Ambit Capital Report

June 07, 2013
Strategy
THEMATIC
Analyst contacts
Why do great Indian companies self-destruct? Saurabh Mukherjea, CFA
Over 80% of ‘great’ Indian companies slide to mediocrity in a short Tel: +91 99877 85848
span of time led by poor strategic decision-making fuelled by ’hubris saurabhmukherjea@ambitcapital.com
and arrogance‘. Such faulty strategic decisions usually result in poor Gaurav Mehta
capital allocation which destroys RoCE and creates financial stress. Tel.: +91 22 3043 3255
Thus, the importance of evaluating and tracking strategic decisions to gauravmehta@ambitcapital.com
achieve long-term outperformance cannot be over-emphasised
Consultant: Anirudha Dutta
although it is an area that is often overlooked. Through a series of
Tel: +91 98201 34825
notes, we will analyse management strategies of select companies.
anirudha0765.dutta@gmail.com
Our aim is not only to understand the past better but also to set a
framework for analysing the future.
The systematic slide to mediocrity

The most prominent ‘fallen angels’
We find that the average probability of a sector leader remaining a sector
Name Period*
leader five years later is only 15%, implying that 85% of BSE500 companies
slide towards mediocrity. In fact, the average probability of a ‘great’ company Hero MotoCorp 2004,09
becoming a sector laggard five years later is 25%. Even the Nifty ‘churns’ by TVS Motor 2004,09
around 50% or so every decade (as compared to around 25% for developed Ranbaxy Labs. 2005,10
markets and around 30-40% in other major emerging markets). The tendency Tata Motors 2006,11
for large, successful companies to slide down the market-cap spectrum is not
Tata Steel 2007,12
confined to the Nifty.
Bharti Airtel 2007,12
Why do successful firms slide with such regularity? Indian Hotels 2007,12
Promoters, in their own explanations for underperformance, tend to cite Bharat Forge 2007,12
exogenous factors (such as business cycle, Government interference, rising
Source: Ambit Capital research; Note: * 2004, 09
competitive intensity or the macro environment). However, such explanations indicates that these companies, which were ‘great
are not always convincing because within the same sector (and hence subject firms’ in 2004, have been identified as ‘fallen
to the same regulatory and competitive forces), whilst some firms are sliding, angels’ in 2009.
others are rising. Contrast, for example, the performance over the past five
years of Infosys vs HCL Tech or Bajaj Auto vs TVS Motors. In our view, the slide
is primarily due to poor strategic decision making.
Sustaining leadership
Our framework and forthcoming research on this subject Name Period*
In the first of a series of strategy notes, we present our framework to analyse Berger Paints 2003,08
and evaluate why companies slide in performance. The framework is primarily Asian Paints 2004,09
based on the works of Jim Collins and William Thorndike. The framework and Larsen & Toubro 2004,09
the case studies will help you understand how certain companies achieved
Dabur India 2005,10
great success, how they stumbled and how some of them recovered. The past
is relevant because it gives a peek into the future and is potentially a CRISIL 2005,10
determinant whether a company comes out of the rut to regain greatness. This Nestle India 2006,11
first note has a preponderance of discussions on Tata group companies Balkrishna Inds 2007,12
(owing to its virtue of being the largest and most diverse corporate group in TCS 2007,12
India), an imbalance which subsequent notes will correct.
Source: Ambit Capital research; Note: * 2003, 08
Investment implications indicates that these companies have been identified
as sector leaders in 2003 as well as in 2008.
Our analysis shows that Tata Steel, Tata Motors, Titan and TTK Prestige are at
an inflection point today. A cyclical turnaround in the domestic market could
propel a turnaround at Tata Motors. Tata Steel, however, has larger
challenges of sorting out the problems at Corus, even if the domestic demand
were to see an upswing. Titan and TTK Prestige have had a great run for a
decade and the key question is will growth stall over the next five years. We
have no firm answers, but we prefer Tata Motors over Tata Steel. TTK Prestige
remains on our BUY list (we do not cover Titan at present but like TTK Prestige,
Titan is also on our ten-baggers list).
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
CONTENTS
Executive summary………………………………………………………………… 3
Introduction……………………………………………………………………….. 18
The ‘greatness’ framework………………………………………………………20
Self-destruction quantified……………………………………………………… 22
Identifying ‘fallen angels’………………………………………………………. 24
How and why do great companies fall?.................................................. 27
Case study: Titan………………………………………………………………….41
Case study: TTK Prestige………………………………………………………… 50
What we will cover in our forthcoming notes…………………………………62
Ambit Capital Pvt Ltd 2

Strategy
Executive summary
80% of companies slide into More than 80% of ‘great’ Indian companies slide to mediocrity in a brief span of
mediocrity… time. Super successful companies usually become victims of their own success
because after a while, ’hubris and arrogance‘ sets in and the promoter and/or
management make ill-judged strategic decisions. More than anything to do with
the business cycle or with regulation or competition, this point emerges forcefully
from our observations of corporate India over the past decade. Such faulty
strategic decisions usually result in poor capital allocation which destroys RoCE
and creates financial stress. Therefore, the importance of evaluating and tracking
strategic decisions to achieve long-term outperformance cannot be over-
emphasised although it is an area that is often overlooked. Through a series of
notes, we will analyse the management strategy of select companies, which will
…thanks to management help you to understand not only the past but hopefully set a framework for
hubris and arrogance analysing the future as well.
Exhibit 1: Factors used for quantifying greatness (as used in the 2012 model)
Head Criteria
1 Investments a. Above median gross block increase (FY10-12 over FY07-09)*
b. Above median gross block increase to standard deviation
2 Conversion to sales a. Improvement in asset turnover (FY10-12 over FY07-09)*
b. Positive improvement in asset turnover adjusted for standard deviation
c. Above median sales increase (FY10-12 over FY07-09)*
d. Above median sales increase to standard deviation
3 Pricing discipline a. Above median PBIT margin increase (FY10-12 over FY07-09)*
b. Above median PBIT margin increase to standard deviation
4 Balance sheet discipline a. Below median debt-equity decline (FY10-12 over FY07-09)*
b. Below median debt-equity decline to standard deviation
c. Above median cash ratio increase (FY10-12 over FY07-09)*
d. Above median cash ratio increase to standard deviation

Cash generation and EPS
5 a. Above median CFO increase (FY10-12 over FY07-09)*
improvement
b. Above median CFO increase to standard deviation
c. Above median EPS increase (FY10-12 over FY07-09)*
d. Above median EPS increase to standard deviation
6 Return ratio improvement a. Improvement in RoE (FY10-12 over FY07-09)*
b. Positive improvement in RoE adjusted for standard deviation
c. Improvement in RoCE (FY10-12 over FY07-09)*
d. Positive improvement in RoCE adjusted for standard deviation
Source: Ambit Capital research. Note: * Rather than comparing one annual endpoint to another annual endpoint (say, FY07 to FY12), we prefer to
average the data out over FY07-09 and compare that to the averaged data from FY10-12. This gives a more consistent picture of performance (as
opposed to simply comparing FY07 to FY12).

Strategy
The systematic slide to mediocrity

Over five years, there is only a We find that the average probability of a sector leader remaining a sector leader
15% probability that a sector five years later is only 15%, implying that 85% of BSE500 companies slide towards
leader retains its leadership mediocrity. In fact, the average probability of a ‘great’ company becoming a sector
position… laggard five years later is 25%. Even the Nifty ‘churns’ by around 50% or so every
decade (as compared to around 25% for developed markets and around 30-40%
in other major emerging markets). The tendency for large, successful companies to
slide down the market-cap spectrum is not confined to the Nifty.
…and 25% probability that they We use our ‘greatness’ model to assess the probability that sector leaders (defined
become sector laggards as firms with a ‘greatness’ score in excess of 75th percentile of the sector) from five
years ago are now amongst the sector laggards (defined as firms with a
‘greatness’ score of less than 25th percentile of the sector), i.e. what is the
probability of self-destruction? We contrast this against the probability of
sustaining leadership i.e. what is the probability that sector leaders are still sector
leaders five years hence. We check this historically starting from 2003—for
example, we assess the chances that a sector leader in 2003 was still amongst the
sector leaders in 2008 and contrast this against the chances of it becoming a
sector laggard by 2008 and so on.
Exhibit 2: The 'greatness' framework
b. Conversion of
a. Investment (gross investment to sales
block) (asset turnover, sales)
c. Pricing discipline
(PBIT margin)
d. Balance sheet
e. Cash generation discipline (D/E, cash
(CFO) ratio)
Source: Ambit Capital research
Exhibit 3: Distribution of firms on the ‘greatness’ score has been calculated by

using data over FY07-12 (total population: 381 firms)
Good,
Zone of mediocrity not Great Zone of greatness
60 211 firms 93 firms Only 77 firms

score < 50% (between 50% score > 67%
50 and 67%)
40
No. of firms
30
20
10
0
0%-10% 10%-20% 20%-30% 30%-40% 40%-50% 50%-60% 60%-70% 70%-80% 80%-90% 90%-100%
Greatness Score

Strategy
Exhibit 4: Probability of self-destruction

2003,08 2004,09 2005,10 2006,11 2007,12 average
Probability that sector leaders in Year-0 stay sector leaders in Year-5? 12% 20% 19% 10% 17% 15%
Probability that sector leaders in Year-0 become sector laggards in Year-
23% 20% 30% 23% 31% 25%
5?
Source: Ambit Capital research, Note: 2003,08 indicates the probability in Year-5 (2008) for a sector leader in Year-0 (2003)
Exhibit 5: Probability of rising to ‘greatness’

2003,08 2004,09 2005,10 2006,11 2007,12 average
Probability that sector laggards in Year-0 stay sector laggards in Year-
20% 17% 13% 21% 19% 18%
5?
Probability that sector laggards in Year-0 become sector leaders in
37% 23% 42% 39% 28% 34%
Year-5?
Source: Ambit Capital research, Note: 2003,08 indicates the probability in Year-5 (2008) for a sector laggard in Year-0 (2003)

Strategy
Identifying fallen angels

RoEs and RoCEs are the best Using our greatness framework, we can identify the ’fallen angels‘ i.e. the once-
measures to identify a loved companies that were considered to be undisputed market leaders, say, for
company’s fall from grace 5-7 years, but then they faded away. More practically speaking, we use our model
to grade firms into leaders (scores above the 75th percentile) and laggards (scores
below the 25th percentile). Then we define ’fallen angels‘ as those firms that slide
from being a leader to a laggard over a five-year period. Our quantitative analysis
suggests that RoEs and RoCEs are the most sensitive measurables in a company’s
fall from grace.
Exhibit 6: List of 'fallen angels'

FY03, 08 FY04, 09 FY05, 10 FY06, 11 FY07, 12
Monsanto India Hero MotoCorp Monsanto India Tata Motors Bharti Airtel
Hero MotoCorp Eicher Motors Tata Motors SKF India SKF India
Eicher Motors Tata Motors ABB Bharat Forge Bharat Forge
Atlas Copco (I) Ashok Leyland Siemens Siemens Alstom T&D India
Godrej Inds. TVS Motor Berger Paints Kirl. Brothers AIA Engg.
Carborundum Motherson Sumi Tata Chemicals Havells India Lakshmi Mach.
Uni. Works
CMC Siemens Bharat Electron Lakshmi Mach. Gateway Distr.
Works
Container Atlas Copco (I) Lakshmi Mach. Bharati Shipyard Sterlite Inds.
Corpn. Works
ONGC Kirl. Brothers Gateway Distr. Allcargo Logistics Hind. Zinc
BPCL Berger Paints Tata Steel Ent. Network SAIL
IOCL PTC India SAIL Hind. Zinc Natl. Aluminium
Dr Reddy's Labs BPCL Natl. Aluminium SAIL Tata Steel
Ranbaxy Labs. HPCL Hotel Leela Ven. Tata Steel Indian Hotels
Guj Gas IOCL ONGC Natl. Aluminium Hotel Leela Ven.
Company
Neyveli Lignite GAIL (India) BPCL Hotel Leela Ven. MRPL
Sanofi India IOCL Thomas Cook (I) GE Shipping Co
Ranbaxy Labs. GAIL (India) Biocon
Guj Gas Company Ranbaxy Labs.
Neyveli Lignite GE Shipping Co
Neyveli Lignite
Source: Ambit Capital research; Note: 2003,08 indicates that these companies, which were ‘great firms’ in
2003, have been identified as ‘fallen angels’ in 2008.

Strategy
Why do successful firms slide with such

regularity?
Within the same sector, there is Promoters, in their own explanations for underperformance, tend to cite
wide divergence in exogenous factors (such as business cycle, Government interference, rising
performance, suggesting competitive intensity or the macro environment). However, such explanations are
internal factors are more not always convincing because within the same sector (and hence subject to the
important than external factors same regulatory and competitive forces), whilst some firms are sliding, others are
rising. Contrast, for example, the performance over the past five years of Infosys vs
HCL Tech or Bajaj Auto vs TVS Motors.
Exhibit 7: NOPAT margins – Infosys losing momentum; Exhibit 8: RoCE of Infosys and HCL Tech – moving in
HCL Tech catching up different trajectories
35.0%
30.0%
30.0%
25.0%
25.0%
20.0% 20.0%
15.0% 15.0%
10.0% 10.0%
5.0% 5.0%
0.0% 0.0%
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Infosys HCL Tech Infosys HCL Tech
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 9: PAT margin of Bajaj and TVS – way apart! Exhibit 10: Bajaj’s RoCE in a different trajectory vs TVS
18% 350%
16%
300%
14%
250%
12%
10% 200%
8% 150%
6%
100%
4%
2% 50%
0% 0%
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
Bajaj TVS Bajaj TVS

Strategy
The five-stage framework
In this note, we use a modified version of Collins’ framework and Thorndike’s

approach to analyse capital allocation to understand why great Indian companies
slide. The core stages in our framework are as follows:
The five-stage framework  Stage 1 - Hubris and arrogance: The company is on top of its game.
Operating margins, RoCE, growth, valuation multiples, etc., are at all-time
highs. Captivated by the success in its core business, the management starts
believing its own press. Success and adulation intoxicates the top brass.
Arrogance sets in. The company loses sight of the factors which made it
successful in the first place.
 Stage 2 – Unbridled expansion: In search of more growth and more

adulation, the management begins an expansion drive which is often
inorganic. The firm ’overreaches‘ into new geographies and product lines
where it has no real experience or expertise. Sub-par capital allocation begins.
 Stage 3 – Stuck in a rut: Often cost discipline and/or product excellence

erodes and prices are then raised. Profits, return multiples and valuation
multiples start sliding. Company politics thrives. The leader becomes
increasingly autocratic and announces 'recovery plans' that aren't based on
accumulated experience.
 Stage 4 – Grasping for solutions: The company thrashes around and looks
for a solution even as profits and financial strength continue to slide. Senior
management jobs are on the line. Often a new leader comes in and
sometimes he tries to fire silver bullets (eg. a 'transformative' acquisition, a
blockbuster product, a cultural revolution, etc). However, a new leader (ideally,
someone from inside) who takes a long, hard look at the facts and then acts
calmly to put in place a measured recovery strategy with sensible use of cash
and capital at its centre, could be the saviour.
 Stage 5a – Capitulation: The firm is sold or fades into insignificance or, and
this happens rarely, shuts down.
 Or Stage 5b – Recovery: The firm turns the corner and begins the long, slow
climb to recovery.
Exhibit 11: The five-stage framework
Source: Ambit Capital research, From the book ’How The Mighty Fall’

Strategy
Investment implications
Our analysis shows that Tata Steel, Tata Motors, Titan and TTK Prestige are at an
The four companies in our first inflection point today. A cyclical turnaround in the domestic market will propel the
of a series of notes are poised outperformance of Tata Motors. Tata Steel has larger challenges of sorting out the
at an interesting juncture problems at Corus. Titan and TTK have had a great run for a decade and the key
question is will growth stall over the next five years. We have no firm answers, but
over the next five years, we prefer Tata Motors over Tata Steel. TTK remains on our
BUY list. Both Titan and TTK are on our 10-baggers list.
Exhibit 12: Tata Steel's journey through the five stages

Stage Remarks
Hubris and arrogance Superb financial performance through FY01-05
Feted as the lowest-cost steel producer globally by World Steel
(FY01-05)
Dynamics
Won the Deming prize
Company started believing that it had insulated itself from steel price
cycles
Unbridled expansion Evaluates alternative businesses to enter into including telecom, BPO, etc
Bids for Corus in 2006 and completes the acquisition in 2007, after a
(FY06-08)
bidding war with CSN
Corus acquisition at a value of US$12bn when company net worth was
US$2bn
Corus did not measure up to the criteria that the company had
enunciated in its annual reports for growth/ acquisition
Stuck in a rut After initial strong performance, Corus goes into the red
(FY09 - present) Domestic expansion plans get delayed
Company saddled with huge debt
Downturn in global steel cycle exacerbates the situation
Grasping for solutions Restructuring at Corus by mothballing capacities and disposing assets
(FY09 - present) Debt refinancing and equity raising
Enhance raw material security
Change of leadership at Corus
Write-down of goodwill - acknowledgement that the acquisition is not
Capitulation or Recovery?
working
(FY09 - present) Plans to sell off underperforming and inefficient assets of Corus
Accelerate expansion plans in India to improve the competitive structure
of the entire company
Source: Company, Ambit Capital research
Exhibit 13: Tata Motors' journey through the five stages

Stage Remarks
Hubris and arrogance Strong financial performance between FY03-07
In a short span of time, becomes one of the three largest passenger
(FY03-06)
vehicle companies in the country
Unbridled expansion Takes two big challenges: develop the Nano and takeover of JLR
(FY07-08) Launch of Nano is widely celebrated; acquisition of JLR is criticised
Stuck in a rut Nano fails to deliver the expected results after the initial euphoria
JLR is hit severely by the downturn in global demand after the financial
(FY09)
crisis
Grasping for solutions Several leadership changes at JLR and India business
A three-tier strategy to revive the fortunes of JLR; decides not to cut
(FY10)
back on investment plans
Strengthen the domestic commercial vehicle portfolio
JLR starts performing strongly, although will continue to need
substantial investments towards product development
(FY11- present) Work on to revive the fortunes in the domestic passenger car market

Strategy
Exhibit 14: Titan's journey through the five stages

Stage Remarks
Launches quartz watches in the Indian market and is widely successful;
Hubris and arrogance
five-year goals achieved in two
Enters the Middle East and is successful
Unbridled expansion Makes a foray into the European watch market
(FY96-98) Enters into jewellery exports
European watch foray creates financial stress; crimps company's ability
Stuck in a rut
to invest in domestic business
(FY1999-2002) Jewellery exports fails to take off
Grasping for solutions Pull back from the European markets
Launch jewellery in the Indian market
Capitulation or Recovery? Relaunch the domestic jewellery SBU with 22ct jewellery
Tanishq becomes a huge success
Rejuvenate the domestic watch portfolio
Expand the Fast Track brand into other product categories
Launch prescription eyewear business
Exhibit 15: TTK Prestige's journey through the five stages

Stage Remarks
Hubris and arrogance Successful launch of its US business through 'Manttra'
(FY90-94) Strong growth of pressure cookers and pans in India (25%+ CAGR)
Unbridled expansion Expansion of its US business; funding it through IPO proceeds
(FY95-99) Ventured into new markets like Middle East, UK and Australia
Labour issues in Hosur and Bangalore plant could not be managed in
Stuck in a rut
time
(FY2000-02) International sales was decimated due to stiff competition
Planned new product launches either failed or could not be executed in
time
Government increased excise and other taxes
Grasping for solutions Reallocated and restructured responsibilities within existing senior
management team
(FY03-04) Reduced focus on exports
Convinced the Government to reduce excise tax rates on pressure
cookers
Gave VRS to a large part of the workforce, relocated manufacturing
facility and resolved union problems
Launched Prestige Smart Kitchens to support distribution of new
product launches
Decided to diversify Indian operations across geographies and
(FY05 - present)
products
Consistent innovation pipeline for new products meant that 50-70% of
sales generated in any year related to products/SKUs introduced over
the past three years

