrated and
allied services (freight forwarding and thirdparty logistics) and investment in logistics
boost growth in its upstream and downstream economic activities.
The emergence of new technologies, especially mobile, in India has sparked a social change thats difficult to quantify. While
mobile, internet and social media penetration and growth can be quantified, describing the changes in social values and lifestyles
that have accompanied those trends is far
more challenging.
The e-commerce industry in India may currently be behind its counterparts in a number of developed countries and even some
emerging markets. However, with Indias
GDP growth pegged at 7-8% by the International Monetary Fund and the World
Bank, it is expected to grow rapidly. Moreover, the Indian e-commerce industry has
access to funds from within the country and
international investors.
Overall, the e-commerce sector is maturing and a number of serious players are
entering the market. However, this will not
be without its share of challenges, be it operational, regulatory, or digital. How a company prepares itself to meet these challenges
will decide whether or not it succeeds.
The eventual success of e-commerce
industry players depends on the logistics
strategy adopted by them. In India, the
revival in logistics industry has long way
to go. There shall be well coordinated efforts across the spectrum such as government, policy makers and private industry
players to elevate the standards of Indian
logistics industry.




Catching a falling knife

Stocks correcting can be good buying opportunity only if there
are no corporate governance issues
In the present age of internet and malls, flash
sales, monsoon sales, annual sales, limited
edition sales, discount sales or sale to celebrate special occasions such as Republic
Day or Independence Day are fairly common. Consumers can be seen eagerly waiting for such sales to buy merchandise that is
otherwise sold at higher price. Like these
sales, even the equity market has witnessed
flash sales over the last few years.
In recent times, the examples of flash
sales of stocks witnessing a sudden and sharp
collapse include Nestle India, Motherson
Sumi Systems and the Amtek group. Considering the growing complexities of the market
and industries, greed of the promoters and
stiff business targets set for executives, this
trend is expected to persist in future.
A stock trading at the higher levels or
at premium suddenly becomes affordable
and attractive to individual small and retail investors. Now the important issue is
how to react to such flash sales. Whether
to participate in such flash sales is the
relevant question.
It is extremely difficult to chart out a
strategy for such flash sales. However, one
inference that clearly emerges is the fact that
such flash sales are not for the faint-hearted
investors. The risk appetite to absorb losses
should be on the higher side. Only these
investors should participate and shop in
such flash sales.

The mother of all the flash sales continues to be Satyam Computer Services. The
rise and fall of the software solutions provider was the biggest accounting and corporate scam that the Indian stock market ever
witnessed. This is not taking into considering the manipulation of stock markets. In
2009, Chairman Ramalinga Raju disclosed the
fudging of cash and bank balances. This was
done to hide the manipulation of the top line
and the bottom-line to keep the markets in
good humor. On the day of the earth-shaking
disclosures, the stock collapsed like a pack
of cards. In subsequent trading sessions, as
more information came to light, it touched a
multi-year low of Rs 11.5.
The Satyam stock eventually managed
to recover some lost ground on the strength
of its business including the clientele, marketing muscle and employee base. The company was acquired by the Mahindra &
Mahindra group company Tech Mahindra at
Rs 58 per share in April 2009. Satyam was
merged with Tech Mahindra in 2013. Satyam
is one of the rare cases of the stock managing
to bounce back significantly post acquisition
by Tech Mahindra despite the massive manipulation of the books of accounts and related contingent liabilities and uncertainties.
The Satyam episode created an embarrassing situation for many. For instance, the
software sectors growth estimates went
haywire as Satyam was counted as one of

