Wealth Insights

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September 2019
Volume XIII, Number 3
EDITORIAL POLICY
The goal of Wealth Insight, as with
all publications from Value
Research, is not just limited to
22
COVER STORY
generating profitable ideas for its
readers; but to also help them in
generating a few of their own. We
aim to bring independent, unbiased
and meticulously- researched
stories that will help you in taking
better-informed investment
decisions, encouraging you to
indulge in a bit of research on your
own as well.
All our stories are backed by
India’s
quantitative data. To this, we add
rigorous qualitative research
obtained by speaking to a wide
variety of stakeholders. We firmly
stick to our belief of fundamental
most
research and value-oriented
approach as the best way to earn
wealth in the stock market. Equally
important to us is our unwaveringly
profitable
focus on long term planning.
Simplicity is the hallmark of
our style. Our writing style is
simple and so is the presentation
of ideas, but that should not be
companies
construed to mean that we
over-simplify.
Read, learn and earn – and let’s
grow and evolve as we undertake
this voyage together.
Editor
Dhirendra Kumar
Senior Associate Editor
Vibhu Vats
Copyediting
Debjani Chattopadhyay,
37 SPECIAL REPORT 47 STOCK ADVISOR
Rachael Rajan
Research & Analysis
GDP growth Hot stocks that we
Danish Khanna, Jugal
Harpalani, Rajan Gulati rejected and why
and Yash Rohra
Design profit growth During our research process,
Kiran Sindhwal, Mukul Ojha we have decided to junk many
Production GDP growth is widely tracked to ideas that looked promising at
Hira Lal determine the state of the economy the time. We tell you why we
Data source for stocks and corporate profits. But it may not
AceEquity did so and what you can learn
be a very effective tool. from that.
9DOXH5HVHDUFK,QGLD3YW/WG
Wealth Insight is owned by Value
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Editor: Dhirendra Kumar.
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Total pages 64, including cover
4 Wealth Insight September 2019

Columns
7 34 INTERVIEW
EDIT
DHIRENDRA
by ‘Protecting
The gods of
KUMAR
returns is as
profitability
Based on the analysis of
important as
today’s challenging
business environment, the
Profit 100 list for 2019
protecting
deploys even more robust
profitability criteria capital’
Jinesh Gopani
41 Head – Equity,
Axis Mutual Fund
STRAIGHT
TALK
by ANAND
TANDON
The value of
management 8 MONTHLY AGENDA 19 ANALYST’S DIARY
guidance Yes, FIIs drive How to reduce the
While management
forecasts are widely the market chance of making a loss
sought, they tend to A lasting relief?
have little analytical
worth An expensive bet
50 STOCK SCREEN
44 Quality stocks available
MAINSTREET
cheap
by SAURABH 10 INSIGHT Reasonably priced growth
MUKHERJEA
Sectoral tidbits stocks
Market
savvy doesn’t Attractive blue chips
help much 12 MARKET COMPASS Discount to book value
Following the market
avidly doesn’t help
Index watch High dividend-yield stocks
generate great Sectoral analysis
investment insights. It
actually alienates you Big moves 62 WORDS WORTH NOW
from the real world. Not quite there yet
DISCLAIMER
The contents of Wealth Insight published by Value Research India Private Limited (the ‘Magazine’) are not intended to serve as professional advice or guidance and the Magazine takes no responsibility or liability, express or implied, whatsoever for any investment
decisions made or taken by the readers of this Magazine based on its contents thereof. You are strongly advised to verify the contents before taking any investment or other decision based on the contents of this Magazine. The Magazine is meant for general reading
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to the jurisdiction of Delhi courts only. ALL RIGHTS RESERVED
September 2019 Wealth Insight 5

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EDIT
The gods of profitability

Based on the analysis of today’s challenging business environment, the
Profit 100 list for 2019 deploys even more robust profitability criteria
DHIRENDRA KUMAR
If this was a world where corporate investment manager named Gary Mishuris, titled
financial reports were perfectly trustworthy as well as ‘How I Spotted a Fraud (Before It Was Too Late)’. It’s a
an accurate reflection of the financial circumstances fascinating story of how, at the beginning of his long
of companies, it would be a trivial matter to conduct career, the author spotted the elaborate dressing up of
our annual exercise of ‘India’s Most Profitable profit in a company that was highly regarded by Wall
Companies’. The simple, stated bottom line would Street. The starting point of that story was a
provide an infallible window into the true profitability divergence, over several years, between the company’s
of each company, and a quick look at the trendline of profits and cash flows. Upon further investigation,
this profitability would tell you practically everything Mishuris understood exactly what accounting trick
that you needed to know about whether a company the company was employing to dress up its accounts
was worthy of investment. and managed to advise his employer to exit the stock
However, we do not live in such a world, and it takes well before the stock crashed. This divergence is a red
more – a lot more – effort and cleverness than that to flag that we also check for and use to eliminate
glean meaningful information that investors can companies from our ambit.
actually utilise in their investment decisions. Our However, there’s a fascinating twist in the tale. As a
‘India’s Most Profitable Companies’ exercise, which is young analyst, he was pleased that he caught this out
in its fourth year in this issue, has been a constant and managed to avoid losses for the fund which
endeavour to finetune this ability to pierce the veil of employed him. However, he never paid attention to the
the obvious numbers that companies state and arrive fact that at the bottom of all this, there was a perfectly
upon the real state of their profitability. good business. What the company had done was to
Over the years, our research team has evolved this window-dress the numbers through an accounting
annual series from a fairly straightforward ranking trick, but there was no fraud. The stock crashed from
based on profitability to one where we have added a about $70 to just $4. However, he never got the idea of
range of terms and conditions, so to speak, for re-evaluating the value it offered at $4. Eventually, the
companies to be considered, regardless of apparent stock went up 10 times from that price and so the story
profitability. This was less the case when we started ends in a sort of a Pyrrhic victory while teaching us
this series back in 2016. Over the last few years, as a an extremely valuable lesson about investing.
range of Indian businesses have faltered, our team has As it has happened every year since 2016, when you
analysed the changing conditions and heavily tweaked read our story and go through the list, you are likely to
the real meaning of the word ‘profit’ in the current see names that will come as a surprise. Investors tend
Indian context. to have a built-in bias of what ‘good companies’ are
However, let me not give you the impression that I and don’t like it when they see something that
consider the dressing up of profits as an exclusively or contradicts those biases. Numbers-centric stories like
even mostly an Indian or developing-markets problem. this are quite valuable because they force us to
Some time back, I read a column by an American confront those biases and challenge them.

MONTHLY
AGENDA
, FIIs drive the ket

es mar
Y
The ongoing slump in the market has again seen for- in a month and FIIs had been selling during that peri-
eign institutional investors (FIIs) pull out of the mar- od. Curiously, the corresponding buying by mutual
ket. Or is it the FII selling that has caused the market to funds has helped little. Even when the quantum of fund
slump? We can’t be sure. But the graphs below show buying was around that of FII selling or even more
some instances when the Sensex fell dramatically with- than that, markets have still treaded the FIIs’ path.
1HU¶-LI 1\S¶(\N
FII selling MF buying 1M Sensex FII selling MF buying 1M Sensex
-11,236 (` cr) 11,244 (` cr) -10.8 returns (%) -10,270 (` cr) 7,952 (` cr) -12.6 returns (%)
3600 FII (` cr) MF (` cr) Sensex 18500 2400 FII (` cr) MF (` cr) Sensex 19000
2400 18000 1600 18500
1200 17500 800 18000
0 17000 0 17500
-1
-1200 16500 -800 17000
-2
-2400 16000 -1600 16500
-3
-3600 15500 -2400 16000
Jan 6, 2010 Feb 5, 2010 Jul 25, 2011 Aug 23, 2011

MONTHLY
AGENDA
(\N¶:LW
( \
FII selling MF buying 1M Sensex
-25,013
-2 (` cr) 20,697 (` cr) -11.4 returns (%)
6000
60 FII (` cr) MF (` cr) Sensex 29000
40
4000 28000
20
2000 27000
0 26000
-20
-2000 25000
-40
-4000 24000
-60
-6000 23000
Aug 10, 2015 Sep 7, 2015
:LW¶6J[
:L
FII selling MF buying 1M Sensex
-21,249
-2 (` cr) 21,769 (` cr) -9.6 returns (%)
4500
45 FII (` cr) MF (` cr) Sensex 39000
30
3000 38000
1500
15 37000
0 36000
-15
-1500 35000
-30
-3000 34000
-45
-4500 33000
Sep 10, 2018 Oct 9, 2018
1\S¶(\N 1\S¶(\N
FII sellingg MF buying
bu 1M Sensex FII selling MF buying 1M Sensex
-3,212 (` cr) 1,846 ` cr)
(` -11.2 returns (%) -25,557 (` cr) 29,359 (` cr) -5.30 returns (%)
1500 FII (` cr) MF (` cr) Sensex 20500 3000 FII (` cr) MF (` cr) Sensex 41000
1000 20000 2000 40000
500 19500 1000 39000
0 19000 0 38000
-500 18500 -1000 37000
-1000 18000 -2000 36000
-1500 17500 -3000 35000

Jul 22, 2013 Aug 21, 2013 Jul 1, 2019 Aug 9, 2019

Sectoral tidbits
How to augment your Sector for related diversification must be
knowledge? Follow these 5 points “structurally attractive” or if not
1. The Five Rules For Successful currently attractive, must have the
Stock Investing by Pat Dorsey capability to be made attractive
UnseenValue 2. Con Calls - as many as you can over time (not every sector can be
in that sector made attractive!)
@UnseenValue
3. Annual Reports - as many as 2. The Cost-of-Entry Test: This is
you can in that sector where innovation, economies-of-
Tweets Following
4. Interact with trade/ learnings & prudent corporate
4,192 64 channel partners governance (scarce resource as we
5. AGMs know now!!) comes into play!
Likes Followers
The cost-of-entry must not
4,332 18k In a country where Britannia is capitalise all the future profits.
struggling to sell a Rs. 5/- pack of Otherwise the game is over even
biscuit, Tata Starbucks reported before it starts
Why Follow 3. The Better-off Test: Either the
23% sales growth. Even Dabur, ITC
experienced less pain and of new venture must gain competitive
This handle was actu- advantage from its association
course, Asian Paints could sell
ally recommended by with the Group or vice versa (e.g. a
anti-bacterial, anti-fungal products.
our readers in a recent speciality consumption play
“Unity in diversity” -
conversation on Twitter. expanding into related areas;
playing out.....
With a strong focus on beverages company adding solid
the consumer-goods, foods or vice-versa; animal+human
Quality is never subjective!
pharmaceutical and spe- generics etc)
It can be measured by screening
cialty-chemicals indus- Just like the ConAgra Foods, I do
the “debt-pregnancy” at the
tries, @UnseenValue is see Godrej Agrovet transforming
bottom of an economic cycle. A
popular among investors into a farm-to-fork integrated
good quality business (is MCap
looking to learn more, behemoth from Indian
agnostic) would still be throwing
both from a general in- free cash and depending on subcontinent over the next 10-20
vesting point of view and capacity utilisation may as well go years.
with respect to industry- for CapEx despite the gloom. Given my super long horizon, I
and company-specific have to have the “capacity to
factors. @UnseenValue suffer” in the short to medium
There are only 2 sources of
also engages with other term.
sustainable profits - a) sector
investors and frequently Conviction | Patience
attractiveness and b) durable
retweets posts that are moats! Slowly but surely developing
useful or impactful. This Horizontal Integration (related, NOT distinctive, integrated & system-
makes following this mindless diversification) must wide capabilities in each of the
handle a great way to ex- therefore be directed towards above businesses. Economies of
pand your network and deep-value creation. Michael scale in sourcing of raw materials
receive investing infor- Porter has refined these into “3 and distribution; invested since
mation from a variety of essential tests” IPO and sipping periodically. Don’t
sources. 1. The Attractiveness Test: which expect a quick turnaround
warrants that the sectors selected #GodrejAgrovet #GAVL

MARKET
C MPASS INDEX WATCH
S&P BSE Bankex

The S&P BSE Bankex comprises both private-sector and public-sector banks. The index has proved to be
an outperformer over the last five years with respect to the BSE Sensex. Bankex’s price-to-book ratio is at
a 6 per cent premium to the median. Its price-to-earnings ratio is at a 19 per cent premium to its five-year
median. The current dividend yield of Bankex is at a 60 per cent discount to its five-year median.
2LÙ\TILYZ 0UKL_TV]LTLU[ )HURL_:LUZL_4LKPHU

40000
30.1
Price to earnings
2.41
Price to book
35000
30000
25000
0.35
Dividend yield (%)
17.4
Market cap (` lakh cr)
20000
15000
Jul ’14 Jul ’15 Jul ’16 Jul ’17 Jul ’18 Jul ’19
0UKL_^LPNO[Z 7YPJL[VIVVR]HS\L7)
3.5

3.0
/+-*)HUR 2.5
2.27
0*0*0)HUR
2.0
2V[HR4HOPUKYH)HUR
(_PZ)HUR 1.5
:[H[L)HURVM0UKPH
1.0
0UK\Z0UK)HUR Jul ’14 Jul ’15 Jul ’16 Jul ’17 Jul ’18 Jul ’19
-LKLYHS)HUR
9)3)HUR
@LZ)HUR
7YPJL[VLHYUPUNZ7,
60
*P[`<UPVU)HUR
50
40
=HS\H[PVUZKP]PKLUKZHUKYL[\YUZ 30 25.2
20
Company name P/B Dividend yield (%) 1Y return (%)
ICICI Bank 2.52 0.24 23.3 10

Jul ’14 Jul ’15 Jul ’16 Jul ’17 Jul ’18 Jul ’19
Kotak Mahindra Bank 4.80 0.05 18.7
Axis Bank 2.48 0.15 7.7
HDFC Bank 3.91 0.67 7.2 +P]PKLUK`PLSK
2.0%
City Union Bank 2.86 0.26 7.0
Federal Bank 1.24 1.64 -1.3 1.6
State Bank of India 1.31 0.00 -3.7 1.2

IndusInd Bank 3.58 0.52 -27.7 0.8 0.88
RBL Bank 2.18 0.68 -30.6 0.4
Yes Bank 0.68 2.52 -79.8
0
Data as on August 16, 2019 Jul ’14 Jul ’15 Jul ’16 Jul ’17 Jul ’18 Jul ’19

MARKET
SECTORAL ANALYSIS C MPASS
The Big Four vs the rest

In the Indian banking sector, four banks, viz., SBI, HDFC Bank, Bank of Baroda and ICICI
Bank command about half of the industry’s total assets. The accompanying charts compare
the Big Four with the rest in the industry.
:)0 /+-*)HUR )V) 0*0*0)HUR 6[OLYZ
;V[HSHZZL[Z (K]HUJLZ
Total assets denote the size of a bank and include property, trading Advances are credit extended to customers in the form of loans,
assets, loans to customers, deposits to central bank, etc. overdraft facility, cash credit, etc.

12.8
20.5 21.3
35.8

52.5 6.3 71.7 3.8 43.1

32.8
12.7 8.3
7.0 4.1

6.4 10.6
4.0 6.3
9.6 5.9
All numbers in ` lakh crore if not otherwise indicated All numbers in ` lakh crore if not otherwise indicated
+LWVZP[Z .YVZZ57(Z
Bank deposits consist of money placed in a banking institution. These A loan becomes a non-performing asset (NPA) when it ceases to
deposits are made in savings, FDs or corporate accounts. generate income for the bank.

0.1
0.04

16.1
0.6 1.7
29.5

4.8 57.8 1.7 0.2 0.7
42.9 5.2
9.5
0.2

5.9 0.5
3.7 9.0
6.6
All numbers in ` lakh crore if not otherwise indicated All numbers in ` lakh crore if not otherwise indicated
5L[PU[LYLZ[THYNPU *HWP[HSHKLX\HJ`YH[PV
NIM denotes the difference between the interest earned CAR denotes the ability of a bank to absorb a given loss and yet comply
and interest paid to lenders as a per cent of assets with statutory capital requirements. The minimum CAR requirement is 9 per cent.
All no. in % 16.9 All no. in %

16.4 16.2
15.7
13.7
12.9
4.30 4.30 12.0 12.0
11.5 11.6
3.54 3.61
3.29
3.01 2.89 2.90 3.01
2.62
’15 ’19 ’15 ’19 ’15 ’19 ’15 ’19 ’15 ’19 ’15 ’19 ’15 ’19 ’15 ’19 ’15 ’19 ’15 ’19
June-end data. Bank of Baroda’s 2019 numbers are post its merger with Vijaya Bank and Dena Bank

MARKET
C MPASS BIG MOVES
Large caps Price to earnings Net profit (` crore)

3M returns (%) 3Y avg RoE (%) 3Y earnings growth (%) 3M price (`) movement
2218
40.2 47 1017
HDFC Asset Management Company
The company’s Q1 profit grew by 42 per cent and AUM by 18
per cent YoY. 38.9 – 1583
28.9 – 1321
HDFC Life Insurance 519
The insurer reported an 11.7 per cent increase YoY in Q1
profit. Its new-business margins also expanded. 25.4 – 403
-7.3 62 615
Bank of Baroda
98
Post its merger with Vijaya Bank and Dena Bank, the bank
reported a profit of `710 crore in Q1. 0.8 28.1 106
-10.7 27 2171
Bandhan Bank 553
The promoter’s impending stake reduction in the bank
to comply with regulations is a concern. 22.3 – 494
-18.6 18 1658
2117
Piramal Enterprises
With the company selling its entire stake in Shriram Transport
Finance, its goal of getting into banking has become distant. 11.8 29.5 1724
277
-20.6 9 6263
JSW Steel
The company reported a 56.9 per cent drop YoY in consolidated net
profit for Q1 FY20. 21.6 119.4 220
-20.7 36 1211
635
UPL
The company reported a 57.8 per cent drop YoY in Q1
profits. The ongoing trade war is also a concern for it. 25.2 4.5 503
-24.1 10 6054
166
GAIL
The stock corrected due to a lower-than-expected tariff revision
for the company’s Hazira-Vijaipur-Jagdishpur pipeline. 11.7 24.0 126
-26.1 5 7680
472
Tata Steel
Declining steel prices resulted in a drop of 64.5 per cent in
the company’s consolidated net profit for Q1. 13.7 71.7 348
-32.3
180
Tata Motors – -30199
The company’s loss doubled to `3,680 crore in June 2019
quarter as against a loss of `1,863 crore last year. -6.5 -258.3 122
Our large-cap universe has 82 large companies, making the top 70 per cent of the total market capitalisation. The list mentions the stocks that have fluctuated most wildly in the last three months.
Data as on August 14, 2019.

