Ambit Strategy Thematic Tomorrows Ten Baggers 19jan2012

January 19, 2012
Strategy
STRATEGY THEMATIC
Tomorrow’s ten baggers Analyst contacts

Gaurav Mehta
31 firms have outperformed the BSE100 by 10x or more since Tel: +91 22 3043 3255
1996 (excluding Financials or firms with market cap less than gauravmehta@ambitcapital.com
US$100mn). We take a subset of these 31 and identify the

Saurabh Mukherjea, CFA
drivers of their outperformance i.e. the operating levers which Tel: +91 22 3043 3174
differentiate great firms from the rest of the market. We then saurabhmukherjea@ambitcapital.com
apply these drivers of greatness in today’s context to identify 71
firms in the BSE500 (which are most able to deliver on these Exhibit 1: The Great 25
drivers). Of these 71 firms, 25 pass our accounting cleanliness Mcap
Company Ticker
and governance filters (see Exhibit 1). This is the “Great 25”. ($mn)
Attractive Valuations*
Going beyond “Good & Clean” and thinking long term BHEL BHEL IN 13,240
Whilst the consistent and marked outperformance of our Good & Clean (G&C) Tata Power Co. TPWR IN 4,592
portfolios over the past year has attracted attention, we have also been
Cadila Health. CDH IN 2,621
criticised by clients for the ‘short termism’ of the G&C portfolios. (The G&C
portfolios are constructed using: (i) a battery of financial tests based on the Cummins India KKC IN 2,117
previous fiscal year’s data, and (ii) our forensic accounting model. Each G&C Castrol India CSTRL IN 2,068
portfolio typically runs for a quarter before we revise it.) Hence, in this note Exide Inds. EXID IN 2,018
we have used multi-year financial analysis to create a list of 25 great Indian Torrent Pharma. TRP IN 911
companies that have the potential to be tenbaggers in the coming decade.
GSFC GSFC IN 607
Voltas VOLT IN 545
Step 1: Defining greatness
Sadbhav Engg. SADE IN 340
We identify firms that have delivered 10 times as much returns as the BSE100
over the last 15 years. We call these firms 10Xers. After filtering such firms Bajaj Electrical BJE IN 327
(there are 31 of them) for weak accounting quality and corporate governance, Mahindra Life. MLIFE IN 206
we get a final list of 14 stocks. It is these 14 stocks that we use to identify the ICRA ICRA IN 168
drivers of greatness. Moderate Valuations**
Nestle India NEST IN 7,683
Step 2: The drivers of greatness
Asian Paints APNT IN 5,171
We identify what differentiates a great firm relative to an average firm at each
Lupin LPC IN 3,814
stage of the value generation process: investment, conversion of these
investments to sales, pricing discipline, balance sheet discipline and cash Titan Inds. TTAN IN 3,219
generation. CMC CMC IN 555
Elgi Equipment ELEQ IN 211
Not only do the great firms perform significantly better than an average firm
on a variety of measures encompassing the five aforementioned stages, even Rich Valuations***
more interestingly the great firms show a more consistent and calibrated ITC ITC IN 31,969
approach to growth over long periods of time. GlaxoSmith C H L SKB IN 2,045
Coromandel Inter CRIN IN 1,468
Step 3: Investment implications CRISIL CRISIL IN 1,289
We apply the winning formula (i.e. the drivers of greatness) to the BSE500 ex- EID Parry EID IN 670
Financials universe of firms over the more recent past (FY06-FY11). We find
Supreme Inds. SI IN 460
that 71 firms are able to muster passing scores on two-thirds of the drivers. Of
Source: Ambit Capital research;
these 71, 25 firms pass our accounting quality and corporate governance
standards. These 25 firms are shown in Exhibit 1. Of these 25 firms, 13 are * Trading below 5 year P/E, P/B, EV/EBITDA (on at
trading below their five year valuation averages. least 2 of these 3 measures)
** Trading below either 5 year P/E, 5 year P/B or 5
Many of the firms which emerge from this filtering approach – Tata Power, year EV/EBITDA (on 1 of these three measures)
BHEL, Voltas, Cummins – are cyclicals. Obviously, the fate of these firms is tied
*** Trading above 5 year P/E, P/B, EV/EBITDA
to the economy and the interest rate cycle. However, to the extent that we are
relatively close to a turn in the rate cycle, even from a cyclical perspective
these companies look relatively well placed.
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit
Capital may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Please refer to disclaimer section on the last page for further important disclaimer.
Strategy
Step 1: Defining greatness

We begin our analysis by identifying greatness on the basis of stock market
outperformance. We identify firms which have delivered 10 times as much return
as the BSE100 over the last 15 years and call these firms 10Xers. With 1996 as the
initial year, we look for all firms which were listed then or subsequently, and have,
over the period of their existence, delivered 10 times the returns of the benchmark
BSE100 index.
This gives us a list of 31 such firms from the universe of all listed firms’ (excl
Financial Services firms) with a market cap of over US$100mn. We then filter these
firms for accounting quality and corporate governance to get a final list of 14
stocks. It is these 14 stocks or 10Xers that we focus on in ”Step 2” of this note.
Exhibit 1: 10Xers*
10Xers since 1996

Company Bloomberg Ticker
Infosys INFO IN Equity
Wipro WPRO IN Equity
NMDC NMDC IN Equity
Sun Pharma.Inds. SUNP IN Equity
Hind.Zinc HZ IN Equity
Jindal Steel JSP IN Equity Our Focus Set for Step 2
Hero Motocorp HMCL IN Equity Company Bloomberg Ticker
Adani Enterp. ADE IN Equity Infosys INFO IN Equity
Sterlite Inds. STLT IN Equity Wipro WPRO IN Equity
Exide Inds. EXID IN Equity
CRISIL CRISIL IN Equity
Glenmark Pharma. GNP IN Equity
Hind.Zinc HZ IN Equity
Coromandel Inter CRIN IN Equity
Hero Motocorp HMCL IN Equity
United Phosp. UNTP IN Equity Our
Motherson Sumi MSS IN Equity accounting Exide Inds. EXID IN Equity
GMDC GMDC IN Equity and Coromandel Inter CRIN IN Equity
Havells India HAVL IN Equity governance Motherson Sumi MSS IN Equity
Rajesh Exports RJEX IN Equity
filters
Rajesh Exports RJEX IN Equity
Pantaloon Retail PF IN Equity Phoenix Mills PHNX IN Equity
Opto Circuits OPTC IN Equity Nava Bharat Vent NBVL IN Equity
Berger Paints BRGR IN Equity
KPIT Infosys. KPIT IN Equity
Phoenix Mills PHNX IN Equity
Praj Inds. PRJ IN Equity
Nava Bharat Vent NBVL IN Equity
Hawkins Cookers HAWK IN Equity
KPIT Infosys. KPIT IN Equity
Praj Inds. PRJ IN Equity
BF Utilities BFUT IN Equity
Kemrock Inds. KRI IN Equity
Kwality Dairy KLD IN Equity
NESCO NSE IN Equity
Hawkins Cookers HAWK IN Equity
CRISIL CRISIL IN Equity
Chromatic India CRDS IN Equity
Source: Ambit Capital research. * “10xers” is a term popularized by the American business guru Jim Collins in his latest book “Great by Choice”. We
are avid fans of Mr.Collins and have tried to apply his thinking in the Indian context of rapid economic change and insufficient data.
Obviously, over the years, these 10Xers have delivered better RoCEs, RoEs and EPS
CAGR than an average firm and this has contributed to their stellar performance
versus the benchmark. This can be readily seen in exhibit 2.
Ambit Capital Pvt Ltd 2

Strategy
Exhibit 2: 10Xers over BSE100 - RoE, RoCE and EPS

FY96-11 10xers v/s BSE100 Average Median
Measure 10Xers BSE100 10Xers BSE100
EPS (CAGR %) 28 12 28 12
EPS (CAGR/Standard deviation) 0.53 0.34 0.50 0.21
RoE (Change- last 5 yrs v/s first 5 yrs)* 15.1 1.8 12.2 (0.7)
RoE (CAGR/Std Dev) 0.02 (0.11) 0.03 (0.02)
RoCE (Change- last 5 yrs v/s first 5 yrs)* 13.9 0.5 9.4 0.4
RoCE (CAGR/ Standard deviation) 0.03 (0.11) 0.04 (0.02)
Source: Ambit Capital research, Capitaline
* For example, for a firm listed since 1996, this will be the change between the average value for FY2007-
2011 over the average for FY1996-2000
Not just growth, ‘consistent’ growth

Before we go into the next section to understand what made these firms so
successful, it is worth highlighting a very important fact about the 10Xers - they
haven’t just beaten the benchmarks in terms of EPS, RoE and RoCE improvements;
they have done so more consistently than other firms in the market (see the table
above). This has resulted in higher CAGR to standard deviation measures (i.e.
better growth adjusted for noise) on all these three counts for the 10Xers.
However, the more interesting question is: “What was the recipe for their
success?”- “What was it that these firms did differently to start with that helped
them generate superior financial performance and shareholder returns?”
To answer this question and thereby identify the drivers of greatness, we turn to
the next section.

Strategy
Step 2: The drivers of greatness

To identify the drivers of greatness, we use the following chart as a framework to
understand what the 10Xers do differently at each stage of a firm’s value addition
process.
Exhibit 3: Framework for determining drivers of greatness
b. Conversion of
a. Investment investment to
(gross block) sales (asset
turnover, sales)
c. Pricing
discipline (PBIT
margin)
e. Cash d. Balance sheet

generation discipline (D/E,
(CFO) current ratio)
Source: Ambit Capital research
a. Investment
The first step in a firm’s value generation process is obviously investment.
Exhibit 4: Markers of greatness - Investment

FY96-11 10Xers v/s BSE100 Average Median
Gross Block (Change- last 5 yrs v/s first 5 yrs, %)* 1483 714 820 313
Gross Block (CAGR/Standard deviation) 0.82 0.74 0.82 0.66
Net Block (Change- last 5 yrs v/s first 5 yrs, %)* 1466 659 793 295
Net Block (CAGR/Standard deviation) 0.61 0.46 0.58 0.41
The 10Xers invest more (much more) than the average BSE100 firms (see the
first and third rows of the table shown above). While this is to be expected, the
more interesting finding from Exhibit 4 is that the 10Xers have shown more
consistent and calibrated growth. This is evident from the fact that the CAGR to
standard deviation ratio (i.e. better growth adjusted for noise) is higher for
10Xers versus the benchmarks on both gross block and net block.

Strategy
b. Conversion to sales
After having made the investment decision, it is vital that a firm translates its
investments into better sales. This can be monitored by measuring the change
in asset turnover ratio or the growth in sales figures themselves.
Exhibit 5: Markers of greatness - Conversion to sales

Fixed assets turnover (Change- last 5 yrs v/s first 5 yrs)* 0.82 0.59 0.83 (0.01)
Fixed assets turnover (CAGR/Standard deviation) 0.05 (0.08) 0.04 (0.10)
Sales (CAGR %) 28 16 25 15
Sales (CAGR/ Standard deviation ) 0.99 0.91 0.97 0.71
Again, the 10Xers haven’t just shown better improvement on both Asset
Turnover and Sales than the average BSE100 firms but have also achieved it in
a more consistent and calibrated manner. This has meant higher CAGR to
standard deviation ratio (i.e. better growth adjusted for noise) for the 10Xers
versus the average firm on both these measures.
c. Pricing discipline
After ensuring translation of higher investments to sales, the next key decision
for a firm is pricing. What 10xers are able to do is to maintain pricing
discipline. The concrete measure at this stage is operating margins.
Exhibit 6: Markers of greatness - Pricing discipline

PBIT margin (Change - last 5 yrs v/s first 5 yrs)* 9.9 (0.7) 3.1 (0.6)
PBIT margin (CAGR/Standard deviation) 0.06 (0.02) 0.02 (0.01)
Yet again, the 10Xers were found to be better both in terms of PBIT margin
improvement as well as better CAGR to standard deviation ratio on this
measure versus the average firm. (In fact the average BSE100 firm seems to
have shed PBIT margin over the past decade.)
d. Balance sheet discipline

Whilst all the action described above takes place on the P&L, in a “high cost of
capital” market like India, it is essential that a firm focus on maintaining
Balance Sheet discipline. We look for improvements on debt-equity and
current ratios to assess a firm’s ability to maintain a healthy Balance Sheet.

Strategy
Exhibit 7: Markers of greatness - Balance sheet discipline

Net Debt Equity (Change- last 5 yrs v/s first 5 yrs)* (1.02) (0.25) (0.71) (0.24)
Net Debt Equity (CAGR/Standard deviation) (0.59) (0.32) (0.31) (0.01)
Current Ratio (Change- last 5 yrs v/s first 5 yrs)* (0.03) (0.23) (0.13) (0.26)
Current Ratio (CAGR/Standard deviation) (0.00) (0.06) (0.05) (0.08)
The 10Xers again score better not just on magnitude changes but also on
CAGR to standard deviation ratio on both net debt equity and current ratio
measures than the average firm.
Interestingly, whilst the 10xers seem to have delevered 3-4x more than the
broader market over the past decade, it is encouraging to note that the
broader market has also reduced its leverage over this period.
e. Cash generation
Eventually everything that a firm does should lead to better operating cashflow
generation (especially over the long time periods that we are using here).
Healthy cash generation also then feeds back toward funding investments for
the future growth of the firm (which in turn kicks off the whole virtuous cycle all
over again).
Exhibit 8: Markers of greatness - Cash generation

CFO (Change- last 5 yrs v/s first 5 yrs, %)* 23.6 6.5 16.2 3.9
CFO (CAGR/Standard deviation) 0.12 (0.12) 0.13 0.04
The 10Xers again score better both on magnitude change (3-4x better than the
average firm) as well as CAGR to standard deviation ratio versus the average
firm.

Strategy
A framework for picking tomorrow’s

multibaggers
Having identified the drivers of greatness in the previous section, we now turn to
identifying tomorrow’s multibaggers. For this we look for firms, which in more
recent times (FY2006-FY2011), have replicated the same sort of operational
metrics improvement which the 10Xers have shown over FY1996-2011, in terms of
improvements across factors (a)-(e) outlined above. These improvements are not
just magnitude based improvements but should also reflect consistency as
measured by CAGR to standard deviation ratios.
These steps (investment, conversion to sales, pricing discipline, financial discipline

etc.), if undertaken, should then result in improvements in the bottomline as
measured by EPS while also resulting in higher return ratios, as measured by RoEs
and RoCEs. Again, these should not just be magnitude based improvements but
also higher CAGR to noise improvements. We thus have a total of six heads which
we weigh equally to provide each firm a cumulative greatness score on 100.
Improvements are measured over the last six years (FY2006-FY2011). These six
headings along with the respective sub-criteria are outlined below.
Exhibit 9: Factors used for quantifying and identifying greatness in India

Threshold or Medians
Head Criteria for BSE500 firms
(over FY06-FY11)
1 Investments a. Above median gross block increase (FY09-11 over FY06-08) 80%
b. Above median gross block CAGR to standard deviation 0.95
2 Conversion to sales a. Improvement in asset turnover (FY09-11 over FY06-08) 0

b. Above median asset turnover CAGR to standard deviation (0.03)
c. Above median sales increase (FY09-11 over FY06-08) 80%
d. Above median sales CAGR to standard deviation 1.0
3 Pricing discipline a. Above median PBIT margin increase (FY09-11 over FY06-08) 0.07
b. Above median PBIT margin CAGR to standard deviation 0.06
4 Balance sheet discipline a. Below median Debt:Equity decline (FY09-11 over FY06-08) 0.03
b. Below median Debt:Equity CAGR to standard deviation (0.01)
c. Above median current ratio increase (FY09-11 over FY06-08) 0.04
d. Above median current ratio CAGR to standard deviation 0.10
Cash generation and EPS

5 a. Above median CFO increase (FY09-11 over FY06-08) 82%
improvement
b. Above median CFO CAGR to standard deviation 0.13
c. Above median EPS increase (FY09-11 over FY06-08) 33%
d. Above median EPS CAGR to standard deviation 0.27
6 Return ratio improvement a. Improvement in RoE (FY09-11 over FY06-08) 0

b. Above median RoE CAGR to standard deviation (0.05)
c. Improvement in RoCE (FY09-11 over FY06-08) 0
d. Above median RoCE CAGR to standard deviation (0.07)

Strategy
Quantifying greatness
From the universe of BSE500 firms, after removing Financial Services firms and
firms with insufficient data, there were 396 firms which we scored on the six
headings highlighted on the previous page. The cut-off for greatness was placed at
66.7%* and there were just 71 firms (less than 18% of the total population of 396
* The greatness score is firms) which could manage a score above this cut-off.
calculated by assigning equal
weights to the 6 factors Exhibit 10: Distribution of firms on the greatness score
outlined in Exhibit 9 on the
previous page. 90 Zone of mediocrity
Good,
Greatness beckons
not Great
80
218 firms 107 firms Only 71 firms
score < 50% (between 50% score > 67%
70
Thus each of these 6 factors and 67%)
carries a weight of 16.7%. 60
No. of firms
The scoring on sub-criteria 50

within each of these factors is 40
binary with a firm getting
30
either 1 or 0 based on
whether it has done better 20
than the respective threshold 10

or not. 0
0%-10% 10%-20% 20%-30% 30%-40% 40%-50% 50%-60% 60%-70% 70%-80% 80%-90% 90%-100%
Greatness Score
These scores are then
cumulated to arrive at a final
greatness score on 100 for In the next exhibit, we present key financial data on the three zones defined above
the firm. – Mediocrity (217 firms), Good but not great (107 firms), and Great (71 firms) -
based on their degrees of greatness.
Exhibit 11: Zones of greatness - Financial summary

Mediocre Good but not great Great
Number of firms 218 107 71
Mcap (US$ mn) 417 523 552
Share price (3-year CAGR) 12% 30% 38%
Gross block (3-year CAGR) 15% 25% 14%
Sales (3-year CAGR) 14% 20% 21%
EPS (3-year CAGR) -2% 17% 27%
CFO (3-year CAGR) 0% 14% 17%
RoE (3-year average) 12.9 20.1 27.6
RoCE (3-year average) 12.3 20.3 28.7
Debt equity 0.75 0.48 0.29
PE (FY11) 12.5 15.0 12.4
PB (FY11) 1.5 2.2 2.6
EV EBITDA (FY11) 7.4 8.3 7.5
With regard to fundamentals, the superiority of Great firms compared to the other
two groups is evident in Exhibit 11. However, the bottom three rows of the exhibit
show that the 71 Great firms are actually trading at a 10% valuation discount to
107 “Good but not great” firms.
Of these 71 great firms, only 25 clear our accounting and corporate
governance filters and this gives us our final list of 25 great companies.
We present the ‘Great 25’ in the next section (Step 3).

Strategy
Step 3: Investment implications

Great firms, but are these good stocks? Having identified the 25 great firms
that exhibit the ingredients required to be tomorrow’s winners, we next run a
valuation check to ascertain if they are currently trading at reasonable prices for
outright investments. We compare these firms with respect to their 5-year average
valuations on three metrics — P/B, P/E and EV/EBITDA. We find 13 firms to be
inexpensive on at least two of the three metrics and hence attractive for
investment. Six firms are expensive compared to their 5-year average P/B, P/E and
EV/EBITDA multiples. However, as we had highlighted in our October 19 note,
Good & Clean 3.0: Battleships, empirical evidence suggests that valuations don’t
make much of a difference when investing in high quality firms with a long
term (at least one year) horizon. It is worth noting that three firms – Exide,
Coromandel and CRISIL – appear both in the “Focus Set” created in Step1 and in
the “Great 25” shown below.
Exhibit 12: The Great 25 — Arranged by attractiveness of valuations