the major players in the industry. Further,

the company used to be part of the leading
stock market indices including the BSE
Sensex and the NSE Nifty 50.
From a low of Rs 11.5 to Rs 58, the
purchase price paid by Tech Mahindra,
Satyam delivered a gain of five times in short
span of time. Post acquisition, the stock
appreciated further. Satyam is one of the
prime examples of catching a falling knife.
The investment strategy looks extremely lucrative. However, it is not easy. It
is risky and not suitable for the risk-averse
small investors. It can even back-fire and
destroy the entire capital. However alluring, small investors should avoid the investment strategy of investing in flash sales.
There is no trend that emerges from the
recent debacles. Both Nestle and Motherson
have recovered swiftly. The Amtek group
counters continue to be in doldrums and trading at the lower levels.
Nestle, the owner of popular brands
Maggi, EveryDay and Nescafe, collapsed after higher-than-permitted lead content were
discovered in Maggi noodles. In June 2015,
the company recalled Maggi noodles from
the market. Maggi came back on the shelf in
Diwali in November 2015 after the Mumbai
High Court gave a clean chit to the company.
End November 2015, Nestle started production of Maggi at all its five facilities.
The Nestle stock touched a 52-week low
of Rs 5499 after the quality issue surrounding Maggi surfaced in June 2015. The most
amusing part of the story is the fact that the
counter recovered to report an all-time high
of Rs 7500 in October 2015. This translates
into gain of 36.4% in a matter of five months.
Prior to the Maggi fiasco, the Nestle stock
was available at price to earnings (P/E) multiple of 54.9 and price to book value (P/BV)
ratio of 24 times. Now the stock is commanding P/E of 47 and P/BV of 19.6 times. Its
turnover plunged 32.1% and net profit 60.1%
in the quarter ended September 2015.
Nestle was not facing any corporate
governance issues or management crisis. The
problem was mainly related to the flagship
brand Maggi. Products and brands in the
other segments were unaffected by the adverse developments surrounding Maggi. The
other business segments include dairy products, coffee and chocolates. Probably, this
was one of the major factors that helped the
company to bounce back quickly on the trading floor. Nestle is cash-rich, with a strong
hold on the markets it serve. It had a consisDec 21, 2015 Jan 03, 2016 CAPITAL MARKET

tently earned high return on equity, ranging
between 46% and 124%, over the last decade. Mutual funds held 0.83% stake in
Nestle end September 2015.
Motherson Sumi Systems is another
stock that witnessed bear hammering in September and October 2015. This was owing to
the possibility of its business being get adversely affected over the emission issue at its
key European client Volkswagen, a Germanyheadquartered manufacturer of luxury cars.
In September 2015, Volkswagen plunged
into crisis triggered by one of the biggest scandals in the automobile industry world over
when it disclosed that it had fixed cheat device on diesel powered vehicles to show lower
toxic emission during regulatory tests. These
vehicles were sold across the world including
the US and Europe. The tremors of this sudden and tragic events at Volkswagen were felt
on the domestic turf as Motherson reported
a steep correction of 45% from its 52-week
high of Rs 396 in August 2015 to a 52-week
low of Rs 217 in October 2015. The company supplies auto components to multiple
brands of Volkswagen.
In a conference call in September 2015 to
assure and update the investors about the
developments and its impact on Motherson,
the management clarified the entire revenues
from the Volkswagen group was not at stake.
The Volkswagen group contributed around
40% to the revenues. The diesel models are
under cloud and not the petrol ones. Further,
Audi is the biggest customer of Motherson.
As per multiple estimates, the fiasco at
Volkswagen will have an impact of around
2% to 3% on the consolidated revenues.
The Motherson stock bounced back on
the trading floor and is now available at Rs
277, a recovery of 27.5% from its annual
low. The company is among the major success stories in the auto component sector and
stock market as well. It has been disclosing
its medium-term targets, i.e., five-year targets, and, importantly, sharing achievements
of targets within the set time-frame. The performance is quite good if the targets are compared with the actual numbers. Indeed, the
stock continues to be a prized asset and a
promising bet. During the last decade, consolidated turnover increased 34 times and net
profit eight times. The market value appreciated 16 times in this period.
The corporate strategy of mergers and
acquisitions has been effectively deployed
by the management to improve its clout in
the market. Motherson, a joint venture beDec 21, 2015 Jan 03, 2016 CAPITAL MARKET

The fall and the rise

Motherson Sumi Systems witnessed bear
hammering in September and October
2015 but bounced back and is now
available at Rs 277
Relative performance of
Motherson Sumi Systems v BSE Sensex