MARKET
BIG MOVES C MPASS
Mid caps Price to earnings Net profit (` crore)

52.2 – -423
Adani Power 59
The company is expanding by buying stressed assets
available at a bargain. -184.0 -195.6 38
-13.1 7 3799 660

Indiabulls Housing Finance
The stock exhibited extreme volatility amidst allegations of
promoters siphoning off funds. 27.0 15.3 574
-16.7 27 495
Indiabulls Ventures
The stock fell in line with the other stocks of the group.
23.3 94.8 245
204
-18.7 19 478
Indian Bank
The bank has expressed concerns about its merger with
Oriental Bank. 6.7 -15.5 228
185
-22.1 24 319
Motilal Oswal Financial 685
A market-wide meltdown in non-banking finance stocks hit the
company. 19.8 13.9
534
-31.2
28
Central Bank of India – -4001
The profit of `118 crore in Q1 failed to enthuse investors
amidst challenging market conditions. -29.2 -41.6 19
-38.7 – -2412
Jindal Steel & Power 155
The stock corrected amidst rumours of payment default and sale
of pledged shares by lenders. -8.4 6.6 95
-43.6
658
RBL Bank 17 944
The management signalled that some of its loan accounts may
face stress. 11.3 42.0 371
-52.5 30 574
Yes Bank 155
The bank continued its provisioning for the second quarter,
reporting a fall of 90 per cent in its profits in Q1 YoY. 14.3 -40.5 74
-65.3
14
Vodafone Idea – -19929
The company reported a net loss of `4,874 crore. Also, its user
base fell and revenue declined. -18.3 -328.9 5
Our mid-cap universe has 188 mid-sized companies, making the next 20 per cent of the total market capitalisation. The list mentions the stocks that have fluctuated most wildly in the last three months.
Data as on August 14, 2019.

MARKET
C MPASS BIG MOVES
Small caps Price to earnings Net profit (` crore)

-36.8 – -3084
Reliance Power 6
The stock has been falling along with other Reliance ADAG
group stocks. The company’s financials are already shaky. 4.8 -248.9 4
-45.4 – -647
Jai Prakash Associates 4
NCLAT directed the NCLT to decide on the insolvency plea filed
by ICICI Bank against the company in six weeks. -61.3 21.2 2
-54.2
47
Jain Irrigation Systems 5 250
The company’s long-term issuer rating was downgraded.
3.6 76.6 22
-55.2
101
Reliance Infrastructure – -4805
The company’s auditors questioned the company’s ability to
continue as a going concern. 15.5 -310.1
45
-57.2
107
Reliance Capital 1 1134
PwC resigned as the company’s auditor, citing unsatisfactory
response to certain observations. 8.9 -2.1
46
-58.1 – -1036
111
Dewan Housing Fin. Corpn.
The company has been facing liquidity crisis and is
finding it difficult to honour payback commitments. 24.0 -212.4
47
-59.7
248
Indiabulls Integrated Services 13 78
After a massive rally, the stock corrected along with
other Indiabulls group stocks. 0.3 122.7 100
-68.1 – -4244
139
Jet Airways India
The company has been undergoing insolvency
proceedings. 0.0 -234.9 45
-71.4
119
PC Jeweller – -97
CRISIL downgraded the company’s bank facilities.
15.9 -161.1
34
-71.5
245
Coffee Day Enterprises 11 60
The stock fell after its promoter committed suicide due
to mounting debt obligations. -1.7 33.8
70
Our small-cap universe (minimum market capitalisation `500 crore) has 583 small-cap companies, making the last 10 per cent of the total market capitalisation. The list mentions the stocks that have
fluctuated most wildly in the last three months. Data as on August 14, 2019.

MARKET
C MPASS
Not quite there yet

While it has been five years since CSR norms were introduced, many large
companies have yet to spend the required amounts
S
ection 135 of the Companies Act, 2013, mandated crore. The following table mentions the top 25 non-
corporate social responsibility (CSR) spending of compliant companies.
2 per cent of the preceding three years’ average of Recently, the government tightened the CSR norms.
net profits by eligible companies. Failing to spend the Apart from requiring transfer of unspent amount to a
amount, such companies were required to disclose the CSR fund, any non-compliance will also attract a
reasons for that. CSR mandates a range of public- penalty of `50,000 to `5 lakh and/or jail time up to
welfare activities such as promotion of education and three years for the officials responsible.
donating to government’s welfare projects. However, after intense lobbying by India Inc, the
Currently, 1,455 listed companies are eligible for government has decided not to operationalise
CSR. Of them, about 917 companies (63 per cent) these amendments. It is considering removing the
have been CSR compliant but the remaining 538 jail provision and making non-compliance just a
companies have an unspent CSR amount of `1,761 civil offence. WI
:OPYRPUNYLZWVUZPIPSP[`
Top 25 companies by amounts unspent on corporate social responsibility
Required CSR Budgeted CSR Actual CSR Unspent
Company name Sector M-cap (` cr) spend (` cr) spend (` cr) spend (` cr) amount (` cr)
Power Finance Corporation Finance 28,869 148 279 101 179
Bharat Petroleum Corporation Crude Oil 75,186 203 350 178 172
Tata Consultancy Services IT 8,42,636 542 542 434 108
Hindustan Zinc Non-Ferrous Metals 89,682 204 204 130 74
Bharti Airtel Telecom 1,90,524 112 112 46 66
Kotak Mahindra Bank Bank 2,92,881 96 96 37 60
Aurobindo Pharma Healthcare 35,063 45 102 47 55
REC Finance 28,261 157 157 103 54
Yes Bank Bank 19,039 96 96 54 42
Zee Entertainment Media & Entertainment 31,528 40 62 23 39
LIC Housing Finance Finance 25,221 57 57 19 39
Petronet LNG Inds. Gases & Fuels 35,775 44 44 7 37
IndusInd Bank Bank 97,973 89 89 55 33
Lupin Healthcare 34,357 66 66 38 28
ICICI Bank Bank 2,71,360 119 119 92 27
Container Corporation Logistics 29,600 26 37 13 23
Interglobe Aviation Aviation 58,916 50 50 27 23
PTC India Financial* Finance 773 9 23 1 22
Bharat Electronics* Capital Goods 23,793 35 35 14 21
HCL Technologies IT 1,47,443 144 144 125 19
MRF Automobile & Ancillaries 24,155 43 43 26 16
MRPL Crude Oil 9,114 67 91 78 13
HUDCO* Finance 6,786 23 23 12 11
Ashok Leyland Automobile & Ancillaries 18,890 36 44 34 10
VA Tech Wabag Miscellaneous 1,536 4 12 2 10
M-cap as on August 9, 2019. CSR data for FY19. *CSR data for FY18.

ANALYST’S
DIARY
How to reduce the

chance of making a loss
Here is a typical analyst musing regarding ‘when’ to invest so that your
stock is less likely to slip into a loss
;OLZ[\K`
There is a general perception among investors that
>OH[PZKP]PKLUK`PLSK&
high dividend-yield stocks don’t provide much growth
Dividend yield is dividend divided by
and hence generate limited capital gains. In order to
the share price. Because the latter
check this, we considered all the occasions over five
changes daily, so does the dividend
years when investors could pick up stocks, in BSE 500, yield. If the stock price is depressed,
that were trading at a dividend yield of more than 4 it may appear artificially high. Also,
per cent. This dividend yield is more than twice the a high dividend yield is based on the
dividend yield of the BSE Sensex in 2014. past dividend. If the dividend is cut,
the yield will also come down.
Hence, don’t get too attracted
6IZLY]H[PVUZ towards a high yield as it may or
1,368 83
may not be available in the future.
Total number of instances No. of companies in BSE 500
43% 28%
Probability of one-year Probability of three-year
*VUJS\ZPVU
1. If you buy a high
dividend stock, it’s likely
negative returns negative returns
that you won’t make a loss over
one and three year(s). A possible
However, the list was clearly dominated by public reason for this could be that when
sector companies (PSU) as paying high dividends is stocks start showing a high dividend
instilled in their business model. Hence, we decided yield, they have already fallen signifi-
to take a look at the returns without PSU companies. cantly and hence due to a bounce-back
show positive returns in the near term.
6UL_JS\KPUN7:<Z
2. While PSU stocks offer
32% 19%
high dividends, their
shares aren’t wealth cre-
ators per se. WI
Probability of one-year Probability of
negative returns three-year negative returns

ANALYST’S
DIARY
A lasting relief?
Companies that may benefit from
the reduced tax rate for long and
those that may not
During the budget announcement, the finance
minister revealed that the government’s direct tax
revenue saw an increase of 78 per cent from `6,38,000
I
n her first budget, the finance minister Nirmala crore to `11,37,000 crore between FY14 and FY18.
Sitharaman extended the reduced corporate tax According to the government, it is achieving a double-
rate of 25 per cent to all companies that have a digit rate of growth in the taxes collected. The
turnover up to `400 crore. Earlier it was meant only government (the elephant in the quote above)
for companies with a turnover of `250 crore. therefore seems happy with this growth in revenue
According to the government, this would cover 99.3 (rice from paddy) and has the room to reduce
per cent of the companies in India. Out of around corporate tax rates further.
4,200 listed companies as on date, more than 70 per The following tables highlight the companies that
cent had revenue of `400 crore or less in FY19. The would benefit from this lower tax rate. The table titled
finance minister said, “A few mounds of rice from ‘Sustainable benefit’ mentions those companies that
paddy that is harvested from a small piece of land may benefit from the lower tax rate for a few more
would suffice for an elephant. But what if the elephant years to come, given their low sales growth or lower
itself enters the field and starts eating? What it eats sales base, as compared to the companies featuring in
would be far lesser than what it would trample over!” the table titled ‘Unsustainable benefit’. WI
)LULMPJPHYPLZVM[OLUL^[H_YH[L
The tax rate for companies with sales up to `400 crore has been made 25 per cent. Earlier this rate was meant only for companies with sales of `250
crore. The first table mentions those companies which will enjoy this benefit for the foreseeable future, given their low sales growth. The companies in
the second table may soon lose this benefit.
:\Z[HPUHISLILULMP[ FY19 5Y sales <UZ\Z[HPUHISLILULMP[ FY19 5Y sales

M-cap sales growth M-cap sales growth
Company Sector (` cr) (` cr) (% pa) Company Sector (` cr) (` cr) (% pa)
ITDC Hospitality 1,486 356 -5.0 Apollo Pipes Plastic Products 487 362 246.2
Man InfraConstruction Infrastructure 590 371 -1.3 Centrum Capital Finance 1059 377 45.4
Oriental Hotels Hospitality 697 347 -0.5 Ashiana Housing Realty 1123 338 25.0
ICRA Ratings 2,740 328 3.0 *XÀF%LRVFLHQFHV +HDOWKFDUH
EIH Associated Hospitality 868 264 4.1 7DVW\%LWH(DWDEOHV )0&*
Wim Plast Plastic Products 508 373 4.7 Nesco Capital Goods 3725 360 17.4
Quick Heal IT 789 315 5.3 Aksharchem Chemicals 199 323 17.4
Taj GVK Hotels Hospitality 997 317 5.4 0XVLF%URDGFDVW 0HGLD
Care Ratings Ratings 1,590 319 6.2 Ultramarine & Pigments Chemicals 518 307 15.4
Geojit Financial Finance 547 288 6.7 Yuken India Capital Goods 560 339 15.3
Nirlon Infrastructure 1,802 299 8.2 MPS Media 897 363 12.9
Disa India Capital Goods 775 252 8.7 Paisalo Digital Finance 1767 360 10.4
La Opala RG Const. Materials 1,859 278 9.4 :DWHUEDVH )0&*
IEX Power 4,433 254 10.7 Foseco India Chemicals 764 353 8.8
Amrutanjan Healthcare 854 253 12.3 Data as on August 9, 2019

ANALYST’S
DIARY
An expensive bet
High P/E stocks are not just expensive at the moment but their low
wealth-creation potential makes them even less rewarding
M
any investors first look at the price-to- P/Es of more than 100 times on the back of
earnings (P/E) ratio while buying a stock. It is expectations of ever-rising future earnings. But in the
calculated by dividing the stock price by the ensuing years, as investors realised that high growth
company’s earnings per share (EPS). Basically, the would not sustain, the P/E corrected.
P/E ratio tells you what you are paying for each rupee The list below mentions some companies trading at
of a company’s earnings. If a company is trading at a high P/Es (greater than 45). We have pruned our list
P/E of 10, this signifies that for every one rupee of the by filtering out companies having high debt (debt-to-
company’s earnings, investors will have to pay `10, equity > 1) and only chose those that have delivered
hence making a return of 10 per cent. strong free cash flows in the last five years.
The P/E of a stock is dependent on various Next, to find out what sort of returns investors can
factors, including expectations of the expect from investing in these high P/E stocks, we
company’s future earnings growth, considered the last 10-year median earnings growth
management quality, state of the industry, and the median dividend payouts. Thereafter, we
corporate-governance quality and so on. calculated the future 10-year return at an exit P/E
Stocks trading at high P/ of 40 times under three scenarios:
Es are often driven by growth at 50 and 75 per cent of
high expectations from the 10-year median and at the
the company. However, same rate as the median.
when the company fails As the table shows, the returns
to deliver on these look dismal. This means that for high P/E
expectations, the P/E corrects. stocks to provide decent returns to its
During the tech bubble in the early investors, it’s imperative that they grow at an
2000s, many tech companies, such as ever-higher rate – a very difficult, if not
Wipro, were trading at impossible, feat to achieve. WI
;VVWYPJL`
Investing in high P/E stocks could lead to dismal returns in the long term unless earnings growth accelerates significantly
10Y median 10Y RETURN (% PA) AT
10Y median TTM dividend 0.50 times 0.75 times Same
Company Sector M-cap (` cr) TTM P/E PAT growth (%) EPS (`) payout (%) of growth of growth growth
Gillette FMCG 23,110 96 6 74 56 -5 -3 -2
Symphony Consumer Durables 8,632 82 11 15 35 -1 2 4
P&G Hygiene & Health Care FMCG 33,240 83 13 124 40 0 3 6
Bayer CropScience Chemicals 10,696 71 3 44 16 -4 -3 -2
Nestle FMCG 1,16,166 69 20 175 59 5 10 15
Pidilite Industries Chemicals 68,514 70 13 19 29 1 4 7
0 'LYHUVLÀHG
Asian Paints Chemicals 1,50,129 67 12 24 41 2 4 7
Hindustan Unilever FMCG 4,00,488 64 9 29 76 1 4 6
Honeywell Automation Consumer Durables 20,723 54 22 431 9 8 13 18
Britannia Industries FMCG 59,774 52 25 48 34 10 16 23
Page Industries Textile 20,200 53 26 341 45 11 18 24
Dabur FMCG 76,346 52 15 8 34 6 9 13
Dr. Lal Pathlabs Healthcare 9,290 45 22 25 16 10 16 21
TTM: Trailing 12 months. Minimum market cap `500 crore. All data as of August 14, 2019.