Strategy
TATA STEEL LTD. TATA MOTORS LTD.
Karl Slym, MD, Tata Dr Ralf Speth, CEO

Mr. H.M. Nerurkar, MD, Tata Steel Motors Jaguar Land Rover
Tata Steel’s RoCE (%) through the different stages Tata Motors’ RoCE (%) through the different stages
70
140
60 120
Hubris & Unbridled Stuck in a rut/Grasping for Hubris & Unbridled Stuck in Grasping Capitulation
50 100 for
Arrogance expansion a rut or Recovery?
Arrogance expansion solutions/Capitulation or
solutions
R o C E (% )
40 Recovery? 80
Ro CE (% )
30 60
20 40
20
10
0
0
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 -20
Year Year
RoCE (%) through the five stages RoCE (%) through the five stages
Tata Steel’s share price performance through the Tata Motors’ share price performance through the
different stages
different stages
Share Price chart-Tata Steel vs Sensex
Hubris & Arrogance Unbridled expansion Stuck in a rut/Grasping for Share Price chart-Tata Motors vs Sensex
1600.0 3 yr CAGR relative
5 yr CAGR relative solutions/Capitulation or Recovery? Grasping for Capitulation or Recovery ?
1400.0 performanceof ‐9% Hubris & Unbridled expansion Stuck in a rut
performance of 33% Till date CAGR relative performance of 1600.0
1 yr CAGR solutions Till date CAGR relative
Arrogance 2 yr CAGR relative
1200.0 ‐19% 1400.0 1 yr CAGR performance of 49%
4 yr CAGR relative performance of ‐36% relative
performance relative
1000.0 1200.0 performance of
of ‐32% performance
800.0 1000.0 31%
of 240%
600.0 800.0
400.0 600.0
200.0 400.0
0.0 200.0
Apr-00 Apr-02 Apr-04 Apr-06 Apr-08 Apr-10 Apr-12 0.0

Apr-02 Apr-04 Apr-06 Apr-08 Apr-10 Apr-12
Tata Steel Sensex
Tata Motors Sensex

Strategy
TITAN INDUSTRIES LTD. TTK PRESTIGE LTD.
Mr. Bhaskar Bhat, MD, Titan Mr. T.T. Jagannathan, Chairman, TTK Prestige
Titan’s RoCE (%) through the different stages TTK’s RoCE (%) through the different stages
60
60
50
50
40
40
Hubris & Unbridled Stuck in a Grasping Capitulation
RoCE (%)
rut for
RoCE (%)
Hubris & 30 Arrogance expansion or

30 solutions Recovery?
Unbridled Stuck in a rut Arrogance?
expansion Growth 20
20
10
10
0
0
FY90 FY92 FY94 FY96 FY98 FY00 FY02 FY04 FY06 FY08 FY10 FY12
FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
-10
Year
Year
RoCE (%) through the five stages
RoCE (%) through the five stages
Titan’s share price performance through the different TTK’s share price performance through the different
stages stages
Share Price chart-Titan vs Sensex Share Price chart-TTK vs Sensex

Unbridled
5000.0 3500.0 Stuck in a rut
expansion Stuck in a rut Hubris & Arrogance? Unbridled Grasping for solutions Capitulation or
4500.0 4 yr CAGR in line 3 yr CAGR relative 2 yr CAGR relative
3 yr CAGR Till date CAGR relative 3000.0 expansion Recovery?
4000.0 with Sensex performance of ‐
relative performance of 36% Dec94‐Mar99 performance of ‐31% Till date CAGR relative
3500.0 2500.0 29%
performance CAGR relative performance of 69%
3000.0 2000.0 performance
of ‐32%
2500.0
of ‐20%
2000.0 1500.0
1500.0 1000.0
1000.0
500.0 500.0
0.0 0.0
Apr-95 Apr-97 Apr-99 Apr-01 Apr-03 Apr-05 Apr-07 Apr-09 Apr-11 Apr-13 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12
Note: TTK got listed in Dec 94, hence share price
performance during the first stage is not applicable
Titan Sensex TTK Prestige Sensex

Strategy
Who are the big winners and losers of tomorrow?

In our forthcoming notes, we will be using our ’greatness‘ model to address the
following issue:
1. Amongst today’s ‘great’ firms which are the laggards of tomorrow?
Using our ’greatness‘ model, we will attempt to identify the 80% of ’great‘ Indian
companies of today that are most prone to sliding to mediocrity in the near future.
The list of leading Indian companies that can either sustain good performance or
slide to mediocrity in the near future has been provided in exhibit 16 on page 14
(in the entire BSE500 universe, ex-financials) and exhibit 17 on page 15 (on a
sector by sector basis).
2. What do great companies who stay great have in common?
What do the remaining 15% of the great companies who manage to sustain
greatness over long periods of time (eg. Asian Paints, HDFC Bank, ITC) have in
common with each other? How have these firms immunised themselves from
‘hubris and arrogance’ and the poor capital allocation decisions that follow?
3. Amongst the laggards and fallen angels of today, which are the great
firms of tomorrow?
We return to our ’greatness‘ model and now combine it with the tenets of
’disciplined capital allocation‘ to identify the titans of tomorrow who are currently
regarded as second- or third-rate players. So we will attempt to figure out whether
firms like BHEL, Infosys, Wipro, and Indian Hotels, can mount a turnaround.
The list of laggards that can either continue to exhibit mediocrity or alternatively
show enough mettle to revive and turnaround has been provided in exhibit 18 on
page 16 (in the entire BSE500 universe, ex-financials) and exhibit 19 on page 17
(on a sector by sector basis).

Strategy
Exhibit 16: Overall leaders of today

6 mnth 3-yr share Next 2-yr Next 2-yr 3-yr average 3-yr average
Mcap
Stock Sector ADV price CAGR EPS BVPS RoE (%) RoCE (%)
($ mn)
($ mn) (%) CAGR (%) CAGR (%) (FY10-FY12) (FY10-FY12)
Eicher Motors Auto 1,642 1.3 63 31 25 15 31
Exide Inds. Auto Anc 2,112 3.7 5 22 18 26 40
Balkrishna Inds Auto Anc 446 0.3 34 12 21 30 25
Elgi Equipment Capital Goods 220 0.2 13 48 19 26 39
Cummins India Capital Goods 2,262 2.3 5 4 13 31 43
Whirlpool India Consumer Durable 467 0.4 -5 30 DNA 38 53
TTK Prestige Consumer Durable 690 3.1 77 24 33 49 69
Bayer Crop Sci. Fertilizers 970 0.4 24 DNA 25 24 32
Nestle India FMCG 8,982 3.0 24 15 24 110 141
Asian Paints FMCG 7,796 7.8 29 18 21 45 61
ITC FMCG 46,557 40.8 32 19 15 32 47
GlaxoSmith CHL FMCG 4,187 3.2 52 18 19 31 48
Carborundum Uni. Industrials 426 0.2 10 34 10 22 24
Supreme Inds. Industrials 791 0.4 52 24 26 40 36
Sadbhav Engg. Infrastructure 279 0.3 -4 60 5 12 12
Redington India IT 539 0.5 -1 14 20 20 18
Persistent Sys IT 371 0.6 11 15 18 20 23
Jagran Prakashan Media 519 0.2 -10 9 14 28 32
CRISIL Miscellaneous 1,440 0.6 28 17 14 43 57
Kajaria Ceramics Miscellaneous 326 0.3 60 28 30 28 26
Cadila Health. Pharma 2,774 1.7 8 31 22 34 27
Ipca Labs. Pharma 1,333 1.7 30 22 25 26 25
Lupin Pharma 5,933 10.6 27 23 26 29 26
Torrent Pharma. Pharma 1,214 0.6 14 18 22 30 27
Mahindra Life. Realty 281 0.2 -2 22 12 9 11
Oberoi Realty Realty 1,276 0.5 NA 44 19 20 23
Titan Inds. Retail 4,330 12.4 35 22 30 46 61
Bata India Retail 1,004 3.5 51 26 23 25 38
Shoppers St. Retail 535 0.8 19 DNA 5 10 11
Torrent Power Utilities 1,089 0.8 -26 16 6 24 21
Source: Ambit Capital research, Bloomberg

Strategy
Exhibit 17: Sectoral leaders of today

Mcap
Stock Sector ADV price CAGR EPS BVPS RoE (%) RoCE (%)
($ mn)
($ mn) (%) CAGR (%) CAGR (%) (FY10-FY12) (FY10-FY12)
Eicher Motors Auto 1,642 1.3 63 31 25 15 31
Bajaj Auto Auto 8,854 15.8 17 15 24 68 72
Exide Inds. Auto Anc 2,112 3.7 5 22 18 26 40
Balkrishna Inds Auto Anc 446 0.3 34 12 21 30 25
IndusInd Bank BFSI 4,662 12.9 40 23 15 19 NA
HDFC Bank BFSI 28,586 35.2 22 25 19 17 NA
HDFC BFSI 23,141 37.8 16 16 13 21 NA
MM&FS BFSI 2,414 5.7 41 24 20 22 NA
Cummins India Capital Goods 2,262 2.3 5 4 13 31 43
Elgi Equipment Capital Goods 220 0.2 13 48 19 26 39
UltraTech Cem. Cement 8,871 7.3 25 14 18 21 22
Shree Cement Cement 2,881 1.4 32 16 26 27 20
TTK Prestige Consumer Durable 690 3.1 77 24 33 49 69
Asian Paints FMCG 7,796 7.8 29 18 21 45 61
GlaxoSmith CHL FMCG 4,187 3.2 52 18 19 31 48
ITC FMCG 46,557 40.8 32 19 15 32 47
Supreme Inds. Industrials 791 0.4 52 24 26 40 36
Sadbhav Engg. Infrastructure 279 0.3 -4 60 5 12 12
TCS IT 50,479 37.9 25 13 24 40 50
Persistent Sys IT 371 0.6 11 15 18 20 23
D B Corp Media 807 0.3 3 21 13 33 34
Jagran Prakashan Media 519 0.2 -10 9 14 28 32
Cadila Health. Pharma 2,774 1.7 8 31 22 34 27
Lupin Pharma 5,933 10.6 27 23 26 29 26
Torrent Pharma. Pharma 1,214 0.6 14 18 22 30 27
Oberoi Realty Realty 1,276 0.5 NA 44 19 20 23
Mahindra Life. Realty 281 0.2 -2 22 12 9 11
Titan Inds. Retail 4,330 12.4 35 22 30 46 61
Bata India Retail 1,004 3.5 51 26 23 25 38
Jubilant Food. Retail 1,251 9.4 57 31 38 46 51
Idea Cellular Telecom 7,777 8.6 36 48 13 7 8
Bharti Airtel Telecom 19,697 28.7 4 59 9 16 16
Torrent Power Utilities 1,089 0.8 -26 16 6 24 21
Source: Company, Bloomberg, Ambit Capital research

Strategy
Exhibit 18: Overall laggards of today

Mcap
Stock Sector ADV price EPS BVPS RoE (%) RoCE (%)
($ mn)
($ mn) CAGR (%) CAGR (%) CAGR (%) (FY10-FY12) (FY10-FY12)
Bharat Forge Auto Anc 963 1.7 -3 25 10 11 12
BEML Ltd Capital Goods 125 0.8 -44 DNA DNA 7 9
Suzlon Energy Capital Goods 403 12.1 -41 54 -44 -12 5
India Cements Cement 366 1.9 -16 10 4 6 8
Century Textiles Conglomerate 478 4.8 -13 145 4 12 11
Simplex Infra Engineering & Construction 87 0.0 -41 12 6 11 13
Punj Lloyd Engineering & Construction 259 4.6 -27 DNA 1 -3 8
Natl.Fertilizer Fertilizers 383 0.1 -24 DNA DNA 9 11
Monsanto India Fertilizers 222 0.1 -3 DNA 3 15 17
GNFC Fertilizers 215 0.1 -10 DNA DNA 10 12
AIA Engg. Industrials 568 0.2 -7 19 15 18 25
Lak. Mach.
Industrials 396 0.3 4 DNA DNA 15 23
Works
Firstsour.Solu. IT 123 0.2 -25 19 DNA 7 6
3i Infotech IT 50 0.2 -58 DNA DNA 9 9
Tata Elxsi IT 100 0.2 -12 65 16 22 24
Uttam Galva Metals 168 0.9 -14 DNA DNA 9 12
SAIL Metals 4,149 5.5 -33 8 6 15 17
Natl. Aluminium Metals 1,474 0.3 -32 DNA DNA 8 13
Tata Steel Metals 5,046 30.8 -14 99 -1 5 10
Thomas Cook (I) Miscellaneous 247 0.1 -3 30 13 11 14
Indian Hotels Miscellaneous 729 0.7 -19 66 2 -1 5
Hotel Leela Ven. Miscellaneous 134 0.1 -26 9 -33 2 3
Astrazeneca
Pharma 347 2.2 -5 DNA DNA 32 44
Phar
Natco Pharma Pharma 235 0.6 38 16 14 16 17
Omaxe Realty 428 0.6 15 75 16 6 7
Anant Raj Inds. Realty 323 2.3 -15 11 4 5 6
Ansal Properties Realty 60 0.2 -35 46 4 4 6
Mercator Shipping 51 0.2 -35 51 DNA 2 6
SCI Shipping 288 0.3 -40 DNA -8 0 3
MTNL Telecom 210 0.7 -30 8 DNA -49 -25

Strategy
Exhibit 19: Sectoral laggards of today

Mcap
Stock Sector ADV price EPS BVPS RoE (%) RoCE (%)
($ mn)
($ mn) CAGR (%) CAGR (%) CAGR (%) (FY10-FY12) (FY10-FY12)
Ashok Leyland Auto 1,114 2.5 -9 19 0 14 13
Sundram Fasten. Auto Anc 125 0.1 -10 DNA 15 16 14
Bharat Forge Auto Anc 963 1.7 -3 25 10 11 12
BEML Ltd Capital Goods 125 0.8 -44 DNA DNA 7 9
Suzlon Energy Capital Goods 403 12.1 -41 54 -44 -12 5
Birla Corpn. Cement 338 0.1 -12 15 3 20 22
India Cements Cement 366 1.9 -16 10 4 6 8
Guj Fluorochem Chemicals 522 0.8 18 DNA DNA 23 22
Guj Alkalies Chemicals 234 0.5 16 6 15 11 11
Simplex Infra Engineering & Construction 87 0.0 -41 12 6 11 13
Punj Lloyd Engineering & Construction 259 4.6 -27 DNA 1 -3 8
Jyothy Lab. FMCG 567 0.4 22 45 10 13 16
Tata Global FMCG 1,628 7.8 12 17 8 8 12
Lak. Mach. Works Industrials 396 0.3 4 DNA DNA 15 23
Rel. Indl. Infra Infrastructure 99 3.8 -21 DNA DNA 11 13
GTL Infrastructure 44 0.2 -66 DNA DNA -2 10
3i Infotech IT 50 0.2 -58 DNA DNA 9 9
Tata Elxsi IT 100 0.2 -12 65 16 22 24
Container Corpn. Logistics 2,631 2.0 -1 7 11 18 23
Sh.Ashtavinayak Media 14 0.1 -57 DNA DNA 3 5
Natl. Aluminium Metals 1,474 0.3 -32 14 4 8 13
Tata Steel Metals 5,046 30.8 -14 99 -1 5 10
Indian Hotels Miscellaneous 729 0.7 -19 66 2 -1 5
Hotel Leela Ven. Miscellaneous 134 0.1 -26 9 -33 2 3
Astrazeneca Phar Pharma 347 2.2 -5 DNA DNA 32 44
Natco Pharma Pharma 235 0.6 38 16 14 16 17
Anant Raj Inds. Realty 323 2.3 -15 11 4 5 6
Ansal Properties Realty 60 0.2 -35 46 4 4 6
Rajesh Exports Retail 648 0.5 15 DNA DNA 19 13
Shree Gan.Jew. Retail 114 0.4 -7 DNA DNA 34 31
Mercator Shipping 51 0.2 -35 51 DNA 2 6
SCI Shipping 288 0.3 -40 DNA -8 0 3
MTNL Telecom 210 0.7 -30 8 DNA -49 -25
Bombay Rayon Textiles 530 0.5 -3 DNA DNA 8 8
Lanco Infratech Utilities 364 3.0 -48 55 -6 8 10

Strategy
1. Introduction
“Alice: Would you tell me, please, which way I ought to go from here?
The Cheshire Cat: That depends a good deal on where you want to get to.
Alice: I don't much care where.
The Cheshire Cat: Then it doesn't much matter which way you go.
Alice: …so long as I get somewhere.
The Cheshire Cat: Oh, you're sure to do that, if only you walk long enough.”
— From: Lewis Carroll’s Alice’s Adventures in Wonderland

Titan and TTK Prestige have On 31 March 2007, Tata Steel had a market cap of `261bn (share price of `397)
delivered returns of 58% CAGR and Tata Motors had a market cap of `280bn (share price of `141). Then within a
and 82% CAGR over the last year, the two companies made acquisitions which made global media headlines.
ten years Five years later, as on 31 March 2013, Tata Steel and Tata Motors have a market
cap of `303bn (share price of `313; equity dilution of 32%) and `858bn (share
price of `269; dilution of 40%), respectively. As the strategy of the two companies
unfolded, could this have been foreseen? Titan and TTK Prestige over the last
decade have delivered shareholder returns of 58% CAGR and 82% CAGR,
respectively. What will be the trajectory of these companies over the next five
years? We seek to answer these questions by tracking the journeys and evaluating
the decision making of these companies.
Our greatness model identifies Over the last two years, we have developed a framework called the ’greatness
ten-baggers model‘ to identify ten baggers; basically we look for companies which over a six-
year period show that they can consistently invest in their business and generate
profits and cash flows (see Section 2 for more details). Also, we use the greatness
framework for other purposes:
 The framework can be used to identify the propensity of leading Indian

companies to fade away to mediocrity and vice versa (of second- or third-rung
franchises to rise to greatness). This is discussed in Section 3 of this note.
 We can also use the framework to identify ’fallen angels‘ i.e. the once-loved
companies that were seen as undisputed market leaders, say, for 5-7 years but
then they faded away. Section 4 of this note identifies such companies in the
context of the Indian market and discusses Tata Motors and Tata Steel.
We take our analysis beyond In Section 5, we take our analysis beyond number crunching and delve into the
number crunching and take a reasons why a number of great companies fade away whilst a few fall from grace
deep look into strategic but then pick themselves up and make a comeback. Since most companies make
decision making important strategic decisions that determine their future trajectory, we explore
whether analysis can help to identify the strengths and flaws of such strategic
decisions.
Seemingly similar decisions As we begin this series of notes on India Inc’s strategic decisions, we also
have diametrically opposite understand that luck and/or timing, as in all else in life, plays a big role in
outcomes corporate success. Seemingly similar decisions have diametrically opposite results.
And that is what makes corporate history interesting, exciting and relevant. For
example, both Tata Steel and Tata Motors made large acquisitions at around the
same time, acquisitions that were multiple times their balance sheet size then.
One acquisition now seems hugely unsuccessful whilst the other is an albatross
around the neck and the first major challenge for the new chairman of the group.
At the time of the acquisitions, experts had expected exactly the opposite outcome.