Base=100 as on 11 December 2014

Face value: Rs 2

* 11 December 2015

tween the Samvardhana Motherson group

and Sumitomo Wiring Systems of Japan, is
one of the worlds largest manufacturers of
automotive rear view mirrors and also a leading maker of instrument panels, bumpers
and door trims in the Europe. The company has set a revenue target of US$ 18
billion by 2020 from around US$ 5.5 billion reported in the fiscal ended March 2015
(FY 2015). The organic and inorganic
growth will be an integral part of the business strategy.
The Amtek group companies Amtek
Auto, Castex Technologies, JMT Auto and
Metalyst Forgings saw a sharp erosion
in wealth in July and August 2015. Amtek
Auto is down by 77% from its 52-week
high of Rs 213 in December 2014. Similarly, Castex Technologies has declined 95%,
JMT Auto 36.3% and Metalyst Forgings
77.8% from their respective annual highs.
This wealth destruction was largely
owing to the hefty debt on the balance sheets
and resultant cash crunch, poor financial
performance and corporate governance issues. The NSE mid August 2015 announced
removal of Amtek Auto from the futures
and option segment from 30 October 2015.
The exclusion increased the intensity of the
bear assault.
The management of Amtek Auto, the
flagship company of the Amtek group, admitted to temporary cash crunch in August
2015. All the four group companies have
overleveraged balance sheets: Amtek Auto
has a debt-to-equity ratio of 2.36, Castex
Technologies 2.39, JMT Auto 1 and
Metalyst Forgings 2.

The management of the Amtek group of

companies is working on turnaround
through sale of non-core businesses and assets and minority stake in overseas companies and disposing of some industrial real
estate assets.
There are corporate governance issues
that have shaken the confidence of the market. As per a news report in Business Standard in September 2015, the lenders have
decided to go for a special audit of books of
accounts of various Amtek group companies before providing a fresh line of credit to
tide over liquidity crunch. The BSE sought
a clarification from Amtek Auto on this report. According to the company, it is in advanced discussion with various banks and
financial institutions for re-alignment of its
debt obligations.
Further, allegations of manipulation of
stock prices of subsidiary Castex (earlier
known as Amtek India) were made. As per
the complaint, the price rigging was aimed
at facilitating mandatory conversion of 6%
foreign currency convertible bonds into equity shares of Castex. A glance at the price
chart of the stock clearly reveals abnormal
movement. The share price climbed to an
all-time high of Rs 362 in July 2015, trigging
mandatory conversion, but subsequently
reported a sharp decline. Presently, the stock
is trading at Rs 18.25. The low price might
be tempting for investors. But it could be a
way to wealth destruction.
Stocks trading at absolute low prices
attract retail investors as honey attracts
bees. Despite several cases of wealth destruction of thousands of crore, still lowpriced stocks are the top picks for the retail individual investors.
In this context, the now defunct airline
Kingfisher Airlines is a classic example. It is
a blend of flash sale and extended sale as
well. The airline lost the plot owing to mismanagement. Despite its troubles, the stock
had emerged among the highly traded stocks
by number of shares when it was in the news
for all the wrong reasons. Now the stock is
suspended and not traded.
The individual public shareholders were
holding 58.47% equity in Kingfisher on 30
September 2014. The stock is a complete
disaster for the low-value loving individual
investors. There is a valuable lesson: stocks
trading at absolutely low price should be
avoided if inflicted with corporate governance issues. In fact, the story might be
already over for such stocks. It is only

speculation that remains. The business of
betting is not retail investors cup of tea
and should be avoided. Ideally, it is better
to opt for strong and quality stocks offering safety of capital rather than go for reckless speculation.
Can the falling knife be considered an
investment opportunity? There are no
straight answers. This strategy might work
if companies are not facing any corporate
governance issues and manipulation of books
of accounts. Nestle and Motherson managed
to recover as the problems were never about
mis-management and the quality of the books
of accounts.
Indeed, the most difficult part of such
instances is the fact that it is impossible to
lay rules based on these case studies. Hindsight wisdom is of no use in such cases.
Each case is unique. Only a broader framework can be built based on several instances
that the market has witnessed in the past.
The most important issue is the reasons for the sudden and sharp fall in the
stock price. There might not be simple and
straight answers. It could take days or
months for the story to be completely told.
Such as the debacle of Financial Technologies India (FTIL) owing to scam at subsidiary National Spot Exchange (NSEL) was
unfolding for many months. Fresh information was flowing almost daily. Somewhat
similar is the case with the Amtek group
companies, with new developments taking
place on a daily basis.
Additionally, check whether an enterprise is forthcoming about the reasons. Investors should assess whether the answers
provided by the management are convincing. Are enough data and information offered?
If investors fail to unearth the real reasons
for the steep and unexpected fall in price, it
is better to stay away from such stocks. It
could be just a precursor to future crisis.
The retail investors can look at the reaction of institutional investors such as the
mutual funds, foreign institutional investors and private equity investors. Institutional investors are street smart, with lot
of interesting bits of stories that are not in
public domain.
Institutional investors might even have
insider information. The privileged information might be driving their investment activities. FTIL was gradually moving south
without any apparent reason. Also, mutual
fund holding was on decline. Subsequently,
the scam at subsidiary NSEL came into light.