Cheap w.r.t history?
Current Valuation Overall cheap on
(1 for “Yes”)
SN Ticker Company how many
EV/ EV/
P/E P/B P/E P/B counts?
Ebitda Ebitda
Attractive Valuations*
1 BHEL IN Equity BHEL 10.9 3.0 6.2 1 1 1 3/3
2 TPWR IN Equity Tata Power Co. 18.1 1.8 10.6 1 1 1 3/3
3 CDH IN Equity Cadila Health. 20.1 5.7 15.6 1 1 0 2/3
4 KKC IN Equity Cummins India 20.0 5.2 13.7 1 1 0 2/3
5 CSTRL IN Equity Castrol India 21.6 16.1 12.6 1 1 1 3/3
6 EXID IN Equity Exide Inds. 16.3 3.6 10.6 1 1 0 2/3
7 TRP IN Equity Torrent Pharma. 15.0 3.9 10.1 1 1 0 2/3
8 GSFC IN Equity GSFC 4.3 0.9 2.9 1 1 1 3/3
9 VOLT IN Equity Voltas 9.7 2.0 6.6 1 1 1 3/3
10 SADE IN Equity Sadbhav Engg. 13.3 2.2 8.3 1 1 1 3/3
11 BJE IN Equity Bajaj Electrical 10.4 2.4 6.1 1 1 1 3/3
12 MLIFE IN Equity Mahindra Life. 8.9 0.9 6.2 1 1 1 3/3
13 ICRA IN Equity ICRA 18.0 3.3 11.6 1 1 0 2/3
Moderate Valuations**
14 NEST IN Equity Nestle India 41.4 33.7 25.0 0 1 0 1/3
15 APNT IN Equity Asian Paints 31.6 11.4 19.3 0 1 0 1/3
16 LPC IN Equity Lupin 22.0 5.4 17.7 0 1 0 1/3
17 TTAN IN Equity Titan Inds. 33.6 13.7 21.5 0 1 0 1/3
18 CMC IN Equity CMC 17.9 4.2 13.4 0 1 0 1/3
19 ELEQ IN Equity Elgi Equipment 13.6 3.0 7.8 0 1 0 1/3
Rich Valuations***
20 ITC IN Equity ITC 31.6 9.4 18.6 0 0 0 0/3
21 SKB IN Equity GlaxoSmith C H L 31.7 9.2 17.7 0 0 0 0/3
22 CRIN IN Equity Coromandel Inter 10.8 3.5 7.6 0 0 0 0/3
23 CRISIL IN Equity CRISIL 32.5 15.0 20.9 0 0 0 0/3
24 EID IN Equity EID Parry 24.2 2.1 13.6 0 0 0 0/3
25 SI IN Equity Supreme Inds. 12.3 4.1 7.4 0 0 0 0/3
Source: Ambit Capital research, Bloomberg, Capitaline. * Trading below 5 year average P/E, P/B, EV/EBITDA (on at least 2 of these 3 measures)
** Trading below either 5 year average P/E, 5 year P/B or 5 year EV/EBITDA (on 1 of these three measures)
*** Trading above 5 year average P/E, P/B and EV/EBITDA

Strategy
More colour on the Great 25

Exhibits 13 through 15 in the following pages provide greater colour on these 25
great companies. More specifically, exhibit 13 provides a financial summary of
these firms based on historical data. Exhibit 14 provides market cap, 3-month ADV
and forward looking EPS and BVPS CAG` for these firms over FY11-FY13.
Finally, Exhibit 15, provides a brief description of the key business activities of each
of these firms.
Exhibit 13: The Great 25 — Financial summary based on historical data

Share price Gross block Sales EPS CFO RoE RoCE
Debt
Ticker Company (3 year (3 year (3 year (3 year (3 year (3 year (3 year
Equity
CAGR) CAGR) CAGR) CAGR) CAGR) average) average)
BHEL IN BHEL -1% 23% 29% 29% -8% 29.2 44.3 (0.5)
TPWR IN Tata Power Co. 9% 14% 21% 23% 30% 14.8 12.5 1.6
CDH IN Cadila Health. 56% 14% 25% 38% 53% 33.3 25.7 0.4
KKC IN Cummins India 38% 8% 14% 21% 14% 32.6 44.4 (0.0)
CSTRL IN Castrol India 39% 6% 13% 32% 13% 76.7 117.5 0.0
EXID IN Exide Inds. 40% 14% 17% 52% -4% 34.9 45.8 0.0
TRP IN Torrent Pharma. 57% 14% 18% 26% 19% 30.7 26.4 0.1
GSFC IN GSFC 69% 4% 10% 47% 35% 24.0 30.3 (0.1)
VOLT IN Voltas 20% 19% 17% 20% -52% 35.2 46.2 (0.3)
SADE IN Sadbhav Engg. 53% 45% 36% 14% 87% 8.8 12.0 2.1
BJE IN Bajaj Electrical 61% 17% 26% 20% 20% 34.5 41.3 0.1
MLIFE IN Mahindra Life. 22% 23% 38% 17% DNA* 8.4 9.6 0.3
ICRA IN ICRA 29% 11% 25% 19% DNA* 22.7 33.9 0.0
NEST IN Nestle India 40% 16% 21% 27% 26% 119.3 169.0 0.0
APNT IN Asian Paints 43% 17% 20% 28% 17% 45.5 57.5 0.0
LPC IN Lupin 54% 21% 29% 25% 46% 33.9 25.9 0.2
TTAN IN Titan Inds. 57% 6% 30% 43% 112% 40.2 49.4 (1.0)
CMC IN CMC 83% 5% 0% 25% 16% 31.4 35.8 (0.1)
ELEQ IN Elgi Equipment 63% 14% 23% 19% 29% 25.6 41.2 (0.4)
ITC IN ITC 36% 13% 15% 14% 22% 29.2 43.1 (0.1)
SKB IN GlaxoSmith C H L 64% 5% 22% 20% 20% 29.0 44.3 0.0
CRIN IN Coromandel Inter 80% 6% 26% 48% 41% 43.4 31.3 0.4
CRISIL IN CRISIL 59% 19% 16% 32% 27% 41.2 53.6 0.0
EID IN EID Parry 38% 23% 26% 47% -14% 27.4 21.7 1.0
SI IN Supreme Inds. 100% 13% 23% 60% 17% 36.1 34.9 0.9
Source: Ambit Capital research, Capitaline * Cash flows reversed from negative to positive during the period and hence CAGR cannot be computed