COVER STORY
India’s most
profitable
companies

I
Yash Rohra
n this issue of Wealth Insight, we are back with our

yearly coverage of India’s 100 most profitable
companies. Over the years, our methodology for
picking these companies has undergone a sea change.
In the 2019 list, we have further tweaked it and added
additional checks for cash flows, leverage and interest
coverage, given the current massacre in the stock market
because of liquidity crunch, debt defaults and corporate-
governance issues.
Cyclical companies operating in the consumption-driven
sectors couldn’t qualify the criteria used in 2018. But they
should not be penalised if they have created wealth and
profits for their shareholders in the long run. Keeping this
in mind, we have also incorporated cyclical companies in
our analysis by revisiting our criteria for growth in
profitability and ROE.
Further, this year, we have also ranked companies based
on the consistency of profit growth. It’s irrefutable that
companies with growing profits and earnings stability
should get some advantage over the ones with rising but
volatile profits. The table below lists the filters that we used.
Please note that the companies mentioned in this story
should not be considered as our recommendations. You
should carefully evaluate them before investing in them.
Key filters
Basic filters Profit-growth filters z Interest-coverage ratio of
z Top 1000 companies by z Year-on-year profit growth more than three times in
market cap should be more than 8% eight out of the last 10
z Should have a record for in at least six out of the years
the last 10 years and last 10 years
profits in all of them z Weighted average Final-rank calculation
10-year profit growth z Based on weighted aver-
ROE filters should be over 15% age profit growth, consis-
z Weighted average tency in profit growth and
10-year ROE should be Hygiene filters weighted average ROE.
more than 15% z Positive cash flow from Equal weights were
z ROE should be more than operations in eight out of assigned to these three
15% in at least six out of the last 10 years parameters.
the last 10 years z Debt-to-equity ratio of
For detailed methodology,
z Current ROE should be less than two times in at
see the subsequent pages.
greater than 15 least eight out of the last
10 years

T
he quality of your following topics will tell you what Western European countries,
analytical filters determines those filters were and the possess. It is dominated by small
the quality of your stock rationale for using them. companies in terms of number of
selection. In order to pick the listed companies. Due to
Profit 100 companies, we focused Top 1,000 companies fewer disclosures,
not just on profitability but also The Indian stock market is still substandard
on the reliability and durability developing. It has yet to reach the corporate-
of those profits. That required us maturity that many developed governance
to use a number of filters. The markets, like those of the US and standards and
Profit 100
Here is the list of India’s most profitable companies, based on 10-year
profit growth, consistency of profit growth and return on equity
Final M-cap Weighted average Weighted average Deviation in profit growth FY19 profit
rank Company name Sector (` cr) 10Y profit growth (%) 10Y ROE (%) over 10 years (times) growth (%) FY19 ROE (%)
1 Eicher Motors Automobile & Ancillaries 45,220 37.6 30.7 0.86 12.4 24.8
2 Bharat Rasayan Chemicals 1,986 44.4 29.2 0.92 13.4 31.5
3 Page Industries Textile 20,174 25.2 51.5 0.43 13.5 48.6
4 Vinati Organics Chemicals 10,892 31.0 28.3 0.92 96.3 30.6
5 Bombay Burmah Trading Tea & Coffee 5,604 35.4 31.2 1.27 220.4 23.5
6 Britannia Industries FMCG 59,774 26.8 44.1 1.06 15.4 30.3
7 Dr. Lal Pathlabs Healthcare 9,290 25.2 31.8 0.74 16.7 23.8
8 Indian Energy Exchange Power 4,333 30.6 46.7 1.33 25.3 50.5
9 DFM Foods FMCG 1,303 31.6 29.0 1.23 40.5 28.5
10 Godrej Consumer Products FMCG 64,549 27.5 28.1 0.91 43.3 34.6
11 PI Industries Chemicals 15,556 27.1 27.7 0.90 11.6 19.5
12 Godrej Agrovet FMCG 8,637 28.7 28.1 1.08 43.6 22.1
13 HDFC AMC Asset Management 46,986 21.0 42.1 0.64 30.8 35.1
14 L&T Infotech IT 28,128 20.3 38.8 0.51 36.3 35.2
15 Ajanta Pharma Healthcare 8,527 24.3 32.3 0.93 -17.4 18.1
16 Menon Bearings Automobile & Ancillaries 364 28.3 27.8 1.18 18.7 30.2
16 Marico FMCG 50,637 19.6 35.8 0.46 37.3 41.2
16 Bajaj Finance Finance 1,90,672 45.5 20.8 0.78 60.0 22.6
19 Jamna Auto Industries Automobile & Ancillaries 1,311 34.3 27.8 1.43 9.7 29.5
20 Advanced Enzyme Healthcare 1,715 30.8 24.8 1.20 23.2 18.8
21 Muthoot Capital Finance 882 35.8 20.3 0.74 53.6 18.9
22 Motherson Sumi Automobile & Ancillaries 31,737 24.1 29.6 1.12 1.0 20.1
22 Newgen Software IT 2,051 41.7 22.4 1.22 40.2 23.0
24 Balmer Lawrie Investments Finance 954 18.9 43.6 0.80 41.5 48.4
25 Cholamandalam Financial Finance 8,879 24.6 29.8 1.31 26.7 39.1

lack of transparency of smaller into consideration companies that
companies, we restricted our have earned profits in all of the
PROFIT-GROWTH TOPPER
analysis to the top 1,000 companies last 10 years. Further, we zeroed in Avenue Supermarts
by market capitalisation. on only those companies that have Often called the Indian
maintained a constant rise (at least Walmart, the success mantra
Long-term horizon at 8 per cent, which is the typical of Avenue Supermart lies in
To ensure analytical strength, we rate of inflation in India) in their its strategy of placing
removed companies that didn’t profitability over the years. its hypermarket
have a 10-year record. However, we Using this criterion, we outlets near
included those companies which removed those companies which residential locations
were listed within the last 10 years are unable to pass on their and its strategy of
but have a track record. costs, thereby resulting in a owning its stores,
growth rate of less than 8 per which leads to huge
Profitability cent. This is because a company savings on the rental cost and
Profits – the lifeline of our cover earning similar profits year after safeguards it from fixed costs,
story – were the most important year may not create wealth for its especially during downturns.
criterion for our analysis. We took shareholders in the long run.
See page 33 for the explanation of columns of this table.
Rank Returns (% pa) P/E

Debt to equity Interest coverage Final
(times) ratio (times) Profit ROE Deviation in profits 1Y 5Y 10Y Current TTM Median TTM Company name rank
0.0 416 6 14 23 -42.4 11.4 46.3 21.8 47.0 Eicher Motors 1
0.4 11 3 18 28 -33.0 55.7 55.8 17.8 17.7 Bharat Rasayan 2
0.1 36 53 1 2 -45.2 19.6 43.1 53.1 69.2 Page Industries 3
0.0 196 19 24 29 56.4 41.4 54.4 36.2 27.6 Vinati Organics 4
0.2 29 11 13 49 -47.3 33.5 29.9 6.4 11.7 Bombay Burmah Trading 5
0.0 196 36 4 37 -22.8 34.1 31.7 51.9 49.4 Britannia Industries 6
0.0 359 51 12 16 16.0 9.1 – 44.5 45.8 Dr. Lal Pathlabs 7
0.0 317 21 3 57 -8.2 – – 26.6 31.2 Indian Energy Exchange 8
0.7 5 17 20 47 4.5 36.5 43.4 36.8 62.2 DFM Foods 9
0.5 10 34 25 26 -26.0 17.5 25.3 27.5 43.9 Godrej Consumer Products 10
0.0 109 35 31 25 43.6 23.3 72.3 36.4 30.9 PI Industries 11
0.2 15 27 27 38 -25.0 – – 26.6 38.9 Godrej Agrovet 12
0.0 – 77 6 10 28.9 – – 46.2 43.6 HDFC AMC 13
0.0 192 82 7 6 -7.3 34.3 – 18.6 18.5 L&T Infotech 14
0.0 444 57 11 31 -15.2 11.4 60.8 21.5 28.9 Ajanta Pharma 15
0.5 11 29 30 44 -27.2 42.3 33.4 16.0 20.1 Menon Bearings 16
0.1 54 91 9 3 9.2 26.0 26.2 43.3 47.5 Marico 16
– – 2 82 19 16.5 71.4 67.8 43.8 38.0 Bajaj Finance 16
0.0 9 12 29 64 -58.9 26.7 23.5 11.1 20.3 Jamna Auto Industries 19
0.1 32 20 46 45 -28.4 -12.9 – 14.9 34.4 Advanced Enzyme 20
– – 10 87 15 -54.6 41.3 31.7 11.7 13.0 Muthoot Capital 21
1.1 8 59 17 40 -49.4 1.1 29.4 21.1 36.0 Motherson Sumi 22
0.2 17 5 65 46 23.9 – – 20.2 22.2 Newgen Software 22
– – 95 5 20 5.5 17.0 18.3 12.6 17.3 Balmer Lawrie Investments 24
– – 55 16 54 -22.7 12.8 24.7 12.9 16.8 Cholamandalam Financial 25

An analogy can be drawn FY19, Infosys earned a profit of litigation
between such companies and a `15,400 crore (ROE of 24 per cent) expenses or
person who was able to afford a and Hindalco earned a profit of disposal of assets.
lavish lifestyle by earning `10,000 `5,500 crore (ROE of 10 per cent). These exceptional
in 1990. But today, he would An investor should always items also affect the
struggle to survive on the same prefer investing in a company company’s profitability. Some
salary, given its reduced worth. with a high ROE as it shows the companies report these items on a
company’s ability to deploy its regular basis. Such occurrences
Return on equity (ROE) funds efficiently. To remove low- obscure the true picture of a
Earning profits is the objective of ROE companies, we applied a company’s profitability. They also
every business. However, what minimum threshold for return on distort the company’s return on
matters most is the amount of equity of more than 15 per cent. equity, which may look
equity or own funds that a understated or overstated for a
company deploys to earn those Exceptionals prolonged period. To avoid such
profits. For instance, Infosys and Many companies report cases, we have removed
Hindalco have a similar equity exceptional incomes or losses companies which tend to report
capital of close to `60,000 crore. In arising from asset write-offs, huge exceptional items on a
25 HCL Technologies IT 1,46,521 23.3 29.0 1.11 16.0 26.0
27 TVS Motor Company Automobile & Ancillaries 17,844 29.7 24.7 1.32 8.0 24.8
28 Muthoot Finance Finance 24,535 27.8 23.7 1.13 16.5 23.6
29 Tata Consultancy Services IT 8,26,106 16.5 37.4 0.64 21.9 36.2
30 Hester Biosciences Healthcare 1,433 29.3 18.8 0.72 62.2 25.6
31 Titan Company Diamond & Jewellery 96,116 21.2 28.0 1.01 24.3 24.9
32 V-Mart Retail Retailing 3,196 37.3 18.0 0.91 -20.7 16.4
33 Balaji Amines Chemicals 849 25.3 22.9 0.92 3.5 22.5
34 Sundaram-Clayton Automobile & Ancillaries 4,003 25.9 28.9 1.50 27.8 32.3
34 Avenue Supermarts Retailing 92,845 48.8 17.6 0.95 11.9 17.7
36 Tasty Bite Eatables FMCG 2,181 31.2 25.9 1.70 13.6 26.3
37 Aegis Logistics Logistics 6,708 33.3 20.8 1.29 11.9 19.4
38 Can Fin Homes Finance 5,007 29.7 18.6 0.86 3.7 18.2
38 Abbott India Healthcare 19,443 23.8 25.0 1.17 12.2 24.7
40 Stovec Industries Textile 357 26.6 25.2 1.46 23.7 26.0
41 Suprajit Engineering Automobile & Ancillaries 2,143 23.5 24.9 1.15 -3.4 18.8
42 V-Guard Industries Capital Goods 9,628 22.2 23.2 0.83 24.6 21.4
42 Astral Poly Technik Plastic Products 14,567 25.9 20.5 0.82 11.8 18.1
42 Paushak Chemicals 689 43.5 20.6 1.39 81.4 26.8
45 Tata Elxsi IT 3,782 28.0 34.1 2.33 20.8 34.5
46 Alkyl Amines Chemicals Chemicals 1,583 25.9 23.9 1.35 30.5 23.9
47 Adani Ports Logistics 74,213 20.0 22.4 0.69 8.6 17.7
47 GSK Consumer Healthcare FMCG 33,348 17.7 28.1 0.97 40.4 25.9
49 Maithan Alloys Ferro Manganese 1,265 36.2 26.4 2.93 -12.5 25.8
49 Atul Chemicals 10,735 26.5 19.5 1.00 56.3 17.4

regular basis. The companies in China. However, as those
which had median exceptional production curbs were eased,
CONSISTENCY-OF-PROFITS TOPPER
items of more than 10 per cent of their stocks started to nosedive. HDFC Bank
their profits in the last 10 years Here comes the importance of HDFC Bank is also popularly
were not covered in this list. consistency. To remove companies known as the ‘20 per cent
with such exceptional compounding machine’. Its
Consistent performance performance, we applied another consistency in profits is
Many companies are able to criterion: a minimum return on such that in the last
deliver exceptional performance equity of more than 15 per cent 20 years, there has
in the short term but cannot in at least six out of the last 10 only been one year
replicate it in the long term and years. A similar criterion was in which it
turn out to be wealth destroyers applied in the case of registered a profit
for investors. HEG and Graphite profitability. Companies with growth of less than 20
India are two examples. These year-on-year profitability growth per cent. The major reason
companies registered phenomenal of less than 8 per cent (assumed attributable to this trend is its
profit growth due to banning of rate of inflation) in six out of the significant retail exposure.
production of graphite electrodes 10 years have been removed.

0.1 74 64 22 39 8.5 8.8 25.8 14.8 14.9 HCL Technologies 25
– – 24 47 55 -27.7 17.1 33.3 26.8 37.0 TVS Motor Company 27
– – 33 55 41 53.0 30.6 18.2 12.2 11.4 Muthoot Finance 28
0.0 211 114 8 11 11.6 13.6 26.4 25.6 22.9 Tata Consultancy Services 29
0.5 10 25 98 14 27.1 51.1 41.6 32.6 30.7 Hester Biosciences 30
0.0 38 75 28 36 17.7 25.9 34.6 66.8 55.3 Titan Company 31
0.0 19 7 106 27 -38.6 37.0 39.7 58.8 39.4 V-Mart Retail 32
0.4 14 47 64 30 -52.2 29.8 33.1 8.1 12.1 Balaji Amines 33
– – 43 23 76 -51.7 11.4 44.3 34.1 50.7 Sundaram-Clayton 34
0.1 31 1 109 32 -5.1 42.2 – 90.9 98.3 Avenue Supermarts 34
0.3 12 18 40 86 2.0 92.9 59.5 68.2 56.2 Tasty Bite Eatables 36
0.2 13 14 81 51 -17.4 44.9 40.8 29.6 35.0 Aegis Logistics 37
– – 23 101 24 19.0 38.4 37.8 16.4 20.5 Can Fin Homes 38
0.0 312 61 44 43 20.7 32.5 34.9 40.1 36.9 Abbott India 38
0.0 212 38 42 69 -29.3 17.6 30.1 13.9 19.5 Stovec Industries 40
0.5 9 63 45 42 -39.7 7.7 37.7 16.5 32.4 Suprajit Engineering 41
0.0 126 70 59 22 5.2 34.2 48.7 52.4 45.4 V-Guard Industries 42
0.2 10 44 86 21 5.7 27.9 60.1 70.3 62.9 Astral Poly Technik 42
0.0 360 4 85 62 -3.1 65.9 49.4 19.9 18.4 Paushak 42
0.0 419 31 10 112 -56.4 18.4 25.1 14.1 29.4 Tata Elxsi 45
0.4 10 45 53 60 19.6 21.2 40.1 15.6 16.3 Alkyl Amines Chemicals 46
1.1 5 85 66 13 -3.7 6.1 13.1 17.2 21.4 Adani Ports 47
0.0 1943 104 26 34 19.0 11.2 23.9 32.4 37.4 GSK Consumer Healthcare 47
0.0 41 9 37 119 -28.7 50.1 34.0 5.2 6.6 Maithan Alloys 49
0.0 92 40 90 35 19.5 25.9 51.8 22.6 23.4 Atul 49

However, we gave a relaxation without checking the actual cash Va Tech Wabag has
for four years to adjust for flows. Many businesses have a witnessed steady
cyclicality. This is because many robust track record of profits over the last 10
companies operating in cyclical profitability but suffer from years but its cash
sectors like auto, metals or subdued operating cash flows. flows have never
chemicals may have a strong Profits have no meaning until reflected this trend as a
financial standing but may not they are converted into cash. It is large part of its sales have
perform well in some years owing also considered a potential red been made on credit. This is
to subdued demand or high flag if a company earns also a potential reason why its
commodity prices. handsome profits but its cash stock has never proved to be a
flows are not in order. profitable investment for its
Cash flows Profits are based on accrual investors.
In investing, there is a popular accounting (where profits can be To avoid such cases, we applied
saying: turnover is vanity, profit recognised without receiving another stringent criterion based
is sanity and cash is reality. Our actual cash), whereas cash flows on operating cash flows. We
search for the most profitable reflect the actual receipt or removed companies having no
companies would be incomplete payment of cash. For instance, positive cash flows in at least
49 Metropolis Healthcare Healthcare 5,151 21.4 26.5 1.34 15.3 30.2
49 HDFC Bank Bank 6,08,949 23.2 18.8 0.21 20.7 17.1
53 CCL Products Tea & Coffee 3,216 21.3 21.3 0.77 4.6 19.6
54 Atul Auto Automobile & Ancillaries 500 25.7 30.6 2.11 14.5 22.0
54 Solar Industries Chemicals 9,843 17.2 23.6 0.49 18.6 23.8
56 Syngene International Miscellaneous 11,978 26.4 21.8 1.32 8.6 18.3
57 Jubilant FoodWorks FMCG 15,756 28.6 23.1 1.55 63.0 28.6
57 Relaxo Footwears FMCG 10,634 24.1 24.7 1.37 8.9 18.8
59 Kaveri Seed Company Agriculture 2,711 25.3 26.1 1.61 2.9 21.5
59 Cholamandalam Investment Finance 20,413 36.9 18.2 1.35 30.3 21.1
61 Natco Pharma Healthcare 9,701 32.4 20.9 1.51 -7.4 19.6
62 Cera Sanitaryware Construction Materials 3,163 19.5 21.7 0.57 11.6 17.6
63 Mayur Uniquoters Textile 1,027 17.0 29.0 1.27 -7.6 18.5
64 Sundram Fasteners Trading 8,892 26.7 21.9 1.48 18.3 27.0
65 Cadila Healthcare Healthcare 22,896 18.3 26.7 1.26 4.1 19.4
65 Manappuram Finance Finance 9,453 32.6 18.7 1.43 37.5 22.4
67 Berger Paints India Chemicals 32,402 16.5 23.8 0.69 8.0 21.4
68 Sudarshan Chemical Chemicals 2,247 28.0 23.1 1.76 59.5 26.8
69 Havells India Capital Goods 39,707 19.9 29.2 1.60 18.7 19.8
70 Indraprastha Gas Inds. Gases & Fuels 21,158 17.3 20.9 0.52 16.7 19.0
71 KRBL FMCG 5,237 25.1 21.6 1.43 15.8 20.1
72 Repco Home Finance Finance 1,951 21.1 17.4 0.61 15.7 16.3
0,QGLD 'LYHUVLÀHG
73 Nestle India FMCG 1,13,070 18.1 47.8 1.83 31.2 45.3
75 TTK Prestige Consumer Durables 7,218 18.8 26.6 1.47 -27.0 17.6

eight years out of the last 10 last 10 years. Hence, we filtered
years. We kept this criterion more out companies which are
ROE TOPPER
stringent than our return on excessively dependent on leverage Page Industries
equity and profitability criteria, for their healthy return on equity Operating in a segment that
given the fact that historically, the or profitability. Further, excessive rarely sees a slump, Page
absence of cash flows has debt can prove to be a major Industries is the exclusive
translated into potential concern for a cyclical business, licensee of innerwear
corporate-governance issues and especially in the case of a one- brand Jockey (USA)
subdued stock returns. We time debt payment. in India, Sri Lanka,
excluded banking and financial We provided a relaxation of two Bangladesh, Nepal
companies from these criteria as years to incorporate companies and the UAE. Jockey
cash flows are not relevant to them. which once raised debt for heavy has a pull factor for
capital-expenditure requirements the youth. Its high
Debt to equity but later paid it off and generated ROE is also a result of high
We removed companies with debt- wealth. We also exempted financial sales on a limited asset base
to-equity of more than two times companies and those with financial and expanding profit margins.
in three or more years over the subsidiaries from this criterion.