Strategy
Some fallen angels revive and The main purpose of this series of notes is to give investors a toolkit (both in terms
become great again of analytical tools and in terms of questions to ask managements) which will
enable them to analyse strategic decisions that are made by corporates as they
happen. Furthermore, since some great companies can recover after falling, we
intend to arm investors with tools that can help them track and time the
‘turnaround trade’ i.e. when the ill-effects of poor strategic decisions have peaked
out. Investors need to have a toolkit to analyse strategic decisions as they happen
because of the huge impact such decisions have on capital allocation and thus on
RoCE, which we find to be the single best metric to assess a company’s rise and its
subsequent fall.
For example, two companies from Ambit’s ten-baggers list—Titan Industries

(Section 6) and TTK Prestige (Section 7)—went through a crisis and then emerged
from it to have a strong run over the last ten years. How did they get into trouble?
How did they come out of it? Have they proofed themselves from future disasters?
What should investors watch out for? We seek answers to these questions in this
note.

Strategy
2. The ‘greatness’ framework

‘’Greatness is not in where we stand, but in what direction we are
moving….’’
— Oliver Wendell Holmes
The ’greatness‘
framework This quote appropriately captures the driving philosophy behind our ’greatness‘
framework that lies at the core of our process of identifying potential ten baggers.
The framework uses publicly
We had unveiled this framework on 19 January 2012 with the first iteration of the
available historical data to
assess which firms, over a ’Tomorrow’s ten baggers‘ note. This framework studies a firm’s structural strengths
sustained period of time by focusing not on absolutes but rather on improvements over a period of time
(FY07-12), have been able and the consistency of those improvements. A basic sketch of the underlying
to relentlessly and process behind the making of a great firm has been recaptured in Exhibit 20
consistently: below.
(1) Invest capital;
(2) Turn investment into Exhibit 20: The ’greatness‘ framework
sales;
(3) Turn sales into profit; b. Conversion of
(4) Turn profit into a. Investment (gross investment to sales
Balance Sheet strength; block) (asset turnover, sales)
(5) Turn all of that into
free cash flow; and
(6) Invest free cash flows
again.
Clearly, this approach will c. Pricing discipline

have limited value if there is (PBIT margin)
a structural break in the
sector or in the company,
which makes past
performance a meaningless d. Balance sheet
guide to future performance.
e. Cash generation discipline (D/E, cash
However, to the extent that (CFO) ratio)
such structural breaks tend
to be the exception than the Source: Ambit Capital research
rule, the ‘greatness’ model
helps in creating a shortlist We rank the BSE500 universe of firms (excluding Financial Services firms and
of stocks that investors can excluding firms with insufficient data) on our ’greatness‘ score, which consists of six
then analyse in greater equally weighted headings—investments, conversion to sales, pricing discipline,
detail. balance sheet discipline, cash generation and EPS improvement, and return ratio
improvement.
Under each of these six headings, we further look at two kinds of improvements:
 Percentage improvements in performance over FY10-12 versus FY07-09;

and
 Consistency in performance over FY07-12 i.e. improvements adjusted for

standard deviations.

Strategy
The various metrics used to quantify greatness can be seen in the following exhibit:
Exhibit 21: Factors used for quantifying greatness (as used in the 2012 model)
Head Criteria
1 Investments a. Above median gross block increase (FY10-12 over FY07-09)*
b. Above median gross block increase to standard deviation
2 Conversion to sales a. Improvement in asset turnover (FY10-12 over FY07-09)*
b. Positive improvement in asset turnover adjusted for standard deviation
c. Above median sales increase (FY10-12 over FY07-09)*
d. Above median sales increase to standard deviation
3 Pricing discipline a. Above median PBIT margin increase (FY10-12 over FY07-09)*
b. Above median PBIT margin increase to standard deviation
4 Balance sheet discipline a. Below median debt-equity decline (FY10-12 over FY07-09)*
b. Below median debt-equity decline to standard deviation
c. Above median cash ratio increase (FY10-12 over FY07-09)*
d. Above median cash ratio increase to standard deviation

Cash generation and EPS
5 a. Above median CFO increase (FY10-12 over FY07-09)*
improvement
b. Above median CFO increase to standard deviation
c. Above median EPS increase (FY10-12 over FY07-09)*
d. Above median EPS increase to standard deviation
6 Return ratio improvement a. Improvement in RoE (FY10-12 over FY07-09)*
b. Positive improvement in RoE adjusted for standard deviation
c. Improvement in RoCE (FY10-12 over FY07-09)*
d. Positive improvement in RoCE adjusted for standard deviation

Source: Ambit Capital research. Note: * Rather than comparing one annual endpoint to another annual endpoint (say, FY07 to FY12), we prefer to
average the data out over FY07-09 and compare that to the averaged data from FY10-12. This gives a more consistent picture of performance (as
opposed to simply comparing FY07 to FY12).
Exhibit 22: Distribution of firms on the ‘greatness’ score has been calculated by
using data over FY07-12 (total population: 381 firms)
Good,
Zone of mediocrity not Great Zone of greatness
60 211 firms 93 firms Only 77 firms

score < 50% (between 50% score > 67%
50 and 67%)
40
No. of firms
30
20
10
0
0%-10% 10%-20% 20%-30% 30%-40% 40%-50% 50%-60% 60%-70% 70%-80% 80%-90% 90%-100%
Greatness Score

Strategy
3. Self-destruction quantified
"We're so great we can do anything!"
— How the mighty fall, Jim Collins
80% of listed companies’ Over the last 20 years, around 80% of listed companies have failed to deliver
returns are less than inflation shareholder returns in excess of inflation (assuming an annual inflation rate of
7.9%). Given that nominal GDP growth over this period has been around 15% per
annum, such paucity of shareholder returns is surprising.
Even more worryingly for those who prefer investing in large caps:
 The top-100 companies (in terms of their market cap as of March 1993) have
delivered an average return of only 7% per annum in the subsequent 20 years;
and
 The Nifty has ’churned‘ by around 50% or so every decade (as compared to
around 25% for developed markets and around 30-40% in other major
emerging markets).
Sustaining leadership
Through our ‘greatness’ model, we seek to contrast the probability of sector
leaders remaining sector leaders over long periods versus them turning sector
laggards.
Methodology
We use our ‘greatness’ model to assess the probability that sector leaders (defined
as firms with a ‘greatness’ score in excess of 75th percentile of the sector) from five
years ago are now amongst the sector laggards (defined as firms with a
‘greatness’ score of less than 25th percentile of the sector), i.e. what is the
probability of self-destruction? We contrast this against the probability of
sustaining leadership i.e. what is the probability that sector leaders are still sector
leaders five years hence. We check this historically starting from 2003—for
example, we assess the chances that a sector leader in 2003 was still amongst the
sector leaders in 2008 and contrast this against the chances of it becoming a
sector laggard by 2008 and so on.
Results
Whilst the average probability of a sector leader remaining a sector leader five
years later is only 15% (see the table below), the average probability of it
becoming a sector laggard is 25%. Thus, the chances of a sector leader becoming
a sector laggard are significantly higher than its chances of sustaining leadership,
i.e. the probability of self-destruction is relatively high.
Exhibit 23: Probability of self-destruction

2003,08 2004,09 2005,10 2006,11 2007,12 average
Probability that sector leaders in Year-0 stay sector leaders in Year-
12% 20% 19% 10% 17% 15%
5?
Probability that sector leaders in Year-0 become sector laggards in
23% 20% 30% 23% 31% 25%
Year-5?
Source: Ambit Capital research, Note: 2003,08 indicates the probability in Year-5 (2008) for a sector leader in Year-0 (2003)
Laggards become leaders with Conversely, when we look at sector laggards, we find that it is much more likely
unerring regularity that they will become sector leaders five years later (34% probability) as opposed
to staying laggards (18% probability).

Strategy
Exhibit 24: Probability of rising to ‘greatness’

2003,08 2004,09 2005,10 2006,11 2007,12 average
Probability that sector laggards in Year-0 stay sector laggards in
20% 17% 13% 21% 19% 18%
Year-5?
Probability that sector laggards in Year-0 become sector leaders in
37% 23% 42% 39% 28% 34%
Year-5?
Source: Ambit Capital research, Note: 2003,08 indicates the probability in Year-5 (2008) for a sector laggard in Year-0 (2003)
The two preceding tables show that mean reversion in corporate fundamentals is
the norm in India. Very few leaders remain leaders (only 15% probability) and very
few laggards remain laggards (only 18% probability). This implies that the
fundamentals of more than 80% of Indian companies revert to the mean – the
mighty go into decline and the puny begin to rise.

Strategy
4. Identifying ’fallen angels’

"The bigger they are, the harder they fall."
- Joe Walcott
We identify fallen angels Using our greatness framework, we can identify the ’fallen angels‘ i.e. the once-
loved companies that were considered to be undisputed market leaders, say, for
5-7 years, but then they faded away. More practically speaking, we use our model
to grade firms into leaders (scores above the 75th percentile) and laggards (scores
below the 25th percentile). Then we define ’fallen angels‘ as those firms that slide
from being a leader to a laggard over a five-year period.
Our quantitative analysis suggests that RoEs and RoCEs are the most sensitive
measurables in a stock’s fall from grace. More specifically, we use the following
steps to quantify the sensitivity of a fundamental parameter (such as sales growth,
asset turnover, profit margins, RoE, and RoCE) as firms decline from being leaders
to laggards:
(1) Using the difference between the value of the parameter in years t & t-5, and
dividing it by the average for the period (t-5 to t), to arrive at value x;
(2) Using the difference between the value of that parameter in years t+5 & t, and
dividing it by the average for the period (t to t+5), to arrive at value y; and
(3) Using the difference (y-x) to measure the sensitivity of that parameter.
RoE and RoCE best reflect a Based on this, RoE and RoCE are the most sensitive factors that best reflect a firm’s
firm’s fall from grace fall from grace.
Exhibit 28 on page 26 provides a list of fallen angels. As seen in this exhibit, some
of the once-loved companies that have been identified as ’fallen angels‘ based on
our ‘greatness’ framework include companies such as Hero MotoCorp, Ranbaxy
Labs, Tata Motors, TVS Motor, Tata Steel, Bharat Forge, Indian Hotels and Bharti
Airtel.
Bharti is a good example of a Bharti is the numero uno in the telecom space and for many years it seemed that
fallen angel the company could do no wrong as it went from strength to strength. However,
Bharti appears on our list of fallen angels in FY12, as for some time now, it seems
that the company and its management can do nothing right. For one, growth in
the domestic market slowed down as tariffs were driven down by high competitive
intensity. The industry bid astronomical amounts for the 3G/BWA spectrum in FY11
auctions, resulting in the Government garnering `677bn. It whet the
Government’s appetite as spectrum reserve prices have been set much higher than
industry expectations in auctions since. Moreover, regulatory challenges increased
especially in the aftermath of the 2G scam. Whilst Bharti has not been accused of
anything in the scam related to the 2008 licence handouts, no one is quite sure of
who may try to implicate whom in the murky world of Indian politics-business.
Possibly stung by the 2G scam, the Government and the regulator have become
more punitive, introducing what may deemed to be ‘anti-industry’ regulations such
as one-time excess spectrum fee on retrospective basis, reduction in termination
rates and possible abolishment of roaming.
Decision to acquire Zain - a These are all external challenges that impact the entire industry. What added to
game changer Bharti’s woes was its decision to make a big bet on the African market. It acquired
Zain at an enterprise value of `503bn (US$10.7bn; 51% of its then market cap of
US$20.9bn). Bharti was trading at 6.1x FY11 EV/EBITDA when it acquired Zain
and instead of issuing stock, it paid in cash. Three years down the line, with the

Strategy
benefit of hindsight, the acquisition seems ill-timed and expensive. Whilst the
Africa market is potentially large (total population of 495mn in 17 countries), the
larger markets are moderately penetrated (~51% average), have significant
competition and present varying regulatory challenges. The acquisition was
completed just after the highly expensive 3G auctions and at a time when the
management’s attention was possibly needed in the domestic business. The
company has undergone multiple management changes including swapping roles,
whilst the well-oiled machine appeared to be stumbling. The company’s market
cap tumbled from US$38.0bn in August 2011 at its peak to a low of US$16.5bn in
August 2012. Since then it has partially recovered.
Exhibit 25: Bharti's subscriber growth in India has Exhibit 26: Snapshot of African countries in Bharti’s
tapered off recently portfolio
Percentage of Mobile
200 mn Population
Bharti's FY12 penetration
(mn)
190 Africa Revenue (%)
180 Nigeria 34.3% 162.5 59%
170
Zambia 9.6% 13.5 61%
160
150 Congo DRC 9.4% 67.8 23%
140 Gabon 7.3% 1.5 120%
130
Tanzania 6.0% 46.2 56%
120
110 Congo Brazzaville 4.5% 4.1 95%
100 Ghana 4.3% 25.0 85%
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
Niger 4.0% 16.1 27%

Others 20.6% 158.3 47%
Total 100% 495.0 51%
Source: COAI, Ambit Capital research Source: COAI, Ambit Capital research
Similarly, no one would have doubted the leadership position of Indian Hotels five
years ago. Indian Hotels also does well on our ‘greatness’ framework for 2007. In
fact, its ‘greatness’ score was 71% in 2007, which implies that it was consistently
investing capital, converting that into revenues, converting revenues into profits,
maintaining high return ratios, generating operating cash flows, and investing
these cash flows again.
Indian Hotels’ five-year average net sales growth (FY03-07) was 26% and its EBIT
margins were close to ~21%. Even its RoEs and RoCEs were pretty decent, unusual
for an Indian hotel chain. The five-year (FY03-07) average RoE was ~10% and
RoCE was ~11%. Much of this was also reflected in its stock price performance—
Indian Hotels outperformed the Sensex by 13% CAGR over December 2002-
December 2007).
Exhibit 27: Indian Hotels - breakup of revenue growth

(in ` mn unless otherwise mentioned) FY02 FY07 5-year CAGR (%)
Standalone revenues 5,380 16,184 25
Room revenues 2,530 8,451 27
Average Room Rate (` per day) 4,418 9,234 16
Room occupancy (No. of rooms) 1,569 2,507 10
Source: Company, Ambit Capital research; Note: standalone entity
As can be seen in the above exhibit, according to the disclosures made by the
company in the Management Discussion & Analysis section, it appears that whilst
the AR` increased at a CAGR of ~16% over FY02-07, the remaining 10% of the
growth in room revenues was on account of an increase in the number of rooms.

Strategy
However, over the next five years, Indian Hotel’s leadership position faded away.
The five-year average net sales growth (FY08-12) declined to 7% (from 26% in the
previous block of five years). This was accompanied by a corresponding decline in
its EBIT margin to ~15% average over this period. Even its FY08-12 average RoEs
and RoCEs declined to ~3% and ~8% respectively. Not only did Indian Hotels
underperform the Sensex by 16% (the five-year CAGR over December 2007-
December 2012 of Indian Hotels’ stock price was -17% as against -1% for the
Sensex), even its ‘greatness’ score declined to a mere 8% (in FY12).
The reasons for the fall from grace are usually multiple and can be a result of
external (usually not controllable) or internal factors (usually addressable by the
management). A sharp decline in the price of a global commodity coupled with
reduction in import tariffs can hit an entire sector very hard. These are external
factors and the Indian steel industry was adversely affected by these factors in the
1990s.
In the 1990s, Tata Steel Usually, internal factors are also involved. For example, in the steel industry, whilst
undertook restructuring when the new entrants in the 1990s went on a high-cost debt-fuelled investment binge,
others chose a debt-fuelled Tata Steel went on a restructuring and modernisation programme. The results
expansion binge were there for all to see over the next decade. Research has shown that when
companies fall from grace, over 80% of the factors are within management control
or internal and less than 20% are external. Hence, it is important to scrutinise and
understand corporate and management strategy for strong investment returns and
to avoid minefields. And last but not the least, is the role of lady luck. We will
discuss these in greater details in the next section.
Exhibit 28: List of 'fallen angels' i.e. companies which in the space of five years went
from being top quartile to bottom quartile on our ‘greatness’ scores
FY03, 08 FY04, 09 FY05, 10 FY06, 11 FY07, 12
Monsanto India Hero MotoCorp Monsanto India Tata Motors Bharti Airtel
Hero MotoCorp Eicher Motors Tata Motors SKF India SKF India
Eicher Motors Tata Motors ABB Bharat Forge Bharat Forge
Atlas Copco (I) Ashok Leyland Siemens Siemens Alstom T&D India
Godrej Inds. TVS Motor Berger Paints Kirl. Brothers AIA Engg.
Carborundum Lakshmi Mach.
Motherson Sumi Tata Chemicals Havells India
Uni. Works
Lakshmi Mach.
CMC Siemens Bharat Electron Gateway Distr.
Works
Container Lakshmi Mach.
Atlas Copco (I) Bharati Shipyard Sterlite Inds.
Corpn. Works
ONGC Kirl. Brothers Gateway Distr. Allcargo Logistics Hind. Zinc
BPCL Berger Paints Tata Steel Ent. Network SAIL
IOCL PTC India SAIL Hind. Zinc Natl. Aluminium
Dr Reddy's Labs BPCL Natl. Aluminium SAIL Tata Steel
Ranbaxy Labs. HPCL Hotel Leela Ven. Tata Steel Indian Hotels
Guj Gas
IOCL ONGC Natl. Aluminium Hotel Leela Ven.
Company
Neyveli Lignite GAIL (India) BPCL Hotel Leela Ven. MRPL
Sanofi India IOCL Thomas Cook (I) GE Shipping Co
Ranbaxy Labs. GAIL (India) Biocon
Guj Gas
Ranbaxy Labs.
Company
Neyveli Lignite GE Shipping Co
Neyveli Lignite
Source: Ambit Capital research; Note: 2003,08 indicates that these companies, which were ‘great firms’ in
2003, have been identified as ‘fallen angels’ in the year 2008.

Strategy
5. How and why do great companies

fall?
“I change my mind when the facts change. What do you do?”
- John Maynard Keynes
As highlighted in the preceding sections, more often than not great firms regress
to mediocrity in India. Why does this happen? CEOs and promoters in their own
explanations for underperformance tend to cite the business cycle or Government
interference and regulations (eg. the telecom sector or the infrastructure sector).
Occasionally, they point to rising competitive intensity in a sector (eg. in two-
wheelers). However, such explanations on closer inspection are not particularly
compelling because within the same sector (and hence subject to the same
regulatory and competitive forces), we find some firms which are sliding and
others which are rising.
Infosys’s performance has For example, over the past five years, as Infosys’s NOPAT margin has slid from
lagged behind peers 25.1% (in FY09) to 19% (in FY13) and its RoCE has fallen from 30.4% (in FY09) to
20.2% in FY13, HCL Tech has displayed a very different trajectory. HCL Tech’s
NOPAT margins have remained relatively flat over FY09-12 (15% in FY13 vs
15.5% in FY09) and its RoCE has risen from 21.1% in FY09 to 27.2% in FY13. (We
have used a 12-month period ending March for HCL Tech.) Unsurprisingly,
therefore over this period, Infosys has underperformed the Nifty by 20 percentage
points whilst HCL Tech has outperformed the Nifty by 540 percentage points.
Exhibit 29: NOPAT margins – HCL Tech catching up Exhibit 30: RoCE – moving in different trajectories
35.0%
30.0%
30.0%
25.0%
25.0%
20.0%
20.0%
15.0% 15.0%
10.0% 10.0%
5.0% 5.0%
0.0% 0.0%
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Infosys HCL Tech Infosys HCL Tech
Bajaj Auto has outperformed Another example is Bajaj Auto and TVS Motors. Over the past ten years, TVS
TVS Motors Motors’ PAT margin has slid from 4.7% (in FY03) to 3.5% in FY12 and its RoCE has
fallen from 26.2% (in FY03) to 23.0% in FY12. Over the same period, Bajaj Auto’s
PAT margins have risen from 10.6% (in FY03) to 15.8% in FY12 and its RoCE has
risen from 30% (in FY03) to 200% in FY12. Unsurprisingly, whilst TVS Motor’s
share price has risen by a CAGR of 6% over the last ten years, Bajaj Auto’s share
price has returned to a CAGR of 40% over the last five years (Bajaj Auto was listed
in 2008 after the demerger).