Strategy
Exhibit 14: The Great 25 — Forward looking data

Sr. Mcap 3-month ADV FY11-13 EPS FY11-13 BVPS
Ticker Company
No. (US$ mn) (US$ mn) CAGR (%) CAGR (%)
1 BHEL IN BHEL 13,240 21.2 9.1 23.3

2 TPWR IN Tata Power Co. 4,592 6.3 3.9 16.2
3 CDH IN Cadila Health. 2,621 1.2 17.7 24.5
4 KKC IN Cummins India 2,117 2.3 2.6 11.5
5 CSTRL IN Castrol India 2,068 0.6 5.3 12.2
6 EXID IN Exide Inds. 2,018 4.4 13.6 19.5
7 TRP IN Torrent Pharma. 911 0.2 17.2 22.9
8 GSFC IN GSFC 607 0.8 3.2 24.4
9 VOLT IN Voltas 545 2.0 -9.9 14.7
10 SADE IN Sadbhav Engg. 340 0.3 22.3 23.5
11 BJE IN Bajaj Electrical 327 0.3 13.5 17.6
12 MLIFE IN Mahindra Life. 206 0.1 30.5 11.4
13 ICRA IN ICRA 168 0.4 6.3 11.6
14 NEST IN Nestle India 7,683 2.6 21.5 51.4

15 APNT IN Asian Paints 5,171 4.1 16.7 23.9
16 LPC IN Lupin 3,814 7.7 18.8 26.4
17 TTAN IN Titan Inds. 3,219 17.3 26.8 34.1
18 CMC IN CMC 555 0.3 7.6 18.4
19 ELEQ IN Elgi Equipment 211 0.1 -4.1 20.4
20 ITC IN ITC 31,969 27.2 18.8 11.2

21 SKB IN GlaxoSmith C H L 2,045 1.1 20.0 12.1
22 CRIN IN Coromandel Inter 1,468 0.9 18.9 7.8
23 CRISIL IN CRISIL 1,289 1.5 18.5 19.7
24 EID IN EID Parry 670 0.3 DNA DNA
25 SI IN Supreme Inds. 460 0.2 30.5 30.4
Source: Bloomberg, Ambit Capital research

Strategy
Exhibit 15: The Great 25- Business activity description

Sr. No. Ticker Company Business activity description
Bharat Heavy Electricals Limited manufactures power plant equipment. The Company's products include
gas turbines, generators, thermal sets, diesel shunters, turbo sets, hydro sets, power transformers,
1 BHEL IN B H E L
switch gears, circuit breakers and boilers. The Company also manufactures compressors, valves,
rectifiers, pumps, capacitors, oil rigs, as well as castings and forgings.
Tata Power Company Limited generates and supplies electricity in Mumbai and its suburbs. The
Company also constructs and operates independent power plants as well as captive power plants for
2 TPWR IN Tata Power Co.
industrial concerns. Tata Power also provides various services related to electricity distribution, erects
and commissions transmission lines, and is diversifying into the telecommunications market.
Cadila Healthcare Ltd. manufactures, and markets healthcare solutions ranging from formulations,
active pharmaceutical ingredients, vaccines, diagnostics, health and dietetic foods, animal healthcare to
3 CDH IN Cadila Health.
cosmeceuticals. The Company's products are available in tablets, capsules, injections, liquids, dry
syrups, powders, granules, and ointments.
Cummins India Limited manufactures internal combustion engines, including diesel, reciprocating
piston, gas turbine and gasoline engines. The Company also manufactures generating sets and public
4 KKC IN Cummins India
transport-type passenger motor vehicles, including luxury coaches and air-field buses. In addition,
Cummins India Ltd. operates a computerized and fully-equipped research and development facility.
Castrol (India) Limited manufactures and markets automotive and industrial lubricants and specialty
5 CSTRL IN Castrol India products. The Company's products include lubricating oils, greases and brake fluids. The Company also
manufactures cable filling compounds, jellies, waxes and other items.
Exide Industries Ltd. manufactures a wide range of lead and electric storage batteries. The Company's
6 EXID IN Exide Inds. batteries are used for automobiles, railways, aircrafts, power stations, telephone exchanges, and other
uses.
Torrent Pharmaceuticals Ltd. manufactures bulk drugs and pharmaceutical formulations. The Company's
formulations include cardio-vascular, psychotropic and anti-biotic drugs while its bulk drugs include
7 TRP IN Torrent Pharma.
atenolol, ciprofloxacin and norfloxacin. Torrent Pharmaceuticals has wholly owned subsidiaries in
several regulated and less regulated international markets.
Gujarat State Fertilizers & Chemicals Limited manufactures fertilizers and chemicals in four product
8 GSFC IN G S F C areas: Finished Products, Intermediate Products, Polymers and Fibre Products. The Company also
maintains trading activities in nylon products, petrochemicals, industrial gases and plastics.
Voltas Limited offers engineering solutions for a wide spectrum of industries in areas such as heating,
ventilation and air conditioning, refrigeration, electro-mechanical projects, textile machinery, machine
9 VOLT IN Voltas
tools, mining and construction equipment, materials handling, water management, building
management systems, indoor air quality and chemicals.
Sadbhav Engineering Limited provides construction services, with a focus on irrigation, roads and
10 SADE IN Sadbhav Engg. highways, and mining operations. The Company constructs earthen dams and canals, rehabilitates and
upgrades roads, and excavates overburden of mineral properties.
Bajaj Electricals Limited manufactures electric fans and general lighting items, such as lamps, special
11 BJE IN Bajaj Electrical lamps, fluorescent tubes, and lighting fixtures. The Company also manufactures consumer durables like
small electrical appliances.
Mahindra Lifespace Developers Limited specializes in the construction and operation of commercial and
12 MLIFE IN Mahindra Life.
residential property complexes, projects management services and business centers.
13 ICRA IN ICRA ICRA Limited provides investment information and credit rating services in India.
Nestle India Ltd. manufactures brand name milk products and other food products The Company's
products include Everyday dairy whitener, milk powder and ghee, Milkmaid sweetened condensed milk
14 NEST IN Nestle India
and Cerelac weaning foods. Nestle's beverages include Nescafe and Sunrise coffee and Nesfit enriched
glucose powder. Nestle also manufactures Maggi noodles, soups and sauces.
Asian Paints Limited manufactures a wide range of decorative paints, varnishes, enamels, and black &
15 APNT IN Asian Paints synthetic resins. The Company, through its subsidiaries, also manufactures specialty industrial chemicals
and vinyl pyridine latex products which are used in the manufacture of rubber tires.
Lupin Limited manufactures bulk actives and formulations. The principal bulk actives manufactured by it
include Rifampicin, Pyrazinamide, Ethambutol (anti-TB), Cephalosporins (anti-infectives) and
16 LPC IN Lupin
cardiovasculars. The company also possesses competencies in phytomedicines, in which medicines are
made out of plant and herbal resources supported by the discipline of modern medicine.
Titan Industries Ltd. manufactures and retails jewelry and watches. The Company produces quartz
17 TTAN IN Titan Inds.
analog electronic watches, watch movements, step motors and watch cases.
CMC Ltd. provides computer users with a range of computer software and hardware support services.
18 CMC IN CMC The Company's services comprise of hardware maintenance, site preparations, installation and
commissioning of systems, software development, education and training.

Strategy
Sr. No. Ticker Company Business activity description
Elgi Equipments Limited manufactures reciprocating and screw type air compressors, diesel engines.
generators and pumps, garage equipment, auto products and heat pressure cleaners. Elgi markets a
19 ELEQ IN Elgi Equipment
range of wheel balancers, oil suction units, AC recovery plants, mobile service units, and pasteurizer
and bottle washers. The Company operates in India and markets its products globally.
ITC Limited, a member of BAT Group of UK, is a holding company, which has a diversified presence in
20 ITC IN ITC Cigarettes, Hotels, Paperboards & Specialty Papers, Packaging, Agri Business, Packaged Foods &
Confectionery, Branded Apparel, Greeting Cards and other FMCG products.
Glaxo SmithKline Consumer Healthcare Limited manufactures and sells malted milk food products. The
21 SKB IN GlaxoSmith C H L Group's products, which include energy & protein products, cereals, baby foods, ghee & butter, are sold
under the "Horlicks", "Boost", "Viva", "Brylcream", "Eno", "Maltova" and "Gopika" brand names.
Coromandel International Ltd. manufactures fertilizers and pesticides. The Company produces both
22 CRIN IN Coromandel Inter
chemical and organic fertilizers, insecticides, fungicides, herbcides, and plant biostimulant.
Crisil Ltd. operates a credit rating agency in India. The Company specializes in the areas of risk
23 CRISIL IN CRISIL
identification, classification and assessment, across a broad spectrum of industries.
E.I.D. - Parry (India) Limited is a diversified manufacturer of fertilizers, pesticides, sugar, ceramics,
24 EID IN EID Parry electronics and seeds. The Company is also diversifying into the manufacture of organic fertilizers, bio-
pesticides, acetic acid, wall tiles and horticultural activities.
Supreme Industries Limited manufactures industrial and engineered molded products and storage and
material handling crates. The Company also manufactures chemicals, multilayer sheets, multilayer
25 SI IN Supreme Inds.
films, packaging films and expanded polyethylene foam, PVC pipes and fittings, molded furniture and
disposable EPS containers.
Source: Bloomberg

Strategy
Institutional Equities Team

Saurabh Mukherjea, CFA Head of Equities (022) 30433174 saurabhmukherjea@ambitcapital.com
Research
Analysts Industry Sectors Desk-Phone E-mail

Aadesh Mehta Banking / NBFCs (022) 30433239 aadeshmehta@ambitcapital.com
Anand Mour FMCG (022) 30433169 anandmour@ambitcapital.com
Ankur Rudra, CFA Technology / Telecom / Education (022) 30433211 ankurrudra@ambitcapital.com
Ashvin Shetty Automobile (022) 30433285 ashvinshetty@ambitcapital.com
Bhargav Buddhadev Power / Capital Goods (022) 30433252 bhargavbuddhadev@ambitcapital.com
Chandrani De, CFA Metals & Mining (022) 30433210 chandranide@ambitcapital.com
Chhavi Agarwal Construction / Infrastructure (022) 30433203 chhaviagarwal@ambitcapital.com
Dayanand Mittal Oil & Gas (022) 30433202 dayanandmittal@ambitcapital.com
Gaurav Mehta Derivatives Research (022) 30433255 gauravmehta@ambitcapital.com
Hardik Shah Technology / Education Services (022) 30433291 hardikshah@ambitcapital.com
Krishnan ASV Banking (022) 30433205 vkrishnan@ambitcapital.com
Nitin Bhasin Construction / Infrastructure / Cement (022) 30433241 nitinbhasin@ambitcapital.com
Pankaj Agarwal, CFA NBFCs (022) 30433206 pankajagarwal@ambitcapital.com
Parita Ashar Metals & Mining / Media / Telecom (022) 30433223 paritaashar@ambitcapital.com
Puneet Bambha Power / Capital Goods (022) 30433259 puneetbambha@ambitcapital.com
Rakshit Ranjan, CFA Mid-Cap (022) 30433201 rakshitranjan@ambitcapital.com
Ritika Mankar Mukherjee Economy (022) 30433175 ritikamankar@ambitcapital.com
Ritu Modi Cement (022) 30433292 ritumodi@ambitcapital.com
Shariq Merchant Consumer (022) 30433246 shariqmerchant@ambitcapital.com
Sales
Name Regions Desk-Phone E-mail
Deepak Sawhney India / Asia (022) 30433295 deepaksawhney@ambitcapital.com
Dharmen Shah India / Asia (022) 30433289 dharmenshah@ambitcapital.com
Dipti Mehta India / Europe (022) 30433053 diptimehta@ambitcapital.com
Pramod Gubbi, CFA India / Asia (022) 30433228 pramodgubbi@ambitcapital.com
Sarojini Ramachandran UK +44 (0) 20 7614 8374 sarojini@panmure.com
Production
Sajid Merchant Production (022) 30433247 sajidmerchant@ambitcapital.com
Kausalya Vijapurkar Editor (022) 30433284 kausalyavijapurkar@ambitcapital.com
Praveen Mascarenhas Database (022) 30433251 praveenmascarenhas@ambitcapital.com

Strategy
Explanation of Investment Rating
Investment Rating Expected return

(over 12-month period from date of initial rating)
Buy >5%
Sell <5%
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Ambit Strategy Thematic Tomorrows Ten Baggers 19jan2012

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January 19, 2012

Tomorrow’s ten baggers Analyst contacts

US$100mn). We take a subset of these 31 and identify the

Step 1: Defining greatness

10Xers since 1996

Ambit Capital Pvt Ltd 2

Exhibit 2: 10Xers over BSE100 - RoE, RoCE and EPS

Not just growth, ‘consistent’ growth

Ambit Capital Pvt Ltd 3

Step 2: The drivers of greatness

Exhibit 3: Framework for determining drivers of greatness

e. Cash d. Balance sheet

Source: Ambit Capital research

Exhibit 4: Markers of greatness - Investment

Ambit Capital Pvt Ltd 4

Exhibit 5: Markers of greatness - Conversion to sales

Exhibit 6: Markers of greatness - Pricing discipline

d. Balance sheet discipline

Ambit Capital Pvt Ltd 5

Exhibit 7: Markers of greatness - Balance sheet discipline

Exhibit 8: Markers of greatness - Cash generation

Ambit Capital Pvt Ltd 6

A framework for picking tomorrow’s

These steps (investment, conversion to sales, pricing discipline, financial discipline

Exhibit 9: Factors used for quantifying and identifying greatness in India

2 Conversion to sales a. Improvement in asset turnover (FY09-11 over FY06-08) 0

Cash generation and EPS

6 Return ratio improvement a. Improvement in RoE (FY09-11 over FY06-08) 0

Ambit Capital Pvt Ltd 7

The scoring on sub-criteria 50

than the respective threshold 10

Exhibit 11: Zones of greatness - Financial summary

Ambit Capital Pvt Ltd 8

Step 3: Investment implications

Exhibit 12: The Great 25 — Arranged by attractiveness of valuations

Ambit Capital Pvt Ltd 9

More colour on the Great 25

Exhibit 13: The Great 25 — Financial summary based on historical data

Ambit Capital Pvt Ltd 10

Exhibit 14: The Great 25 — Forward looking data

1 BHEL IN BHEL 13,240 21.2 9.1 23.3

14 NEST IN Nestle India 7,683 2.6 21.5 51.4

20 ITC IN ITC 31,969 27.2 18.8 11.2

Ambit Capital Pvt Ltd 11

Exhibit 15: The Great 25- Business activity description

Ambit Capital Pvt Ltd 12

Sr. No. Ticker Company Business activity description

Ambit Capital Pvt Ltd 13

Institutional Equities Team

Analysts Industry Sectors Desk-Phone E-mail

Ambit Capital Pvt Ltd 14

Explanation of Investment Rating

Investment Rating Expected return

Additional information on recommended securities is available on request.

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