0.0 47 71 36 58 21.4 – – 42.9 – Metropolis Healthcare 49
– – 65 99 1 7.7 22.9 23.8 27.6 26.5 HDFC Bank 49
0.5 26 72 76 18 -4.2 25.9 33.8 21.4 26.4 CCL Products 53
0.0 96 46 15 106 -46.0 -6.6 39.3 8.6 22.9 Atul Auto 54
0.5 9 106 57 4 -12.2 23.1 33.4 37.5 39.6 Solar Industries 54
0.4 14 41 71 56 6.4 20.0 – 36.1 37.2 Syngene International 56
0.0 – 28 62 79 -24.4 15.0 29.1 46.3 75.6 Jubilant FoodWorks 57
0.2 40 60 48 61 105.0 54.9 74.4 59.3 49.3 Relaxo Footwears 57
0.0 424 49 38 84 -22.4 -9.9 29.2 14.1 17.8 Kaveri Seed Company 59
– – 8 104 59 -9.4 29.2 37.6 17.1 21.5 Cholamandalam Investment 59
0.1 44 16 78 78 -26.0 21.2 40.3 16.5 38.4 Natco Pharma 61
0.1 22 93 72 8 -11.2 10.2 48.8 28.1 36.1 Cera Sanitaryware 62
0.0 154 107 21 50 -42.3 -10.2 52.3 13.8 23.5 Mayur Uniquoters 63
0.5 15 37 70 72 -36.2 29.0 30.4 20.2 26.2 Sundram Fasteners 64
0.8 13 99 34 48 -34.8 1.0 17.6 13.1 26.9 Cadila Healthcare 65
– – 15 100 66 20.8 47.0 25.9 10.2 11.5 Manappuram Finance 65
0.2 25 116 54 12 13.1 31.3 38.9 65.3 55.3 Berger Paints India 67
0.6 11 32 61 91 -22.6 26.8 34.9 22.3 18.4 Sudarshan Chemical 68
0.0 22 86 19 83 -3.9 23.0 38.3 54.2 40.6 Havells India 69
0.0 578 105 80 7 11.8 36.4 26.3 26.2 24.5 Indraprastha Gas 70
0.5 12 54 74 65 -36.1 23.7 36.0 10.3 18.1 KRBL 71
– – 76 111 9 -50.2 -6.6 10.7 7.7 24.3 Repco Home Finance 72
0,QGLD
0.0 23 100 2 95 13.7 17.9 20.0 68.8 67.0 Nestle India 73
0.1 35 97 35 70 26.0 15.4 50.5 44.0 48.2 TTK Prestige 75

Interest-coverage ratio interest-coverage ratio of (volatility) of
Debt defaults can spook the over three times in at the company’s
markets. Recent defaults from the least eight of the last profit growth
likes of Cox and Kings, 10 years. and divides it with the
Talwalkars, Sintex and many average profit growth.
more have made us incorporate Deviation in profit The lower the coefficient of
the interest-coverage criterion. growth variation, the lower the
Several companies have low After arriving at the final fluctuation in profits.
debts but still, their profits are not list, we also evaluated companies Further, we ranked the
enough to cover interest based on the deviation of their companies which qualified our list
payments, which leads to defaults, profit growth in comparison to based on this. The application of
specifically in a weak demand the average profit growth of the this measure has given a natural
environment. last 10 years. We used the advantage to the companies having
To overcome this problem, we ‘coefficient of variation’ as a higher visibility in their profit
applied an additional filter for measure to calculate the growth and increased their
interest-coverage ratio. According deviation in profit growth. It chances of qualifying to the list of
to it, a company should have an measures the standard deviation top 100 companies.
75 VIP Industries FMCG 5,334 25.3 24.3 2.05 14.6 27.2
77 Mold-Tek Packaging Plastic Products 760 25.3 18.6 1.31 14.7 17.5
78 Whirlpool Of India Consumer Durables 18,946 19.9 25.1 1.51 16.8 21.1
79 Minda Industries Automobile & Ancillaries 7,607 34.0 20.7 2.40 -7.9 20.7
80 Mindtree IT 11,643 23.1 24.4 1.82 32.3 25.1
81 SIS India Miscellaneous 6,006 30.1 19.2 2.05 33.2 20.4
82 Shriram City Union Finance Finance 9,272 20.4 16.3 0.76 35.3 16.3
82 Hexaware Technologies IT 10,499 18.0 27.2 1.56 16.8 27.6
84 Poly Medicure Healthcare 1,560 18.8 24.5 1.48 -7.4 17.8
84 Pidilite Industries Chemicals 64,630 16.4 27.3 1.46 -3.9 24.0
86 M&M Financial Finance 18,085 26.5 16.1 1.45 54.2 17.3
87 NRB Bearings Automobile & Ancillaries 848 25.2 22.0 2.18 19.3 25.9
88 Power Finance Corporation Finance 27,549 28.2 18.5 1.85 69.8 29.0
89 Sundaram Finance Finance 16,296 20.0 17.0 0.97 59.0 17.3
90 Honeywell Automation Consumer Durables 20,342 24.3 17.3 1.41 43.7 22.7
90 Petronet LNG Inds. Gases & Fuels 35,498 23.0 21.2 1.72 5.7 21.5
92 Tech Mahindra IT 62,256 20.9 23.6 2.03 13.1 22.7
92 Kajaria Ceramics Construction Materials 7,266 18.1 24.6 1.64 -3.6 15.7
92 Supreme Industries Plastic Products 13,074 16.8 25.4 1.58 3.9 21.5
95 Bajaj Finserv Finance 1,11,340 19.8 26.0 2.22 21.5 24.3
96 KPR Mill Textile 3,916 24.5 19.1 1.72 15.3 19.9
96 City Union Bank Bank 13,632 16.1 17.1 0.50 15.3 15.2
98 Bliss GVS Pharma Healthcare 991 23.1 22.2 2.11 110.5 21.4
99 Endurance Technologies Automobile & Ancillaries 12,969 23.6 23.0 2.76 26.7 20.9
99 Divis Laboratories Healthcare 41,866 16.9 23.5 1.50 54.2 21.0

Weightage growth and return on equity of less
than 15 per cent.
PROFIT 100 TOPPER
Companies may have an
extraordinary phase of profitability, Eicher Motors
which may last for some years but Final ranking criteria Eicher’s Royal Enfield bikes
may not sustain in the long term. Then we ranked the list of are not just bikes; they are a
To weed out such companies which companies qualifying all our biker’s joy. Eicher doesn’t sell
may qualify because of those criteria based on three just bikes; it sells
extraordinary years, we gave parameters: weighted average dreams. This is what
different weights to all 10 years, profit growth, weighted average gives the company
with the recent years carrying the ROE and coefficient of variation its moat. The
more weights than the older years. of profit growth. company has a more
For instance, we assigned a Finally, we ranked this list than 90 per cent
weight of 10 to the 2019 numbers, based on the combined score of all market share in the
weight of nine to 2018 numbers, three parameters. This makes the mid-size motorcycle segment.
weight of eight to 2017 numbers and overall criteria a robust . of It is now at the top of our 100
so on. We then removed companies profitability. And that’s how we most profitable companies.
with weighted average profit arrived at the Profit 100.

0.1 58 48 52 102 -32.7 33.1 42.2 46.7 31.4 VIP Industries 75
0.6 7 50 102 52 -7.9 41.7 38.3 23.0 32.0 Mold-Tek Packaging 77
0.0 70 87 43 77 -11.2 30.3 36.7 45.2 45.5 Whirlpool Of India 78
0.6 8 13 83 113 -23.5 68.9 41.6 31.1 25.9 Minda Industries 79
0.0 341 67 51 94 -26.7 9.5 22.1 16.9 20.6 Mindtree 80
0.8 3 22 92 101 -26.6 – – 23.8 34.1 SIS India 81
– – 81 118 17 -28.4 -1.5 16.1 9.2 20.7 Shriram City Union Finance 82
0.0 289 102 33 81 -19.9 24.8 31.6 19.3 18.2 Hexaware Technologies 82
0.4 9 96 50 71 -18.0 10.0 41.3 22.0 33.6 Poly Medicure 84
0.0 52 117 32 68 21.5 30.5 35.9 70.0 50.6 Pidilite Industries 84
– – 39 119 67 -34.3 5.4 24.6 14.3 22.5 M&M Financial 86
0.6 10 52 69 108 -49.7 -0.9 18.1 11.1 23.1 NRB Bearings 87
– – 30 103 97 27.6 -0.3 3.7 4.0 5.3 Power Finance Corporation 88
– – 84 115 33 7.4 12.9 29.2 15.4 33.2 Sundaram Finance 89
0.0 86 58 112 63 4.5 36.6 31.4 54.4 63.4 Honeywell Automation 90
0.1 34 68 77 88 15.1 25.5 23.2 17.1 18.7 Petronet LNG 90
0.1 43 79 56 100 0.0 5.8 13.4 14.6 17.1 Tech Mahindra 92
0.1 24 101 49 85 17.5 10.6 40.7 33.0 36.9 Kajaria Ceramics 92
0.1 20 112 41 82 -3.8 15.1 39.2 35.2 30.4 Supreme Industries 92
– – 88 39 109 4.3 51.3 38.4 36.1 26.9 Bajaj Finserv 95
0.5 11 56 94 87 -10.9 37.5 38.8 11.7 15.6 KPR Mill 96
– – 118 114 5 3.2 32.6 30.5 19.8 18.6 City Union Bank 96
0.2 42 66 68 105 -45.4 16.6 14.2 8.5 19.9 Bliss GVS Pharma 98
0.3 29 62 63 118 -42.5 10.2 – 22.2 35.7 Endurance Technologies 99
0.0 397 110 58 75 35.3 17.1 21.8 30.5 29.2 Divis Laboratories 99
The median P/Es are for five years. If five-year data are not available, they are for three years or one year. Debt-to-equity and interest-coverage ratios are not applicable for companies,
such as TVS Motor and Sundaram Clayton, with financial subsidiaries. Returns since listing for companies where five-year or 10-year returns aren’t available. Data as on Aug 14, 2019.

Maximising profits
Some valuable insights into the companies
forming the Profit 100 list
Now that you have gone through the Profit 100 table, it’s
time to go beyond it! The tables in this section will help
you enhance your perspective about the companies that
form the Profit 100 (or that got excluded in the process).
Keep an eye on these companies when you begin your
research on the Profit 100. ([[YHJ[P]LS`WYPJLK
These companies from the Profit 100 list are trading below their median
Discount or premium to median P/E P/Es by 25 per cent or more
The tables titled ‘At a premium’ and ‘Attractively Final 1Y total TTM 5Y median Discount to
priced’ list companies from the Profit 100 list that are rank Company name return (%) P/E P/E median P/E (%)
trading above and below their median P/Es by at least 1 Eicher Motors -42.4 21.8 47.0 54
25 per cent. These tables will help you understand 5 Bombay Burmah Trading -47.3 6.4 11.7 46
where the valuations of these companies stand in 9 DFM Foods 4.5 36.8 62.2 41
comparison with their historical valuations. 10 Godrej Consumer Products -26.0 27.5 43.9 37
However, valuations should not be a sole parameter
12 Godrej Agrovet -25.0 26.6 38.9 32
to buy or sell a stock. Companies may trade
15 Ajanta Pharma Ltd. -15.2 21.5 28.9 25
significantly above or below their historical valuations
19 Jamna Auto Industries -58.9 11.1 20.3 45
due to fundamental changes in their businesses.
20 Advanced Enzyme -28.4 14.9 34.4 57
Pledging 22 Motherson Sumi -49.4 21.1 36.0 41
In the current scenario, many companies are witnessing 24 Balmer Lawrie Investments 5.5 12.6 17.3 27
a free fall because of high promoter pledging. A high 27 TVS Motor Company -27.7 26.8 37.0 27
pledging casts doubt about the company’s promoters. 33 Balaji Amines -52.2 8.1 12.1 33
Recent fall in the stocks of Zee entertainment, Apollo 34 Sundaram-Clayton -51.7 34.1 50.7 33
Hospitals and Emami show the side-effects of pledging. 40 Stovec Industries -29.3 13.9 19.5 29
The table titled ‘The pledging risk’ lists companies from
41 Suprajit Engineering -39.7 16.5 32.4 49
the Profit 100 list whose promoters have pledged at least
45 Tata Elxsi -56.4 14.1 29.4 52
10 per cent of their stakes.
54 Atul Auto -46.0 8.6 22.9 62
Cash-flow problems 57 Jubilant FoodWorks -24.4 46.3 75.6 39

An absence of cash flows in the long term are a 61 Natco Pharma -26.0 16.5 38.4 57
potential red flag. The table titled ‘Shaky cash flows’ 63 Mayur Uniquoters -42.3 13.8 23.5 41
lists companies that have cleared our profitability 65 Cadila Healthcare -34.8 13.1 26.9 51
filters but failed the cash-flow check. 71 KRBL -36.1 10.3 18.1 43
72 Repco Home Finance -50.2 7.7 24.3 68
([HWYLTP\T 77 Mold-Tek Packaging Ltd. -7.9 23.0 32.0 28
These companies from the Profit 100 list are trading above their median
81 SIS India -26.6 23.8 34.1 30
P/Es by 25 per cent or more
82 Shriram City Union Finance -28.4 9.2 20.7 55
Final 1Y total TTM 5Y median Premium to
rank Company name return (%) P/E P/E median P/E (%) 84 Poly Medicure -18.0 22.0 33.6 34
4 Vinati Organics 56.4 36.2 27.6 31.5 86 M&M Financial Services -34.3 14.3 22.5 37
32 V-Mart Retail -38.6 58.8 39.4 49.4 87 NRB Bearings -49.7 11.1 23.1 52
69 Havells India -3.9 54.2 40.6 33.6 89 Sundaram Finance 7.4 15.4 33.2 54
75 VIP Industries -32.7 46.7 31.4 48.9 96 KPR Mill -10.9 11.7 15.6 25
84 Pidilite Industries 21.5 70.0 50.6 38.3 98 Bliss GVS Pharma -45.4 8.5 19.9 58
95 Bajaj Finserv 4.3 36.1 26.9 34.2 99 Endurance Technologies -42.5 22.2 35.7 38
The median P/Es are for five years. If five-year data are not available, they are for three years or one year, as the case may be. TTM: Trailing 12 months. Data as on August 14, 2019

;OLWSLKNPUNYPZR :OHR`JHZOMSV^Z
The following companies from the Profit 100 The following companies couldn’t make it to the Profit 100 list due to their negative operational
list have high promoter pledging of more than cash flows in multiple years over the last 10 years
10 per cent. Watch out. No. of years of Weighted
No. of years of positive cash average 10Y Weighted
Final M-cap profits over 10 flows over 10 profit growth average 10Y
rank Company name Pledging (%) Company name Sector (` cr) years years (%) ROE (%)
15 Ajanta Pharma 13.4 Eldeco Housing Realty 411 10 6 31.9 17.6
16 Menon Bearings 12.1 Insecticides (India) Chemicals 1275 10 5 26.0 18.2
47 Adani Ports 32.1 Jayant Agro-Organics Chemicals 438 10 6 26.7 17.1
49 Metropolis Healthcare 45.3 Lux Industries Textile 2590 10 4 35.7 32.1
77 Mold-Tek Packaging 11.1 Shemaroo Entertainment Media 741 10 4 27.9 15.8
87 NRB Bearings 11.1 Suyog Telematics Miscellaneous 406 10 6 45.3 29.8
Data as on August 14, 2019 Data as on August 14, 2019
Columns in the Profit 100 table

M-CAP (` cr): The total market value of the company. profit of `150 on the equity capital of `1,000, that
It is calculated by multiplying the total outstanding translates into an ROE of 15 per cent.
shares and the current market price of the
company. DEBT TO EQUITY: Total debt of the company as
compared to the total equity capital of the
WEIGHTED AVERAGE 10-YEAR PROFIT GROWTH (%): Calculated company. The lower this ratio is, the better.
by multiplying the profit growth in each year by
the weightage assigned to that particular year. The INTEREST-COVERAGE RATIO: It shows the number of
sum of all these years is considered to be the times a company’s earnings (before interest outgo)
weighted average profit growth. cover the total interest expense. The higher the
coverage ratio, the better.
WEIGHTED AVERAGE 10-YEAR ROE (%): Calculated
by multiplying the return on equity of PROFIT AND ROE RANK: Based on the
each year by the weightage assigned to weighted average profit growth and
that particular year. The sum of all ROE of the company. The higher the
these years is considered to be the profit growth or ROE, the higher the
weighted average return on equity. rank.
DEVIATION IN PROFIT GROWTH: It refers to the RANK FOR DEVIATION IN PROFITS: Based on
difference in the profit growth of the the deviation in the company’s
company from its average profit growth of profitability. The lower the deviation,
the last 10 years. The higher the standard the higher the rank.
deviation or difference in the profits from the
RETURNS (1, 5 AND 10 YEARS, %): All returns refer to the
average, the higher the deviation. To compare it,
total returns, comprising change in stock price and
we have divided the deviation in profit growth with
the total dividends received during that period.
the average profit growth.
Returns of more than one year are compounded
CURRENT PROFIT GROWTH (%): Percentage growth in the per annum.
net profit of the company as compared to the
TTM P/E: Ratio of the market price of the stock to the
previous year.
latest 12-month earnings per share of the company.
ROE (%): It signifies a company’s net profit as
MEDIAN P/E: Median of five-year daily price-to-
compared to the total equity invested by the
earnings of the company. WI
company. For instance, if a company has earned a

INTERVIEW JINESH GOPANI
Head – Equity, Axis Mutual Fund
‘Protecting
returns is as
important as
protecting
capital’
The strength of a company and a
portfolio is tested in a bear market. The
ongoing bearish phase has been giving
investors the jitters. We speak to
Jinesh Gopani of Axis Mutual Fund
about the ongoing decline what’s
causing it. He manages Axis Focused
25 Fund, which has assets of about
`8,000 crore. We ask him how he picks
stocks for this fund and how an
investor can make a concentrated
portfolio that performs.
The market has seen a steep decline lately.

What is the outlook for the market going
ahead? Which sectors are you bullish on?
Markets have been negatively impacted as
investors have lost their risk appetite due to
a flurry of negative news. Weak GDP, rising
credit costs and weak corporate governance
have put off foreign investors. However, we
believe that this is not likely to sustain for too
long. Our channel checks indicate incrementally
positive demand in the run up to the festival
season. While demand is expected to revive slowly,
this bodes well for corporate earnings as the trough
seems to have been crossed.
Currently, we like the consumption theme.
Consumption includes financiers (retail banks/
NBFCs), durables, staples, auto and discretionary.
Demographics and aspirations have been in favour

INTERVIEW
of the consumption theme over the markets; (5) normal monsoons and determine if a stock has become
longer term. There can be periods subsequent rural demand recovery overvalued?
where some segments slow down, during the festival season. We believe that many quality
but we need to tide over it through companies are trading at high
the business cycle. We also remain How do you select promising stocks? valuations. The sectors where
constantly vigilant about When do you exit a stock? there is earnings growth are very
disruption, given the nature of Our stock-selection process has expensive while the sectors that
these industries. always been bottom-up and we are offering some sort of comfort
continue to do the same. The on valuations are not getting
Today, there are many pockets of investment philosophy is centred earnings growth. Earnings growth
turbulence: housing finance, PSU on four pillars, viz., fundamental in the current quarter seems
banking, telecom, auto, etc. Where is research, pricing power, strong elusive as the banking sector
the problem structural in nature and management teams and risk accounts for the bulk of the Nifty
where is it just a passing phase? management. The fund endeavours index’s earnings growth. The
India’s economy has shown signs to buy and hold high-growth stocks in this space are already
of slowdown over the last 12 secular businesses run by dynamic richly valued as compared to other
months. The reasons for this could management with utmost integrity. sectors. Given changing business
include: (1) tightening credit We believe a fundamental landscape, with the advent of
supply to SMEs due to NBFC investment approach focused on technology, businesses having edge
issues; (2) continued high real identifying such sustainable over others will get
interest rates for a long period; (3) businesses while controlling risk is disproportionate profitability. It’s
weakening business sentiments the best way to deliver returns in like winner takes it all. Hence,
due to tighter compliance/
regulatory environment on
multiple fronts; (4) weaker “Our channel checks indicate
investment cycle impacting job
creation; (5) NPL pressures making incrementally positive demand in the run
banks risk averse in lending; and
(6) slowing global growth. These
up to the festival season... This bodes well
have been the primary reason for for corporate earnings as the trough seems
the negative market tones. We see
these as a near-term challenge for
to have been crossed.”
markets, but retain our positive
long-term view on the markets the Indian equity market over the leaders/innovators will command
given the structural long term. The fund has always high premiums.
transformation that the economy focused on ‘quality’ companies that
is currently going through. are able to sustain profitable About 80 per cent of your portfolio is
Our rationale for this revolves growth and generate long-term in large caps and 20 per cent in mid
around five possible positive trends returns for unitholders no matter caps. You don’t have any small caps.
that are likely to shape market which sector the investment has How do you see mid and small caps
consensus over the next few been made into. currently in terms of valuations and
quarters: (1) continued low Change in business the opportunities available?
inflation enables more policy rate fundamentals is the primary Mid caps have been underperform-
cuts and easier liquidity conditions reason for selling a stock, which ing large caps since the beginning
drive rate transmission; (2) include a change in competitive of 2018. Over the last year, the mid-
rewarding transparency and clean advantage, capital-allocation cap index showed 12-13 per cent
businesses and clean-up of bad decision and corporate underperformance against the
business practices; (3) potential governance. We believe that large-cap index. We believe that the
conclusion of strategic deals in instead of using absolute valuation market is heavily polarised in
companies which have been the as a metric, it’s the relative risk– favour of a few stocks. Over the
focus of the news, thus restoring reward metric that matters more. last 18 months, only 15 out of 50
investor risk appetite; (4) stable stocks drove the index return,
INR and benign global liquidity Quite a few stocks in your portfolio while the rest 35 stocks actually
attract foreign capital to domestic have stretched valuations. How do you gave negative returns. Same was

INTERVIEW
the case with the mid-cap index, volatility than large caps. Having mentals crashed. We can see that
where only 15 per cent of the said that, more than size, the the mid-cap index is back to where
stocks were up by a small quan- quality of the company, pedigree it was around three years back
tum, while the rest 85 per cent of the management and its ability (pre-demonetisation, October 2016).
were down by 20–30 per cent. Only to sustain reasonable growth rates Since then, index returns show
48 out of 150 mid-cap stocks have is more important. that large caps have outperformed
ROEs of more than 20 per cent in While, mid and small caps offer mid and small caps. However, the
FY19. We believe that merely low huge opportunity to create wealth dispersion of individual stock
valuations are not always attrac- and can come out as multibaggers, returns has been quite similar
tive. Valuations should be seen in they also run the risk of higher across market-cap buckets. The
context of quality. A company’s interim draw-downs. Over the last companies that have performed
‘right to grow (moat)’ and ‘room to 10 years (ended December 2018), have the higher weights in the
grow (penetration in market)’ in an only 17 out 150 mid-cap companies Nifty 50 Index and hence the index
economic environment are the key could cross the threshold to returns look higher. In such an
determinants of valuation. At this become large caps; 32 remained environment, we are more comfort-
juncture, evaluating a stock in mid caps, while the rest either are able having a compact yet
terms of good or bad rather than now small caps or have got merged high-conviction portfolio compris-
large or small is more important. or delisted. Same numbers for ing high-quality companies with
We do believe that opportunities small caps are even starker. Only high growth prospects.
in the mid- and small-cap space two small caps have grown to
have emerged post the steep become today’s large caps over the Axis Focused 25 runs a concentrated
corrections. While the broader last 10 years. We believe what portfolio. If an investor wants to
create a focused portfolio of 15–25
stocks, what should he do to minimise
“Valuations should be seen in context of risk and maximise performance?
At Axis, we have followed the same
quality. A company’s ‘right to grow (moat)’ philosophy and stock-selection
and ‘room to grow (penetration in market)’ approach that we have been
following since the inception of
in an economic environment are the key Axis Mutual Fund, irrespective of
determinants of valuation.” market cycles. Looking at
companies from at least a two-
three-year perspective and
market is likely to remain volatile, matters more is whether a ensuring strong corporate
our focus will remain on company is good or bad rather governance and promoter pedigree,
companies with well-defined than big or small. a secular growth rate, a strong
niches, and strong moats are likely business model, which
to deliver above-average returns Experts often talk about the virtues of demonstrates pricing power, and
within the wider mid- and small- diversification. Star investors like ultimately good ROEs and cash
cap basket. Tactical investment Buffett and Munger preach about flows have helped us for a long
opportunities can be looked at in focusing. Which makes more sense: time now. Our philosophy has got
the current market environment. diversifying or focusing? rewarded, especially when there is
At Axis, we have always aimed for pain in the market.
What role do mid- and small-cap compact but high-conviction port- We believe that protecting
stocks play in wealth creation? How folios across our equity schemes. It returns is equally important as
much should an individual investor also depends on the kinds of protecting capital. Managing draw-
rely on them, given that they often opportunities that markets offer at downs and risk is the key to long-
also tend to prove wealth destroyers. different times. Over the last nine- term success in investing. The key
Mid and small caps should be 10 months, markets have been very factor driving performance should
looked from wealth-creation narrow. Only a few stocks have be the philosophy of buying
perspective but over a long term. been able to perform. In the last fundamentally good-quality and
This segment should not be looked few months, all the companies high-earnings-growth stories
at for making a quick buck as this which couldn’t justify their high rather than betting on short-term
space has significantly higher valuations with underlying funda- momentum. WI

SPECIAL
REPORT
GDP growth
profit growth
GDP growth is widely tracked to determine the state of the
economy and corporate profits. But it may not
be a very effective tool. Here’s why.

SPECIAL
REPORT
Danish Khanna
per cent increase in inflation and a growth (measured by EPS).
1 per cent growth of output. So, However, that does not always hold
W
hat is the key rationale while the country’s nominal GDP true. Theoretically, they may
for investing in emerging reflects a growth of 10 per cent, the appear to be closely linked in the
markets? The first and real GDP growth is only 1 per cent. real-world scenario. However,
foremost reason would be to Investors track GDP growth to several factors, including
capitalise on growth predict future stock-market measurement issues, sector
opportunities. Emerging returns, as they think that strong representations and share of
economies tend to grow at a GDP growth eventually translates unlisted companies, influence
higher rate as compared to their into high corporate earnings these two. A company can be
developed counterparts. In 2018, highly affected by the decision of
emerging and developing markets GDP is one of the most its management, which could lead
grew at a rate of 4.5 per cent, prominent indicators for to a divergence between the GDP
while advanced economies grew at measuring a country’s growth and actual earnings
2.2 per cent on a real basis, as growth.
revealed by the International
economic activities. It This story delves into all these
Monetary Fund (IMF). represents the total value problems and tries to find an
Gross domestic product (GDP) of final goods and services answer to the question why
is one of the most prominent produced within a country investors should not perceive GDP
indicators for measuring a during a specified time growth as an indicator of stock-
country’s economic activities. It period. market returns.
represents the total value of final Although conventional wisdom
goods and services produced suggests that both the numbers
within a country during a should be the same, this is not
specified time period. It is GDP growth vs EPS growth always true in the real world. In
Real Real
measured through the total of Country GDP (%) EPS (%) Gap (% pt) fact, there is only a tenuous link
consumption, government Brazil 2.3 0.2 -2.1
between companies’ earnings
spending, investments and net of growth and gross domestic
Chile 3.8 1.5 -2.3
exports (i.e, exports minus product (GDP) growth. The table
China 9.1 -0.1 -9.2
imports). However, to avoid any ‘GDP vs EPS growth’ lists the gap
possibility of double counting, the India 6.9 2.3 -4.6 between 10-year annualised real
value of intermediate goods, Indonesia 4.1 1.0 -3.1 GDP and real EPS growth across
which are used for the production Korea 4.0 6.5 2.5 different markets.
of final goods, is not taken into Malaysia 4.5 0.4 -4.1 Although several studies have
consideration. Mexico 2.6 5.7 3.1 linked economic growth to
GDP indicates the growth and corporate earnings, there may be
Philippines 4.8 -1.0 -5.8
overall health of an economy. a divergence between these two
Poland 3.7 -3.0 -6.7
There are two types of GDP: because of several factors,
Russia 3.3 -5.8 -9.1
nominal and real. While nominal including:
GDP measures the current value South Africa 2.7 2.6 -0.1
of goods and services and includes Taiwan 3.9 3.1 -0.8 Why measuring GDP is hard
inflation, real GDP is adjusted for Thailand 3.4 0.4 -3.0 The real beauty of GDP lies in its
inflation. Notably, real GDP Turkey 4.5 1.0 -3.5 single figure. It squeezes all
growth may suffer even when Canada 2.4 3.8 1.4
nominal GDP is rising. This
France 1.6 4.5 2.9
happens when the economy
Germany 1.4 4.8 3.4
witnesses high inflation, while
Japan 0.7 6.1 5.4
output faces a falling trend.
For example, the GDP of UK 2.0 -0.1 -2.1
country A was 100 million in 2016 US 2.2 3.0 0.8
and 110 million in 2017. Seeing the Average EM 4.2 1.0 -3.1
numbers, one may assume growth Average DM 1.7 3.7 2.0
of 10 per cent year-on-year. Source: Schroders, IBES, Oxford Economics. Data 10 years up to
However, it was the outcome of a 9 31, March, 2017.

SPECIAL
REPORT
human activities in a couple of There are two types of GDP: nominal and real. While
digits. GDP focuses on how we nominal GDP measures the current value of goods and
rank different countries and
services and includes inflation, real GDP is adjusted for
compare their performance. But
how can the sum of everything inflation.
produced be so compact? The GDP
number may be eye-catching but MNCs, thus deriving a significant adding all taxes and reducing
in reality, measuring GDP is a proportion of their profits from subsidies, we get the GDP of the
very difficult and complex task. abroad. These profits earned are economy. GVA thus provides the
The quality of the result largely reflected in companies’ earnings. production contribution of a
depends on the inputs used. However, such goods produced are particular sector. It serves as a
Problems may arise due to poor not reflected in the home better gauge of economic
reporting standards or outright country’s GDP. Therefore, it is condition but GDP can be the key
manipulations in GDP important to recognise the measure for making cross-country
calculations in emerging markets. exposure to overseas earnings, as comparisons and analyses.
At the time of writing this article, this can potentially cause
several discussions were going corporate earnings growth to GDP= GVA + product taxes –
around the method followed in diverge from GDP growth. product subsidies
calculating India’s GDP growth.
As quoted on the website of the Market structure As per India economic survey
Ministry of Statistics and Next thing to consider is the of 2018, the agriculture sector
Programme Implementation, structure of the stock market. The employs more than 50 per cent of
“Major weakness in calculation of composition of the stock the total workforce in India and
GDP lies in estimating the market may be quite contributes around 15 per
contribution of the large number different from the cent to GVA. But it has a
of unorganised and small self- structure of the mere representation of 0.6
employed enterprises in economy. In the per cent in Nifty, which is
manufacturing and services, due economy, some used as a gauge for
to irregular income streams, sectors may corporate earnings and
multiple activities undertaken contribute growth. Similarly, some
during a year and absence of significantly to the major sectors, such as
business accounts.” At times, we GDP, but they may not be defence, textile, insurance,
also observe an increase in the present in the stock market. asset management and real estate,
growth rate but a decrease in the Let’s we look at the sector-wise do not have any meaningful
employment rate, which again composition of gross value added representation in the Nifty 50 but
indicates a decrease in output (GVA) in India. GVA is used to are a major component of the
growth unless there is a measure the output or economy.
significant rise in productivity. contribution of a particular On the other hand, the financial
Hence, assessing GDP is not an sector. What differentiates GVA sector, which holds around 30 per
easy task to do, especially if there from GDP is the effect of taxes cent weightage in the Nifty 50,
is a mismeasurement in the and subsidies. When all GVAs contributes close to 5 per cent to
underlying determinants. from different sectors are GVA.
combined,
Globalisation Dilutions and share buybacks
Increasing globalisation has When we talk about corporate
enabled companies to expand earnings growth, we look at the
their footprint across the world. It EPS growth of the index. EPS,
has paved the way for many which depends on both earnings
companies in emerging markets to and the number of shares, is
grow into affected by various corporate
actions. In the case of dilutions,
the total number of outstanding
shares is increased. They happen
primarily because of IPOs (initial

SPECIAL
REPORT
public Stock markets only track the performance of the listed

offerings), universe. Many private sector companies, which have a
employees very large share in the economy and contribute
exercising
stock options
significantly to a country’s GDP, are ignored while
or conversions calculating corporate earnings growth.
of bonds and
preferred shares. If popularly known as the Buffett and all sectors are still not well
the number of shares Indicator. It plays a key role in represented in the market, it may
increases faster than earnings, determining whether an overall not show a true picture.
that decreases the EPS. market is undervalued or On the other hand, the ratio of
On the other hand, in the case overvalued. corporate profits to GDP
of share buybacks, there is a If this ratio above 100, that eliminates the bias due to listed
decrease in the total number of indicates overvaluation, whereas companies and may reflect a true
shares outstanding. This leads to a reading below this level picture for both developed and
an increase in the EPS without indicates undervaluation. This emerging economies like India.
any actual increase in the indicator may work well in The graph ‘Corporate profit to
earnings. developed economies since they GDP’ will help you understand
include a large set of public-listed this relationship in India over the
Private companies companies representing most of last 20 years.
Stock markets only track the the sectors. However, when it
performance of the listed comes to developing economies, Conclusion
universe. Many private sector where the market size is shallow All this suggests that
companies, which have a very the link between
large share in the economy and economic growth
contribute significantly to a and earnings
country’s GDP, are ignored while growth is not
calculating corporate earnings straightforward.
growth. Besides, the private Even if an investor
sector employs a large correctly predicts
number of workforce, thus that an economy will
contributing to the GDP. grow faster, it simply
does not mean that
Market cap-to- the listed
GDP ratio companies will also
Named after veteran experience faster
investor, Warren Buffett, earnings growth
the ratio of market during the same period.
cap to GDP is Economic growth and
earnings growth can diverge
owing to a number of factors.
Corporate profit to GDP 7.8
While all economies are subject to
In %
7.3 the issues discussed in this report,
6.5 emerging markets are more prone
6.2 6.2 to their influence .
5.4 5.5
At the same time, it is not easy
4.7 4.9
4.6 to say that the country’s economic
4.3
3.8 growth is irrelevant to the
3.5
3.0 3.1 3.0 earnings growth. What it means is
2.3
2.0 2.2 that an investor has to work
1.7 1.9
harder to identify the right
beneficiaries of strong GDP
growth in emerging markets. WI
FY98 FY00 FY02 FY04 FY06 FY08 FY10 FY12 FY14 FY16 FY18

STRAIGHT TALK
The value of
management guidance
While management forecasts are widely sought,
they tend to have little analytical worth
ANAND TANDON
Every religion develops a set of rituals research and overseeing teams of analysts, it’s the con-
which define its practitioners. The ‘religion’ of clusion of this author that managements tend to behave
fundamental analysis of equities involves one such like trend-following systems – extrapolating what is
ritual – the periodic request to company managements visible in the rear-view mirror to the future. In times of
to ‘guide’ the analyst community by making forward- linear growth or slowdown, these forecasts seem accu-
looking forecasts about the likely performance of the rate. However, they completely break down when faced
company. Based on these forecasts, analysts write up with turning points in the economy.
their ‘research’ notes, tweaking guidance by a marginal
amount – either up or down – coloured by their Case study: Maruti Suzuki
understanding of whether the management guidance As a leader with a market share that exceeds 50 per cent
offered is likely to be optimistic or deliberately toned in some segments, it could be assumed that Maruti,
down. The implicit assumption is that a ‘beat’, where with its pan-India presence and decades of experience
actual reported numbers are better than ‘market in Indian markets, would make robust forecasts. I have
expectations’ (defined as a ‘consensus’ figure reported taken edited excerpts from the recent quarterly results
by all analysts covering the stock), will lead to a rally in transcripts to show how their forecasts pan out (italici-
stock prices and a ‘miss’ will lead to lower stock prices. sation is mine). Editing has been done to increase read-
This kind of ‘chasing the tail’ analysis would be at ability while attempting to keep the meaning
least marginally useful in determining stock prices unchanged. We start a year back on April 27, 2018,
over the medium to long term if management guidance where a forecast is made for FY19.
involved some insights that an outsider to the company Analyst 1: Hi sir, can you share the growth outlook for
would be less likely to have; in other words, if it carried FY19?
some information content. Over several decades of ED, Corporate Planning: ...I think the year looks to be good.
4HY\[P!:HSLZ]VS\TLZPU/-@ 4HY\[P!:HSLZ]VS\TLZPU-@
While Maruti clocked double-digit growth in the first half of FY19, the For the full year, Maruti’s volume growth slipped into lower single digits,
signs of a slowdown were visible in Q2 FY19. with exports growth turning negative.
Q2 FY19 H1 FY19 FY19 FY18
Market Number Growth Number Growth Market Number % to total sales Number % to total sales Growth
Domestic 4,55,400 -0.4% 9,19,240 11.3% Domestic 17,53,700 94.2% 16,53,500 92.9% 6.1%
Exports 29,448 -15.2% 56,087 -7.8% Exports 1,08,749 5.8% 1,26,074 7.1% -13.7%
Total sales 4,84,848 -1.5% 9,75,327 10.0% Total sales 18,62,449 100.0% 17,79,574 100.0% 4.7%
Source: Q2 and H1 FY19 presentation, Maruti Suzuki Source: Q4 FY19 investor presentation, Maruti Suzuki

STRAIGHT TALK
The GDP growth is also in the right direction. So we are Managements tend to extrapolate
committed towards double-digit growth, though indus-
try growth is forecasted at about 8 to 9 per cent; we to the future what is visible in the
would try to exceed industry growth. rear-view mirror. In times of linear
Fast forward to Q2 earnings call. A look at the table growth or slowdown, these forecasts
‘Maruti: Sales volumes in H1 FY19’ shows that over the
first half of FY19, management lived up to its forecast seem accurate. However, they
– volumes grew double digits – though signs of a slow- completely break down when faced
down are visible in Q2 numbers. with turning points in the economy.
The investor conference call was held on October 25,
2018. By this time, IL&FS had already defaulted and over
a month had passed since news about strain in financial interest rates by 35 basis points compared to the begin-
markets – particularly among NBFCs, the largest vehicle ning of the year. So, all these factors are sort of detri-
financiers – was already well know. Yet, management mental to the overall sentiment in the marketplace.
spokesman continues to remain sanguine. Festival sales so far are flat when it comes to retail but
Analyst 1: ...Could you share the demand outlook for the bookings are good and we have almost another 20 days
full year and how has the festive season progressed so to go for Dhanteras and Diwali particularly. These are
far both in terms of enquiries and retail sales? the big dates and we look forward to demand picking up
ED, Corporate Planning: Well, in the beginning of the year, during this time. Moving forward, certainly our endeav-
we had mentioned that we will be targeting double-dig- our would be to match our targets what we had set in
it growth and we are on track as far as H1 is concerned. the beginning of the year.
As we enter H2, there has been a couple of disruptions Analyst 2: And sir, ...the current liquidity issue has
so far; one major disruption being three years of raised questions on the financing side as well. If you
third-party insurance premium that customer has to can highlight if there is any issue on retail financing.
pay upfront, which translates to about `8,700 – quite If a customer is buying a car, is he facing any liquidity
high. And then increase of about 17 per cent on petrol, issue? Also your dealer financing. …is Maruti ready to
26 per cent on diesel and also there is an increase in step up and do some kind of interim financing as well?

STRAIGHT TALK
1:>:[LLS!/PZ[VY`VMMVYLJHZ[Z]ZHJ[\HSZ
The forecast and actual numbers given by the management can vary significantly, as seen in FY16 and FY19 numbers of JSW Steel
FY15 FY16 FY17 FY18 FY19 FY20

Million tonnes Actual Forecast Actual Forecast Actual Forecast Actual Forecast Actual Forecast
Crude steel 12.63 13.40 12.56 15.75 15.80 16.50 16.27 16.75 16.69 16.95
Saleable steel 12.03 12.90 12.13 15.00 14.77 15.50 15.62 16.00 15.76 16.00
FY15 FY16 FY17 FY18 FY19 FY20
Per cent Actual Forecast Actual Forecast Actual Forecast Actual Forecast Actual Forecast
Crude steel 6.10% -0.55% 25.40% 25.80% 4.43% 2.97% 2.95% 2.58% 1.56%
Saleable steel 7.23% 0.83% 23.66% 21.76% 4.94% 5.75% 2.43% 0.90% 1.52%
ED, Corporate Planning: There are absolutely no issues on Q4 for the next year and has consistently done so over
retail financing because our car in terms of NPA is a several years. Since the steel business is cyclical, one
very good asset for financiers and we have three catego- could expect variability from forecasts to be high – and
ries of financiers. There are PSU banks that decide in they indeed are. Importantly, errors are on either side.
terms of their credit evaluation. Then there are private Attention should be paid to saleable steel forecast
banks that are a little more liberal. Then there are growth rates. Against a growth forecast of 7.23 per cent
NBFCs that purely go by customer relationships rather in FY16, the actual growth was negligible at 0.83 per
than their banking documents. So, all three categories cent. Similar miss was reported in FY19. Note that
of financiers are there and we have close to 82 per cent while the difference between 16 MT (forecast) vs 15.76
finance penetration. As far as inventory funding is con- (actual) doesn’t seem large, a growth forecast of 2.43
cerned, dealers have enough sanctions from various
banks and dealers that are operating in a transparent
way are not facing any problem absolutely on inventory
An analyst can develop a better
funding as well. forecast if he relies on information
Analyst 2: As of now, there is no such thing which has gathered from sources other than
come up from Maruti across dealers?
ED, Corporate Planning: No, there is absolutely no concern the management – like
so far and in fact four days ago, ICICI had issued a press performance of other industries or
statement where they are doing 100 per cent finance for key economic indicators.
vehicles during the consumer season and also they are
talked about their turnaround time of four hours. So,
that is the kind of scenario which is there and I do not per cent vs an actual growth of 0.9 per cent is off by
think there is any cause of worry on that front. over 60 per cent! What insight does a guidance provide
The figures in the table ‘Maruti: Sales volumes in except for being in the general ballpark in absolute
FY19’ for full year tell their own story. Over the next few numbers, which any reasonable analyst should be
months, sales performance fell precipitously against expected to be able to make an educated guess at?
forecast; dealer financing came under severe pressure,
leading to significant shut-downs among dealers. And Your forecast may be better than theirs
of course, end-user financing slowed considerably as Managements are good at describing developments
NBFCs struggled to survive. As the management’s within their company. The latest order book, capacity
response to the questions above reveals, with just five constraints or execution challenges, fund raising and
months to go for the end of FY19, they had no clue of capex plans are all within their realm of expertise.
the approaching train-wreck. When it comes to forecasts, an analyst can develop a
better forecast if he relies on information gathered
Case study: JSW Steel from sources other than the management – like perfor-
Maruti is not an isolated case. The table ‘JSW Steel: mance of other industries or key economic indicators.
History of forecasts vs actuals’ is a compilation of over The future is unknown and management’s crystal balls
five years of management guidance provided by JSW are opaque – even more so than those of analysts. WI
Steel. JSW makes its outlook known at the end of every Anand Tandon is an independent analyst.

MAIN STREET
Market savvy doesn’t help much

Following the market avidly doesn’t help generate great investment insights.
It actually alienates you from the real world.
SAURABH MUKHERJEA
“Our job is to find a few intelligent The least important driver of investment success
things to do, not to keep up with every damn thing in The English poet D H Lawrence once noted that if we
the world.” stare at a map long enough, “the map appears to us
– Charlie Munger more real than the land.” Extending the metaphor to
Last week someone made the mistake of inviting me to market data, if one stares at share prices, P/E multi-
speak at an investment conference in Mumbai. Once I ples, central-bank pronouncements and quarterly
had suitably riled the audience, I exited the venue only results long enough, the financial market appears to be
to find myself pursued by a salesman from a financial- more real (and more relevant) to an investor than the
data vending shop. The salesman was under the real world. Taken to its extreme, the obsession with
misapprehension that I was still the CEO of an prices and high-frequency data becomes a kind of psy-
investment bank which was spending well in excess of chological disorder, wherein investor loses all sense of
$150,000 per annum on financial data. I disabused him perspective of the real world and builds algorithms to
of this notion and disappointed him with the fact that trade basis smoke signals being generated tick by tick
Marcellus’ financial data budget is $1,500 per annum, a by the financial market.
figure which would just about pay for the smartphone In their different ways, Buffett, Munger and John
which the salesman was sporting. Bogle understood this form of psychosis earlier than
Once the salesman had abandoned me for more fruit- other investors and built varied investment methods to
ful quarries, I pondered during my taxi ride home as to capitalise on this insight (that focusing on financial
why with a 99 per cent drop in my col- markets per se does not generate
leagues’ financial-data spend, we at wealth). Buffett and Munger popular-
Marcellus actually feel happier in terms
If one stares at ised the notion of delving deep into the
of our relationship with the stock mar- share prices, P/E sustainable competitive advantages of a
ket and why the drop in financial-data multiples, cen- company and understanding the quality
spend had not impacted our investment of its accounts. Bogle’s insight was even
performance (so far).
tral-bank pro- more profound.
My conclusion – self-serving as it nouncements and Bogle took Paul Samuelson’s effi-
might be for a person who is more inter- quarterly results cient-markets theory to heart and was
ested in psychology, forensic accounting, amongst the first executives in the
history, economics and corporate strate-
long enough, the mutual fund industry to fully under-
gy – is that being on top of whatever it is financial market stand its profound implication, namely,
that is happening in financial markets appears to be it makes little or no sense to pay juicy
actually doesn’t count for much. Whilst fees to a fund manager to manage your
it probably makes one feel busy as one
more real to an money, given that the fund manager has
peers into those big screens, it rarely investor than the little or no chance of consistently beat-
generates investment insight. So, why is real world ing the market. Thus was born Bogle’s
this the case? breakthrough idea – in 1975 Vanguard

MAIN STREET
launched the world’s first index mutual fund. Instead year-old thing). When I need to check prices, I go to the
of beating the index and charging high fees, the index stock-exchange website using my phone and that pro-
fund would mimic the index performance over the long cess takes 20–30 seconds. That time lag switches off
run, thus achieving higher returns with lower costs my fast brain/System 1. Most of my colleagues access
than the costs associated with actively managed funds. stock-price data using similar techniques. Only our
Daniel Kahneman’s famous ‘System 1 vs System 2’ trader has ready access to real-time prices.
framework [from Thinking, Fast and Slow (2011)] can Our five analysts share one terminal from an Indian
also be used to understand why being on top of financial-data provider. The terminal’s main function
stock-market data does little to generate wealth or is to give us in digital form financial statements for
happiness. Brian Portnoy in his enjoyable book The around 5,000 Indian companies going back around 20
Geometry of Wealth: How to Shape a Life of Money years. My colleagues take turns to use this terminal.
and Meaning (2018) explains why System 1, which he The delay in accessing the terminal in turn slows down
calls our fast brain i.e. the part of the brain most the impulse to drown in data.
exposed to financial-market data, leads to poor deci- All of this gives us ample time to read annual
sion making: “The fast brain loves consistency. It is reports and books. Not only does that make book-
biased to confirm beliefs and see patterns even when worms like me happy, it also gives us a better chance
they don’t exist. It shies away from ambiguity and of generating insights. We believe insights which
doubt. It accepts given categories and isn’t fond of make money tend to come from extensive reading,
thinking in terms of probability, preferring specific thinking and in-depth discussions with well-informed
predictions. It anchors on what you already think you people (ideally people who see the world from a differ-
know and ignores evidence that is hard to find. In ent vantage point than our own).
Kahneman’s terms, ‘what you see is all there is’.” We have also invested in a hot-water kettle, a big jar of
Notice the similarity between the last sentence of coffee and noise-cancelling headsets as we find that
Portnoy’s para and the D H Lawrence quote cited earlier these are more useful than financial-market data in gen-
in the note – financial markets create an illusory world erating investment insights. In contrast, absorbing loads
which can drown those who immerse themselves in mar- of market data and crunching massive datasets is a good
ket data. This in turn leads to investment mirages way to spend time but that rarely generates insights. WI
Saurabh Mukherjea is the author of The Unusual Billionaires and
Investment implications Coffee Can Investing. He’s the founder of Marcellus Investment
I don’t have a single financial market app or social-me- Managers, a SEBI regulated provider of portfolio management services.
dia app on my phone (which itself is a battered four-

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Hot stocks that we

rejected and why
During our research process, we have decided to junk many
ideas that looked promising at the time. Here is why we
did so and what you can learn from that.

S
Vikas Vardhan Singh
electing good stocks is the key to building it is available at a reasonable price or else wait, as we
long-term wealth. However, equally, if not are doing for Avenue Supermart.
more, important is to focus on what not to Benjamin Graham (Warren Buffett’s mentor) has
buy. When you put a lot of effort to go articulated this very concern, mentioning that inves-
through a stock and buy it eventually, your tors who buy companies at hefty premiums are at the
time is well spent. On the other hand, when mercy of uncertain future prospects. Quality stocks
you put the same effort to reject a stock, that’s again result in outperformance in the long run only when
time well spent. No doubt, a great portfolio is built they are purchased at reasonable valuations. On the
with great stocks but the foundation of a solid portfo- other hand, expensive valuations leave little on the
lio is laid by avoiding big losers which can shake your table for new investors. Therefore, you should not fol-
portfolio. Often, such a rejection of stocks teaches low the crowd into a market favourite but ensure that
great lessons about investing. you have a reasonable margin of safety.
We took a hard look at the stocks that we rejected at
Value Research Stock Advisor and the lessons that Fancy stocks: Arrow Greentech
came out with these rejections. When the markets are rising, investors are likely to
start overrating their investment acumen and buying
Valuations: Avenue Supermarts rubbish. You must avoid falling into this trap.
We identified some great businesses but still did not Remember that for every Infosys, there is a DSQ
recommend them. One fundamentally strong company Software. Late Parag Parikh, founder of Parag Parikh
with great growth and a strong business model is Financial Advisory Services, said, “When you buy
Avenue Supermarts, the Walmart of India. It has fancy stocks you have to pay fancy prices and soon you
grown its revenue by more than 33 per cent per will end up with a fancy loss when the fancy ends.”
annum in the last five years and created a strong busi- But first, what are fancy stocks? Well, these are
ness model without bloating its balance sheet with newly discovered stocks by ‘some’ investors and have
debt. However, it is available at a price to earnings of become a sudden darling of the stock market for any
more than 90 times. In other words, it would take crazy and unsustainable reasons.
more than 90 years to recover money through the net One such case is Arrow Greentech. The company
profits of the company (assuming no growth). claimed to have introduced the first water-soluble film
When you buy great companies at fancy prices, in the world and India’s first water-soluble, capsulated
returns in the long term may be impacted severely. detergent powder. The stock, when discovered in 2013,
This is because an abnormally high growth rate is ran up almost 100 times in the next three years. In
not sustainable in the long term. And when earnings FY17, the company had an operating margin of more
revert to the normal sustainable rates, then it takes than 75 per cent.
longer to recover money. The table ‘Recovery of We avoided Arrow Greentech despite its patent
investment’ how many years claims and high growth rate. The rejection was
it will take to recover your because of the absence of a credible performance his-
investment at various P/ tory. Moreover, the company’s majority sales to one
Es, assuming different subsidiary raised concerns. Today, the stock is back on
growth rates. the ground, giving an important lesson to investors.
The key is once you find a It’s easy to paint a favourable short-term picture for
company you’d like to own, such small companies with an unproven track record
don’t pounce on it at once. See if and it’s easy to manipulate their stocks, too. Stay away
The problem of high P/E

Here is the time taken to recover your investment in terms of earnings for various earnings growth rates. “When you buy fancy stocks
Growth rate | P/E 90 50 30 15 10 you have to pay fancy prices
No growth 90 50 30 15 10 and soon you will end up
10% growth 24.2 19.0 14.5 9.0 7
with a fancy loss when the
15% growth
20% growth
19.1
16.1
16.0
13.1
12.2
10.6
8.4
7.6
6.5
6.0
fancy ends.”
Parag Parikh, Founder of Parag Parikh Financial
25% growth 14.1 11.6 9.6 7.0 5.6 Advisory Services

;OLYPZPUNHUKMHSSPUNHYYV^ ;VVJVTWSL_[V\UKLYZ[HUK
Arrow Greentech raced when the market discovered its ‘revolutionary’ Given Tata Motors’ complex business model, its domestic and global
technology. It later fell as the buzz fizzled out. profits have seldom shown a steady pattern.
1000 ` 14000 cr Domestic JLR
800 7000
600 0
400 -7000
200 -14000
0 -21000
July 2013 July 2019 2013 2014 2015 2016 2017 2018 2019
from such fancy stocks. Stick with companies which During its restructuring in 2003, the Triveni Group
have gradually built their businesses over the long converted a minority shareholder’s stake into prefer-
term and are sustainable. ence shares, which was an unusual move. The promot-
er group benefited from the profit generated thereaf-
A complicated business model: Tata Motors ter. In 2013, SEBI asked for the disclosures about the
Tata Motors is a well-known brand with a growing company’s history following investors’ complaints
portfolio of cars, studded with jewels like Jaguar and that the company had not given the details about its
Land Rover. It was available at a very previous initial public offering in 1993. In the same
attractive valuation a year ago. year, SEBI asked it to disclose more information, as
However, Tata Motors threw a this was missing in the red herring prospectus
unique challenge to us. filed by the group company Triveni Engineering.
Understanding its business, as well In 2016, Welspun India, a towel and textile
as its growth driver, was a hercule- maker, was alleged by one of its largest custom-
an task, given the company’s range ers, Target Corp, to have substituted Egyptian
of products and presence across the cotton with a cheap-
globe. All its markets are fundamen- er type of cotton to
tally different and the rules that apply
Once you find a make bedsheets.
in one may not apply in another. For instance, any company you’d like However, in a can-
pickup in demand for Tata Motors in the US was did confession, the
marred by the slowdown in China. An improvement to own, don’t management
in China was marred by the European market. When
every international geography was doing well, Tata
pounce on it at revealed that it had
changed its working
Motor’s domestic market was struggling. To add to the once. See if it is style, which attract-
complexities, Tata Motors housed a finance company
and a technology company within itself, which had
available at a ed us to the compa-
ny. But when we
completely different dynamics. reasonable price looked for more
Hence, go for businesses with fewer drivers, the information on
ones that are simpler to understand. or else wait Welspun, we found
that the group had
Corporate governance: dozens of companies, a web of ownership and was not
KRBL, Welspun India, Triveni Turbine new to controversies. Its name appeared in a land
The businesses of KRBL, Welspun India and Triveni scam in 2004. In 2010, SEBI banned the promoter enti-
Turbine looked good and their valuations were attrac- ty Welspun Corp from trading, citing trade practices
tive too. However, doubts regarding their corpo- which were “fraudulent and unfair.” However, the ban
rate-governance standards held us back from going on promoter entities was lifted in March 2012.
ahead with these stocks. While researching a company, try to find any irreg-
In KRBL, Gautam Khaitan, one of the directors, ularities in its past. If it’s a serious lapse, stay away
was being probed by the Enforcement Directorate for from the company. Chances are high that a company
his alleged involvement in a bribery scandal about the that has compromised on corporate governance once
purchase of helicopters from AgustaWestland. might repeat it to cover up the past mistake. WI

STOCK
SCREEN
Ideas to delve deeper

S
ound investment methods outlast cycles and However, please note that they are not our
fads and generate profits over the long run. recommendations.
Value Research presents stock screens based on Each stock screen explains the reason behind picking
time-tested principles. the stock, which over time will help you develop your
What are stock screens? These are a listing of attractive own investing rules. As we will be evolving such models
stocks based on the objective principles of sound and implementing changes to the methodology to be in
investment. We apply stock filters carefully crafted by line with economic and market cycles, the list will be
Value Research analysts on the universe of Indian stocks dynamic and updated periodically.
to identify these attractive stocks. The filters are devised In the following pages of ‘Stock Screen’, we present
to identify stocks of the following kinds: five categories that collectively list a number of
Quality stocks available cheap stocks. With these, you will be well-equipped to select
ttractive blue chips
A stocks to build your own portfolio after doing further
Stocks available at a steep discount to book value research. If you think that stock picking is a lot of
High dividend-yield stocks hard work, you can get started with these screens and
Growth stocks available at reasonable prices with time understand the way the ideas are shaping to
We believe that stocks listed in this section are a good make your own judgement on stock selection.
starting point to start a close scrutiny before adding Great investments are not easy to find, but practice,
them to your portfolio. patience and sound principles are all that you need.
Key terms
Universe companies In order to arrive at our universe of companies, we checked ICR of more than two implies that it can service more than twice its current
if the companies traded on all the days for the last two quarters. We considered interest charges.
the companies with a market capitalisation of more than `500 crore. Debt-equity ratio The debt-equity ratio is calculated as the ratio of total out-
Price to book value (P/B) Price to book value is the ratio of the price of a stock standing borrowings of the company to its total equity capital. It essentially tells us
to the book value per share of the company. It shows how much premium investors which companies use excessive leverage to achieve growth. Conventionally, the
are willing to pay for the underlying net assets of the company. debt-equity ratio of less than two is considered safe.
Price to earnings (P/E) The price-to-earnings ratio, or the P/E ratio, is simply Return on equity (RoE) This is measured by taking profit after tax as a percent-
the ratio of the price of a stock to its earnings per share. It shows in multiples how age of net worth of the company. It indicates how efficiently the company has been
much investors are willing to pay for the earnings. The thumb rule of valuing a stock able to utilise investors’ money.
is that a high-growth stock will have a high P/E ratio, while a value stock will have Stock return Stock return is calculated by taking the percentage change in the
a relatively lower P/E ratio. price of the stock adjusted for bonus or split.
Earnings per share (EPS) Earnings per share, or EPS, is calculated by dividing Dividend yield This is defined as the percentage of the dividend paid per share
the company’s net profit with the total number of outstanding shares. to the current market price of the stock. Since the denominator in this ratio is the
EPS growth Growth of the EPS over a specified time period – trailing 12 months market price, a stock’s dividend yield changes every day.
(TTM), a quarter or five years. Quarterly comparisons are on a year-on-year basis. Dividend-payout ratio This is the total dividend paid to the shareholders as a
For five years, the figures are annualised. percentage of net profit.
Price-earnings to growth (PEG) This ratio demonstrates how high a price we Altman Z-Score Developed by Edward Altman of New York University, the Z-Score
are paying for the growth that we are purchasing. It is the ratio of price to earnings predicts a company’s financial distress or the possibility of its going bankruptcy
to the EPS growth of the stock. In all our analyses, we have taken five-year historic within two years. A Z-Score of more than three is desirable.
EPS growth. Modified C-Score It tells the probability of financial manipulations. In order to
Earnings yield Earnings before interest and taxes (EBIT) divided by enterprise develop it, we have modified James Montier’s C-Score. A C-Score of less than four
value. Enterprise value is market cap added to total debt and less cash and is desirable.
equivalents. Piotroski F-Score Developed by Joseph Piotroski, the F-Score highlights financial
Dividend per share Total dividend declared during the year divided by the total performance as compared to that in the previous
number of outstanding shares. year. It thus points out to the current outperformer Growth Value
Net sales This is simply the income that a company derives by in terms of profitability and financial improvement.
selling the goods and services that it produces. The downside of taking sales as an An F-Score of seven or above is good. Large
indicator of growth is that it may not be matched by a similarly scintillating bot- Stock style It indicates the style of the stock. It
tom-line (net profit) performance. A company may be earning revenue at a high is derived from a combination of the stock’s valu- Mid
rate. But if it is doing so by incurring a very high cost, the bottom line may not grow ation — growth or value — and its market capital-
in proportion to the growth in the top line (sales). isation — large, mid and small. For example, on the Small
Interest-coverage ratio (ICR) This indicator is generally used to gauge right we have shown the stock style of a large-cap
whether a company has the ability to service its debt. The interest-coverage ratio growth stock.
is calculated as the ratio of operating profit to interest outgo. A company with an

STOCK
SCREEN
Quality stocks available cheap

The stocks listed below clear essential checks on solvency, accounting,
recent financial performance and valuations
No. of companies that
cleared the filters
REASONS TO INVEST THE FILTERS 903

Safety Market cap greater than C-Score less than 4 512
Soundness `500 cr PEG less than 1
95
Good performance Z-Score greater than 2.99 P/E to median P/E less
F-Score greater than or equal than 1.5 88
Reasonable valuations
to 7 Earnings yield greater than 5% 38
Banking and finance companies were removed from this analysis as the metrics don’t apply to them.
Safe bets
Company Stock Altman Piotroski Modified Earnings Market Share 52-week
Industry style Z-Score F-Score C-Score yield (%) P/E PEG cap (` cr) price (`) high/low (`)
ADF Foods
Food Processing 13.0 8 1 9.0 18.4 0.46 511 252 305-192
Action Const Equipment
Construction 4.0 9 2 13.6 12.3 0.18 631 53 144-52
Ahluwalia Contracts
Construction 7.8 8 2 9.5 19.2 0.83 2,057 307 380-251
Alkyl Amines Chemicals
Organic Chemicals 4.0 8 0 10.4 14.5 0.86 1,466 706 916-535
Bhansali Engg Polymers
Thermoplastics 8.6 9 2 9.6 17.7 0.15 914 54 150-50
Confidence Petroleum
Storage & Distribn. 6.1 8 0 16.1 8.5 0.07 583 21 50-21
Deccan Cements
Cement 4.1 8 3 23.6 8.7 0.11 504 360 490-331
Excel Industries
Pesticides 5.8 8 1 24.6 6.8 0.16 961 758 1922-736
Firstsource Solutions
Misc.Other Services 6.5 8 0 12.5 8.9 0.68 3,389 48 77-39
Ganesha Ecosphere
Textile Processing 5.2 8 1 19.1 8.1 0.42 550 245 380-231
Garware Polyester
Plastic Films 3.0 8 2 21.4 6.6 0.18 530 226 290-186
Graphite
Welding machinery 7.5 8 2 114.2 2.1 0.02 5,592 283 1062-255

STOCK
SCREEN

Gujarat Gas
Indl.Gases 3.1 8 1 6.6 23.9 0.65 12,625 179 194-115
Gujarat Narmada Valley
Nitrogenous Fertilizer. 3.0 9 2 18.7 4.8 0.21 3,010 179 418-178
Heidelberg Cement
Cement
3.3 8 2 9.2 18.3 0.31 4,544 194 215-122
Himadri Speciality Chem
Coal & Lignite
3.9 9 3 12.7 11.0 0.18 3,330 76 147-62
IOL Chemicals & Pharma
Drugs & Pharma
5.0 8 3 37.4 3.4 0.02 1,059 188 235-108
International Paper APPM
Paper
4.7 9 3 20.4 8.1 0.17 1,752 441 591-380
KNR Construction
Construction
4.9 8 2 7.2 14.5 0.52 3,442 241 303-165
Kalyani Steels
Finished Steel
3.6 8 1 34.7 5.7 0.33 796 178 305-162
Kennametal
Machine Tools
5.3 8 1 6.0 24.0 0.49 2,127 950 1275-750
L&T Technology Services
Other Projects
15.3 8 1 6.8 21.0 0.76 16,180 1,564 1855-1366
Lux Industries
Readymade Garments
7.3 9 2 6.5 24.5 0.96 2,532 1,003 1940-990
National Aluminium Co
Aluminium
3.4 8 2 48.5 6.4 0.74 7,313 38 78-38
Oriental Carbon & Chem
Carbon Black
5.2 8 1 10.4 12.4 0.99 994 1,003 1245-900
Polyplex Corporation
Plastic Films
3.0 8 0 50.0 4.2 0.03 1,459 449 668-435
Radico Khaitan
Liquors
4.3 8 0 7.1 21.0 0.86 4,098 293 499-262
Sandhar Technologies
Auto Ancillaries
3.7 9 3 9.1 16.0 0.81 1,432 235 391-227
Sandur Manganese
Minerals
6.1 9 1 56.7 4.2 0.20 603 680 1422-646
Satia Industries
Paper
3.4 9 2 16.6 6.9 0.10 655 651 781-471
Seshasayee Paper
Paper
3.9 9 2 33.2 5.6 0.11 1,127 173 270-160

STOCK
SCREEN

Sharda Motor Industries

Auto Ancillaries
4.4 8 3 31.6 6.6 0.15 556 915 2052-881
Shemaroo Entertainment
Media & Entertainment
10.7 8 2 15.6 9.4 0.66 748 267 543-264
Time Technoplast
Other Forms-Primary Plastic 3.0 9 0 18.7 6.7 0.43 1,358 58 165-58
Transpek Industry
Inorganic Chem. 3.9 9 1 12.6 12.1 0.18 714 1,244 1730-1077
Tube Investments
Auto Ancillaries 4.9 8 0 6.7 24.9 0.56 6,397 339 434-267
VenkyS
Food Processing 5.3 9 2 13.2 12.2 0.29 2,012 1,408 3075-1135
WPIL
Pumps & Compressors 3.1 8 3 17.1 9.1 0.32 586 594 1000-540
Data as on August 22, 2019. New entrants.
Reasonably priced growth stocks

Growth investing is about picking companies that are fast growing their
bottom lines. But make sure that the valuations are not overheated.
REASONS TO INVEST THE FILTERS cleared the filters
All-weather style Market cap greater than

At least 20% in the trailing 12
900
Companies with strong `500 cr months YoY
fundamentals Earnings growth of:

At least 20% in latest quarter
104
YoY
Greater stability vis-a-vis
At least 20% in the past five Stocks with a P/E of less
value or growth years
than 15 47
On fast track
Company Stock 5Y median Quarterly EPS TTM EPS 5Y EPS Market cap Share 52-week
Industry style P/E P/E PEG growth (%) growth (%) growth (%) (` cr) price (`) high/low (`)
Alkyl Amines Chemicals

Organic Chemicals 14.5 16.0 0.86 99 45 33 1,466 696 916-535
Balmer Lawrie Investments
Misc. Fin.services 12.5 17.1 0.73 47 42 92 956 425 460-361
Balrampur Chini Mills
Sugar 4.4 9.7 0.04 51 256 28 2,670 122 169-65
Bharat Financial Inclusion
Misc. Fin.services 12.8 26.5 0.18 50 65 88 12,597 898 1235-824

STOCK
SCREEN
Bombay Dyeing
Textile Processing
1.0 41.0 0.00 129 5,301 55 1,420 64 274-62
Chambal Fertilisers
Nitrogenous Fertilizer.
9.4 12.7 0.51 52 26 49 5,858 136 195-128
Deccan Cements
Cement
8.7 15.0 0.11 106 51 76 504 357 490-331
Dhampur Sugar Mills
Sugar
3.6 6.0 0.08 81 108 100 989 145 253-83
Dolat Investments
Invest.Services
12.5 17.8 0.40 30 53 35 669 38 92-24
E.I.D. Parry
Sugar
8.3 23.9 0.54 86 357 21 2,656 147 248-135
GHCL
Soda Ash
4.7 6.8 0.21 68 49 33 1,883 190 277-189
Gallantt Ispat
Steel Wires
5.4 34.6 0.13 526 149 43 620 20 51-20
Ganesha Ecosphere
Textile Processing
8.1 13.3 0.42 53 67 27 550 250 380-231
Garware Polyester
6.6 15.0 0.18 28 79 43 530 226 290-186
Plastic Films
Gateway Distriparks
2.6 23.2 0.14 90 292 38 1,030 93 191-93
Transport Support Services
Granules
8.7 18.8 0.43 61 81 56 2,329 90 123-79
Drugs & Pharma
Gujarat State Petronet

14.3 16.5 0.80 43 30 37 12,254 219 226-149
Crude Oil & Natural Gas
HG Infra Engineering
10.4 13.5 0.22 37 39 22 1,430 210 308-170
Construction
Himachal Futuristic Comm

10.9 14.0 0.43 131 37 24 2,505 19 26-17
Communication Equipt.
Hindustan Oil Exploration

8.5 32.3 0.31 32 169 26 1,326 97 158-97
IOL Chemicals & Pharma

3.4 19.7 0.02 485 680 132 1,059 188 235-108
Drugs & Pharma
India Nippon Electricals

11.3 20.0 0.41 68 38 27 767 328 570-291
Auto Ancillaries
Indian Hume Pipe Co 13.6 23.5 0.46 23 43 30 1,224 249 370-226

Cement & Asbestos prod.
International Paper APPM 8.1 28.5 0.17 36 108 51 1,752 441 591-380
Paper

STOCK
SCREEN
Ion Exchange
Industrial Machinery 13.0 13.6 0.44 41 38 33 927 604 794-335
JK Paper
Paper 3.8 10.0 0.08 43 59 64 1,808 98 192-98
JMC Projects
Real Estate 12.7 16.9 0.29 34 38 39 1,923 115 151-67
Jindal Saw
Steel Tubes & Pipes 3.9 6.6 0.16 53 29 33 2,152 65 102-63
KRBL
Other Agri.prod. 9.7 17.4 0.68 36 28 32 5,217 217 404-197
Kalyani Steels
Finished Steel
5.7 8.3 0.33 31 22 31 796 178 305-162
Kirloskar Ferrous Ind
Pig Iron
8.0 15.0 0.43 75 124 37 845 58 104-58
Manappuram Finance
Hire Purchase
10.4 11.6 0.32 36 40 33 10,338 120 145-66
NIIT
Computer Software
1.3 23.4 0.11 5,959 1,546 37 1,529 90 117-61
Oriental Carbon & Chem
Carbon Black
12.4 14.7 0.99 43 39 29 994 998 1245-900
PNB Gilts
Invest.Services
4.2 7.9 0.19 202 311 32 589 33 40-24
Plastic Films
4.2 9.4 0.03 33 70 73 1,459 444 668-435
Power Grid Corporation
Electricity Distribn.
7.0 13.3 0.41 104 99 46 1,07,143 202 216-173
Rail Vikas Nigam
Construction 7.0 – – 37 23 28 4,952 23 30-19
SJVN
Electricity Generation 6.4 8.5 1.42 43 44 22 9,549 24 31-22
Satia Industries
Paper 6.9 6.7 0.10 41 24 38 655 651 781-471
Seshasayee Paper
Paper 5.6 10.3 0.11 44 58 52 1,127 171 270-160
Seya Industries
Organic Chemicals 10.6 19.3 0.22 27 45 73 1,016 410 714-382
Sobha
Real Estate 13.2 18.4 1.93 72 52 22 4,432 456 588-380
Texmaco Rail & Engg
Other Machinery 13.7 63.6 0.13 71 178 68 1,020 44 81-44

STOCK
SCREEN
Trident
Cotton & Blended Yarn 6.6 11.4 0.35 111 87 39 2,900 54 76-52
Usha Martin
Other Metal prod. 1.7 79.3 0.02 3,149 359 73 701 23 46-23
West Coast Paper Mills
Paper 4.9 10.3 0.05 21 24 212 1,548 234 415-210
Data as on August 22, 2019. EPS growth rates are annualised. Median P/E is for less than five years if five-year data are not available. New entrants.
Attractive blue chips

Investing in blue chips at reasonable valuations is one of the simplest
methods of wealth creation with limited pain
REASONS TO INVEST THE FILTERS cleared the filters
Liquidity Large and mid caps
268
Large companies in respective businesses Debt-equity ratio of less than two
Strong balance sheets Interest coverage ratio should be more than two 225
Liked by institutions Five-year average ROE of more than 20% 165
Annualised earnings growth of more than 20% over 74
the past five years
34
PEG of less than 1.5
Five-year average return on equity above 20% 15
7
Solid foundation
Company Stock Debt-equity Interest 5Y avg 5Y EPS Market cap Share 52-week
Industry style P/E PEG ratio coverage ratio RoE (%) growth (%) (` cr) price (`) high/low (`)
Aarti Industries
Organic Chemicals
24.3 0.96 1.3 4.3 22.8 44.0 12,560 1,443 1899-1100
Godrej Consumer Products

Cosmetics & Toiletries
27.1 1.18 0.5 9.8 26.8 24.9 63,475 610 979-585
Hero Motocorp 14.4 1.21 0.0 136.7 34.5 27.3 53,884 2,675 3380-2226
Two & Three Wheelers
Rajesh Exports 17.4 0.66 1.2 3.5 20.9 46.4 20,839 713 785-542
Gems & Jewellery
Sun TV Network 12.0 0.87 0.0 1,570.4 25.6 30.4 16,351 419 808-407
Media & Entertainment
Sundram Fasteners 19.9 0.74 0.5 15.2 23.1 45.3 8,418 404 689-399
Fasteners
Vinati Organics 35.0 1.39 0.0 196.2 26.2 41.1 10,527 2,053 2280-1056
Organic Chemicals
Data as on August 22, 2019. EPS growth rates are annualised. New entrants.

STOCK
SCREEN
Discount to book value

Stocks available at a discount to their book value indicate bargain and
inherent value, provided the business fundamentals are sound
REASONS TO INVEST THE FILTERS
900
Really cheap Market cap greater than Companies must have a five-year
Relatively undervalued `500 cr earnings growth of more than 729
Companies with assets Debt-equity ratio of less than 1.5 10%
Price at least 10 per cent below 517
times
Return on net worth of more than the book value
388
10% in the most recent year
40
Bargain hunt
Company Stock 5Y EPS Dividend Debt-equity Market cap Share 52-week
Industry style P/E P/B growth (%) yield (%) ratio RoE (%) (` cr) price (`) high/low (`)
Andhra Sugars
Diversified
4.4 0.7 37 3.6 0.3 10.6 744 272 485-261
Banco Products
Auto Ancillaries
10.2 0.8 15 10.3 0.0 15.3 694 97 239-91
Bharat Road Network

Construction
44.3 0.5 17 0.7 1.0 11.5 588 70 166-61
Birlasoft
Computer Software
6.4 0.9 14 3.4 0.0 17.4 1,627 58 315-58
Bodal Chemicals
Organic Chemicals
6.4 1.0 46 1.2 0.3 23.5 844 68 139-68
Dalmia Bharat Sugar & Ind

Sugar
3.4 0.4 17 2.1 0.7 11.5 616 74 136-59
Dhampur Sugar Mills

Sugar
3.5 0.8 100 4.5 1.5 22.5 966 147 253-83
GHCL
Soda Ash
4.7 0.9 33 2.6 0.7 19.8 1,889 191 277-189
Gateway Distriparks
2.6 0.7 38 4.8 0.6 25.8 1,020 93 191-93
Graphite
Welding machinery
2.1 1.0 92 19.4 0.1 84.1 5,528 283 1062-255
Gujarat Alkalies & Chem

Caustic Soda
4.3 0.6 40 2.1 0.1 14.9 2,855 389 648-382

STOCK
SCREEN
Gujarat Industries Power

Electricity Generation
5.3 0.4 10 4.1 0.3 10.6 1,075 70 95-67

4.5 0.6 42 3.9 0.1 18.9 2,817 180 418-177
HEG
Welding machinery
1.4 0.9 108 8.5 0.2 107.0 3,629 939 4955-919
Hinduja Global Solutions

Misc.Other Services
6.7 0.7 21 1.8 0.4 13.6 1,177 559 918-553
India Glycols
Organic Chemicals
4.2 0.5 39 3.1 1.0 14.8 604 194 540-191
Indiabulls Real Estate

Real Estate
11.7 0.8 26 0.0 0.9 39.4 3,121 68 159-63
Indian Oil Corporation

8.1 1.0 21 7.6 0.9 14.0 1,13,911 120 171-105
JK Paper
Paper
3.7 0.8 64 3.5 0.8 23.1 1,779 99 192-98
Jindal Saw
Steel Tubes & Pipes
3.8 0.3 33 3.0 0.9 13.0 2,112 66 102-63
Jindal Stainless
Stainless Steel
5.6 0.9 55 0.0 1.3 20.7 1,495 63 161-60
Kalyani Steels
Finished Steel
5.5 0.8 31 2.8 0.0 15.7 777 178 305-162
Kiri Industries
Dyes & Pigments
14.7 0.8 26 0.0 0.1 11.2 1,329 396 654-373
NCC
Construction 5.8 0.7 85 2.8 0.6 13.3 3,216 53 119-52
National Aluminium Co
Aluminium 6.2 0.7 20 14.9 0.0 13.0 7,136 38 78-38
Plastic Films 4.1 0.5 73 11.4 0.3 21.9 1,433 446 668-435
Prakash Industries
Diversified 1.5 0.2 23 3.1 0.3 14.5 663 35 163-35
Redington
Computer Hardware 7.5 1.0 23 3.2 0.3 13.0 3,965 103 116-64
Rico Auto Industries
Auto Ancillaries 12.7 0.8 152 2.2 0.5 10.1 501 37 87-36
SJVN
Electricity Generation 6.4 0.8 22 20.2 0.2 11.0 9,510 24 31-22

STOCK
SCREEN
Sandur Manganese
Minerals
4.1 0.8 47 0.5 0.0 23.2 593 667 1422-646
Surya Roshni
Diversified
7.2 0.7 22 1.3 1.0 12.6 860 157 327-155
Take Solutions
Misc.Other Services
8.9 1.0 28 1.0 0.3 12.6 1,499 101 212-94
Tata Steel
Finished Steel
4.5 0.6 23 4.8 1.5 14.2 40,699 341 648-336
Technocraft Industries
Steel Tubes & Pipes
7.5 0.9 23 0.0 0.7 17.2 734 300 650-295
Tejas Networks
Computer Hardware 7.1 0.6 104 1.2 0.0 12.2 769 83 322-81
Thirumalai Chemicals
Organic Chemicals 5.9 0.8 49 3.6 0.2 18.3 565 54 165-54
Time Technoplast
Other Forms-Primary Plastic 6.6 0.8 56 1.3 0.5 13.3 1,343 58 165-57
Vardhman Textiles
Cotton & Blended Yarn 7.5 0.9 13 1.7 0.5 12.5 5,175 897 1155-875
Welspun Enterprises
Construction 11.0 0.9 25 2.2 0.4 10.2 1,365 91 177-88
High dividend-yield stocks

Good dividends are not just a bonus in addition to stock returns, they also
accumulate to become sizeable in the long run
REASONS TO INVEST THE FILTERS
Cushion against volatility Market cap greater than Stocks with a current dividend 900
Higher total return `500 cr yield of more than 3%
770
Generate regular tax-free Dividend payout ratio of less Stocks with sustained per
income than 40% share dividend and amount 57
over the past five years
38
Dear dividend
Company Stock Dividend Dividend Dividend Earnings Market cap Share 52-week
Industry style P/E PEG per share (`) yield (%) pay-out ratio (%) yield (%) (` cr) price (`) high/low (`)
Allcargo Logistics
9.0 0.99 3.5 3.8 35.5 13.5 2,259 90 124-89

STOCK
SCREEN
Andhra Sugars
Diversified
4.4 0.17 10.0 3.6 23.3 31.5 744 271 485-261
Birlasoft
Computer Software
6.4 3.81 2.0 3.4 18.9 27.7 1,627 59 315-58
Cochin Shipyard
Shipping
9.0 0.45 13.0 3.8 35.8 39.5 4,474 340 442-335
Cyient
Computer Software
9.9 0.77 15.0 3.4 34.6 15.8 4,840 440 820-417
Deepak Fertilisers
Inorganic Chem.
16.1 -0.79 3.0 3.7 37.4 9.0 714 79 265-79
GFL
Organic Chemicals
0.7 0.02 3.5 4.6 15.2 34.5 830 76 1141-76
GIC Housing Finance
Housing Finance
6.0 0.72 5.5 3.3 16.1 10.2 889 162 358-161
Gateway Distriparks
2.6 0.14 4.5 4.8 13.4 7.5 1,020 93 191-93
Graphite
Welding machinery
2.1 0.02 55.0 19.4 31.6 116.3 5,528 281 1062-255
Gujarat Industries Power
Electricity Generation
5.3 8.89 2.7 4.1 24.6 32.7 1,075 70 95-67
Gujarat Mineral Dev Corp
Coal & Lignite
41.2 -1.14 3.5 3.2 31.5 24.8 1,972 61 120-61
4.5 0.19 7.5 3.9 14.7 19.8 2,817 179 418-177
Gujarat State Fert & Chem
5.8 3.23 2.2 3.1 18.5 19.0 2,825 70 125-69
Hindustan Aeronautics
Air Transport
8.8 0.38 19.8 3.0 29.2 15.7 21,902 654 968-610
IIFL Finance
Invest.Services
4.3 0.17 5.0 4.5 17.5 14.1 3,559 112 740-99
IRB Infra Developers
Construction
3.6 0.32 5.0 6.0 19.1 17.6 2,906 82 199-81
India Glycols
Organic Chemicals
4.2 0.14 6.0 3.1 14.0 24.5 604 192 540-191
JK Paper
Paper
3.7 0.08 3.5 3.5 14.6 32.1 1,779 99 192-98
Jain Irrigation Systems
Plastic tubes & pipes
5.4 0.15 1.0 5.1 23.5 16.3 975 20 89-16

STOCK
SCREEN
Jindal Saw
Steel Tubes & Pipes
3.8 0.16 2.0 3.0 7.5 16.9 2,112 65 102-63
Kirloskar Industries
Industrial Machinery
13.4 8.52 21.0 3.1 24.3 -32.0 655 695 1170-588
Lumax Auto Technologies

Auto Ancillaries
8.1 1.03 3.0 3.9 31.0 19.9 527 78 216-72
Munjal Showa
Auto Ancillaries
8.3 -3.38 4.5 3.5 28.8 32.1 509 123 240-115
NOCIL 7.6 0.20 2.5 3.3 22.4 22.6 1,257 74 183-74

Thermoplastics
National Peroxide 6.7 0.20 65.0 4.5 24.3 21.6 837 1,420 5539-1272
Inorganic Chem.
PTC India 6.5 -53.28 4.0 6.9 33.3 3.9 1,709 58 94-53
Phillips Carbon Black 5.6 0.09 3.5 3.0 15.7 20.5 1,999 115 260-106
Carbon Black
Rail Vikas Nigam 6.9 – 0.8 3.4 29.3 – 4,889 23 30-19

Construction
Reliance Capital – – 11.0 29.5 21.2 10.9 941 37 488-36

Equipt.Leasing
Reliance Infrastructure – – 9.5 23.5 18.7 23.0 1,061 40 490-37

SREI Infrastructure Finance 1.3 0.06 0.5 4.9 5.2 17.1 509 10 56-10
Equipt.Leasing
Sarda Energy & Minerals 2.6 0.54 5.0 3.4 8.9 25.3 529 144 439-144
Finished Steel
Srikalahasthi Pipes 5.9 0.26 6.0 3.5 23.8 34.3 791 168 262-157
Pig Iron
Tata Steel 4.5 0.21 16.3 4.8 18.2 16.3 40,699 340 648-336
Finished Steel
Thirumalai Chemicals 5.9 0.12 2.0 3.6 18.0 27.9 565 54 165-54
Organic Chemicals
Trident 6.5 0.35 1.5 5.3 28.3 14.1 2,859 54 76-52

Cotton & Blended Yarn
Yes Bank 27.7 0.97 2.0 3.2 27.1 21.6 15,914 60 396-60
Banking

WORDS WORTH
NOW
We should not view wealth creators with

suspicion, nor should we look down upon them.
If there is no wealth creation, there won’t be
wealth distribution… For me, those who create
wealth are also the wealth of the nation.
Narendra Modi Prime minister, Financial Express, August 16, 2019
...This is not a slowdown for the aviation industry. It was a Saudi Aramco and Reliance
temporary mismatch of demand and supply during January- have agreed to form a long-term
March 2019...Focused on our expansion, we partnership in our oil-to-chemicals
have added overall 119 new flights and (O2C) division. In terms of the
opened five new international markets in understanding between the parties,
2019-20. We are bullish on the Indian Saudi Aramco will invest in Reliance
travel market and see huge potential for for a 20 per cent stake at an
growth over the next three years. enterprise value of $75
William Boulter Chief Commercial Officer, IndiGo,
billion for the O2C
BusinessLine, August 21, 2019 division.
Mukesh Ambani
Chairman and MD,
Reliance Industries,
At a very broad level, enforcement actions have generated a Business Standard,
lot of soul searching and there appears to be a perceptible August 13, 2019
change (in corporate governance) behaviour
for the good. There is a lot of introspection
at board level, board committee I am myself perplexed why [the
level and statutory auditor level. The animal spirit of businesses is
conscientiousness has increased. affected]… Maybe because the
business community was used to a
Injeti Srinivas Corporate Affairs Secretary, certain kind of way of functioning,
Financial Express, August 13, 2019
chalta hai, ho jayega, pata lenge,
but now they find all that difficult.
You just have to worry about what you can do. If the growth They have to follow the rules, the
is slowing down, then you need to see how do we still try to law which is also a process of change
grow?... It’s doomsday and I’m not going to which is making things
spend any money – we can’t take that call. difficult…I am trying
You need to take the economy over a five- to recognise things. I
year horizon. You can never view it in a don’t claim to know
six-month, one-year horizon. too much.
N Chandrasekaran Chairman, Tata Sons, Rakesh Jhunjhun-
The Economic Times, August 21, 2019 wala Investor, Mint,
August 14, 2019

WHEN YOU REAP THE BENEFITS,
SOW A NEW SEED.
REACH FOR BETTER™
IN LIFE. AND YOUR INVESTMENTS.
www.franklintempletonindia.com
SCAN TO KNOW MORE
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Total pages 64, including cover

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September 2019 Wealth Insight 5

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The gods of profitability

September 2019 Wealth Insight 7

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, FIIs drive the ket

2400 18000 1600 18500

1200 17500 800 18000

8 Wealth Insight September 2019

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1000 20000 2000 40000

500 19500 1000 39000

-500 18500 -1000 37000

-1000 18000 -2000 36000

-1500 17500 -3000 35000

September 2019 Wealth Insight 9

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10 Wealth Insight September 2019

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S&P BSE Bankex

2L`U\TILYZ 0UKL_TV]LTLU[ )HURL_:LUZL_4LKPHU

ICICI Bank 2.52 0.24 23.3 10

State Bank of India 1.31 0.00 -3.7 1.2

12 Wealth Insight September 2019

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The Big Four vs the rest

   

All no. in % 16.9 All no. in %

September 2019 Wealth Insight 13

Large caps Price to earnings Net profit (` crore)

14 Wealth Insight September 2019

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Mid caps Price to earnings Net profit (` crore)

-13.1 7 3799 660

September 2019 Wealth Insight 15

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Small caps Price to earnings Net profit (` crore)

16 Wealth Insight September 2019

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Not quite there yet

18 Wealth Insight September 2019

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How to reduce the

Total number of instances No. of companies in BSE 500

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:\Z[HPUHISLILULMP[ FY19 5Y sales <UZ\Z[HPUHISLILULMP[ FY19 5Y sales

20 Wealth Insight September 2019

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September 2019 Wealth Insight 21

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n this issue of Wealth Insight, we are back with our

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24 Wealth Insight September 2019

Rank Returns (% pa) P/E

September 2019 Wealth Insight 25

26 Wealth Insight September 2019

Rank Returns (% pa) P/E

All-weather style Market cap greater than