Strategy
Exhibit 31: PAT margin of Bajaj and TVS – way apart! Exhibit 32: Bajaj’s RoCE in a different trajectory vs TVS
18% 350%
16%
300%
14%
250%
12%
10% 200%
8% 150%
6%
100%
4%
2% 50%
0% 0%
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
Bajaj TVS Bajaj TVS
In this section, we use a modified version of Collins’ framework and Thorndike’s

approach to analyse capital allocation to understand why great Indian companies
slide. The core stages in our framework are as follows:
The five-stage framework  Stage 1 - Hubris and arrogance: The company is on top of its game.
Operating margins, RoCE, growth, valuation multiples, etc., are at all-time
highs. Captivated by the success in its core business, the management starts
believing its own press. Success and adulation intoxicates the top brass.
Arrogance sets in. The company loses sight of the factors which made it
successful in the first place.
 Stage 2 – Unbridled expansion: In search of more growth and more

adulation, the management begins an expansion drive which is often
inorganic. The firm ’overreaches‘ into new geographies and product lines
where it has no real experience or expertise. Sub-par capital allocation begins.
 Stage 3 – Stuck in a rut: Often cost discipline and/or product excellence

erodes and prices are then raised. Profits, return multiples and valuation
multiples start sliding. Company politics thrives. The leader becomes
increasingly autocratic and announces 'recovery plans' that aren't based on
accumulated experience.
 Stage 4 – Grasping for solutions: The company thrashes around and looks
for a solution even as profits and financial strength continue to slide. Senior
management jobs are on the line. Often a new leader comes in and
sometimes he tries to fire silver bullets (eg. a 'transformative' acquisition, a
blockbuster product, a cultural revolution, etc). However, a new leader (ideally,
someone from inside) who takes a long, hard look at the facts and then acts
calmly to put in place a measured recovery strategy with sensible use of cash
and capital at its centre, could be the saviour.
 Stage 5a – Capitulation: The firm is sold or fades into insignificance or, and
this happens rarely, shuts down.
 Or Stage 5b – Recovery: The firm turns the corner and begins the long, slow
climb to recovery.

Strategy
Exhibit 33: The five-stage framework
Source: Ambit Capital research, From the book ’How The Mighty Fall’
Tata Steel and Tata Motors – We first apply the framework to two of the largest and well-regarded companies in
two companies from the same India—Tata Steel and Tata Motors. We chose these two companies not only
group and such different because both of them appear on our fallen angels list, but being part of the same
trajectories over the last 3-5 industrial group, they present a good chance to compare and contrast their
years respective strategies over the last decade. Both the companies, at the peak of their
performance in the last decade, made big acquisitions that made headlines
globally. How and why did they make these decisions and could the results of the
same have been foreseen or at least forecasted with certain probability assigned to
them?
In the next two sections, our case studies on Titan and TTK (two mid-cap stocks
that we like) takes you through the history of these two companies as they grow,
stumble, take big bets and then enjoy a decade of strong growth.
Stage 1: Hubris and arrogance

In stage 1, when a company experiences great success, it starts generating
considerable free cash flow (as, almost by definition, high profits and high RoCE
over the span of multiple years translate into considerable free cash flow). This
often leads to hubris and arrogance, which finally drives poor capital and resource
allocation decisions.
After FY02 - an era of strong In the successful years spanning FY01-05, Tata Steel generated more cumulative
performance EBITDA (`135bn) than it had generated in totality over the previous 15 years. Tata
Steel’s RoCE rose from 10% in FY2000 to 61% in FY05. Tata Steel’s performance
during this period was a result of: (1) a strong upturn in the global steel cycle due
to strong economic growth worldwide in general and specifically in China; and (2)
Tata Steel’s restructuring and modernisation efforts of the previous decade and a
half, which bore fruits.

Strategy
Exhibit 34: Tata Steel - standalone CFO and RoCE
70 120,000
Standalone
Visibility o ver stro ng
60 100,000
cashflo ws in the
CFO and Ro CEs co ming years gives
50 Capacity
multiply o ver co nfidence to 80,000
FY2000 to FY05 gro ws expand
40 fro m geo graphically with a 60,000
3.3mt to large acquisitio n
30 5mt
40,000
20
10 20,000
0 -
% Rs bn
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
CFO (RHS) RoCE (%)
Source: Capitaline, Ambit Capital research
For Tata Motors, in the four successful years spanning FY05-08, the firm generated
a cumulative EBITDA of `136bn. In the ten years prior to FY04, the same firm had
generated a cumulative EBITDA of only `70bn. Pre-tax RoCE for Tata Motors rose
from 4.5% in FY98 to 33% in FY06. Tata Motors’ performance was driven primarily
by the upturn in the domestic market.
Alongside this generation of capital, comes fame, adulation, awards and press
attention. In a country, which has liberalised only in the last couple of decades,
such public attention combined with the financial fruits of success can prove to be
a heady cocktail for many CEOs. As a result, just as they have to make the most
capital allocation decisions in their companies’ history, managements find that
their egos are being stroked by the press, the sell-side and investment bankers.
Stage 2 then follows and overexpansion – organic or inorganic – begins.
A major part of the To be fair, both Tata Motors and Tata Steel at the early part of the last decade had
performance was thanks to the the humility to acknowledge the role of the general upswing in the economy to
market growth their strong performance. To quote Ratan Tata, the then Chairman of Tata Motors,
from the FY03 annual report: “It is important also to recognise that a major
component of the company’s performance has been due to the growth in market
size…”
Both the companies were coming out of a difficult period and reflected the
orientation of the managements of the two companies. Tata Steel had spent much
of its life since inception in a highly controlled and protected environment. Once
economic liberalisations started, Tata Steel spent the years restructuring and
modernising to meet the challenges of an extremely difficult operating
environment in India and globally. Further, with liberalisation, Tata Steel had
become exposed to global cycles of the steel industry.
Tata Motors has a history of Tata Motors, on the other hand, had been used to taking big, hairy, audacious
taking on BHAGs and coming goals (BHAGs1) and was used to operating in an environment where business
out tops cycles were notorious and vicious. First, the company took on the Japanese JVs in
the LCV market in the 1980s. In the late 1990s, Tata Motors embarked on
indigenously developing a passenger car (Indica), the launch of which coincided
with the economic slowdown and the downturn in the CV industry. In the first
decade of the 21st century, Tata Motors would endeavour to build the cheapest car
in the world and take over two iconic luxury car brands that BMW and Ford had
struggled with.
1
A term borrowed from the book ‘Built to Last’ by James Collins and Jerry Poras

Strategy
Well-deserved recognition and Strong turnaround performance brought recognition in its wake. Once again we
accolades often sow the seeds would like to stress that the recognition and awards are well deserved but its
of hubris and arrogance consequences often are the seeds of future downfall. In 2000, Tata Steel became
the first firm in the Tata Group to qualify for the JRD-Quality Value Award, an
award created by the Group in 1995 in memory of JRD Tata and with the aim of
recognising business excellence. When, in July 2000, Dr JJ Irani, the then MD of
Tata Steel, received the award from Ratan Tata at Mumbai’s elegant National
Centre for Performing Arts (NCPA), the ovation that ensued never seemed to
cease. (Source: Tata Log, by Harish Bhat, Penguin Books, 2012.)
In 2004, Tata Steel, now under the leadership of its new MD, B. Muthuraman,
received a special ’Leadership in Excellence‘ plaque to mark the company’s
progress up the ’Quality Value‘ ladder. At this stage, Tata Steel was regularly
being feted by World Steel Dynamics as one of the most-efficient and low-cost
global steel companies.
In October 2008, Tata Steel won the Deming Prize, the manufacturing equivalent
of the Nobel Prize. In November 2008, at a special ceremony in Tokyo,
Muthuraman, who would eventually be bestowed the Padma Bhushan by the
President of India, received the Deming Prize. Says Harish Bhat, a veteran of the
Tata empire, “The Indian national flag was prominent on the dais that day, which
made many people at Tata Steel very proud – some even wept with joy.” (Source:
Tata Log, by Harish Bhat, Penguin Books, 2012.)
When Tata Motors launched the Indica, the very first India-made car, in the
January 1998 Auto Expo, the public gave it a euphoric welcome. The then minister
of commerce and industry, the late Murasoli Maran, called the car “The Kohinoor
of India”. Three years later, when the ’Indica V2‘ was launched, “it became the
fastest-selling automobile in Indian history when it completed sales of 100,000 cars
in less than 18 months. The [car’s] market share zoomed to over 20% during the
year 2000-02.” (Source: Tata Log, by Harish Bhat, Penguin Books, 2012.)
With the Indica’s commercial success came other accolades. JD Power, a car
review publication, called the Indica V2 diesel the best in the ‘operating costs’
category, ahead of the legendary Maruti 800. BBC Wheels declared the Indica V2
the ‘best car in the `3 lakhs to `5 lakhs category’.
For Tata Motors, the heady success of the Indica in the 1990s (the first
contemporary car designed by an Indian firm) was compounded by the sensational
debut of the LCV 'Ace' in the mid-2000s. These two runaway successes combined
with the boom in the Indian economy over FY04-08 boosted the management’s
confidence.
Stage 2: Unbridled expansion
Lack of management By itself, expansion is not a bad thing. However, in the Indian context, there are
bandwidth and relatively small two limiting factors which make expansion a perilous affair—lack of promoter (or
domestic market are key management) bandwidth and the relatively small size of the domestic market.
constraints for Indian The modest size of the domestic market means that market leaders relatively early
companies in the Nifty lifecycle find that they have to venture abroad or into new sectors to
sustain growth. Unfortunately, Indian companies, for all their claims to be reliant
on ’professional management‘, are still overwhelmingly dominated by and run by
promoter families. These families are only human and once they find that they
have to expand beyond the core business and the core territory that they know so
well, they struggle.
Expansion into new countries or new sectors by Indian companies are rarely
successful as the finite nature of the promoter’s skill set puts a natural cap
therefore on how far an Indian company can go. Rapid expansion into new
markets or products usually results in poor capital allocation which dilutes both
operating margins and RoCEs. Thus, the slide in the company’s financial strength
and share price begins. Tata Steel and Tata Motors are classic examples of these
problems.

Strategy
We continue with the examples given in the preceding sub-section. In August

2004, Tata Steel announced the acquisition of NatSteel, a South Asian steel maker
with ~2mt of steel capacity for ~SG$260mn. Whilst NatSteel was a pure converter
with low margins, Tata Steel believed the acquisition would give it entry in South
Asian markets and eventually drive significant synergy benefits. Then, in December
2005, Tata Steel acquired Millennium Steel, Thailand, which has a 1.2mt steel-
making capacity and 1.7mt long products rolling capacity.
In April 2007, Tata Steel After this came the mega acquisition - in 2006, Tata Steel bid for Corus. Tata
completed the acquisition of Steel’s first bid for Corus in October 2006 was at 455pence/share. A counter bid
Corus by CSN Brazil made Tata Steel raise its offer twice, and Corus was finally acquired
by Tata Steel at 608pence, 34% above the original bid value. The total acquisition
cost for Tata Steel was US$12.04bn, which was funded through a combination of
debt and equity. To put this acquisition into perspective, Tata Steel’s FY06
shareholders’ equity was just over US$2bn. To date, this acquisition remains the
largest by an Indian firm.
Corus did not fit with Tata  Tata Steel’s global foray should not have been surprising given that the
Steel’s publicly stated company had consistently articulated its strategy in its communication to
strategy… shareholders. As early as 2003-04, the chairman Ratan Tata wrote to
shareholders: “It (Tata Steel) must explore ways of enhancing its capacity
domestically as also establishing finishing facilities in strategic location
internationally, leveraging its low-cost Indian base and the availability of
domestic iron ore.” The same year in its MDA, the company stated: “It is the
Company’s vision to be a 15 million tonne company by year 2010. This would
be achieved through organic growth and through acquisition of steel capacities,
both within and outside the country”.
 What was surprising in the acquisition of Corus was that Corus did not have
raw material security and would not be able to leverage on the low-cost
production base in India. The Corus acquisition was not consistent with the
company’s stated vision. Read these excerpts from the MDA in its FY05 annual
report: "In the near term, the industry cost structure is likely to remain high due
to shortage of coking coal and iron ore. These structural deficiencies in the steel
value chain are unlikely to be resolved in the near future... the company
believes that the maximum value can be created by making semi-finished
products (slabs/ billets) at locations where raw materials are available (or can
be competitively assembled), and by finishing them at locations where
customers/ markets currently exists or will grow in future."
…so why did Tata Steel acquire  Corus certainly did not fit into the above criteria. What did Tata Steel see in
Corus? this acquisition then? The acquisition could have partly been driven by the then
prevalent wisdom in the steel sector about consolidation, with Mittal Steel
(LNM Group) showing the path. But LNM was consistently following the
strategy of having primary manufacturing in countries which had cheap energy
or availability of raw materials or both. The other reason, and the less
flattering one, could be that Tata Steel was driven by hubris into making a
large acquisition to match the chairman’s vision of taking the group global.
 In Corus, Tata Steel saw the chance to become one of the largest steel
producers in the world. In its FY07 annual report, Chairman Ratan Tata wrote
to shareholders: "Undoubtedly the most notable event during the year was the
company's public offer to acquire 100% of the shares of Corus group plc... the
acquisition of Corus has transformed Tata Steel from a domestic producer to an
international steel company with global scale." One can only speculate if the
outcome would have been different, if instead of a marketing person (B
Muthuraman), an operations person (Dr JJ Irani) had been at the helm of the
company at that point of time. Was the acquisition driven by the group
chairman's vision to take the group global and caution was thrown to the
winds?

Strategy
To be fair, Tata Steel’s move  To be fair, Tata Steel’s decision was hailed by most industry observers as being
was welcomed by most analysts one which was synergistic and sensible. Steel Business Briefing stated that
and industry watchers there were lot of synergies and Tata Steel was acquiring "extremely good
management" and "extremely good distribution". Initial results were
encouraging given that steel prices were buoyant and the deal was hailed as a
success over the next few quarters. Such was the hubris that Muthuraman, the
then MD, gave a target of the combined EBITDA margin to improve from 13%
to 25% in five years. In contrast, in 2001 and 2002, the company would be
hesitant to forecast steel prices beyond one quarter. Unfortunately for Tata
Steel, in FY12 and FY13, the combined EBITDA margin achieved was 9.3% and
9.2% respectively.
 Leaving aside the acquisition price for Corus and leaving aside the recession
that the world economy entered after September 2008, Tata Steel simply did
not have the management bandwidth to run an ailing European steel
manufacturer. We quote from the April 2013 issue of Forbes:
“It was a bad start”  “It was a bad start” says Leahy (Secretary of British Trade Union community).
And he blames Kirby Adams. (Adams, once MD of BlueScope Steel, was
chosen by B Muthuraman, then MD of Tata Steel, to replace Philippe Varin,
who was exiting Corus after seeing off the acquisition.) “We had a fraught
relationship with Adams,” says Leahy. “He didn’t understand how to deal with
unions. It was an unmitigated disaster.” Not surprisingly, Adams left in 2010.
Even as all of this was happening, a slowdown started to loom and job cuts
were rising.
 Köhler, the third managing director in two years, shifted gears in the
restructuring process that Adams had initiated in Europe. He centralised
functions across verticals and regions. His aim was to integrate key functions
like operations, sales, marketing and the supply chain.
 Whilst the intentions were noble, the organisation was completely unprepared.
Instead of improving communication channels with the leadership team across
units, insiders said Köhler surrounded himself with ‘yes men’. An executive
from Tata Steel Europe, who declined to be named, said Köhler surrounded
himself with former colleagues from ThyssenKrupp: “There is no British
executive in the top management.”
Exhibit 35: Management changes at Tata Steel

Philippe Varin stepped down from his position
on April 6, 2009, within two years of the
Philippe Varin, acquisition.
May 2003 - April 09
CEO He was to be replaced by Kirby Adams,
formerly chief executive of BlueScope Steel,
headquartered in Australia
Kirby Adams, CEO
(was made MD & In June 2010 Kirby Adams stepped down from
April 09 - October 10
CEO from his executive roles
September 09)
Mr Kolher's term gets over by October 2013
October 2010 - Mr. Karl-Ulrich News reports mention that Tata Steel is
present Köhler, MD & CEO looking out for a new CEO for the European
business
 An integration team was put in place right from Day 1, but company insiders
speak about how the integration proved to be a big challenge. Even when a
seasoned Tata veteran, Dr T Mukherjee, was based out of London, he could
make limited headway and apparently there were too many differences
between the Dutch and the English managers.
 Further, Dr Mukherjee was close to retirement and probably did not have the
appetite to drive the tough integration process. Raw material security proved to

Strategy
be elusive, without which having production facilities in high-cost locations did

not make sense. Also, this was the first really large deal for a company; its
earlier biggest challenge was operational in nature and internally focused –
restructuring and modernisation. To top everything, the global financial crisis
came soon after and demand in Europe is yet to recover to its pre-crisis levels.
In Tata Motors’ case whilst the Indica and the Indigo had been relatively
successful, the firm was not able to attack Maruti’s market share in a
meaningful manner. Meanwhile, Ratan Tata had the dream and vision of
building an affordable family car to migrate two-wheeler users to four-
wheelers. Tata Motors took up the challenge and began serious work on the
development of the low-cost car (Nano) in the mid-2000s (total project cost of
around US$1bn, according to unofficial sources). The product was showcased
in the Auto Expo in January 2008 and then the Nano was launched in the
summer of CY10 amidst much fanfare.
Tata Motors strategy was clear Tata Motors’ strategy was very clearly enunciated in the chairman's statement in its
and it is a company that is used FY02 annual report, "In the commercial vehicles segment, the new vehicles being
to executing BHAGs developed today will totally upgrade the company's product range... a greater
commitment to build an international presence for the Company's brands and
products in selected international markets."
On passenger cars: "...the necessary investments to continue to develop and renew
a range of products would be uneconomical, given the limited size of the Indian
market. Therefore, the challenge will be to explore a creative and meaningful
relationship which would synergise our company's advantages with the market size
and access of an international associate." The takeover of Daewoo's CV business
and tie-ups with MG Rover and Fiat were consistent with the company’s stated
strategy.
Exhibit 36: Tata Motors - standalone exports

(` mn) FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
Total revenues 2,03,769 2,38,721 3,16,112 3,28,850 2,82,615 3,81,448 5,16,070 5,97,950
Export revenues 14,527 21,967 26,873 27,541 22,064 19,215 33,390 35,980
% of standalone revenues 7.1% 9.2% 8.5% 8.4% 7.8% 5.0% 6.5% 6.0%
But the acquisition of JLR was At around the same time, after months of negotiation, Tata Motors acquired JLR
still a surprise for US$2.3bn in March 2008. To put this acquisition price of US$2.3bn into
perspective, Tata Motors’ shareholders’ equity was US$2bn at the end of FY08.
Prior to that, the company had acquired the commercial vehicle unit of Daewoo in
South Korea, and used the technology available to develop world-class CVs for the
Indian market.
Paradoxically, for Tata Motors, whilst the JLR acquisition turned out to be a
success, the fact that the Nano failed to find buyers and then the Commercial
Vehicles market turned south in India left Tata Motors without cash or
management bandwidth to build a new small car for the Indian market. As a
result, Tata Motors lost market share heavily (from 17.1% in FY06 to 11.7% in
FY13) in the Indian passenger vehicle market.
The JLR acquisition was widely Unlike Corus, the JLR acquisition was criticised by industry observers and analysts.
criticised To quote from a few news reports at that point of time:
 "But many investors and automotive analysts question whether a bid by India's
Tata Motors - maker of workhorse trucks and low-end mass market cars - for the
two luxury brands would make much business sense." (Source: nbcnews.com)
 "But while Corus acquisition was widely seen as a good match - and since
appears to be paying off - experts don't see similar synergies in a Tata Motors
takeover of Jaguar and Land Rover." (Source: nbcnews.com)

Strategy
The above goes to show how difficult it is to get capital allocation decisions right,
especially where M&As are concerned and how decisions look smart or foolish with
the benefit of hindsight. In the same article, various experts made comments such
as "makes no sense at all" and "value destructive given lack of synergies" on the JLR
acquisition. The concerns of the automotive industry veterans were that Ford had
underinvested in R&D which Tata Motors would have to make up for and did not
have the resources for.
Stage 3: Stuck in a rut
As the company tries to the cope with its larger scale (with its competitive
advantages diluted in new markets/products and with its management talent
’maxed out’), operating performance gets stuck in rut. Profit margins and RoCEs
stagnate at low levels. As the share price continues to slide, pressure builds up on
the management and organisational politics takes hold. The pressure and the
politics make it that hard for the company to break out of the cycle of
underperformance. Deterioration in the macro environment can further hurt the
performance.
Tata Steel’s consolidated RoCE slid from 22% in FY08 to 4% in FY10 and 8% in
FY12. The firm’s consolidated RoE declined from 32% in FY08 to -17% on FY10
and 7% in FY12.
Exhibit 37: Tata Steel - Net debt:equity rises to 1.9x in FY09 and FCF negative for last two years due to India capex
3.00 Net Curreny 80,000
debt : devaluatio Stronger
Equity n and PAT and
2.50 rises actuarial Equity 60,000
due to loss raising of
2.00 Corus negatively Rs45bn 40,000
acquisiti impacts increases
on equity net worth
1.50 20,000
1.00 -
0.50 (20,000)
- (40,000)
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
Rs mn
FCF (RHS) Net Debt to equity (x)
The global financial crisis The end of the liquidity-fuelled global growth cycle was especially harsh for
started the slide European steel makers. Capacity utilisation in Europe fell from nearly 90% to less
than 70%. Subdued steel prices coupled with rising raw material costs led to Tata
Steel Europe reporting an EBITDA loss in FY10. Since then, the company’s
European operations have been making losses at the PAT level as interest costs
cannot be recovered by the wafer-thin EBITDA margins. Senior management at
Tata Steel Europe has seen multiple changes, with the MD being changed thrice
within a span of two years.
“The consultants left when it Senior executives from Tata Steel India who were deputed to Europe also returned
was time to deliver” to India within a short span as differences of opinion within the firm rose. What
compounded the confusion was that in search of solutions, Tata Steel Europe spent
US$80m on management consultants, but, in the words of a former executive,
“The consultants left when it was time to deliver”. The parent company also went
for multiple rounds of equity dilution between 2007 and 2011. (For a
comprehensive account of just how much infighting Tata Steel saw in Europe, refer
to the comprehensive story in Forbes’s April 2013 issue:
http://forbesindia.com/article/boardroom/putting-the-shine-back-into-tata-
steel/35049/1 .)

Strategy
As early as 2008, Tata Steel The first sign that all was not well was evident in the FY08 annual report itself,
was considering asset disposal within a year of the acquisition. Muthuraman wrote, "The integration with Corus is
in Europe? proceeding smoothly and is yielding better than predicted results." Ratan Tata wrote,
"The Tata Steel and Corus operations are being run as one virtual company..."
However, Koushik Chatterjee, CFO, wrote: "The group will pursue the optimisation
of its European assets, dispose and restructure assets that are of low profitability..."
This clearly indicates that within a year of the acquisition Tata Steel was
considering disposal of assets in Corus, but it never moved fast enough.
Both Nano and JLR did not Tata Motors also hit an air pocket immediately after the JLR acquisition. The Nano
perform well after the initial missed the October 2008 roll-out deadline due to the now infamous land issues at
euphoria Singur in West Bengal. Nano deliveries commenced in July 2009 and these
coincided with a recovery in the domestic automobile market. However, the Nano
was unable to see a significant uptick, with volumes averaging a mere 3,372
units/month in FY10. Overseas, JLR volumes plunged post acquisition as the world
economy melted post-Lehman. JLR’s volumes declined 32% YoY in FY09 and
volumes continued to slide in 1HFY10 (declining 6% YoY). Tata Motors’
consolidated RoCE before tax deteriorated from 23% in FY08 to negative 2% in
FY09 before recovering to 12.5% in FY10.
Exhibit 38: Tata Motors - Net debt:equity ratio has declined after the FY09 shock
A cquistio n debt fo r JLR,
5.5 do emstic and glo bal slo wdo wn 50
severly impacts earnings. Debt
4.5 equity ratio blo ats 25
3.5 -
A fter witnessing weak JLR witnesses reco very
2.5 vo lumes at the beginning fro m 2HFY10. Do mestic (25)
o f the decade, M HCV M HCV sales,to o , make a
Nano pro ject co st and
1.5 vo lumes gro w at 34% stro ng co meback resulting (50)
expansio n o f M HCV
CA GR o ver FY03-05, in stro ng FCF generatio n &
facilities results in uplift
0.5 resulting in debt-equity bringing do wn the debt- (75)
in debt-equity ratio
ratio easing equity ratio
(0.5) (100)
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FCF Net debt-equity
The timing was poor in Without a doubt, the timing of the two deals was poor. But that is known only with
hindsight, but rich valuations the benefit of hindsight. The global financial crisis hit both the companies hard. To
were always rich.., quote Ratan Tata from an interview to Hindustan Times first published on 11 May
2009: “If one had known there was going to be a financial meltdown then yes (Tata
went too far) but nobody knew… Both the acquisitions were made, I would say, at
an inopportune time in the sense that they were near the top of the market in terms
of price.” Valuation was also an issue. Tata Steel paid 12.0x the peak EBITDA of
,..Tata Steel paid 12.0x Corus’s
Corus, a commodity business, when Tata Steel was trading at 4.75x trailing
EBITDA whilst it was trading at
EBITDA.
only 4.75x trailing EBITDA
Stage 4: Grasping for solutions
By now the situation is desperate due to the weak financial position of the
company (a combination of sustained losses and/or high debt taken on to finance
acquisitions). Desperate times call for desperate solutions and one frequently sees
the old management team shunted out at this stage. How the new management
team reacts holds the key to which of the two stage 5s – capitulation or recovery –
the company heads towards.
If the new management aims for dramatic ’silver bullets‘ such as a
‘transformational’ acquisition or drastic cultural change or investment in a
blockbuster product, then it is more likely that stage 5a comes into play. On the
other hand, if the new management calmly takes stock of the situation, assesses

Strategy
the operating metrics in detail and gradually puts in place a strategy which focuses
on generating cash and conserving capital then stage 5b becomes more likely.
Tata Steel’s corrective action  Continuing with the examples given in the previous sub-sections. Tata Steel
seems to have come a bit late undertook several measures to re-structure its European operations: (1) Cut
production in Europe from 20mt in FY08 to 14mt in FY12 by idling blast
furnaces at three sites; and (2) Sale of its stake in TeeSide Cast Products in
FY11.
Key part of the strategy is to  Simultaneously, Tata Steel went ahead with expansion plans in India to
ramp up domestic capacity as increase capacity from 5mt to 16mt. Over FY08-12, capacity at Jamshedpur
fast as possible increased from 5mt to 10mt. Furthermore, the company is continuing with a
6mt greenfield expansion at Kalinganagar (which seems to be well behind
schedule and has overshot its original budget by US$2bn). Net debt levels for
the company have remained elevated at ~`500bn since FY08 (implying
consolidated debt:equity of 1.6x at the end of FY13).
 This is despite the consolidated business generating healthy cash flow from
operations of ~`560bn over FY08-12. We highlight that Tata Steel's
consolidated capex over FY08-12 was ~`445bn, which largely pertains to the
Indian expansion. Therefore, had Tata Steel delayed the Indian expansion, it
would have largely repaid the outstanding debt by FY12. However, Tata Steel's
approach of going ahead with the expansions at both Jamshedpur and
Kalinganagar have kept debt levels elevated and invited significant balance
sheet stress.
 Tata Steel has posted a net loss of `70bn in FY13, largely due to goodwill
write-down of `83bn during the year. According to the April 2013 cover story
in Forbes, Tata Steel is looking for a new European head, as the current leader
has failed to deliver on time. The pressure to turn Tata Steel around is clearly
rising and it looks likely that the company will have a new CEO in the coming
months. In parallel, Tata Steel will have a new MD when the current MD, HM
Nerurkar, steps down in September. The current Group CFO, Koushik
Chatterjee, is tipped to get the job.
Tata Motors’ domestic business  After two years of strong growth, Tata Motors’ MHCV sales in India moderated
is going through a downturn, in FY12 and severely slowed down in FY13 (down 25% YoY). The company
but it also missed the surge in continues to lose market share in the domestic passenger vehicle in India: its
SUV demand market share fell from 14% in FY11 to 11.7% in FY13. Unsurprisingly, the Tata
Motors’ passenger vehicle business in India saw several senior management
exits even as the Nano failed to make a significant dent and 20% of the plant
capacity in the Sanand factory was actually used. Moreover, at a time when
demand for diesel cars in India skyrocketed, the sales of Indica and Indigo fell
(by 34% in FY13).
“This is a result of a lack of  A former senior official at Tata Motors is quoted in the May 2013 issue of
focus and poor allocation of Forbes as saying: “…this is the result of lack of focus, poor allocation of
resources” resources and narrow vision for the car business…In the last five years, there
were just too many things vying for attention. First, there was making the Nano
itself. Then Singur and taking the plant to Sanand. Then fires in the Nano. Then
Jaguar Land Rover.”
Deliberate underinvestment in  “All of this meant that everything that had been planned for the car business
the domestic car business? was getting postponed. And we never had enough money to invest in building a
pipeline for our existing brands,” he says. But the underinvestment in the
domestic passenger car business was likely a part of the strategy. To quote
from the annual report of the company: "Its strategy would be to maximise the
variety of passenger car offerings on a single platform." Clearly for the company
it did not make sense to invest in the development of new platforms only for
the domestic market.
Rapid churn of management in  Between May 2010 and September 2012, Tata Motors went through a
the domestic business repeated and rapid churn of its Indian management team. Finally, Karl Slym

Strategy
(former GM executive) was appointed as MD of Tata Motors’ domestic business

in September 2012. Now i.e. in May-June 2013, Slym is changing the top
organisational structure in Tata Motors and several new appointments have
been made. It appears that there will be drastic changes to products (over the
medium term) and a portfolio revision over the long term. This will be critical
in dealing with Tata Motors’ core problem in the Indian car market—outdated
and uncompetitive products. In December 2012, Slym rolled out his ‘One
Team, One Vision’ plan with the intention of apparently focusing on the
customer.
Exhibit 39: Management changes at Tata Motors' domestic business

May 2010 Rajiv Dube President Passenger Car Division
May 2010 R Ramakrishnan (VP- Sales & marketing, CV) Vice President (Commercial), Passenger Car Division
May 2010 Girish Wagh Vice President (Operations), Passenger Car Division
December 2010 Nitin Seth Head - Car Product Group
December 2010 Neeraj Srivastava (Regional Manager - West, CV) Head - Car Product Group
March 2011 S. G. Saxena Head - Utility Vehicles
March 2011 Rajesh Nair (Head - Used car business) Head - Utility Vehicles
September 2011 Carl Peter Forster Group CEO
June 2012 Prakash Telang Managing Director
June 2012 Neeraj Srivastava Head - Car Product Group
August 2012 Karl Slym Managing Director
September 2012 Ranjit Yadav President Passenger Car Division
September 2012 Neeraj Garg Vice President (Commercial), Passenger Car Division
Source: Company, Ambit Capital research, Note: Pink shaded rows denote exit and Grey shaded rows denote entry
JLR saved the day for Tata  However, even as Tata Motors’ Indian business was sliding, JLR saw a strong
Motors recovery and boosted Tata Motors' consolidated earnings. In FY12, JLR
generated profit after tax of GBP1.4bn as compared to GBP1bn in FY11. The
company’s revenue increased from GBP9.8 billion in FY11 to GBP13.5 billion
in FY12. In FY12, the company sold 314K vehicles, a 29% YoY increase. In
FY13, almost 80% of Tata Motors’ consolidated EBITDA and nearly 70% of its
consolidated turnover came from JLR.
JLR seems to have been a well-  Whilst to experts the JLR acquisition appeared to be ill fated, the company
thought-out acquisition and not seems to have done a thorough due diligence before going ahead with the
a chest-thumping one acquisition. In the summer of 2007, Ratan Tata and Ravi Kant travelled across
the US and UK, meeting JLR dealers to ascertain whether the brands still
evoked passion. The company had ascertained that the two marquee brands
retained their allure. Ford had significantly invested in product development
and therefore, there was a strong product pipeline and the company had
strong R&D capabilities. It also ensured that JLR retained its premium
positioning. Further a predominantly single-country manufacturing base (in
this case, the UK) helped, unlike in Corus which was spread across countries. A
few quotes below are illustrative:
 “There are no first reactions. We have been in the midst of the deal for so long
that there was just a sense of achievement.” (Source: Ravi Kant’s interview to
Economic Times; 28th March 2008)
 "We have enormous respect for the two brands and will endeavour to preserve
and build on their heritage and competitiveness, keeping their identities intact.
We aim to support their growth…” (Source: Tata Motors press release; 26th
March 2008)
 "We have seen the proposed plans for the next five years and we have bought
into those business plans... we believe in those plans." (Source: Ravi Kant's, MD,
interview to Economic Times; 28th March 2008)
 “A three-tier model was developed… First, a short-term goal to manage liquidity
with the assistance of KPMG was put in place. Then came a mid-term target to

Strategy
contain costs at various levels…. Finally, a long-term goal that runs until 2014
was drawn up, focusing on new models and refreshing the existing ones.”
(Source: Mint article in November 2010)
 "Crucially, Tata Motors was able to keep product development plans going,
which paid off with the global economy reviving and customers returning to JLR
showrooms."(Source:http://www.livemint.com/Companies/UhROXPttBWa40lV
OgtS6wL/How-Tata-Motors-turned-JLR-around.html)
Exhibit 40: Management changes at Jaguar Land Rover

January 2010 David Smith Chief Executive Officer
The current JLR CEO has been February 2010 Ralph Speth Chief Executive Officer
in the saddle since February March 2010 Tim Davis Director - Quality
2010 August 2010 Simon Warr Director - Communications
August 2010 Frank Klaas Director - Communications
March 2011 Mike O’Driscoll Managing Director - Jaguar
November 2012 Frank Klaas Director - Communications
November 2012 Fiona Pargeter Director - Communications
December 2012 Des Thurlby Director - HRD
December 2012 Simon Lenton Director - HRD
Source: Company, Ambit Capital research, Note: Pink shaded rows denote exit and Grey shaded rows
denote entry
Stage 5a: Capitulation

When the new management’s silver bullet misfires, then capitulation becomes
inevitable. In the Indian context this usually means that the company slides into
mediocrity. The other two options – hostile takeover and bankruptcy – are rare in
the Indian context due to institutional factors. Hostile takeovers are very difficult to
execute given how the Indian takeover code works and bankruptcy is rarely
enforced by Indian creditors (who are usually the banks).
Stage 5b: Recovery
As the new management cuts costs, sells non-core assets and focuses on
generating cash flow from the core business, the company begins the long, slow
path to recovery.
Tata Steel: Write-offs and equity raises loom
Corus, part of the problem, but Given the economic conditions in Europe, freeing up the Indian operations’ strong
not the only issue cash flows for debt repayments has been pretty much the only realistic solution for
Tata Steel to cure the ills of the unfortunate acquisition. However, frequent rounds
of capacity expansions have diverted the healthy cash streams. We estimate that
Tata Steel’s debt levels would have fallen by nearly 70% from present levels,
assuming that 75% of cash flow generation over FY08-13 was available for
deleveraging. The management is taking a bet that the low-cost Indian operations
will become more significant in the overall scheme of things and the company will
expand its way out of trouble.
Given the escalation in the overall project cost at Kalinganagar, capex levels are
likely to increase, with spending of ~US$2.5bn in both FY14 and FY15. The cash
flows from the enhanced capacity in India (from 6.8mt to 9.7mt) would generate
most of the cash required for capex (FY13 saw cash flow generation of ~`90bn on
6mt throughput). However, given the high spending intensity, Tata Steel may also
need to tap the equity markets in the coming quarters. Beyond 2014, Tata Steel
should be see cash flow streams of at least `120bn p.a. even in a steel down-
cycle, which can be used for debt repayments.
Tough decisions needed at The European question will also need a cure. Tata Steel’s recent write-off of
Corus US$1.6bn of goodwill related to Corus is the start to a more comprehensive
overhaul of operations in the geography. Whilst it may be early days as regards
details, we believe this would entail considerable restructuring of the British
operations (~11mt of capacity) including asset sales, whilst the more modern
Netherland operations (~7mt) are likely to be largely retained. Through these

Strategy
measures, Tata Steel would effectively retain only a smaller stub of the original
acquired Corus business (~21mt steel-making capacity). The European
restructuring could involve further goodwill write-offs as well as some cash
charges.
Tata Motors: Tough road to recovery in passenger car but JLR and MHCV
should help the overall business
Karl Slym has his strategy in For Tata Motors, Karl Slym’s six-point agenda to turnaround the domestic
place, but will JLR be able to passenger car business (as detailed in the May 2013 issue of Forbes) is to
support the company given its streamline the supply chain, create a new vertical for product planning and
own capex needs? management, create a new quality function, create a new strategy team for both
passenger cars & CVs, implement the ’one team, one vision‘ plan focusing on the
customer, and improve the customer experience.
Tata Motors’ standalone debt:equity ratio was at 0.9x as at March 2013. The
company has guided for an average annual capex of `30bn for the standalone
business (mostly towards product development) for the next 3-4 years. Whilst we
expect JLR to generate significant cash flow from operations of GBP7.2 bn over the
next three years, JLR has its own ambitious capex plans (over US$2bn annually for
the next 4-5 years) which we believe will more or less consume the cash generated
from operations.
We also expect the domestic MHCV volumes to ultimately recover and generate
cash in the standalone books which can take care of the standalone capex
requirements to a significant extent. We also believe given the current debt:equity
ratio of 0.9x, there is headroom to raise leverage if required. As a result, funding
does not appear to be a challenge in turning around the domestic car business.
However, we believe the real challenges facing the turnaround of domestic car
business are:
a) Time required to develop the right products - Karl Slym admits it himself in the
Forbes article mentioned above that it takes many years to develop a new car.
b) The competitive intensity in the domestic passenger car industry continues to
rise with several international players lining up a number of products for
launches.
c) The diesel segment which has been Tata Motors’ forte has been recently losing
its sheen given the reducing gap between gasoline and diesel prices and the
significantly high premium price of diesel cars.
d) Most importantly, it will take not less than a great product to undo the
significant brand erosion that Tata Motors’ cars have seen over the years.
Tata Motors does not have a On a balanced consideration of the above factors, we believe the odds are heavily
single strong leader today stacked against the company in preventing further market share erosion as well as
reinstating the market share that it used to enjoy in the mid-2000s in the domestic
passenger car segment. A key risk is that whilst Ravi Kant was earlier running both
the Indian and global operations, now the India and JLR businesses have two
separate CEOs, who may not always see eye to eye. However, given that JLR
continues to perform well and the domestic MHCV segment is not facing any
structural issues, we remain positive on the stock.

Strategy
6. Case study: Titan

“Luck is the residue of design.”
— Branch Rickey
Since 1991, Titan’s stock has Titan Industries in its short history of just over 25 years tasted dizzying success to
returned CAGR of 23% begin with and then plunged to the depths as its big new bets went awry. It took
nearly a decade to come out of trouble but it did. The company took big, hairy,
audacious goals (BHAG) very early on in its existence. Possibly scarred by some of
the near death experience, Titan has been remarkably quiet and measured in its
approach over the last decade. "Scars of the failure still hang over the head of the
current leadership," according to a former senior employee of Titan. Since 1991,
Titan’s stock has returned 23% CAGR, of which 100% of the returns have been in
the last ten years i.e. FY04-13 (59% return CAGR over FY03-13).
Exhibit 41: Titan’s share price return vs Consumer Durables Index vs Sensex
14,000
12,000 Base of 100 as

on April 1, 2003
10,000
8,000
6,000
4,000
2,000
-
Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13
TTAN IN Equity BSETCD Index SENSEX Index
Source: Bloomberg, Ambit Capital research
A large chunk of the super A large part of the return can be attributed to the strong top-line growth in the
returns can be attributed to the jewellery business, which increased from `3.2bn in FY03 (43% of company
growth in the jewellery revenues) to `81.1bn in FY13 (80%). Segmental profits increased from `0.1bn
business (20% of total) to `8.9bn (84%). What is remarkable is not just growth, but the fact
that this was achieved with only `8.3bn of additional capital employed. As a result,
pre-tax RoCE of the jewellery SBU improved from 11% to 111%. Of the total
shareholder returns (TSR) over FY03-13, 97% is due to earnings growth and 3%
due to P/E rerating.
Exhibit 42: Titan - transformation from watchmakers to jewellers…
100% 70%
60%
80%
50%
60% 40%
40% 77% 80% 80% 30%

68% 72%
47% 49% 54%
62% 75% 20%
20% 43%
10%
0% 0%
Revenue contribution (LHS) Revenue growth (RHS)

Strategy
Exhibit 43: Jewellery business - contribution to Titan's PBIT
100% 100%
80% 80%
60% 60%
40% 73% 76%

84%
40%
62% 79%
51%
20% 34% 52% 20%
20% 20% 24%
0% 0%
PBIT contribution (LHS) PBIT growth (RHS)
Exhibit 44: Titan - Jewellery - 84% of PBIT but only 49% of capital employed
60% 122% 140%

110% 111%
50% 120%
100%
40% 72%
80%
30% 54% 52%
39%
45%
69% 60%
67%
20% 61%
24% 40%
17% 46%
10% 11%
32% 34%
39%
20%
21% 29%
20%
0% 0%
13%
CE as % of total CE (LHS) Jewellery RoCE (RHS) Titan RoCE (RHS)
Source: Company, Ambit Capital research; Note: RoCE is before considering tax
Exhibit 45: Earnings growth is the main driver of Titan's share price
700%
500%
300%
100%
-100% FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
-300%
-500%
Share price return EPS Growth P/E multiple Growth
Tanishq’s birth in the domestic Like many important and successful decisions, Tanishq, Titan's jewellery business,
market was a bit of an accident started accidentally. And in the face of tremendous challenges, when the group
wanted to pull the plug, it survived because of another accident at birth. But we
are getting ahead of our story. Titan was born because Xerxes Desai was looking
for new opportunities and challenges and Tata Press was seen to have limited
opportunities. Mr Desai zeroed in on watches, a market that was dominated by the
public sector behemoth, HMT, and smuggled watches.
HMT was into mechanical watches and did not have a quartz offering. As often
happens with a company that has a dominant market share, the company was not
in a hurry to offer a quartz range of watches, although it had considered doing the
same and had tied up for technology. The customers seemed happy and were not
asking for quartz and why give something to the consumer if they did not want or

Strategy
need it and cannibalise its own offering? This author remembers getting his first
wrist watch in 1981, when he passed his Class X exams. It was an HMT naturally,
and a model named Rohit. But such was the demand in the market that there was
a waiting period for the black dial and only the gold dial was available off the
shelf, and a 15-year old in a hurry did not wait.
HMT’s overconfidence was The market thus was ripe for a newcomer. Titan stepped in. Desai decided that
Titan’s opportunity Titan will enter the market with a quartz offering and challenge HMT. It was his
strategic decision, according to people in the know. This is important because in
future, given the success of the watch business, it would be difficult to challenge
Desai’s decisions. For talented and trained manpower, Desai did not have to look
far. HMT had a tie-up with Seiko and had evaluated the quartz opportunity. It had
a bunch of trained engineers who were frustrated with the company's decision to
not go ahead with a quartz offering. They moved en masse to Titan, and Titan was
in business.
Titan’s dream debt meant that Titan had a dream debut. It achieved its five-year projections in two years. Then,
Desai would have no one to the company thought about taking its offering overseas. The Middle East was the
challenge his decisions later on first port of call and thanks to the South Asian diaspora, Titan performed well. The
seeds of the next disaster were planted, as it so often happens, in the heady
success of the early years. The management believed it had the Midas touch.
In 2000, a software executive was brought back to India from the US to head the
international watch business. Europe was the next challenge or rather the next
stop in the international journey of the watch business. A protégé of Xerxes Desai,
the first MD of Titan, handpicked his man to head the European foray.
Titan had evaluated granite This was also a time when it was not easy to get foreign exchange for imports. A
and IT exports as two new net foreign exchange earner had quite a few benefits and as a result many
business opportunities companies used to export anything from pulses to toothpastes (when they were in
the business of manufacturing petchem, textiles or steel); many also resorted to
false declarations. Titan considered exporting granite slabs and IT exports, but
finally zeroed in on jewellery exports. IT was not a bizarre choice given that six
different Tata group companies were engaged in IT services at that point of time.
Why did Titan enter into the Jewellery after all had two things going for it - firstly, India had a traditional
jewellery business? expertise in jewellery manufacturing and India was a large player in diamonds and
gemstones; secondly, jewellery and watches were retailed by the same chains
overseas, and so Titan would have a synergy. Thus, the company had two BHAGs
simultaneously—a foray into watches in Europe and jewellery exports. The forex
earning from jewellery was to support the watch business. This was when Titan's
standalone net worth was `1.6bn (in FY96) only and brand building in Europe
would need investments of around US$5mn-10mn annually over many years.
Arrogance and hubris, as Titan According to people who were involved in the decisions at that point of time, there
enters the European watch was a belief of invincibility within the company. Also, there was external validation
market that added to the hubris. Business schools were inviting the senior management to
speak on Titan's foray into Europe even before it happened, and Philip Kotler, the
marketing guru, in his maiden visit to India mentioned how Titan would be one of
the Indian brands that will soon be a force to reckon with in Europe or words to
that effect. To top it all, there were few who could question Desai, who has a
larger-than-life personality within the company especially after the success of
quartz watches in India.
But the European foray into watches backfired. By year two, the company decided
to go for broke and went on an advertising spree. But the distribution was not in
place and building brands at a global level meant many years of sustained
investments in the brand, a capability that Titan did not have at that point of time.
As one executive then involved with the business stated, "We tried to repeat a
successful formula from the domestic market into Europe and it didn't work...we
were not used to being told what to do and the MBOs in Europe were dictating
terms to us...We didn't have the distribution to justify the spend. Brand building is a

Strategy
cash losing proposition and we needed stock turns of 10-20x to justify the spend,
whereas the best brands were doing 2-3x."
“Difficulty of the market was Another former executive said, "Difficulty of the market was underestimated. Plus
underestimated” other things went wrong - the hiring was bad, we assumed that if we advertise,
people will come and we underestimated the amount of spend necessary (about
US$5mn-10m per year for five years at least)."
Jewellery exports also failed, In jewellery exports, Titan met failure for the second time. It started dealing with
but the European watch large jewellery chains but soon lost eight of its key customers, as it failed to meet
business financially stressed the the exact requirements and was also seen as uncompetitive. On top of this, India's
company poor infrastructure played a role. Customers simply could not believe that the
company could not give a definite date of when products will reach them after the
goods had left Titan's premises. But the goods were at the mercy of the customs
and airport authorities, something overseas buyers could not appreciate and were
also not willing to live with, naturally.
Titan tries to change the Indian So the company had a modern jewellery factory, but no market. It was then that
consumer’s jewellery buying Desai turned his attention to the domestic market. Like watches, he wanted to
habits… change the behaviour of customers in the jewellery market. There were two
specific challenges—first, there was a strong bond with the family jeweller which
spanned many generations; and second, the company wanted to sell 18ct gold
jewellery. The Indian market was for 22ct gold jewellery as against the 18ct gold
jewellery globally and Desai wanted to change the Indian consumer. Who could
argue with the man who had brought quartz watches into the Indian market? A
senior member of the team even pleaded with Desai, saying his wife would never
buy 18ct jewellery but it was to no avail.
…but fails The result was another disaster. In 1998, the jewellery division ran up a loss of
`250m on a turnover of `250m. Accumulated losses in the international watch
division by March 2002 were also large at GBP9 million (`623mn) and largely
hidden in a web or maze of subsidiary and associate companies, all perfectly legal
by the letter of the law but something that hid the true health of the company for
years. As of 31 March 2001, US$38.5m was employed in the European
operations, primarily in brand building and stocks. When we quizzed former
executives about these financial structures, everyone shied away from discussing
these "Enron-like structures". Part of it was led by India's regulations wherein goods
exported, which remained unsold, could not be brought back into the country! The
former executives we met declined to talk about the structures.
For FY97-98, losses at international subsidiaries were almost half of Titan’s
standalone profits. Perhaps in subsequent years i.e. fiscal 2001 onwards, these
losses might be more than what was actually stated, as its direct subsidiary (which
used to amortise TITAN trademarks) sold ‘TITAN trademarks’ for NLG18.3mn
(`422mn, 22% of Titan’s FY01 standalone net worth) to its step-down subsidiary
which had a policy of not amortising trademarks. The annual report for fiscal 2001
states, ”The value of the trademarks has not been amortised as amortisation of
trademarks is not compulsory under the existing Netherlands Antilles regulations,
and the management is of the view that the book value of the trademarks represents
the current fair value.”
Exhibit 46: International business dragging down Titan’s profitability

FY96 FY97 FY98 FY99 FY2000 FY01 FY02 FY03
Currency NLG NLG NLG NLG NLG NLG Euro Euro
Loss at international Subsidiaries (mn) (1.0) (3.6) (3.6) (6.0) (1.3) (3.5) (1.9) (2.5)
Average Exchange Rate (INR/NLG) 20.86 20.42 18.58 21.66 22.92 24.13 42.10 48.00
Loss at international Subsidiaries (` mn) (20) (73) (67) (130) (29) (85) (81) (122)
Titan's standalone profits (` mn) 276 242 146 170 193 235 131 62.1
Intl. Loss as a % of Titan's standalone profit -7% -30% -46% -76% -15% -36% -62% -196%
Source: Company, Ambit Capital research; Note: * Degree of loss is reflected in the historical price chart of Titan. Refer to the same time period chart
of the exhibit - ‘Chronology of major events and share price vs event correlation’

Strategy
Exhibit 47: Titan - decoding the layers of subsidiaries
Titan Industries Ltd
100% Outside Titan group

1
Titan Watch 100% Titan International Tata International Tata Enterprises
Company Ltd Holding BV AG (Overseas) AG
87.5%
19% 4
12.5% 100%
Titan Before 41%
100% Titan International 40%
International
Before Investment BV
(Middle East)
Titan Brand Mar '04
FZE
Holding NV 19%
100% After
Titan Watches &
Mar '04 3
Jewellery
International (Asia
Pacific) Pte. Ltd 41%
100% After Mar '04
2 40%
Rockbourne Holding BV
1. Sold trademarks having Gross block of NLG 20.7mn and Netblock of NLG 16.5mn for NLG 18.3mn
2. Sold above trademark for $13.75mn to Rockboune
3. Titan International Investment BV sold shares of 100% subsidiary, Titan International (Middle East) to Rockboune
4. Titan International Holding sold shares of 100% subsidiary, Titan Watches & Jewellery Intl. (Asia Pacific) to Rockboune
Exhibit 48: Titan - chronological events to hide the losses

Year Particulars of Events
FY95 Titan International Holding BV (TIHBV) started capitalising the trademark of ’Titan‘ to market outside India
FY98 Until FY98, TIHBV capitalised `427mn (22% of FY98 standalone net worth)
TIHBV sold the above trademarks to Titan Brand Holding NV (unconsolidating the sister concern) for `410mn (net book value
FY99
`370mn)
FY200
Titan Brand Holding NV did not amortise trademarks as there was no mandatory requirement like for TIHBV
0-04
Incorporated Rockbourne Holding BV (Titan Industries had 3.61% interest and Tata group companies outside the Titan group had
FY01
96.39%)
Made surplus of `191mn by transferring the above trademark to Rockbourne Holding BV. Titan International Investment BV and
Titan International Holding BV sold their 100% holding in Titan International (Middle East) FZE (TIME) and Titan Watches &
Jewellery International (Asia Pacific) Pte. Ltd (TAPL) to Rockbourne Holding BV (This were the first couple of transactions for the
FY04 company since incorporation). Albeit there were no negative reserves standing in the books of these two companies viz TIME and
TAPL, their holding company had reserves. Sale of these investments helped to turn their negative reserves and surplus to positive.
We believe that these two companies made a loss of `61.5mn if profit from sale of investment is stripped out. This will result in a
surplus of `209mn. Total surplus arising on account of restructuring is `400mn, according to the annual report of FY04
FY08 Divested the stake in overseas subsidiary by selling stake in Titan International Holding BV and Titan Brand Holding NV
Publicly there was denial and But there was denial within the company of the mounting problems. A Times of
no acknowledgement of the India interview at that time quotes Xerxes Desai: “In recent years, our primary focus
failure has been on expansion into Europe and the Tanishq jewellery business. Now that
both are on track, we can turn our attention to other things.” In a similar vein, in
the FY01 annual report, the Director’s Report states: “The Titan brand has now
been firmly established in Spain, Portugal, Greece and Austria.”

Strategy
Management commentary in Fiscal 2004 Annual Report

“Shareholders are aware that TIML has made losses aggregating to about GBP9
million and that the funds employed in the European operations aggregate to about
US$39.50 million at the year-end. During the year, as planned, the overseas
operations have been restructured in order to obtain the maximum possible benefit
from the various assets created abroad, and in the process, ownership of the
overseas trademark rights to the Titan brand and our other brands as well as the
shareholding in TIME and TAPL are being transferred to a new overseas company,
Rockbourne Holding BV (RHBV). This restructuring has resulted in a net aggregate
surplus of about `40 crores which is duly reflected in the consolidated accounts, and
which has correspondingly reduced the accumulated losses.
As mentioned earlier, as a matter of abundant caution, and in order to make up the
balance of the accumulated losses in the European Operations, the Company has
made additional provisions aggregating to `25 crores in the accounts for the year
ended 31 March 2004 towards diminution in investments and doubtful loans and
advances.
As a result of the sale of its shareholding in TAPL, Titan International Holdings BV
(TIHBV) the Company's wholly owned subsidiary in the Netherlands, ended the year
with a profit of EUR1.28 million wiping out its earlier carried forward losses.”
An accident at birth saved the As the losses mounted, there were concerns at the group level to pull the plug on
jewellery business the jewellery business. Ishaat Hussain, the group finance whiz and member of the
board, was in favour of pulling the plug, something that he gracefully
acknowledged at the 25th anniversary celebrations of Titan Industries. Opposing
him was Xerxes Desai. A new team was brought in to turnaround the business—
first Vasant Nangia, who had spent three years in the international watch business
and then Jacob Kurien, when Nangia left to start Oyzterbay.
An accident at birth now saved the jewellery business. When the Tatas decided to
venture into watches, they could not get a licence since consumer goods were not
a priority area. As a result, they entered into a JV with the Tamil Nadu government
(TIDCO) and therefore, there would always be a government representative on the
board, who would frequently be changed, depending upon who was in power.
During the important discussions, the then government representative suddenly
piped up and said that the Chennai Tanishq store was very good and his wife
really liked it. That was it as nobody wanted to upset the government
representative; the jewellery business got a breather. Whilst as business and
research analysts we agonise over strategy, we have to accept with all humility the
role that luck often plays in success or failure.
The European foray may have panned out differently if Titan could have acquired
a European brand. Such an opportunity did arise very early on and for a sum of
money that Titan could afford. But the proposal was shot down at Bombay House,
the group headquarters. This was a time when Indian companies were not known
for overseas acquisitions and TV channels did not run ads of Indian businessmen
buying marquee global brands. It all changed in the 2000s, and within the Tata
group, Tata Tea, Tata Steel, Tata Motors and Indian Hotels made major
acquisitions. A time came when ’every month, Bombay House was asking the Titan
management about their global plans.’
Finally, the jewellery business Titan finally moved to 22ct gold jewellery and thus, overturned one of its key USPs
discovers its USP when it entered the business. Successful companies and leaders are willing to
change and take the mid-course correction. To break the bond with the family
jeweller, the company put Karatmeters in every store and asked women to test
their jewellery for purity. Further, in another campaign, the company promised to
replace the impure jewellery with pure jewellery and pay the difference between
19ct and 22ct. Many women realised that they were being cheated by their family

Strategy
jeweller for a very long time. Said a former executive, "90% of the jewellery tested
was below 22cts and we knew we were on the right track."
The above two decisions were largely responsible for the turnaround. But it was
also backed by superb advertising and brand building support, execution at the
store level, with staff recruitment and training, to ensure a great retail experience
and clever financing. One of the early and memorable ad campaigns ran with the
tag line "Is there a thief in your family?" Later on as the brand became successful,
there was a regular association with Hindi films (especially to promote its range of
traditional jewellery, an area of perceived weakness) and Hindi film stars.
Every company goes through a crisis, and Titan's management was capable of
correcting the course. If we look at our framework in the previous section, it seems
that Titan has been able to step out of danger at the Stage 2 or Stage 3 level,
never going beyond that.
Is Titan now too cautious to Is this history important? How is it relevant for the future? Given that investments
take BHAGs? are often based on the near-term performance of the company, it is often easy to
forget the genes of the company as well as when things could go right or terribly
wrong. Under Desai and the band of very capable executives he assembled
(including Bhaskar Bhat, the present MD), Titan took a number of bold decisions
and was not afraid of failure. It was willing to take BHAGs and at the same time
undertake mid-course correction. Over the last ten years, whilst Titan's execution
machine has functioned brilliantly, it has not taken BHAGs. Xylus, Titan Eye Plus,
Gold Plus and the US foray into jewellery with two stores - all were done in a
calibrated manner with limited risks. Titan has changed.
Challenges ahead for Titan The scars of the failures are still fresh. The credo now is not to touch anything that
is working well and there is a fear of making mistakes, according to a former
executive in the know. Different challenges confront Titan now. For many
youngsters, Titan is "my father's brand". The brand is getting old and may not have
any connect with gen next. Fast Track is an excellent brand, but may risk being not
aspirational enough by playing the volume game. Plus over time, the company has
built up overheads that may hurt in a downturn. For Titan to repeat the growth of
the next decade, it will have to rejuvenate the brands or find new revenue streams.
Exhibit 49: Titan - fixed costs can be a drag on margins
60% 11% 12%

10% 9%
50% 9% 10%
7% 7%
40% 8%
6%
30% 5% 5% 6%
48%
20% 39% 37% 4%
32%
10% 19% 19% 20% 2%
13% 9%
0% 0%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
YoY increase in FC (LHS) FC as % of total revenues (RHS)
As we are writing this, an email pops into our inbox. It’s from one of the former
executives we have met. He writes, "I am at a Tanishq store and there is standing
room only! So how does it matter who did or said what! Old ladies, young women,
men, girls - can never figure why Indians have this fascination!" Who did and said
what matters and precisely for that reason the stores are full even today. When we
visited the flagship Dickenson Road outlet of Titan one weekday morning, the store
was very busy. This when other chains that have tried to replicate Titan's jeweller
success have failed. May be it is too early to start worrying about the next growth
impetus for Titan.

Strategy
Chronology of major events and share price vs event correlation
Exhibit 50: Titan - share price chart – FY93-98: Weak performance of jewellery exports and European operations
(Rs)
12 Launch of
Domestic watches doing
'Tanishq' range
well. Started toying with
of watches with
11 idea of entering Introduced
18 Karat gold in 2005 was first
Jewellery business Sonata
India year of flat
10 watches and Consecutive years of decline in
YoY growth exports resulting from weak gobal
Tanishq's 22
Karat ethnic macro conditions coupled with
9
Jewellery unfavourable move in currency
rate and disruption in supply
8 chain. 18 karat jewellery was not
JV with Timex perceived well as customers were
7 formed in reluctant to move away from
1992 conventional 24 karat segment
6
5 Proposes to set-up
plant to manufacture
4 table clocks
-
Apr-93 Oct-93 Apr-94 Sep-94 Mar-95 Sep-95 Mar-96 Sep-96 Mar-97 Sep-97 Mar-98
—— TTAN's Share Price
Exhibit 51: Titan - FY98-03: Pulled back from Europe; Tanishq business accelerates in India
(Rs)
9
8
Increase in Excise duty to 16% from
8% for watches having MRP above
Introduction of Rs500 and making watches below
7
Karatmeter in Rs500 completely exempt
Tanishq stores which
helped in brand
6 Dismal performance in
creation and gaining
Europe affecting titan Gave VRS to
customer loyalty
sales growth of intl. certain
5 subsidiaries and net employees
margins across Titan
Weak gobal
4 macro conditions
continues
Launched
Jewellery
3 Fastrack
business
picking up
2
Vasant Nangia,
COO of Tanishq
1 Ending JV quits. Jacob Kurian
with Timex takes his chair
-
Apr-98 Sep-98 Mar-99 Sep-99 Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03

Strategy
Exhibit 52: Titan - FY03-08: Evolution of Jewellery (Tanishq) as the key growth driver for Titan
(Rs)
100
Launch of first Tanishq
store in US 2008
90 market
crash
80
Announcing third
70 business under brand
Titan Eye+
Titan clocked average
Jewellery business sales growth of 40%
60
back on track. for FY06-08
Tanishq becomes a
50 success story
Titan forms newly

40 formed Precision
Reintroduced
Engineering SBU; Management guiding for
Fast Track range
Tanishq enters into Launched Flip 40% growth in FY08 which
30
Silverware collection, a dual- was in line with consensus
faced watch estimates
20
10
-
Exhibit 53: Titan - FY08-13: Riding the wave of aspirational consumption in India through Tanishq
(Rs)
330
Signs agreement to acquire

300
Swiss watch brand Favre
Leuba for up to EUR 2 mn
Sales CAGR of 32% over FY09-12
270
whilst clocking 54% net profit
CAGR for the same period. FY10
240 saw rebound in net profit margin
which was on a downtrend since
FY06. FY11-12 reaping benefits of
210 massive store expansion exercise
adding net 135 stores in FY09
(38% of FY08 end stores count)
180
150
120
Management comment on Q4FY12,
expecting lukewarm sales growth,
90
despite that confident of achieving
FY12 guidance
60
30
Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13

Strategy
7. Case study: TTK Prestige

“The harder you practise, the luckier you get.”
— Gary Player
TTK Prestige was incorporated as a private limited company in 1955, under the
name ‘TT Private Limited’. Founded by Mr. TT Krishnamachari, the company
started manufacturing pressure cookers in 1959 with technical support from the
Prestige Group, UK, along with marketing rights extending to UAE, Sri Lanka and
South Africa.
As the current management proudly told us, “As a group we have been successful
at identifying long-term consumption trends in India. We imported pressure cookers
into India before cooking gas became readily available to consumers. We started
selling ballpoint pens when they were prohibited from use by students in schools. We
sold condoms when elders in the family used to give blessings for 16 children to the
younger generation.”
Spreading its wings: 1994 to 1999

By 1994, TTK was a well- In 1984, the company bought the brand ‘Prestige’ for sales and distribution in
established player in India’s India. By 1994, TTK was a well-established player in India’s pressure cookers and
pressure cooker market pressure pans (launched in 1984) market and had recently (in 1992) expanded its
footprint into the US though their own brand called ‘Manttra’. Revenue CAGR over
FY90-94 was 25% whereas PAT CAGR for the same period was 34%. Following the
success of its core business, TTK Prestige decided to expand its international
operations and enter into new product segments in India.
In 1994, `298mn was raised In September 1994, TTK Prestige raised `298mn through an IPO valuing the firm
through an IPO to expand at `1.1bn, ~10.0x one-year forward P/E multiple. Of the total IPO proceeds,
pressure cookers in `230mn was intended to fulfil the needs for international expansion by fulfilling
international markets and non- the corresponding working capital requirements, modernisation of existing
stick cookware in India manufacturing facilities and including establishment of overseas corporate body
(Manttra). The balance was intended to be used for setting up a non-stick
cookware plant following a tie-up with Dupont for the coating to be used on the
surface of these products.
As part of its IPO prospectus, TTK Prestige announced revenue forecast CAGR of
28% over FY94-99 and PAT CAGR of 35%. In order to achieve these growth
targets, the company launched new products domestically and ventured into new
markets like the Middle East, the UK and Australia. However, it significantly
underperformed its own published expectations. Domestic sales CAGR over FY94-
98 was 10% vs 29% projected whilst export sales CAGR over FY94-98 was 12% vs
22% projected.
Exhibit 54: TTK - Comparing the company’s projections from its IPO prospectus with reported numbers (` mn)
FY95 FY96 FY97 FY98 FY99
Proj. Act. Diver. Proj. Act. Diver. Proj. Act. Diver. Proj. Act. Diver. Proj. Act. Diver.
Income 1,060 1,006 -5% 1,364 1,180 -13% 1,610 1,260 -22% 1,900 1,160 -39% 2,250 1,450 -36%
PBT 125 126 1% 170 131 -23% 210 124 -41% 250 59 -76% 300 114 -62%
PAT 88 85 -3% 120 90 -25% 145 84 -42% 180 51 -72% 210 93 -56%
Source: Company, Ambit Capital research; Note: Proj. – Projected; Act. – Actual; Diver. – Divergence

Strategy
Exhibit 55: TTK - Anecdotes from management commentary for FY95-98

Revenue
Year Management commentary on performance Management commentary on prospects
growth
 Spread marketing of cookware geographically  Silverstone range of non-stick cookware to be introduced
 Introduced ‘Kitchen-in-a-box’; accepted by public in FY96
FY95 31%
 Stainless steel range of PCs getting traction  Pursuing to increase export sales
 New range of aluminium cookware planned in FY96
 Tie-up with Braun of Germany to market their products in  Entering into kitchen tools projects; in the process of
India finalising necessary tie-ups
FY96 17%
 Increase in material cost could not be passed  Expects exports to grow post restructuring
 Restructuring of export business
 Recession in consumer durable industry and natural  Hopes FM’s budget will reverse recessionary trend
calamities affected sales  Industrial unrest in Bangalore and Hosur units which
FY97 7%
 Introduces kitchen knifes and stainless steel cookware started in the end of 1QFY98. Expects it to be temporary
 Capex programme to expand/modernise plants
 Industrial unrest affected operations significantly  Planning to upgrade and introduce new models to achieve
 Discontinued personal products trading line greater market share
 Durable industry saw lower consumer off-take  Plans to improve working capital management
 Entered into the UK and Australian markets during the
FY98 -9% year
 Absorbed the entire manufacturing and marketing
overheads
 Reports of settlement with the labour union albeit
settlement valid up to May 2001
Source: Company, Ambit Capital research; Note: PC – Pressure cooker; NS – Non Stick
In our meeting with Mr. T.T. Jagannathan, the Chairman commented on his
experience of exports during the 1990s – “The large American retailers will fleece
you until you are bankrupt. They are the worst counterparties to deal with if your
business does not have the scale to help you negotiate better terms. It was a terrible
experience. One retailer did not pay us for 300,000 pieces while another rejected a
consignment of 400,000 pieces. Also, Wal-Mart wanted deliveries within 24 hours! It
was unreasonable. Once the Indian market started doing well, we were not very
keen on exports anymore.”
The perfect storm: 1999 to 2003

In 1999 TTK Prestige FY99 appeared to be the start of a stabilisation period for the company, with
announced: (a) its intentions to revenue growth of 31% YoY (domestic sales growth of 26% and exports growth of
increase its customer base in 64%) and PAT growth of 84% YoY for the year. This growth was driven by a
the US (retail chains) by 40%; combination of: (a) successful launches of new models—Prestige Supreme and
and (b) an entry into East Prestige Armour cookers; and (b) 56% YoY growth in exports as its US outfit
European markets Manttra Inc commenced operations during the year. On the back of this strong
performance, TTK Prestige announced: (a) its intentions to increase its customer
base in the US (retail chains) by 40%; and (b) an entry into East European markets.
FY2000 saw 4% YoY decline in The downfall: FY2000 (4% YoY decline in revenues and 61% YoY decline in PAT)
revenues and 61% YoY decline saw a combination of the following headwinds:
in PAT due to a combination of
several headwinds  Labour issues in its Hosur unit plant became major obstacles to regular
operations.
 International sales declined by 48% YoY due to: (a) recessionary environment
in the US market due to the IT slowdown; and (b) stiff competition from other
countries’ manufacturers in the US.
 Budget 2000: In February 2000, the then Finance minister, Mr. Yashwant
Sinha, announced an increase in excise duty on pressure cookers from 8% to
16%. This affected the growth prospects of the company as TTK’s products
became expensive, and they lost market share to unorganised players.

Strategy
To add to this, the company also faced the following issues in the subsequent
years (FY01-03):
 ‘Smart cookers’ bombed after launch – designs acceptable in the US do

not necessarily work in India: In 2002, TTK had introduced the ‘Prestige
Smart’ range of cookers but in the immediate next year they wrote off
`88.3mn of inventories through securities premium. The management stated,
“Whilst the design of this range was greatly accepted in the export market, it
was launched ahead of its time in the domestic market.”
 Exports declined further: Exports for TTK Prestige suffered over FY01-03 due
to a combination of: (a) a recessionary economic environment after the 9/11
attacks; (b) intense competition from global peers; and (c) not being able to
cope with the changing product requirements of the US market, according to
the management.
Exhibit 56: TTK - anecdotes from management commentary over FY2000-03

Revenue
Year Management commentary on performance Management commentary on prospects
growth
 Engaging external management consultants to bring
organisational transformation
 Planning to introduce gas stoves, low-capacity PCs
 Industrial unrest affecting Hosur unit’s operations  Implementing VRS
also resulting in product launch delays  Looking for value-adding opportunities involving
FY00 -4%
 US market underwent unexpected developments acquisitions, alliances and partnerships
 Launched new range in flask, NS cookware and PCs  Divesting non-core assets
 To outsource non-critical manufacturing
 Redrafted its export strategy to build a stable customer
base
 Organising business in four strategic areas according to
 Higher excise duty led to fall in operating profits product
FY01 0%  US economic slowdown affected export sales  Planning to launch new range of domestic electrical
 Outsourcing outfit affected due to Gujarat’s appliances, gas stoves and pressure cookers
earthquake, causing delay in product launches
 Invested heavily in branding of Smart Cookers and  Steps for reorganisation of distribution, tailoring
electrical appliances production to avoid building up of inventory, etc.
FY02 2%  Incurred development expenses on products for the  To develop product for export market. Intr. new range of
export market stainless steel and aluminium PCs
 Continued recession in the consumer durables  Effecting capacity correction and right-sizing human
segment affected retail off-take resource
 Domestic sales fell due to high excise duty, non-
availability of products and re-organisation of  Expects substantial reduction in fixed cost, reduction in
capacity excise duty, productivity-linked long-term settlement
FY03 -18%
 First year of loss in the last four decades with workers likely to change fortunes of the company
 Gave VRS and made Bangalore plant as a standby  To launch six new products in FY04
unit
Source: Company, Ambit Capital research; Note: PC – Pressure cooker; NS – Non Stick
Financial impact of ‘the perfect storm’: FY03 was the first year of loss in TTK’s
history (`115mn of loss representing 14.8% of FY02 net worth). Whilst the impact
on TTK Prestige’s P&L is shown in the table below, it is worth highlighting the
balance-sheet write-offs that did NOT go through the P&L in FY03. TTK had written
off `196.4mn against securities premium (part of reserves) on the balance sheet in
TTK’s balance sheet weakened FY03, which equates to 25.4% of FY02 net worth. These adjustments to reserves
substantially after several write- included `88.3mn on account of inventory write-offs, `23.7mn on account on
offs diminution in the value of investments in TTK Tantex (textile and personal care
business) and `84.4mn on account of voluntary retirement schemes. Had they
routed these write-offs through the P&L instead, losses for FY03 would have
increased by `130mn (~17% of FY02 net worth) and over FY04-07 (both years
included), amortisation of VRS expenditure would had resulted in ~28% lower
profits than that reported cumulatively during that period.

Strategy
Exhibit 57: TTK's deteriorating financials from FY2000 to FY03

(in ` mn) FY2000 FY01 FY02 FY03
Revenues 1,303 1,242 1,272 1,048
Revenue growth -4% 0% 2% -18%
EBITDA 100 84 96 (59)
EBITDA margin 8% 7% 8% -6%
Net Profit 36 16 7 (115)
Net Profit growth -61% -57% -55% -1737%
Net Profit margin 3% 1% 1% -11%
Total Debt 339 498 666 809
Capital Employed 1,141 1,293 1,439 1,266
RoE 5% 2% 1% -19%
RoCE 8% 6% 4% -4%
Debt/Equity 0.42 0.63 0.86 1.77
As K. Shankaran, CFO, puts it, “The biggest issue we faced was that although we
had grown to a decent size, we were still running TTK Prestige as a small company.
There was no segregation of responsibilities amongst senior managers and hence
every senior manager was working like a jack of al tradesl. We had to change that.”
The recovery phase: FY02-04

Restructuring of managerial The seeds of TTK Prestige’s recovery phase were planted when R. Srinivasan, a
responsibilities was the biggest professional management consultant, was appointed as a non-executive director
step towards recovery on the Board of the company in October 2000. Srinivasan launched a ‘total
transformation project’. Shankaran says, “The biggest change brought over by Mr.
Srinivasan was around management restructuring. In 2002, a team of 23 senior
managers of TTK Prestige went to a small economy hotel in Mysore to stay for a
couple of days. There, the decision was taken to segregate responsibilities amongst
members of the senior management team.” This included:
 Mr. TT Jaganathan took charge of product innovation which in hindsight

became the main factor of TTK’s success in the subsequent years. His
designation changed from ‘Chairman and Managing Director’ to ‘Executive
Chairman’.
 Mr. Ravichandran took over product launches and operational efficiency

responsibilities with his designation changing from ‘Joint Managing Director’
to ‘Managing Director’.
 Mr. Shankaran, was made responsible for handling labour union problems,
bureaucrats/politicians and investor relations in addition to his existing role of
handling taxation, legal and secretarial matters. Mr. Shankaran says, “Given
my strong public speaking skills, I was the obvious choice for this role.”
 Mr. Chandru Kalro was made head of the sales, marketing and operations
department.
In the 18 months that followed the changes in the managerial structure
highlighted above, TTK Prestige saw the following benefits to its operations:
The excise duty increase on Reduction in excise duty on pressure cookers and cookware: The February
pressure cookers was reversed 2000 excise duty increase announcement led to the formation of ‘All India
in 2002 Pressure Cooker Manufacturing Association’ with Mr. Shankaran being made the
President of this association. Mr. Shankaran says, “On behalf of members of this
association, I wrote a speech to the Government citing the importance of pressure
cookers for empowering women and its contribution to the progress of the Indian
household. Surprisingly, within a couple of months, this letter gathered significant

Strategy
attention amongst political leaders in Delhi”. Thereafter, when Mr. Jaswant Singh
became the Finance Minister of India, he decided to reduce excise duty on
pressure cooker from 16% to back to 8%, and in addition to that, non-stick
cookware was made completely exempt from excise duty, down from 16% duty
applicable previously. “We were back to profitability”, says Mr. Shankaran.
Labour union problems were Resolving labour union problems: Mr. Shankaran says, “The then union leader
resolved in FY03 was playing a role in fuelling workers’ agitation against the company’s management
both in Bangalore as well as in Hosur. Through regular interactions with the union
and citing instances of salary cuts taken by the management I was able to win back
the trust of the union”. Thereafter, many workers were also given voluntary
redundancies (`9.8mn in FY01 and `78.5mn in FY03) and almost the entire
production was shifted from the Bangalore manufacturing unit to Hosur, with
Bangalore being classified as a ‘stand-by’ unit by the company from FY03
onwards.
Exhibit 58: TTK - salary cuts for T.T. Jaganathan in FY99 and FY01 (` mn)
FY97 FY98 FY99 FY2000 FY01 FY02
T.T. Jagannathan
Designation MD MD MD CMD CMD Exec. Chairman
Remuneration 7.5 6.3 3.3 5.7 2.2 2.2
S. Ravichandran
Designation Jt. MD Jt. MD Jt. MD Jt. MD Jt. MD MD
Remuneration 0.2 1.7 1.8 2.2 2.2 2.1
PSK Network was set up in Setting up Prestige Smart Kitchens (PSK) retail network: As TTK Prestige was
June 2003 to help sell new expanding the product range to include new categories, especially electrical
products including appliances appliances, the biggest hurdle faced by the company with respect to distribution
was the refusal of multi-brand dealers to stock these bigger ticket products in their
stores due to: (a) lack of enough shelf space available; (b) lack of willingness to
invest in Prestige-branded kitchen electrical appliances; and (c) lack of an
appropriate footfall into their store for these products. To resolve this issue, the
company opened a franchise retail store in Coimbatore on 6 June 2003 to
showcase TTK’s widened product offering to customers. Mr. Shankaran says, “I still
remember the date because it was a big step forward for us and an auspicious date
was chosen to open the first PSK”. Thereafter, PSKs helped boost sales of kitchen
appliances and gas stoves along with other products by acting as competition to
the traditional dealer in their vicinity. Few months after the successful launch of the
PSK concept, demand for the widened product portfolio of TTK Prestige improved
across the traditional dealer network in south India.
Exhibit 59: PSK’s success contributing directly and indirectly to TTK’s success
600 20%
500 16%
400
12%
300
8%
200
100 4%
0 0%
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E
Total number of PSKs (LHS) % of total sales from PSKs (RHS)

Strategy
The group structure was Shedding flab – consolidation within the group companies: In order to
consolidated into five streamline its operations and focus on the core business, the TTK Group decided to
companies from ~25 reduce the number of companies in the group down from 20 in FY01 to 5 in FY02
– TTK Prestige, TTK Healthcare, TTK Textiles, TTK LIG and TTK Services. This, we
believe, led to increased focus by the two promoters – Mr. TT Jagannathan (on TTK
Prestige) and Mr. TT Raghunathan (on TTK Healthcare)– on the strongest areas of
the group. In a press interview in January 2002, Mr. TT Jagannathan commented,
“It is a constant process of re-inventing oneself. We have decided to focus on our
core expertise and divest our interests in non-core activities. There were certain
areas where we found that we were not performing well. So we decided to exit such
activities.”
Acceleration phase: FY04 onwards

“Since 2004, it has been Mr. Shankaran says, “Since 2004, it has been onwards and upwards for us.” The
onwards and upwards for us.” factors driving the success of TTK Prestige since FY04 include:
 Consistent product innovation: TTK Prestige has consistently launched over

50 new product variants and SKUs every year and at least 1-2 new product
categories every year. Consequently, 50-70% of the company’s total sales
that year came from products launched by Prestige over the previous
three years. This has helped TTK Prestige in maintaining over 50% market
share in south India consistently. As the pressure cooker and cookware
demand has shifted towards induction-friendly SKUs over the past 12 months,
TTK Prestige has been pro-active in revamping its product portfolio
accordingly. This has helped the group gain market share away from Hawkins
at an exponential pace over the past 12 months given the latter’s sluggish
response so far to the evolving demand. “With our tagline ‘Are you ready for a
smarter kitchen’, we have always aimed at making the loudest noise in the
kitchen appliances market” says Mr. Chandru Kalro, COO, TTK Prestige.

Strategy
Exhibit 60: New product launches from Prestige

Products New products launched during the year
FY04  Over 50 new product variants and SKUs;
 Deluxe range of pressure cookers in aluminium, hard anodised, stainless steel and duo metal;
 Handi range of pressure cookers;
 Omega Select range of non-stick cookware;
 Newer models of stoves and kitchen electrical appliances
FY05  Over 50 new product variants and SKUs
 Handi Pressure Cookers in aluminium, SS and anodised form for the domestic market
 English curry pan for the UK market
FY06  54 new product variants and SKUs
 High-end domestic kitchen appliances like chimneys, hobs, microwave ovens, kettles, etc
 Inner-lid cookers in handi format with a choice of polished alum, anodised and colour finishes and with a patented
safety device under the brand name Prestige Nakshatra
 Non-stick coated pressure cookers in both Handi and Kadai shapes
 Duplex gas tables
 Deluxe mixer grinders
 New range of metal-spoon friendly non-stick cookware
FY07  89 new product variants and SKUs in 7 categories
 Selective modular kitchens
FY08  86 new product variants and SKUs
 Opened two Prestige Kitchen Boutiques to promote sales of modular kitchens
FY09  New category of induction cooktops
 Seven more Prestige Kitchen Boutiques opened
FY10  New range of induction cooktops
 Induction compatible pressure cookers and cookware
 Apple range of inner-lid pressure cookers
 Microwave pressure cookers
 Launched Microwave Pressure Cookers and Apple range of inner lid pressure cookers
 Agreements with World Kitchen, USA to enter high-end Tableware/Cookware and Storeware segments
 Agreement with Vestergaard Frandson Group, Switzerland to enter domestic water filter segment.
 Agreements with Bialetti Industries Spa, Italy, whereby TTK bought their pressure cooker and cookware manufacturing
plants in Romania and Italy for installation in India. Also entered into outsourcing arrangements with their Indian
subsidiary
 Focus on R&D: One of the biggest examples of focus on research and

development has been TTK Prestige’s success in the induction cooktop segment
despite competition from the stronger electrical appliances brands such as
Bajaj, Phillips and Preethi. With all these players (including TTK Prestige)
offering Chinese-manufactured induction cooktops since 2009, TTK was the
only one to ‘Indianise’ the product by changing the presets to ‘Idli’, ‘Dosa’,
‘Curry’, etc and hence this helped the company become 2-3x larger than
Bajaj/Phillips in terms of nationwide market share in this product category.
 Superior supply chain management: The group follows a hub-and-spoke

supply chain model with 23 warehouses across India and a large number of
wholesale distributors present across cities to cater to the demands for stock
from all three distribution channels—retail supermarkets, traditional dealers
and franchisee shops. This has been a strength of the company particularly
against its largest competitor, Hawkins, over the past 3-4 years.

Strategy
Exhibit 61: TTK emerging as a leader in the organised space

(Rs mn) (Rs mn)
14,000 1,600
12,000
1,200
10,000
8,000 800
6,000 400
4,000
0
2,000
0 -400
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
TTKPT (Total sales - LHS) HAWK (Total sales - LHS)
TTKPT (PAT - RHS) HAWK (PAT - RHS)
Exhibit 62: TTK - Share of kitchen appliances significantly increased over the years
(Rs bn)
15.0
12.0
9.0
6.0
3.0
0.0
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Pressure Cookers & Pans NonStick Cookware Kitchen Appliances Others
Exhibit 63: TTK - Over the past decade, contribution of pressure cookers and non-
stick cookware in total domestic sales mix has been decreasing
90% 76%
71% 73% 74% 73% 69% 69% 67% 62%
70% 59% 56% 53%
50%
30%
10%
-10% FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
-30%
Dom. share of PC & NSC as % of Total Dom. Sales
Pressure Cookers (PC) YoY sales growth
Non stick Cookware YoY sales growth (NSC)
Cautious approach towards Cautious approach towards exports in recent years: Given the historical
exports in recent years volatility in its exports franchise (see the exhibit below), the management currently
is following a cautious approach of NOT focusing on an ‘owned’ brand in export
markets but acting mainly as an outsourced manufacturer.

Strategy
Exhibit 64: TTK - exports have seen variable trends; however, in the past five
years, it has seen a steady growth trajectory except for FY10
(Rs mn)
700 20%
600
500 15%
400
10%
300
200 5%
100
0 0%
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Exports at FOB (LHS) Export as a % of total sales (RHS)
Management’s succession plan for the future

A well-thought management TTK’s management team admits, “We have become over 10x our size over the past
succession plan for the future decade. We realise the need for an improved structuring of managerial roles to
include specialists for each part of the business. Therefore, we have appointed Aon
Hewitt, an HR consulting firm, to run a five-year project to incorporate an HR
restructuring strategy”. This includes the following changes:
 Progression towards a ‘professionally-run organisation’ with Mr. Jagannathan

stepping down from his role of Executive Chairman after a few years.
 Promotion of Mr. Chandru Kalro from his current role as Chief Operating
Officer to replace Mr. Ravichandran as the MD of TTK Prestige from 1 April
2015.
 Performance incentives of the senior management team to include

shareholding in the TTK Family Trust which currently owns 63.2% in TTK
Prestige’s total equity shares.
 Creating leadership roles for several verticals including different distribution

channels, product categories, and geographies. For this, the performance of a
group of 50 candidates is being monitored internally to assess the need for
hiring external talent for these leadership roles over the next 3-4 years.
Where do we go from here?

TTK Prestige is on track towards evolving across geographies, product segments
and distribution channels. Whilst this growth benefits from weak competition in the
pressure cookers and non-stick cookware segments, the company faces tough
competition from companies like Bajaj Electricals and Phillips in the kitchen
electrical appliances segment. The following factors are likely to be the biggest
drivers of TTK Prestige’s evolution into a strong pan-India diversified retailer in the
years to come:
 Product innovation across all product categories.
 Improvement in the after-sales service through the recently renewed focus

towards expanding the network of after-sales service stores across the country.
 Concerted effort towards streamlining management responsibilities, not only

at the senior management level but also at the level of each product,
geography and retail network.
We reiterate our BUY stance on the stock.

Strategy
Share price performance over the past two

decades
Exhibit 65: TTK - a combination of both EPS growth and rerating in P/E multiple
has contributed to shareholder returns over the past decade
7000%
Base = April 1, 2005
6000%
5000%
4000%
3000%
2000%
1000%
0%
-1000% FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Cum. Share price return Cum. EPS Growth Cum. P/E multiple Growth
Chronology of major events and share price vs event correlation
Exhibit 66: TTK - FY94-98: Underperformance against previous expectations

(Rs)
130
120 IPO listing

Launch of Non Stick Cookware
110
100 Sales growth slowing down from

17% in FY96 to -9% in FY98 and
contraction in net profit margin from
90 for 8% to 5% for like period, mainly
attributable to bad Indian economic
80 conditions and labour strikes.
70
Launched new products in US,
60 started operations in UK and
Australia
50
40
30
20
10
Dec-94 Jun-95 Dec-95 Jun-96 Dec-96 Jun-97 Dec-97
—— TTKPT's share Price

Strategy
Exhibit 67: TTK – FY1998-2003: The perfect storm

(Rs)
Gave VRS to
90 workers at
Hosur plant Slow down in US economy
affecting TTK's export
80 Organised players loosing
market share to
Government's budget unorganised players
70 Export's gaining strength announcing hike in excise
forming almost 17% of duty from 8% to 16% and
turnover Sales Tax in some states Budget reducing excise duty on
Surge in Pressure cookers from 16% to
60
turnover 8% with Nonstick cookware
witnessing exempt from excise duty
31% growth
50
in FY99 Union trouble
affecting operations
40 Reported loss for first
time in 4 decades
30
20
Industrial unrest
in Hosur and
10 Bangalore units Entered into kitchen
electical appliances
-
Apr-98 Oct-98 Apr-99 Oct-99 Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03
Exhibit 68: TTK - FY03-08: Consolidation of existing business strengths

(Rs)
250 2008 Market
TTK announced that it will invest crash
Rs 520mn in setting new
225 manufacturing units and launching
new products. Planned to spend
heavily in brand and expanding Management Interview; guiding
200 62% PAT growth in FY07
PSKs to 150 in numbers
175
Launched Prestige Smart
Kitchen and engaged in
150 other brand extension
exercise to transforn from
single product company to
125 multi product
Recouped market
100 share erstwhile lost to
Consolidating phase unorganised players.
for TTK. Resolved Rebuilding exports Top line growth for FY06-08
75 union problems averaged 21% whilst bottom line
for same period averaged 73%
50
Surge in net profit by 437%

25 coupled with consecutive
years of healthy sales growth
-

Strategy
Exhibit 69: TTK - FY09-13: Rapid market share gains through successful expansion across geographies, product
categories and distribution channels
(Rs)
4,000
Long term settlement with Hosur workers
3,500
Management gives FY12
guidance of 50% topline growth
above Analysts' estimates of 25%.
3,000
Signing MoU with Gujarat Govt
for setting manufacturing unit
2,500
Achieving sales growth

of 60% and PAT growth
2,000 of 50% in FY11
TTK plans to purchase cookware
Management Interview;
plant in Italy and pressure
guiding revenue of Rs 5.0bn
1,500 cooker plant in Romania. Also in
and PAT of Rs 0.55bn for FY10
discussion with Chinese
company for manufacturing tie-
up to meet growing demand
Calling EoGM to
1,000
voluntarily delist TTK
PAT growth of 134% in FY10. Achieved

500 sales guidance given earlier. Net margin
increased from 6% to 10% making it a
new normal margin for TTK
-

Strategy
8. What we will cover in our

forthcoming notes
The framework developed in Section 5 of this note when combined with our
‘greatness’ model (as described in Section 2) gives us flexible and powerful tools.
In our forthcoming strategy notes, we will use these tools to delve into several
topics. Some of these topics are listed below.
Topic 1: Amongst today’s ‘great’ firms which are the ones that appear to
be gripped by ‘Stage 1: Hubris and arrogance’ and are about to enter
‘Stage 2: Unbridled expansion’?
We will look for companies that have a track record of at least 5-10 years of
unprecedented success for the firm in question AND have delivered operating
margins, RoCEs and RoEs which are considerably higher than that of the peer
group. The quantitative analysis will be backed by extensive qualitative analysis
and research of existing literature to connect the dots to identify signs of hubris
and arrogance.
Topic 2: Amongst the great Indian firms of yesteryear, which are the ones
which can pick themselves up from ‘Stage 4: Grasping for solutions’?
Can Hero Motors, Infosys, BHEL, Tata Motors, Bharti Airtel, Indian Hotels and Tata
Steel recover? We do not have the answers as yet but we will analyse the internal
and external dynamics of the industry and management to arrive at some answers.
Topic 3: The CEOs role - allocate capital and talent
According to Thorndike, CEOs need to do two things well to be successful: run
their operations efficiently and deploy the cash generated by those operations.
Whilst a lot of attention is paid to operations in our analysis, very little attention is
paid to resource allocation, both capital and human. If human resource allocation
is done well, then operations will be taken care of. For allocation of capital, there
are three choices of raising it - internal cash flows, equity or debt issuance - and
six choices of deploying it - invest in existing business, diversification, acquisition,
pay down debt, pay out dividends or buyback stock. We will use this framework to
analyse what decisions the CEOs of the companies that we study have made when
faced with these choices and what have been the results and learnings from the
same.
Topic 4: How should Indian CEOs assess acquisitions?
We look at all transactions by BSE200 companies over the last ten years wherein
they have acquired assets either in India or abroad. We measure the three-year
share price performance of these stocks relative to the Sensex pre- and post-
acquisition as a proxy to assessing the success of these acquisitions. Whilst the
three-year median share-price performance pre-announcement was 11% (relative
to Sensex), the three-year median price performance post-announcement was -5%
(relative to Sensex). Why do most M&As fail to deliver?

Strategy
Exhibit 70: Relative performance, pre- and post-announcement of acquisition
Pre-announcement Pre-announcement +11%
-5% Post-announcement
Source: Bloomberg, Ambit Capital research; Note: performance is three-year median share price
performance (CAGR) relative to Sensex.
Topic 5: Why do Indian firms return so little capital to their shareholders?

From family managed to professionally-run companies, the Indian managements
usually loathe to return capital to shareholders, unless the promoter or controlling
group feels the need for funds. Whilst some of the reluctance is based on the logic
of saving for a rainy day, their action tends to depress RoCEs and share price
performance. What are the other reasons for this reluctance and is there
something cultural about it?
Topic 6: Amongst the laggards of today which are the great firms of
tomorrow?
We return to our ’greatness‘ model and now combine it with the tenets of
’disciplined capital allocation‘ to identify the titans of tomorrow.
Topic 7: What do companies that sustain good performance have in
common?
What do the 15% of companies that have remained in the ’great‘ list over a
sustained period of time (eg. ITC, Asian Paints, and HDFC Bank) have in common?
How have these firms immunised themselves against ’hubris and arrogance‘ and
the poor capital allocation decisions that stem from it?

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
Achint Bhagat Cement / Infrastructure (022) 30433178 achintbhagat@ambitcapital.com
Ankur Rudra, CFA Technology / Telecom / Media (022) 30433211 ankurrudra@ambitcapital.com
Ashvin Shetty Automobile (022) 30433285 ashvinshetty@ambitcapital.com
Bhargav Buddhadev Power / Capital Goods (022) 30433252 bhargavbuddhadev@ambitcapital.com
Dayanand Mittal Oil & Gas (022) 30433202 dayanandmittal@ambitcapital.com
Gaurav Mehta Strategy / Derivatives Research (022) 30433255 gauravmehta@ambitcapital.com
Jatin Kotian Metals & Mining / Healthcare (022) 30433261 jatinkotian@ambitcapital.com
Karan Khanna Strategy (022) 30433251 karankhanna@ambitcapital.com
Krishnan ASV Banking (022) 30433205 vkrishnan@ambitcapital.com
Nitin Bhasin E&C / Infrastructure / Cement (022) 30433241 nitinbhasin@ambitcapital.com
Nitin Jain Technology (022) 30433291 nitinjain@ambitcapital.com
Pankaj Agarwal, CFA NBFCs (022) 30433206 pankajagarwal@ambitcapital.com
Pratik Singhania Real Estate / Retail (022) 30433264 pratiksinghania@ambitcapital.com
Parita Ashar Metals & Mining (022) 30433223 paritaashar@ambitcapital.com
Rakshit Ranjan, CFA Consumer / Real Estate (022) 30433201 rakshitranjan@ambitcapital.com
Ravi Singh Banking / NBFCs (022) 30433181 ravisingh@ambitcapital.com
Ritika Mankar Mukherjee Economy / Strategy (022) 30433175 ritikamankar@ambitcapital.com
Ritu Modi Healthcare (022) 30433292 ritumodi@ambitcapital.com
Shariq Merchant Consumer (022) 30433246 shariqmerchant@ambitcapital.com
Tanuj Mukhija E&C / Infrastructure (022) 30433203 tanujmukhija@ambitcapital.com
Utsav Mehta Telecom / Media (022) 30433209 utsavmehta@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 / USA (022) 30433053 diptimehta@ambitcapital.com
Parees Purohit, CFA USA (022) 30433169 pareespurohit@ambitcapital.com
Pramod Gubbi, CFA India / Asia (022) 30433228 pramodgubbi@ambitcapital.com
Praveena Pattabiraman India / Asia (022) 30433268 praveenapattabiraman@ambitcapital.com
Sarojini Ramachandran UK +44 (0) 20 7614 8374 sarojini@panmure.com
Production
Sajid Merchant Production (022) 30433247 sajidmerchant@ambitcapital.com
Joel Pereira Editor (022) 30433284 joelpereira@ambitcapital.com
E&C = Engineering & Construction

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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June 07, 2013

The systematic slide to mediocrity

The ‘greatness’ framework………………………………………………………20

Identifying ‘fallen angels’………………………………………………………. 24

How and why do great companies fall?.................................................. 27

Case study: Titan………………………………………………………………….41

Case study: TTK Prestige………………………………………………………… 50

What we will cover in our forthcoming notes…………………………………62

Ambit Capital Pvt Ltd 2

1 Investments a. Above median gross block increase (FY10-12 over FY07-09)*

b. Above median gross block increase to standard deviation

2 Conversion to sales a. Improvement in asset turnover (FY10-12 over FY07-09)*

b. Positive improvement in asset turnover adjusted for standard deviation

c. Above median sales increase (FY10-12 over FY07-09)*

d. Above median sales increase to standard deviation

b. Above median PBIT margin increase to standard deviation

b. Below median debt-equity decline to standard deviation

c. Above median cash ratio increase (FY10-12 over FY07-09)*

d. Above median cash ratio increase to standard deviation

c. Above median EPS increase (FY10-12 over FY07-09)*

d. Above median EPS increase to standard deviation

6 Return ratio improvement a. Improvement in RoE (FY10-12 over FY07-09)*

b. Positive improvement in RoE adjusted for standard deviation

c. Improvement in RoCE (FY10-12 over FY07-09)*

d. Positive improvement in RoCE adjusted for standard deviation

Ambit Capital Pvt Ltd 3

The systematic slide to mediocrity

Exhibit 2: The 'greatness' framework

Source: Ambit Capital research

Exhibit 3: Distribution of firms on the ‘greatness’ score has been calculated by

60 211 firms 93 firms Only 77 firms

Source: Ambit Capital research

Ambit Capital Pvt Ltd 4

Exhibit 4: Probability of self-destruction

Exhibit 5: Probability of rising to ‘greatness’

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Identifying fallen angels

Exhibit 6: List of 'fallen angels'

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Why do successful firms slide with such

Infosys HCL Tech Infosys HCL Tech

Bajaj TVS Bajaj TVS

Ambit Capital Pvt Ltd 7

The five-stage framework

In this note, we use a modified version of Collins’ framework and Thorndike’s

 Stage 2 – Unbridled expansion: In search of more growth and more

 Stage 3 – Stuck in a rut: Often cost discipline and/or product excellence

Exhibit 11: The five-stage framework

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Exhibit 12: Tata Steel's journey through the five stages

Exhibit 13: Tata Motors' journey through the five stages

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Exhibit 14: Titan's journey through the five stages

Exhibit 15: TTK Prestige's journey through the five stages

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TATA STEEL LTD. TATA MOTORS LTD.

Karl Slym, MD, Tata Dr Ralf Speth, CEO

Apr-00 Apr-02 Apr-04 Apr-06 Apr-08 Apr-10 Apr-12 0.0

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TITAN INDUSTRIES LTD. TTK PRESTIGE LTD.

Hubris & 30 Arrogance expansion or

RoCE (%) through the five stages

Share Price chart-Titan vs Sensex Share Price chart-TTK vs Sensex