A tale of two stocks

FTIL is still to recover from the flash
sale, while erstwhile group company
MCX has managed to recoup significant
losses after FTIL exited MCX
Relative performance of
FTIL & MCX v BSE Sensex

Base=100 as on 11 December 2014

* 11 December 2015
FTIL face value: Rs 2. MCX face value: Rs 10

This means some investors smelled something fishy even prior to the scandal broke
out in the public domain. Mutual fund holding was 8.06% end December 2012 in FTIL.
It declined to 7.52% end June 2013. FTIL is
still to recover from the flash sale, while
erstwhile group company Multi Commodity Exchange of India (MCX) has managed
to recoup significant losses. FTIL exited
MCX in favour of Kotak Mahindra Bank in
September 2014.
But even institutional investors can be
caught off guard by street-smart management. Thus, the decline in institutional holding can be just a raw indication of the possible future carnage. In fact, the management
can manage to push the matter under the
carpet and even emerge unscratched.
KS Oils can be an appropriate example.
The firm had high profile and marquee investors including New Silk Route, Citigroup
Venture Capital and Baring Private Equity
Partners Asia, which lost significant amount
of money. The firm was plunged into crisis
due to mismanagement, misrepresentation
and misadventures. As with Kingfisher, the
story is over for KS Oils as well.
Also, investors should carefully evaluate the response of the management to the
adverse developments. The body language,
reaction and response can provide some inkling about the gravity of issues faced by an
enterprise. In rare instances, the statutory
auditors can offer valuable inputs for taking
informed decisions.
Though too late, the statutory auditors
of C Mahendra Exports have highlighted issues pertaining to accounting practices in

their audit report for FY 2015 and also declined to sign the audit report. Going one
step further, in October 2015, the auditors
issued a public notice informing the general
public that they have not signed the
auditors report. The gems and jewelry maker
plunged from a two-year high of Rs 129.5 in
December 2013 to the present level of Rs
1.29 on 14 December 2015.
Keep in mind the fact that the management can make every effort to rescue the
situation and emerge from the crisis. C
Mahendra had issued bonus shares in the
ratio of 1:1 in June 2015 to boost market
sentiments and give an impression that all is
well with the company.
Similarly, Deccan Chronicle Holdings
had gone for multiple buyback offers just
before the debacle. The buyback was undertaken to improve the morale of the market participants, showcase the balancesheet strength and administer a booster dose
to the stock. This attempt met with failure. Like Kingfisher, Deccan Chronicle has
been suspended from trading. This means
the entire capital of investors has evaporated in air. Again, it is story of greed of the
promoters and mismanagement and accounting misadventures.
In short, corporate actions such as bonus issues and buyback might be a trap for
individual investors. These can be desperate attempts to create a false sense of security and safety among the investors. No
point in expecting charity from companies
in their hour of crisis.
There are multiple scenarios. First comprises investors waiting on the fence for
correction to invest. Other is of investors
already holding the stock. In the first instance, investors should strictly stay clear
if the concerns pertain to poor corporate
governance practices and accounting issues.
In other cases, investors can avoid bullet
investments and take exposure in small installments. This will help to get a better deal
(lower average price). When the buying takes
place in small tranches, investors can react
better to fresh information that emerges.
Falling stocks can be extremely volatile
and quickly burn a significant portion of the
capital or even the entire capital. It is not
possible to feel the jitters unless one has
firsthand experience. The key lesson is to
stay away from such stocks if nerves are
not made of steel and there is no stomach to
digest the fluctuations.
S Khedekar
Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET