Wealth-Insight - Aug 2022

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August 2022
Volume XVI, Number 2
36 COVER STORY
EDITORIAL POLICY
The goal of Wealth Insight, as with all
publications from Value Research, is not just
limited to 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 quantitative
data. To this, we add rigorous qualitative
research obtained by speaking to a wide
Fake, fraud
variety of stakeholders. We firmly stick to our
belief of fundamental research and value-
oriented approach as the best way to earn
wealth in the stock market. Equally important
to us is our unwaveringly focus on long term
planning.
or failing
Simplicity is the hallmark of our style. Our
writing style is simple and so is the
presentation of ideas, but that should not be
construed to mean that we
over-simplify.
Read, learn and earn – and let’s grow
and evolve as we undertake this voyage
businesses
together.
Editor
Dhirendra Kumar
Senior Editor
Vibhu Vats
Copyediting
Debjani Chattopadhyay and
Ruchira Sharma
Learn how to spot such companies from
f miles away
Research & Analysis
Arul Selvan, Karthik Anand Vijay
and Udhayaprakash J
Design
Aprajita Anushree, Mukul Ojha and
24 WORDS WORTH WISDOM 32 INTERVIEW
Sneha Verma
Data support
‘Nobody knows ‘We believe inflation
anything about has peaked and is likely
Ashish Kumar Pal and
Maushami Singh
Production Manager
Hira Lal
Data source for stocks anything beyond to normalise over the
a point’ second half of the year’
AceEquity
9DOXH5HVHDUFK,QGLD3YW/WG
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lessons in investing Head – Equity, Axis Mutual Fund
Editor: Dhirendra Kumar.
Printed and published by Dhirendra Kumar
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Total pages 68, including cover
4 Wealth Insight August 2022

Columns
7 8 INSIGHT
EDIT
Wisdom for
by DHIRENDRA KUMAR
Detective work
investing success
Indian equity investors need to Vishal Khandelwal
Followers
be more suspicious than they Twitter page @safalniveshak 164.5k
generally are
54 10 MARKET MOVES 26 MARKET COMPASS

STRAIGHT TALK Market Reporter Market barometer
by ANAND TANDON Monthly Agenda
Revolutionising Hitting new lows
e-commerce Winds of pain
ONDC is an ambitious initiative
Stock Story: Vedanta
by the Government of India to
enable e-commerce inter-operability. Big Moves
Here are its promises and challenges.
Index Watch
56
EVERYDAY ECONOMICS 28 ANALYST’S DIARY
by PUJA MEHRA The plot thickens

Living beyond means Walking on thin ice
What caused the Sri Lankan
crisis and can such a situation Rabbits and tortoises
occur in India as well?
52 STOCK ADVISOR
The right path to investment success
58
MAIN STREET
by SAURABH MUKHERJEA
Consistent compounding:
India vs China 61 STOCK SCREEN 66 WORDS WORTH NOW
In spite of the greater size and growth
Quality stocks available cheap
of its GDP, China lags behind India in terms of
consistent compounding by its companies. Here’s why. More screens
',6&/$,0(5
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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August 2022 Wealth Insight 5

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EDIT
Detective work
Indian equity investors need to be more
suspicious than they generally are
DHIRENDRA KUMAR
As a child in school, did you know There are many more companies that have blown
any kids who would doctor their report cards? I guess up over the decades and you can read about them in
everything is online and SMS-based now, but back in our cover story. In most of them, there were warning
the day, teachers would hand out handwritten report signs that accumulated and were visible for years.
cards which the children would take home and get While Satyam was different in this regard, most
signed by parents. For a child who was seriously companies are not. Compared to now, things were
nervous about the marks, this offered two quite different in the distant past. At the heart of
opportunities to cook the books, so to speak. Either equity investing is the investors’ ability to trust the
the marks on the report card could be modified or the information and the numbers that companies release
parents’ signatures could be forged. Many children about their business. Without this trust, there is
(and even parents I guess and maybe some teachers nothing. Historically, till at least the 90s, it was pretty
too) had no real interest in what the numbers on the hard to trust such numbers. In fact, stock prices had
report card actually meant. All they cared for was what could be called a trust premium or discount. For
that the appearance of good academic performance example, there was an MNC premium, which was
be maintained. mostly because you could trust the numbers.
So it always is with many businesses that are listed Today, for large parts of the equity markets, the
on the stock markets. The promoters are like those situation is quite different. For at least the 100 to 200
children, with the auditors playing the role of teachers, largest companies, you can by and large trust the
and analysts plus investors in the role of the parents. financial numbers. A lot of regulatory reforms of
The goal of such companies is not the underlying different kind have made a difference, including
reality but the illusion that they generate for investors. those in auditing as well as the web of information
The promoters have their goals but those goals have no created under GST. Moreover, in companies beyond a
alignment with the interest of the ordinary shareholder. certain size, the attention of a large number of
Historically, there have been some really notorious investors as well as analysts should mean that
examples of such companies that have actually had anomalies are relatively easy to detect. However, if
the entire illusion blow up in the face of investors. Of you are doing your own research and investing in
such companies, it’s the larger ones that catch the smaller companies, then you need to know how to
public eye. The largest blow up of this kind was, of look after yourself. In smaller companies, people
course, Satyam. Satyam was unique in two ways. One misjudge the business and the valuations.
was the size of the company and its prominent role in That’s where our cover story, as well as many of the
a flourishing sunrise industry. Two, how Ramalinga tools that are available on Value Research Online can
Raju was able to maintain the illusion till the eleventh play a big role. Detecting potential fraud or even just
hour. That was the real wonder and as one would spotting red flags that could possibly be questionable
expect, the fraud was possible only because of the behaviour is an important part of the investors’ toolkit.
role of the auditors. It’s befitting that the Satyam Equity investors are optimists by nature and tend to
affair has proven to be a strong trigger for the audit believe everything will be fine. Most of the time that’s
reforms that have followed. true but when it’s not true, you need to catch on early.

INSIGHT
Wisdom for
investing success
Avoid the dumb things that can kill you financially -
Vishal Khandelwal - Impatience - Leverage - Derivatives

@safalniveshak - Stock tips - Speculation - Over-trading
Followers - Overconfidence - FOMO - and the like
164.5k Had a haircut two weeks ago. Another barber came home
yesterday for son’s haircut.
To test Warren Buffett’s saying “Never ask a barber if
Why Follow you need a haircut,” I asked him if I also needed one.
He said, “Of course sir. It seems you haven’t had one in
Vishal started his career as an months.”
equity research analyst in 2003. Warren was right.
That's also when he started
investing. But in 2008, he saw
many of his friends and family Making a fortune is overrated.
lose a lot of money, which got [Contentment with] making a living is underrated.
him thinking about the need
for investment education.
So, in 2011 he resigned from Imprudent risk-taking may lead you to one-off success,
the firm and started taking
but the consequence of failure could be huge.
workshops and online courses.
The same year, he started
The idea is to never bet against the fundamental, time-
‘Safal Niveshak’, a blog that
tested rules of sound investing, or to indulge in investing’s
provides articles on value false positives simply because, by nature, they are false.
investing and online courses
for investors. His newsletter,
‘The Journal of Investing Good times = Bad lessons
Wisdom’, has over 90,000 Bad times = Good lessons
subscribers worldwide.
Vishal has authored
and self-published three Money CAN buy happiness. You only need to use it well.
books, one of which – ‘The More on experiences and less on stuff.
Sketchbook of Wisdom’ – has Some of my happiest moments with my kids may not
been called a masterpiece have happened if I did not have the money to create
by Morgan Housel. He is an those experiences.
adjunct professor at FLAME So yes, money can buy happiness.
University.

MARKET
MOVES MARKET REPORTER
Telcos panic as Adani bids in the 5G auction

In a surprise move, Adani Group announced its
participation in the 5G spectrum auctions, which
caused the shares of telecom companies to fall.
While the group plans to use the 5G spectrum to
provide enterprise solutions, this still is
considered a negative since it increases the
competition in the auction, thus pushing the
prices up.
Britannia’s shareholders
reject `5,000 cr lending `5,224 cr
proposal GOOGLE’S INVESTMENT
Tata Group IN AIRTEL, BRINGING ITS
companies
In yet another instance of shareholders
choosing not to remain STAKE TO 1.2 PER CENT.
announce silent spectators, THIS IS AFTER THE TECH
capex plans shareholders of
Britannia Industries
GIANT SAID THAT IT
Tata Sons chairman N rejected a resolution
PLANNED TO INVEST $1
Chandrasekaran stated that that would have BILLION IN AIRTEL, OF
Tata Power plans to spend empowered the WHICH $700 MILLION HAS
`JYVYL in its company to lend BEEN COMPLETED WITH
renewable-energy business money to the extent of
over the next five years, `JYVYL to other THIS DEAL. REMAINING
starting with ` companies. In the past, Britannia $300 MILLION WILL BE
JYVYL in FY23. He also said has lent money to related parties such INVESTED OVER THE NEXT
that Tata Chemicals has a as GoAir and Bombay Dyeing. FIVE YEARS.
`JYVYL capex plan to
expand its soda-ash
capacity at its Gujarat
plant. T V Narendhran,
YES Bank, JC Flowers seal the
Tata Steel’s CEO, largest-ever NPA deal
announced that the YES Bank has agreed to sell `JYVYL worth of bad
company has planned to loans to JC Flowers in what is the single largest sale of
spend `12,000 crore in FY23 NPAs in the country. The sale will be to an asset-
in its India and Europe reconstruction company which will be jointly set up by both
operations. the companies and YES Bank will infuse `350 crore in it.
Reliance Retail enters the food and beverage

segment, becomes the official retailer for Gap
Reliance Retail, a subsidiary of Reliance Industries, announced a strategic
partnership with Pret A Manger (French for ‘ready to eat’), a UK-based
sandwich and coffee chain. The company has also entered into a long-term
partnership with Gap Inc, a US-based fashion brand. It will retail through a mix
of exclusive brand stores, multi-brand stores and e-commerce.

MARKET
MARKET REPORTER MOVES
Infosys to acquire
BASE life science
Infosys has decided to acquire BASE life
science for TPSSPVUL\YVZ. Headquartered
in Denmark, BASE is a leading consulting firm
in the life-sciences industry. This acquisition
adds to Infosys’ life-sciences expertise and
expands its footprint in the Nordic region and
across Europe. Infosys will get BASE’s nearly
200 domain experts, along with its strong focus
on data and artificial intelligence.
Bharat Forge and its Grasim Industries

subsidiary acquire JS forays into B2B
Autocast e-commerce in
Bharat Forge has acquired JS Autocast for
building materials M&M to set
With an investment of `
` JYVYL. JS Autocast is a Coimbatore-
based supplier of critical castings for JYVYL over the next five years, up a new
wind, hydraulic, off-highway and Grasim has announced its subsidiary
automotive applications. The acquisition
strengthens Bharat Forge’s capabilities
entry into B2B e-commerce in
building materials. The main devoted to
and enhances its addressable market focus would be on micro,
small and medium
passenger EVs
segments. Moreover, JS Autocast was Auto major M&M has
recently granted environment clearance to enterprises. The key value
entered into an agreement
expand its foundry operations by more proposition, the company
with British International
than three times. This will enable it to said, would be an integrated
Investment (BII), a
cater to larger opportunities for renewable procurement solution with
UK-based development
and other industrial applications. on-time delivery and a
finance institution, to set
superior product range at
up a subsidiary for
competitive prices.
manufacturing passenger
electric vehicles, whereby
both will invest `1,925
crore each. The BII
investment values the
new company at
`JYVYL
Earnest
money
deposits by
telcos for
the 5G
spectrum `14,000 cr `5,500 cr `2,200 cr `100 cr
RELIANCE JIO AIRTEL VI ADANI ENTERPRISES

MARKET
MOVES MARKET REPORTER
ECONOMIC METRICS
`5,41,492 cr .:;JVSSLJ[PVU
200000 In ` cr
EMBEDDED VALUE OF LIC AS OF 150000
MARCH 31, 2022, AN INCREASE OF 100000
0.3 PER CENT OVER ITS SEPTEMBER 50000

2021 VALUE 0
June 2020 June 2022
DGCA reprimands 0UMSH[PVU!*VUZ\TLY7YPJL0UKL_

SpiceJet 8 % change YoY
Debt-ridden airline SpiceJet 7

suffered at least nine
6
malfunctions across its fleet in a
short period of time. This invited 5
the wrath of the aviation
4
regulator DGCA, which issued a
June 2020 June 2022
notice accusing the company of
failing to maintain safe
operations. 0UK\Z[YPHSHJ[P]P[`!0UKL_VM
0UK\Z[YPHS7YVK\J[PVU
180 % change YoY
NSE appoints 120
Ashish Chauhan 60
as CEO 0
NSE has received SEBI’s -60

approval to appoint Ashish May 2020 May 2022
Chauhan as the MD & CEO.
Chauhan, the current CEO of 059]Z<:+
BSE, got the job after Vikram
82
Limaye, NSE’s current CEO,
refused to apply for a second 79
term.
76
73
Musk backs out of the 70
Twitter deal July 2020 July 2022
Elon Musk, Tesla’s CEO, has pulled out

of the $44 billion deal to buy Twitter, *Y\KLVPS
causing its share price to plunge. 150 Brent $/barrel
Ironically, he stated via Twitter that he 120
is pulling out of the deal as the 90
company has not disclosed the number
60
of spam and fake accounts on the site.
Twitter said it plans to take Elon Musk 30
to court. 0
July 2020 July 2022

MARKET
MOVES MONTHLY AGENDA
Hitting new lows

Amid rising inflation and hence interest rates worldwide, the Indian rupee
has been falling against the US dollar. Here are the major events that have
punctuated the USD–INR trajectory over the years.
`
(\N ¶(\N
Asian financial crisis, due to the unpegging of the Thai
baht from the USD, results in a flight of capital.
Inverted scale
`
4HYJO
India abolishes the
LERMS, a part-
government-, part-
(\N¶4HY
The dot-com Foreign investors rush for
market-determined
exchange-rate
(\N ¶4HY bubble burst leads the safety of the US dollar
The crisis caused by the to a decline in the following the global
system and adopts
devaluation of Mexico’s currency global stock financial crisis.
the floating
against the USD and higher US markets. Also,
exchange-rate
rates cause foreign-capital crude-oil prices
regime.
outflows. rise.

MARKET
MOVES
059]ZV[OLYTHQVY^VYSKJ\YYLUJPLZ
,\YV¶059 )YP[PZOWV\UK¶059 1HWHULZL`LU¶059 *OPULZL`\HU¶059
30 20 0.1 6
40 35 0.2 7
50 50 0.3 8
60 65 0.4 9
70 80 0.5 10
80 95 0.6 11
90 110 0.7 12
100 125 0.8 13
Dec 1998 July 2022 Jul 1987 July 2022 Jan 1991 July 2022 Oct 2009 July 2022
Source: https://www.currency-converter.org.uk/currency-rates/historical/table/CNY-INR.html Inverted scale
5V] -LI¶5V]
The demonetisation drive Increasing oil prices, coupled with a widening current-
leads to a contraction in account deficit, result in foreign fund outflows.
Indian GDP.
4HY 1\S
Severe lockdown US Fed hikes
` is imposed in rates by 50
India, along with bps, with an
many countries, expectation of
due to the COVID another 75
pandemic. bps hike soon.
¶
PIIGS (Portugal, `
Italy, Ireland, Greece
and Spain) countries 4H`
default on their A sharp depreciation in many emerging-market
sovereign debt, currencies, owing to the taper tantrum (rise in
causing the US bond yields due to reduction in the purchase
Eurozone debt crisis. of Treasury bonds by the Fed) in the US. ` `
*\YYLUJ`-(8Z
>OH[JH\ZLZHJ\YYLUJ`[VYPZLVYMHSSHNHPUZ[HUV[OLY& a 40-year high. This forced the Federal Reserve to not only hike interest
A country’s trade balance and domestic monetary policy have a significant rates by 50 basis points in May 2022 but also set the expectation for a
bearing on the value of its currency. Since foreign trade plays an important larger 75 basis-point hike. So, foreign investors will now be forced to rethink
role (exports/imports increase or decrease the net demand for a domestic their decision as higher interest rates will increase their opportunity cost.
currency), a country that consistently imports more than it exports is expect-
ed to see its currency depreciate in the long term. Similarly, a country that >OH[HYL[OLJVUZLX\LUJLZVMHYPZLMHSSPUJ\YYLUJ`&
is following an expansive monetary policy (increasing the supply of The USA’s eminent position as the world’s economic superpower
money through lower interest rates and higher inflation) would also means that when it sneezes, the world catches a cold. When any
witness downward pressure on its currency value in the long run. country’s currency weakens, all of its imports become more
However, the relative levels of these metrics (inflation, interest expensive. On the other hand, if the currency appreciates,
rates, etc.), rather than absolute levels, determine the strength of imports will become cheaper. In the case of India, given that it
each currency against one another. imports a majority of its crude-oil requirements through USD-
denominated purchases, the strengthening of the greenback will
>OÒHZ[OL059MHSSLUHNHPUZ[[OL<:+SH[LS`& not only increase the cost of fuel but will also have a cascading effect
Across the world, several currencies have depreciated against the USD. It on the larger economy. But on the bright side, as the rupee depreciates,
means the factors causing these changes are more US-driven. Two years exports will become more competitive since foreigners will now have a
of expansive monetary and fiscal policies resulted in US inflation touching higher purchasing power.

MARKET
MOVES MONTHLY AGENDA
Winds of pain
What you need to know about the windfall tax on oil producers and what to
do if you have oil stocks in your portfolio
What is this tax?
Effective July 1, domestic crude-oil producers are @JY\KLVPSWYPJLZ
subject to a ‘windfall’ tax. A windfall tax is a special 150 Brent crude in USD/barrel
levy on the companies that have witnessed an
extraordinary rise in their revenues and profits, 100
owing to purely external circumstances or sheer
50
luck and hence they supposedly do not have a moral
claim to the full profits. 0
-50
On whom has this been imposed?
The tax has been imposed on the domestic upstream July 2016 July 2022
oil companies whose margins and profits have been
buoyed by the rising prices of crude oil. The ;OL^PUKMHSS[H_PTWHJ[
government has claimed that the tax is not expected
July 1 drop (%) Returns (Jul 2–Jul 20, %)
to directly impact the retail price of petroleum
products. Apart from this, additional taxes on the -7.1 -13.4 -15.1 -7.7 -3.2 -3.9
export of fuel and further restrictions on the 3.8 1.1
quantum of fuel exports by refiners, such as Reliance
Industries, were imposed to ensure adequate supply
to the domestic market.
Reliance ONGC Oil India Hindustan Oil
What is the tax liability? Industries Exploration
Initially, a windfall tax of `23,250 per tonne of crude
oil had been imposed on all the companies that ambiguity on what constitutes windfall gains,
produced more than two million barrels in the domestic crude-oil producers, such as ONGC, Oil India
previous year. But after 20 days, it was reduced to and Hindustan Oil Exploration, will not have any
`17,000 per tonne, given the fall in crude-oil prices in clarity on how long the tax will be imposed.
the international markets. To ensure that producers
still have an incentive to increase production, the What should investors do?
government also exempted incremental production While shareholders of oil companies were, perhaps,
over the previous financial year from the ambit of always aware of the cyclical nature of the business,
this tax. For instance, if a company produced 100 these developments cast a credible doubt over how
tonnes of crude oil in FY22 and is looking to produce much profits these companies can make during
140 tonnes in FY23, it would have to pay this tax only upcycles. Potential investors in these companies
on 100 tonnes. Unfortunately, declining prices of should also start factoring in the additional risk of
crude oil will not reduce the tax liability for many oil an abrupt increase in taxes during their evaluation.
producers since the tax is structured as a flat fee and Although the windfall tax, in its present form, only
not as a proportion of the oil prices. affects oil producers and not retailers like Indian Oil,
BPCL and HPCL, the possibility of the government’s
How long will it stay? intervention in the retailing sector cannot be ruled
Adding to the uncertainty, there is no specified period out. Investors must recognise that oil prices are a
for which this tax has been imposed. The government political issue in India and soothing public sentiment
has planned to review this tax fortnightly (with the is always a priority for any government. Keep these
intention of withdrawing it if companies cease risks in mind if you have oil stocks in your portfolio
making windfall gains). Even still, as long as there is or plan to invest in them.

MARKET
MOVES STOCK STORY VEDANTA
The commodities behemoth

Starting from iron-ore mining, Vedanta gradually ventured into all major
commodities, thereby emerging as a leading natural-resources company
Riding on an acquisition spree gained leadership in
over the years, Vedanta has commodities, such as zinc,
emerged as one of the world’s aluminium and copper (thanks
largest natural-resources to Sterlite’s stake in Hindustan
companies. The company has Zinc and Bharat Aluminium
its footprint in all major Company).
commodities, such as zinc, oil In 2013, after its merger
& gas, aluminium, iron ore, with Sterlite Industries, Sesa
copper and more recently Goa became ‘Sesa Sterlite’
steel. It is also a market leader (Sterlite Industries’ shares
in many of these segments. were suspended from trading)
Vedanta has an interesting and in 2015, it was renamed
history which dates back to ‘Vedanta’. In May 2020, the
1954 when it was established promoters proposed a delisting
as Scambi Economici SA Goa. in order to take advantage of
Later, it became Sesa Goa. the COVID-led price fall. This
Iron-ore mining was its core move came after its parent
business and thereafter, it company Vedanta Resources
ventured into shipbuilding. delisted from the London
The company’s ownership exchange in the previous year.
changed hands several times. But this attempt failed, as
First, Finsider International investors demanded a higher
took its ownership in 1955, valuation and the company
then Mitsui and Co in 1996 and failed to get enough shares
finally Vedanta Resources in required for this. While the
2007. After 2007, Sesa Goa company gave an impressive
witnessed massive growth on return of 17 per cent per
the back of various mergers annum from January 1991 to
and acquisitions. While there July 15, 2022, its latest decadal
were many small-ticket performance has been just 1.8
acquisitions (relatively), its per cent per annum, owing to
merger with Cairn India, as a recent fall in commodity
well as with Sterlite prices. In the last three
Industries, was a game months, Vedanta’s share price
changer. With the help of has fallen 46.5 per cent. Do
Cairn India, it emerged as one note that promoters have
of India’s largest oil & gas pledged all of their stake in
exploration companies, while Vedanta.
Udhayaprakash Sensex rebased to stock price
with the help of Sterlite, it
Jan 7, 1991
`2 MAY 1993 OCT 11, 1996 1999 APR 1, 2002
Sesa Industries set Mitsui and Co The company Merger of Narrain
up as a subsidiary of acquires Finsider commences mining Mines (iron ore) with
Sesa Goa for International, along operations at Barbil, Sesa Goa. Narrain was
manufacturing pig with its 51% stake Orissa, one of India’s acquired by the
iron in Sesa Goa. largest iron ore mines company in 1999.

MARKET
STOCK STORY MOVES
Revenue (` cr) 2SHUDWLQJSURÀWDQGPDUJLQ Dividend payout ratio
140 (in ’000) z In ` cr z In % In %
120 120
40 (in ’000) 32
35 28 100
100 80
30 24
80 25 20 60
60 20 16 40
15 12 20
40 0
10 8
20 5 4 -20
0 0 0 -40
FY13 FY22 FY13 FY22 FY13 FY22
The negative value of the ratio is due to a net loss in the year.
Return on equity Debt to equity

In % 1.6
40 1.4
30 1.2
20
1.0
10
0.8
0
0.6
-10
-20 0.4
-30 0.2
-40 0
FY13 FY22 FY13 FY22
Apr 8, 2010
`491 JUN 4, 2018 Apr 11, 2022
Acquisition of 90 per cent `438
stake in Electrosteel
Steels for `5,320 cr DEC 20, 2021
Acquires Nicomet and
Jan 29, 2018 becomes India’s only
`346 producer of nickel
Jun 5 2014
`314
Jul 15, 2022

`228
Aug 2, 2013 Mar 30, 2020

`124 Feb 11, 2016 `62
Jul 15, 2022
`62
Jan 23, 2009 83
`68
APR 24, 2007 JUN 11, 2009 SEP 18, 2013 APR 21, APR 11, FEB 2018 MAY 12, 2020
Vedanta Resources Sesa Goa Sesa Goa, Sesa Industries, 2015 2017 Supreme Court Anil Agarwal
Plc buys a majority acquires mining Madras Aluminium Company, Sesa Vedanta cancels mining announces
stake in Sesa Goa assets of Sterlite Energy and Vedanta Sterlite completes leases of 88 iron plan to delist
from Mitsui and Dempo group Aluminium merged into one renamed merger with ores in Goa, including Vedanta, which
Co for `1,750 cr entity to create Sesa Sterlite as Vedanta Cairn India that of Vedanta’s ends in failure

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

3M returns (%) 3Y avg RoE (%) 3Y earnings growth (%) 3M price (`) movement
29.8 22.7 4,912

290
Adani Power
Adani Group announced its entry into the telecom business.
18.0 91.2 223
2,988
10.8 276.7 1,264

Adani Transmission
Adani Group announced its entry into the telecom business.
18.7 30.3 2,698
-23.0
1,821
FSN E-Commerce Ventures 1,617.9 41
Disappointing Q4 FY22 results and the recent battering of
new-age companies led to the plunge. 4.5 52.6
1,401
-23.5
766
JSW Steel 6.8 20,021
An increase in export duty by the government led to a fall in
steel prices, which hammered the stock. 22.0 38.4
586
-26.9 677.2 488

Adani Green Energy 2,091
2,861
Huge debt, rising interest rates and stratospheric valuation call
for a correction. 20.6 44.8
-27.6
4,099
MindTree 27.5 1,781
The fear of a recession (especially in the US) and high attrition
rates took a toll on IT stocks. 27.8 37.3 2,966
-30.2
6,042
L&T Infotech 30.4 2,436 4,218
The fear of a recession (especially in the US) and high attrition
rates took a toll on IT stocks. 29.9 17.3
1,320
-31.5 2.8 41,100

Tata Steel
18.8 66.7
An increase in export duty by the government led to a fall in 904
steel prices, thereby impacting the stock.
-32.9
547
Hindalco Inds. 6.0 14,195
Aluminium prices have fallen by 30 per cent over the last
three months, affecting the stock negatively. 7.3 35.7
367
-44.2 4.7 23,709

Vedanta 426
Over the last three months, the declining prices of various
metals have left an impact. 9.2 34.7
237
Our large-cap universe has 102 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 July 18, 2022.

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

35.9 4.2 2,951

MRPL 71
Despite strong numbers in Q4 FY22, the levying of export duties
and an additional windfall tax dampened the sentiment. 51.5 103.3
53
-13.8 436.5 25
National Standard (India) 6,341
After doubling its profit in FY22, the stock has been falling
due to the market decline. 3.7 157.5 5,468
-20.8 3.5 6,607

Oil India 233
The windfall tax was imposed and the prices of crude oil fell.
12.6 46.8
185
-23.5 15.7 685

Angel One
1,286
It faced the brunt of market volatility and tapering of growth in
new Demat accounts. 32.2 98.6 1,682
-28.2 22.2 1,735

JSW Energy
325 234
The general fall in the market over the last few months has
caught up with the stock as well. 8.7 38.5
-36.1 8.1 1,260

Chambal Fertilisers & Chemicals
475
Its Q4 FY22 net profit fell by 46 per cent YoY.
31.1 39.1 304
-36.2
185
Tata Teleservices (Mah) – -1,215
It reported a loss of `1,215 crore in FY22.
–* -43.5 118
553
-36.4 4.7 7,723

Jindal Steel & Power
An increase in export duty by the government led to a fall in
steel prices, thereby hitting the stock. 1.5 78.1 352
-38.4 3.2 9,392

NMDC
168
A reduction in import duties of iron ore led to a fall in iron
prices, thus impacting the stock. 17.8 26.5 103
-38.7
120
National Aluminium Company 4.6 2,952
Aluminium prices have fallen by 30 per cent over the last three
months, affecting the stock negatively. 10.1 19.4 74
Our mid-cap universe has 239 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.
*Negative shareholders’ equity. Data as on July 18, 2022.

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

50
107.9 – -391.0
PC Jeweller
The stock went up without any specific reason. Investors
should be cautious. -9.6 -416.8 24
82.8
717
Gensol Engineering 70.7 11.1 392
The company is planning to venture into electric-vehicle
manufacturing via an acquisition in the US. 26.8 -15.8
41
76.0 98.2 5.3

Bhatia Communications & Retail
Its net profit increased by 21 per cent YoY in FY22.
13.6 1.6 23
256
59.8 36.0 26.2

Sterling Tools
A 44 per cent rise in FY22 revenue YoY has buoyed investors.
11.8 -16.5 160
781
43.0 35.3 31.0

Orient Bell
The company reported a four-times increase YoY in FY22 net
profit. 5.8 51.6 546
27.6 982.5 1.0

103
Kaiser Corporation
A rise in share price seems to be driven mainly by speculation.
7.0 51.1 80
-25.6 – -3.0
Equippp Social Impact Technologies
After a speculative rise, it was bound to fall.
–* -237.5 69
51
593
-46.4 2.3 502.2

Nahar Spinning Mills
A steady increase in cotton prices and high inflation led to a
fall in the price. 2.1 97.0
318
97
-52.1 10.3 912.2

Brightcom Group
46
After racing far ahead of its fundamentals, it is now seeing a
correction. 15.4 27.1
-54.8
94
Asian Granito India 5.9 91.6
Income-tax officials searched the company’s premises.
7.8 69.7
43
Our small-cap universe (minimum market capitalisation `500 crore) has 902 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. *Negative shareholders’ equity. Data as on July 18, 2022.

MARKET
INDEX WATCH MOVES
S&P BSE Auto

With returns of 16.5 per cent, the S&P BSE Auto index is the best performer over the last three months.
However, it has underperformed the Sensex over the last five years. Valuation-wise, it is trading at a
premium to its five-year median P/E and P/B. Its dividend yield is at a discount to the five-year median.
Chip shortage and hence delayed vehicle deliveries have kept the sector in the news.
2LÙ\TILYZ 0UKL_TV]LTLU[ ):,(\[V:LUZL_4LKPHU

60,000
60.4
Price to earnings
4.1
Price to book
48,000
36,000
24,000
1.09
Dividend yield (%)
11.4
Market cap (` lakh cr)
12,000
0
Jul ’17
Sensex rebased to index
Jul ’18 Jul ’19 Jul ’20 Jul ’21 Jul ’22
0UKL_^LPNO[Z 7YPJL[VIVVR]HS\L7)
6

5
4HOPUKYH 4HOPUKYH
4 3.5
4HY\[P:\a\RP
3
;H[H4V[VYZ
)HQHQ(\[V 2

,PJOLY4V[VYZ 1
/LYV4V[V*VYW Jul ’17 Jul ’18 Jul ’19 Jul ’20 Jul ’21 Jul ’22

49-

;\IL0U]LZ[TLU[Z 7YPJL[VLHYUPUNZ7,
(ZOVR3L`SHUK 10000
;=:4V[VY
7500
6[OLYZ
5000
2500
=HS\H[PVUZKP]PKLUKZHUKYL[\YUZ 0
51.6
Dividend
Company name P/B P/E yield (%) 1Y return (%) -2500
Jul ’17 Jul ’18 Jul ’19 Jul ’20 Jul ’21 Jul ’22
Tube Investments 12.7 50.5 0.2 78.0
The spike in P/E is due to M&M’s net loss.
Mahindra & Mahindra 3.1 22.0 1.0 49.2
Tata Motors 3.4 – 0.0 44.9
TVS Motor 9.5 55.1 0.4 43.4
+P]PKLUK`PLSK
2.5%
Maruti Suzuki 4.8 67.8 0.7 19.2
2.0
Eicher Motors 6.6 49.5 0.7 16.0
Ashok Leyland 5.9 – 0.7 14.0 1.5 1.14%
Bajaj Auto 3.8 18.6 3.5 1.4 1.0
MRF 2.4 51.1 0.2 -2.2 0.5
Hero MotoCorp 3.6 24.3 3.4 -3.0 0
Data as on July 18, 2022 Jul ’17 Jul ’18 Jul ’19 Jul ’20 Jul ’21 Jul ’22

WORDS WORTH
WISDOM
‘Nobody knows anything

about anything beyond a point’
Samir Arora’s eight golden lessons in investing
S
amir Arora is the founder of Helios Capital various recognitions during his time as the Head of
Management (he, along with two others, founded it Asian Emerging Markets. In PMS AIF World’s webinar,
in 2005) and a fund manager there with three Arora gave eight golden lessons to remember. Here is a
decades of experience. Earlier, he was associated with summary of them. To watch the full webinar, visit
Alliance Capital, where he received https://bit.ly/3ohcuol.
DO NOT FOOL YOURSELF OR

1 THE PUBLIC
Sticking to one particular style of
investing forever is fruitless. Arora
criticised fund managers who claim
that they do not look at inflation,
interest rates and the market. While
it is difficult to predict
them, one can never
ignore them while invest-
ing. He says, “You have to
be sensitive to everything
and the worst thing you
can say to yourself is I
don’t look at the market”.
DO NOT USE HINDSIGHT

2 ANALYSIS TO PREDICT
THE FUTURE
Most investors look at the best per-
formers of the past decade or two
and think thatby investing in compa-
nies like them, they can
replicate the performance.
Actually, investors should
look at the factors that led
to such high returns. “How
would you have known 25 years ago that
this was a good company to buy, and how
would you have imagined that these
companies will do better than other
companies?” Asks Arora.

WORDS WORTH
WISDOM
3 DON’T OVERPAY 6 THE HALO EFFECT
A classic lesson The market’s opinion of a company greatly

that every depends on its price and growth. Arora mentioned
investor should ‘Fortune’ magazine’s commentary on Cisco as an
keep in mind. example. When Cisco’s stock was doing well,
Investment is noth- ‘Fortune’ had a favourable view of the company
ing but an exchange but when the stock started doing badly, ‘Fortune’
where we receive a financial asset found several problems with the company.
for money. We have to make sure
that the asset is worth the price we
pay and we simply cannot ignore
this.
7 ACT LIKE THE CASINO AND NOT A GAMBLER
Saying ‘buy good companies and hold them for long peri-
LEARN FROM THE ods’ is easy but vague. Have a definition for yourself:
4 MASTERS what is a good company? What is long term? What if a
company is nearly good? He listed eight such parameters
Arora quotes legendary investors and any company that does not qualify them can be
and experts such as Warren rejected. “You have to have a philosophy or a framework”
Buffett, Seth Klarman, to define your investment, he says.
and Aswath
Damodaran and
suggests how
even an excel-
lent company
can be a bad
8 KNOW YOUR LIMITS
investment at
Sometimes investors increase
the wrong price.
their time horizon too much to
justify their investments in a
company. This is foolish. Just
looking at the metrics of best
5 DO NOT BE CONFUSED performers and saying
those are the key to high
returns is also bad. Also
While cash flows are important as predicting growth over
earnings may not convert into 10–20 years for a medi-
real cash, in
um-term investment is
different sec-
also not reasonable. “You
tors, they
cannot choose five–10 com-
are already
panies and create a story,”
priced in. In
says Arora.
the long
term, the
company is
driven by revenue and earnings,
and that is why in the long run, But the ultimate golden lesson indicates the healthy amount
there will not be much difference that he gave is what you read in of uncertainty that prevails
between earnings and cash-flow the heading of this story: in the market at any time and
growth. “Cash flow is basically convert- “Nobody knows anything about that no one really knows what
ing earnings into cash; it is not coming out anything beyond a point”. This will happen.
of thin air,” exclaims Arora.

MARKET
C MPASS
Market barometer
Here are some charts that will help you make sense of the current market
in terms of valuations and return potential
Sensex’s movement
In ’000 The Sensex is the most convenient
72
indicator to tell the state of the Indian
60
Max 61,766 market. The 10-year graph presented
IIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII
alongside shows the secular run in the
Current markets. However, this rally was
48 54,521 punctuated by several bearish phases.
The most prominent ones include the
following: Chinese growth concerns in
36
2015, demonetisation blues in 2016,
Min and the sell-off in 2018 due to US–China
24 16,640 trade war and the March 2020 COVID-19
shock. The markets staged a remarkable
12 recovery from the lows of March 2020.
Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Recently, however, rising interest rates
’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 ’21 ’22 and the Russian invasion of Ukraine
have spooked the markets.
Sensex’s price to earnings

40 The price-to-earnings ratio of the Sensex
is a simple market-valuation ratio. A
35 Max 35.1 general guideline to help understand the
IIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII
valuation is:
P/E > 24 = Dangerously
30
overvalued
P/E > 20 < 24 = Overvalued
25 Current 21.8 P/E > 16 < 20 = Fairly valued
Median 21.9 P/E > 12 < 16 = Undervalued
20 P/E < 12 = Highly underval-
ued (mouthwater-
Min 16.7 ing valuations)
15
Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul This graph is based on standalone data of Sensex companies.
’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 ’21 ’22 If one takes the consolidated data, the P/E will likely be lower.
Sensex’s price to book value

4.0 The price-to-book-value ratio tells us how
Max 3.83 many times an investor is ready to pay
IIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII
for a rupee of net assets.

3.6
Since book value is stable and less
Current3.11 volatile than earnings, some consider it
3.2
better than the P/E as a measure of
Median 2.95 valuation.
2.8
If
P/B > Median P/B = Overvalued
2.4 Min 2.36 P/B < Median P/B = Undervalued
2.0
Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul
’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 ’21 ’22

MARKET
C MPASS
Sensex’s dividend yield

2.1% Dividend yield is nothing but the return
an investor gets in the form of dividend
on his investment. It is measured as
1.8
Max 1.71 dividend per share divided by price
IIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII
per share.
1.5 Generally speaking, when stocks are
Current 1.31 cheap, dividend yields are high.
If
1.2
Median 1.25
Dividend yield >
Median dividend yield = Undervalued
0.9 Dividend yield <
Median dividend yield = Overvalued
Min 0.72
0.6
Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul
’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 ’21 ’22
Market cap to GDP

115% This measure is Buffett’s personal
Max 111 favourite. He said, “It is probably the
IIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII
single best measure of where valuations

100 stand at any given moment.”
Current 95
Here we have considered the market
85 capitalisation of all the listed companies
on the BSE.
Median 80
If
70
Market cap > GDP = Overvalued
Market cap < GDP = Undervalued
55 Min 56
Considering market cap of all the listed companies on
the BSE, provisional estimate of FY22 nominal GDP and
advance estimate of FY23 nominal GDP
40
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
10Y G-sec yield vs Sensex’s earnings yield

4.0% The spread between G-sec yield and
Max 3.87
Sensex’s earnings yield is another
IIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII
valuation measure. G-sec yield is the

3.2 Current 2.86 yield of the 10-year government bond.
Median 2.82 Sensex’s earnings yield is the inverse of
the Sensex’s P/E ratio. The greater the
2.4 deviation from the median in either
direction, the greater the degree of
overvaluation or the undervaluation of
1.6
the Sensex.
If
0.8 Min 0.79 Spread > Median = Overvalued
Spread < Median = Undervalued
0
Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul All data as on July 18, 2022
’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 ’21 ’22

ANALYST’S
DIARY
The plot thickens

High reinvestment requirements and
inappropriate accounting practices obscure
the financial picture of media companies
W
ould you pay to watch a movie that you have immediately. For example, electricity-consumption
already seen? And what is your media charges are expensed in the period they have been
expenditure for movie content that is older incurred. But if the benefits of an outflow are
than two years? The answers to these two questions expected to accrue over a longer duration, it is
should give a sense of customers’ payment tendency recorded as an ‘asset’ in the balance sheet and the
in the content business and the behaviour of media depreciation component attributable to that asset
companies. alone is reported in the P&L statement. For example,
To understand whether or not media companies are the purchase of a vehicle or a factory is usually
attractive businesses, let’s first learn what a good capitalised because its benefits are expected to last for
business, as well as a great business, looks like. In a a longer duration (at least two to three years).
good business, investors invest a certain amount of While these principles are generally appropriate for
money at the beginning and (under ideal most industries, they hold little significance for media
circumstances) make a reasonable amount of companies. Since the bulk of the monetisation of
recurring profits on the original investment. content happens soon after the release, the current
On the other hand, a great business not only makes industry practice of capitalising the costs of creating
a reasonable amount of recurring profits on the or acquiring content and depreciating it over a long
original investment but also provides similar or period of time tends to result in understating
higher returns on the incremental capital that is expenses and thus, overstating profits. While it may be
reinvested. Media companies generally don’t fall pointed out that there are some instances where
under either of these two categories because of the content continues to make money for many years,
following reasons. such occurrences are the exception rather than the
norm. Although expensing the entirety of content
/PNOYLPU]LZ[TLU[YLX\PYLTLU[Z costs may result in a less profitable P&L and a much
No matter whether it is news, sports, movies, TV smaller balance sheet, it would depict a more accurate
shows or even music (to a large extent), people love picture of a content company’s financial position.
consuming new content. And why wouldn’t they? A classic example is Netflix. The company grew by
Given the proliferation of content, today’s consumers investing more and more in acquiring content. Thanks
are clearly spoilt for choice. Therefore, the value of to outdated/inappropriate accounting principles
content (leaving aside a few exceptions) tends to (which require a lower amount of amortisation/
diminish quickly with the passage of time. And since depreciation than what would reflect the underlying
content companies know that people predominantly economic reality), its total accounting profits over the
don’t tend to be repeat consumers for the same
content, they have no other choice than to incur fresh
5L[MSP_!7(;]Z-*-
Over the past five years, the company’s profit after tax has witnessed
expenditure, which is typically very high (especially a steady increase but its free cash flow has gone downhill.
for those companies that create expensive video Net profit ($ mn) Free cash flow ($ mn)
content), to create new content. 6,000
4,000
0UHWWYVWYPH[LHJJV\U[PUNWYHJ[PJLZ
Another problem with media companies can be 2,000
attributed to inappropriate accounting practices, 0
which revolve around the debate of expensing vs
-2000
capitalising. Conceptually, any outflow of money is
expensed, which is reflected fully in the P&L -4000
statement if the benefits of such an outflow accrue FY17 FY18 FY19 FY20 FY21

ANALYST’S
DIARY
last five years stood at $11.5 billion. But free cash flows :\U;=!7(;]Z-*-
(FCF – which indicates the cash available after taking Sun has had a good balance between profit after tax and
into account the needs of the business in terms of free cash flow over the years.
purchasing new assets and augmenting working capital) Net profit (` cr) Free cash flow (` cr)
reveal a very different picture. Netflix made a negative 2,000
FCF, totalling $6.2 billion during the same period. 1,600
This effectively shows that all the profits made by
Netflix were reinvested in the business (i.e., creating 1,200
new content) so that Netflix could continue running 800
operations. In other words, the profits made in one
year were predominantly attributable to the 400
reinvestment made in the previous one or two years 0
rather than the original investment made in the
FY17 FY18 FY19 FY20 FY21
company in its initial days.
Put differently, if Netflix stops making new content As seen in the graph below, the five-year stock return
in one year, the amount of revenue that it could for ZEE has been -15 per cent, while that for Sun is -10
generate from all the available content (i.e., invested per cent. None of these companies (including Netflix)
capital) is likely to be much lower. was able to beat the benchmark Sensex TRI Index. In
Indian media companies, on the other hand, have hindsight, it is likely that Sun’s decision not to make
been more prudent about this. By focusing on any exclusive content for its OTT (over-the-top) service
traditional family-oriented entertainment genres, they Sun Nxt was the right thing to do. This is because ZEE’s
have managed to keep production costs low, thereby focus on ZEE5, which tends to have more expensive
reining in the quantum of reinvestment needs. This content, combined with ZEE’s inability to operate ZEE5
goes a long way in explaining the relatively narrower profitably (ZEE5 incurred an operating loss of `753.4
gap between accounting profits and free cash flows of crore in FY22 as against a loss of `672.6 crore in FY21),
ZEE Entertainment (the five-year sum of PAT is `6,580 has clearly cost its shareholders dearly.
crore as against FCF of `2,102). But even then, the It’s sufficient to note that the ability to make recurring
sheer difference between these two metrics is
something that investors must ponder over. 4LKPHJVTWHUPLZ]Z[OLPUKL_
All three media companies have underperformed the Sensex TRI in terms of
A,,,U[LY[HPUTLU[!7(;]Z-*- five-year annualised returns.
ZEE has fared comparatively better on the quantum of difference
between profit after tax and free cash flow as compared to Netflix. 12.7
Net profit (` cr) Free cash flow (` cr) 3.2
2,000
1,600 Sensex TRI
1,200 -10.3
-15.3
800
Returns include dividends as well. Data as of June 2022.
400
profits from the capital invested differentiates good
0 companies from the bad. Investors in content companies
-400 should ideally look for companies that have a
FY17 FY18 FY19 FY20 FY21
predictable business model, with a long track record of
profitability and free-cash-flow generation. But
However, Sun TV Network, a South India-focused unfortunately, in the content business, unless a
media company, has performed better in terms of both company is regularly able to create some unique
metrics. During the previous five years, its PAT has content that consumers want to keep consuming
added up to `7,088 crore as against an FCF of `4,861. repeatedly (‘Friends’, a US-based TV show, is such a
Interestingly, from FY21, Sun switched over from rare example), there is a very high chance that
expensing all of its movie-content costs on the day of companies in this sector will not be able to return cash
its first TV broadcast to depreciating it over a period of to shareholders on a sustainable basis, no matter how
four years. With this move, its PAT superficially much accounting profit is made.
increased by `214 crore in FY22. By Arul Selvan

ANALYST’S
DIARY
Walking on thin ice

As interest rates rise, companies with a low interest-coverage ratio are likely
to be in a difficult situation
O
ver the past few months, central banks
have increased interest rates to rein in
inflation. And by the looks of it, they are
going to continue doing so. This will lead to a
rise in interest expense for borrowers.
Consequently, companies with a low interest-
coverage ratio will be in a spot.
The interest-coverage ratio is used to
evaluate a company’s interest-paying ability. It
is an important metric and especially so in a
rising-interest-rate environment. It is
calculated as follows:
Earnings before interest
and tax (EBIT)
Interest-coverage ratio =
Interest expense
The higher the value of the interest-coverage

ratio, the better. Note that the interest expense
doesn’t just include interest paid on
borrowings. It also includes lease payments.
That doesn’t mean you should exclude them.
Lease is a crucial part of many businesses
(retailing, for instance). So, the ability to make
such payments is also important to evaluate.
Ideally, you want to look for companies with
a minimum interest-coverage ratio of two
times. Anything less than that is like walking
on thin ice! If the company’s interest expense
rises and its interest-coverage ratio is low, then
3HYNLZ[JVTWHUPLZ^P[OHUPU[LYLZ[JV]LYHNL
that will lower its net profit.
YH[PVIL[^LLUaLYVHUK[^V
Based on the March 2022 trailing 12 months ICR ICR
Company (times) Company (times)
data for companies with a market
capitalisation of more than `500 crore (as of KEC International 1.97 Adani Green Energy 1.21
July 15, 2022): Devyani International 1.96 Nuvoco Vistas 1.09
z Out of 1,098 companies, 183 (or 17 per cent of Kalyan Jewellers 1.93 Westlife Development 0.98
the total) reported an interest-coverage ratio Torrent Power 1.90 Brigade Enterprises 0.96
of less than two. Adani Transmission 1.72 Ashok Leyland 0.89
z Of these 183, 79 companies (or 7 per cent of Sapphire Foods 1.66 Shree Renuka Sugars 0.65
the total) had a loss before interest and ITI 1.63 GMR Infrastructure 0.59
taxes. Bharti Airtel 1.61 Aditya Birla Fashion 0.58
The table presents the top 25 companies by
IRB Infra 1.41 Alok Industries 0.56
market capitalisation with an interest-coverage
Sunteck Realty 1.40 Indian Hotels 0.40
ratio between zero and two (we have not
included companies with a loss before interest Adani Enterprises 1.38 Tata Motors 0.25
and taxes). Do you own any of them? Trent 1.33 Tata Teleservices (Maha) 0.21
By Karthik Anand Vijay Tata Power 1.27 Data as of March 2022

ANALYST’S
DIARY
Rabbits and tortoises

Insights into the decadal performance of various indices vis-à-vis the Sensex
W
hen we were looking at the decadal performance
of major BSE indices, we noticed that many have
performed well, with 13 indices giving more than
10 per cent returns pa. However, most have performed only
during the bull run over the last couple of years. In order
to understand which ones have performed only over the
last two and a half years and which ones were consistent,
we divided the last 10 years into two periods: from July 12,
2012, to February 28, 2020, and from March 2, 2020, to July
12, 2022. Here are some interesting things we noticed.
z 12 major indices underperformed the Sensex in the first
period, but 11 of them recovered and went on to
outperform the Sensex in the second period.
z Only three indices – MidCap, Consumer Durables, and least volatile index.
IT – outperformed the Sensex over both periods. z The Power index made the best comeback of all as it
z The only index that underperformed the Sensex in both bounced from -1.8 per cent pa in the first period to 49.8 in
the periods is Telecom. the second period.
z While Bankex, Finance, and FMCG outperformed the z On an overall basis, Consumer Durables is the best
Sensex in the first period, Sensex beat them in the performing index of the last 10 years followed by IT and
second period. SmallCap. Metal was the worst performer over the last
z FMCG is probably the most-consistent index as it gave 10 years.
similar returns in both periods while being the second- By Udhayaprakash
7LYMVYTHUJLVMTHQVYPUKPJLZV]LY[OLSHZ[`LHYZ
RETURNS (%)
BSE index Total returns Jul 2012–Feb 2020 Mar 2020–Jul 2022 Volatility
Sensex 12.1 11.0 15.8 1.00
BSE 100 12.1 10.5 17.4 0.98
BSE 500 12.6 10.8 19.0 0.95
Auto 11.6 7.0 28.3 1.01
Bankex 12.7 14.1 8.8 1.26
Capital Goods 10.4 5.7 27.7 1.03
Consumer Durables 19.4 20.4 16.5 0.79
Finance 12.2 13.9 7.0 1.21
FMCG 11.7 11.1 13.7 0.67
Healthcare 12.3 9.1 23.7 0.60
IT 17.8 14.4 29.1 0.68
Infrastructure 5.5* -1.9* 26.6 0.94
Metal 4.1 -3.4 33.7 1.13
MidCap 13.7 11.7 20.8 0.85
Oil and Gas 8.4 6.1 17.0 0.94
Power 8.4 -1.8 49.8 0.84
Realty 6.6 2.6 20.9 1.23
SmallCap 14.3 9.7 31.1 0.80
Telecom 4.5 1.8 14.4 0.85
Volatility is measured in terms of beta vis-a-vis the Sensex. Returns for the Infrastructure Index are from May 28, 2014.

INTERVIEW JINESH GOPANI,
HEAD – EQUITY,
AXIS MUTUAL FUND
‘We believe
inflation has
peaked and is
likely to
normalise over
the second
half of the
year’
A
mid rising inflation and
interest rates, stock
markets worldwide have
turned volatile. We speak
with Jinesh Gopani, Head –
Equity, Axis Mutual Fund, to
understand where the markets are
headed over the short to medium
term. We also speak with him
about the investment approach at
his AMC and how he avoids
wealth-destroying stocks. Gopani
also gives advice to investors
regarding how to deal with
corporate-governance issues.

INTERVIEW
The markets have been falling over However, investors must recalibrate growth prospects, we hold them
the last few months due to rising expectations to be conservative in across portfolios.
inflation and interest rates around their return expectations from Our allocations in consumer
the world. What’s your short- to equity markets as they enter. names have specifically been to
medium-term outlook for the market? companies which have the ability
We are in the midst of How serious do you think the problem to pass on price hikes, given the
unprecedented times in terms of of inflation is currently? When do you current inflation landscape. In
global macro – from multi-decadal see it getting under control? finance, the improving asset
inflation prints to deep For India, the key trigger for quality in select names has
recessionary fears and spiking inflation is commodities, given that resulted in strong operational
interest rates. For risk assets like we are a large commodity importer. results thus far. The sector has
equity, a global repricing has been Commodities (ex-oil) have been on historically been an FPI favourite
underway for the better part of a steady decline since April 2022 as and hence the large country
nine months as markets factor supply has normalised and trade selling has disproportionately
materially higher interest rates. routes have re-opened. Inflation impacted the sector. The
The resulting headwinds have been was a result of sporadic global underlying fundamentals of the
prime drivers for market volatility re-openings and a surge in short- banking sector remain strong and
across the board, including India. term demand, driven by the entire hence we had added some names
We believe that the bulk of this has global normalisation of business in this space. Our portfolio
already taken place, with broad and consumption. The Russia– allocations to the banking space
market gauges down 15–20 per cent Ukraine war complicated matters have a tilt in favour of larger
and some highly speculative assets since both nations are large banks as we believe these banks
down up to 60 per cent. commodity exporters. are better positioned in the
By comparison, India has been marketplace post COVID.
relatively less affected across Finally, we retain our
equities, fixed income and Investors must conviction play on digital trends
currencies on account of our currently playing out across the
recalibrate
economy’s ability to sustain economic landscape. Many of
market downturns. Monetary and expectations to be these companies also double up as
public policy have had a material, conservative in their non-cyclical export stories. Our
yet hidden, role in this resilience. allocations in select IT companies
return expectations
FPIs, who have historically held are purely stock-specific
roughly one-fourth of the largest from equity markets strategies and in stories which we
200 companies in India, have been as they enter believe are likely to be
prime sellers as part of their disproportionate beneficiaries
wider reallocations away from over the medium term. To
emerging markets. This basket In parallel, central bankers have reiterate, our strategy remains
selling has led to a correction of rapidly raised rates to stymie stock-specific and sector-agnostic.
excesses in the Indian market. inflation. We believe inflation has
Coupled with robust earnings, peaked and is likely to normalise Your fund house is known for its strict
valuation metrics for Indian over the second half of the year. adherence to quality. What’s your
companies today look significantly broad investment framework?
more attractive than they did 12 Amid the current market situation, The Axis Mutual Fund investment
months ago. Despite the weak which pockets are you betting on? philosophy is a fundamental-
external environment, relatively Which would you avoid and why? based, research-oriented approach
strong corporate earnings have Domestic demand continues to to investing. By nature, we are
surprised most market remain strong. High frequency high-conviction investors who
participants in India. indicators like auto sales and GST seek to identify businesses with
Over the medium term, we numbers point to robust growth strong and sustainable businesses.
believe the bouts of volatility that both on volumes as well as on net Our emphasis on portfolio
investors witnessed over the last six revenue. We favour the domestic construction revolves around the
months have created opportunities demand story and given that many thesis that stock selection is the
for investors sitting on the side- of these sectors are now key to wealth creation.
lines to meaningfully enter markets. attractively valued given their The fundamental nature of our

INTERVIEW
research looks to identify a pool of

companies whose primary Quality typically outperforms other investment
attribute is financial robustness.
This, coupled with the capability styles during periods of turbulence as these stocks
of the management to stress the are considered less volatile in relative terms by
business assets and exploit market participants
opportunities, provides us a
portfolio of companies with strong
financial metrics and a sustainable
long-term growth trajectory. Corporate-governance issues are a
Today, our domestic portfolio major contributor to shareholder
companies encompass a cross- wealth destruction. How can a retail
section of growth ideas ideally investor avoid companies vulnerable
suited to benefit from gaps left by to such issues? Also, how should an
weaker incumbents and capture investor respond to a corporate-
opportunities. The core portion of governance crisis in a portfolio stock?
our portfolio consists of Corporate governance is an
companies that emphasise quality, important yardstick in a typical
which we continue to hold on to. qualitative assessment of any
portfolio company. While I would
How do you filter out wealth- refrain from confirming your
destroying stocks? What are the key above assessment as a blanket
analytical metrics that you apply to statement, corporate-governance
do so? issues have to be looked at
India continues to remain an z Stable cash flow – a company holistically rather than merely at
active investor’s market. To that should be able to fund its organic face value. Today, due to
effect, if you were to look at the growth from internal accruals and regulatory requirements, listed
performance of the 500 largest use long-term capital and working companies are required to issue
companies as tracked by the S&P capital efficiently periodic disclosures on various
BSE 500, you would notice a z High profitability, low debt-to- governance matters that are made
significant dispersion of returns equity and earnings consistency available to the public and
(data as on June 30, 2022). The Qualitative factors: shareholders. The disclosures are
performance of top 50 companies z Strong management pedigree a good first step for investors to
over the last 10 years has z Transparency of operations for identify and weed out companies
averaged in excess of 29.9 per investors and key stakeholders based on this metric.
cent CAGR, while the bottom 50 z Credible oversight committees Companies that have historically
companies in this list have and strong internal controls high levels of transparency and
significantly lost investor wealth. z Sustainable long-term business governance practices are often
During this period, the model proactive during the best and
benchmark index generated a In aggregate, this style offers worst of times. Not only does this
return of 12.3 per cent. The two potential advantages. First, give confidence to investors in the
moral: stock selection is critical quality has historically delivered short term, it reinforces the
to long-term wealth creation. a return premium, i.e., the belief of shareholders in the
We believe our quality-centric opportunity to outperform a board and the management that
investment approach is ideally broad benchmark over the long appropriate checks and balances
suited to weed out these weaker term. And second, it offers a high are maintained. Investors who
companies as we look to identify margin of safety. Quality find themselves in companies
our investment universe. The typically outperforms other where there is an ongoing
approach is two-fold – qualitative investment styles during periods corporate-governance issue
and quantitative. of turbulence as these stocks are should consider the facts before
Quantitative factors: considered less volatile in taking any hasty decisions.
z Strong return metrics relative terms by market Inevitably, bad corporate-
(e.g., return on equity (ROE), participants due to their inherent governance practices are a mark
return on capital employed (ROCE) fundamental attributes. that does not fade with time.

COVER STORY
Fake, fraud
or failing
businesses
Learn how to spot such companies from miles away

By Arul Selvan, Karthik Anand Vijay and Udhayaprakash
C
reating wealth for the Analysis’, Benjamin Graham metrics are easy to understand
long haul – this is the wrote, “Bond selection is and simple to use.
main purpose of the primarily a negative art. It is a z Finally, you will come across
readers of ‘Wealth process of exclusion and some qualitative tell-tale signs
Insight’. However, it rejection rather than of search that can help you spot
is a topsy-turvy journey. and acceptance.” problems.
Initially, you may assume some Well, we have taken the same A word of caution. First, the
companies to be worth approach for stock selection. It metrics that we have laid out
considering but later, they may is important for investors to are not applicable to companies
turn out to be swindlers. Often, know what to own, as well as involved in the lending and
companies paint a rosy picture what to avoid. Hence, in this insurance businesses. Second,
of their present position. A big cover story, you will learn about don’t use these metrics in
part of this problem has to do some warning signs that can isolation. Just because a
with the way accounting keep you away from trouble. company performs poorly in
policies give leeway to Here is what you will get: one or two metrics, it doesn’t
managers. Giving crooked z First, there is an overview of necessarily mean that it is
companies a wide ‘bandwidth’ some past accounting frauds. cooking its books. But yes, if it
to implement accounting z Next, there are seven metrics is failing on many of them,
policies is not ideal. that will help you see through then that should raise your
In his book ‘Security the accounting mist. These eyebrows! So, here we go.

COVER STORY
A crooked history
To help you understand the anatomy of frauds and hence spot the brewing
ones, here is a summary of the past frauds that hit India Inc
VAKRANGEE
What does it do?
This retail financial-
services provider has
outlets or kendras
throughout the
country. Several
incidents took a toll on the
company. The first incident
came in 2017 when its stock
price rose by 207 per cent. It
made investors and stock
exchanges suspicious and
compelled SEBI to conduct an
investigation regarding the
price manipulation of the
scrip. The second blow
came in April 2018 when
‘The Ken’ published a
detailed report on the
company and its shady
SATYAM COMPUTERS turn in 2009 when its promoter operations. In the following
India’s Enron Ramalinga Raju confessed that month, its statutory auditors
One of the top four IT he had misstated financials up (PwC) resigned, citing the
companies in India, Satyam to `7,000 crore. Revenue and absence of adequate and
Computers later profits were inflated relevant information. In FY19,
became India’s Enron Things took an with dummy bills and the company reported a 77 and
(an American ugly turn in fake proceeds, while 96 per cent fall in its revenue
commodities giant 2009 when its cash balance was and profits, respectively. As a
which also fell due to promoter inflated with fake reason, the company cited the
dubious accounting Ramalinga Raju bank confirmations transformation of its business
practices). The
company had excellent
confessed that and understatement of
liabilities. Following
model and the non-payment of
its e-governance contracts,
growth, with its he had this, the stock fell by a even though these contracts
revenue, EBITDA and misstated massive 78 per cent in accounted for a small part of
profits increasing by financials up to just one day! Just in its revenue. The stock, of
31, 30, and 42 per cent `7,000 crore FY09, the market cap course, fell 92 per cent in 2018.
per annum, declined by 90 per From its peak in January 2018
respectively, during FY03-FY08. cent. The company was (`53,507 crore) to July 14, 2022,
Hence, its market cap grew by eventually bought by Tech the company lost 94 per cent
37 per cent per annum. Mahindra in 2013 and trading of its market cap on an
However, things took an ugly was suspended. absolute basis.

COVER STORY
IL&FS
The default doldrums
India’s largest corporate fraud
icon (of over `90,000 crore) involving

IL&FS not only affected the
company and its subsidiaries
but also the entire credit
market. Problems started in
June 2018 when IL&FS defaulted
on commercial deposits of
COX & KINGS about `450 crore. Over the next
End of the road few months, the company’s
The 250-year-old tour-and-travel credit rating was downgraded
company eventually fell after and gradually, it lost its were evergreen, profits were
defaulting on a series of debts investment-grade rating, as the overstated through non-
to fund an acquisition. The group companies continued to provisioning and more. The
company had an impeccable default on several loans. When entire board was reconstituted
track record when it came out the SFIO (Serious Fraud in 2018 by the government and
with its IPO in 2009 to raise Investigation Office) started a its former vice-chairman Hari
`509 crore and continued to probe, it found lapses in the Sankaran was arrested in 2019.
perform well. Its acquisition of audit. Borrowed funds were From January 2018 to July 14,
Holidaybreak in FY12 raised diverted to related entities, 2022, the listed subsidiaries lost
questions, as it led to a massive loans were provided to non- more than 79 per cent of their
increase in debt and also had creditworthy entities, loans respective market caps.
high amounts of goodwill. The
level of related-party
transactions, which were MANPASAND BEVERAGES
discovered in FY18, shocked Taste turned sour
the investors, as it accounted The seller of the famous fruit
for 37 per cent of the drink ‘Mango Sip’, Manpasand
consolidated revenue, 21 per Beverages later ventured into
cent of debtors and 58 per cent other flavoured drinks as well.
of standalone short-term loans. In 2015, it came out with an IPO
In a forensic audit, it was found to raise `400 crore, with
that from 2015 to 2019, related- excellent numbers in the
party transactions worth preceding years and healthy
`21,000 crore were undertaken numbers post IPO. However,
and sales and cash balances during FY18’s audit, its auditor
were inflated. With the Deloitte quit, citing inadequate
company defaulting transparency. In 2019, its MD
continuously, the National and CFO were found to evade FRAUD
Company Law Tribunal GST by setting up fake business
(NCLT) initiated insolvency units. Also, the management
proceedings in 2019. In 2020, its inflated revenues and margins
promoter Peter Kerkar was and did not pay salaries, while
arrested in a money- its ex-CEO fudged its books. In
laundering case. This the next 12 months from its peak
obviously reflected in the in January 2018 (`5,567 crore), it
market cap as it fell 99 per cent lost 82 per cent of its market
from January 1, 2019 (`2,893 cap. Finally, on June 29, 2020, the
crore) till February 10, 2022, trading was suspended at a
when trading was suspended. market cap of `70.3 crore.

COVER STORY
The company found to

divert the
was declared a
loan amount
non-performing obtained by
asset in 2016 the company
but the fraud to foreign
was only subsidiaries,
uncovered in purchase
assets under
January 2019
the names of
during a its affiliated
ABG SHIPYARD forensic audit companies,
A sinking ship pay the
ABG Shipyard was another expenses of group companies
significant banking fraud and transfer money to related
(`22,842 crore) in India. One of parties. The fraud dated back as
India’s largest shipbuilding early as 2012. The company’s
companies, it started to share price had been on a
struggle during the 2008 decline since 2011 due to its
financial crisis, which decreasing margins and
worsened its operating cycle increasing debt. In 2012, its
and liquidity. The company was promoters pledged 40 per cent
finally declared a non- of their stake, which continued DHFL A house of cards
performing asset in 2016 but the to increase in the coming years. It is the first-ever corporate
fraud was uncovered in Finally, in May 2019, the stock fraud in the housing-finance
January 2019 during a forensic was suspended from trading. industry where once again
audit. Its chairman Rishi Meanwhile, the company lost 48 the promoters were caught
Agarwal and associates were per cent of its market cap. siphoning off funds. As per
the CBI, it is India’s biggest
banking fraud, with the
company’s directors
CG POWER AND directors and then, wrote them
defrauding 17 banks of `34,615
INDUSTRIAL SOLUTIONS off. Owing to this, the company
crore. Loans were granted to
incurred a loss of `800 crore. The
Shock therapy related parties of promoters,
promoters also pledged their
In August 2019, it was found that dummy accounts were created
entire stake in the company.
the promoter of CG Power had in the names of customers
While the share price had been
been siphoning off the who had already repaid loans,
on a decline since January 2016
company’s money for years. The loans were evergreen (when
when the promoters suddenly
promoters cost the company banks give further loans to
pledged 83 per cent of their stake
around `1,000 crore by using fake defaulters and stop them from
in Q3FY16, the company lost 76
transactions, such as turning into non-performing
per cent of its market cap in
inappropriate write-offs of assets) and borrowed funds
2019. Later, it was acquired by
receivables, siphoning money were used by promoters for
the Murugappa Group and made
from the sale and purchase of their personal purposes.
an impressive turnaround.
goods from related vendors and These activities obviously
more. They used the company’s resulted in an inflated
assets as collateral for personal balance sheet. From its peak
loans, which cost the company in September 2018 (`21,290
`400 crore. Besides, they crore), the market cap fell by
provided loans to foreign 73.7 per cent per annum till
subsidiaries, which did not trading was suspended on
have any independent June 11, 2022.

COVER STORY
KEY FINANCIAL
METRICS TO
SPOT A CRISIS
CFO to EBITDA
Accounts receivable to sales; change in sales vs
change in accounts receivable
Bad debtors written off to sales
Capital work-in-progress to gross property, plant
and equipment
Short-term debt as a per cent of net worth
Loans and advances to related parties as a per
cent of net worth
Contingent
g liabilities as a per cent of net worth

COVER STORY
CFO TO EBITDA
It’s not just about profits

A significant mismatch between cash flows from operation and operating
profit may indicate a company’s inability to convert profits into cash
What does it measure? number could be misleading. So, it is
CFO to EBITDA checks a company’s ability important to use this metric in the present
to convert its operating profit or EBITDA business context.
(an accrual measure; EBITDA stands for
earnings before interest, tax, depreciation
and amortisation) into cash flow from
operations (CFO, cash measure). This
Case in point
helps you weed out companies that are not PC JEWELLER
able to convert accounting profits into cash Over FY11–16,
flow. this jewellery
retailer grew its
How to calculate it? EBITDA by 31
CFO before tax can be found in the cash- per cent per
flow statement. Add the ‘cash taxes paid’ to annum. During
CFO to get CFO before tax. the same period,
EBITDA is derived by subtracting its cumulative
operating expenses (barring depreciation) CFO before tax
from operating revenue. divided by
Let’s take the example of Balkrishna EBITDA stood at
Industries (a tyre manufacturer) to just 7 per cent.
understand this. We need to take the In fact, the same
cumulative figures for the last five years. metric stood at
CFO before tax/EBITDA = -96 per cent
`6,883 cr/ `7,382 cr = 93 per cent (i.e., negative
This means that the company was able cumulative CFO)
to convert 93 per cent of its EBITDA into during FY18–22.
operating cash flow. The higher the This is reflected
number, the better it is. in the share
price decline of
What does it tell and 38 per cent per
what doesn’t it? annum over the
A low number on this metric should make last five years
you question the company’s revenue- ended June 2022.
recognition policy. If the company
aggressively recognises revenue and/or if
/PNOVWLYH[PUNWYVÄ[NYV^[OI\[SV^JHZOJVU]LYZPVU
its working capital is increasing, then this
ratio would indeed be low. FY18–22
Don’t invest in a company with a Company 5Y EBITDA growth (% pa) 5Y cumulative CFO/EBITDA (%)
measure consistently lower than 50 per
Anupam Rasayan India 33 3
cent. Compare its metric with that of its
GR Infraprojects 23 0
peers.
Ircon International 23 -77
Having said that, some strategic
KNR Constructions 25 24
changes in the business can lead to a low
number. For example, a company’s Sundaram-Clayton 24 11
working-capital requirements may be TVS Motor Company 26 8
temporarily high and therefore, the Filters applied on BSE 500 non-finance companies: 5Y EBITDA growth of more than 20% pa; cumulative CFO/EBITDA less than 30%

ACCOUNTS RECEIVABLE TO SALES; COVER STORY
CHANGE IN SALES VS CHANGE IN ACCOUNTS RECEIVABLE
No bird in hand
A high accounts-receivable-to-sales ratio implies that a
large chunk of amount is still owed to the company
What does it measure?
Accounts receivable is the amount of
money that is owed by a company’s
customers. To measure the size of accounts Case in point
receivable, we need to divide it by the sales
INOX WIND
number. The second measure, on the other
This wind-turbine
hand, helps you understand the movement
manufacturer
of accounts receivable with respect to sales.
came out with its
IPO in March 2015
How to calculate it? which was
Accounts receivable is available on the
oversubscribed by
‘Assets’ section of the balance sheet, while
19 times. Its
the sales amount can be taken from the
accounts-
income statement. Use total operating
receivable-to-sales
sales. To cite an example, here are the
ratio hovered
FY22 financials of Astral (a CPVC-pipe
between 45 and 55
manufacturer).
per cent over
Accounts receivable/sales =
FY13–15. In the
`269 cr/`4394 cr = 6 per cent
last five years
This means that as of March 2022 end,
(FY18–22), this
Astral was expected to receive 6 per cent of
ratio has stayed
its sales from its customers. In this case,
over 100 per cent
the lower the number, the better it is.
each year. As of
June 2022-end, the
What does it tell and stock’s five-year
what doesn’t it? return is -11 per
A high accounts-receivable-to-sales ratio
cent per annum.
(over 25 per cent) can be detrimental.
This means that a significant portion of *OHUNLPUYLJLP]HISLZTVYL[OHUJOHUNLPUZHSLZ
cash is yet to be collected. This is riskier
for smaller companies that have few YoY change (%) in sales | receivables
large customers. Company Receivable-to- 5Y sales FY18 FY19 FY20 FY21 FY22
sales (FY22) (%) CAGR (%)
If the growth in accounts receivable
7 -3 26 12 16
consistently exceeds the growth in sales, Ajanta Pharma 31 11
42 0 69 -5 38
then the company is making more credit 19 46 5 53 31
Anupam Rasayan India 26 30
sales than cash sales, it has become lenient 58 36 7 59 36
with its credit policy or it has trouble Balaji Amines 25 28 28 10 -1 40 77
39 -3 24 47 92
collecting its dues. Each of the factors is a
9 18 7 -2 6
cause for concern. Larsen & Toubro 29 7
15 11 11 4 9
However, a low accounts-receivable-to- 45 18 6 -1 13
Maharashtra Scooters 58 15
sales ratio (compared to peers) might 56 8 26 45 47
indicate that the company’s credit policy is Tech Mahindra 27 9
6 13 6 3 18
22 7 9 19 32
very stringent. If peers are offering lenient
9 19 -7 20 46
terms, then the company may lose out to Uflex 27 16 16 6 -5 24 46
them. However, this varies from industry
Filters applied on BSE 500 non-finance companies: receivables-to-sales greater than 25%; 5Y sales CAGR more than 5%; YoY
to industry. increase in receivables greater than that of sales in at least four out of five years

COVER STORY
BAD DEBTORS WRITTEN OFF TO SALES
Just forget about it

How much money will the company not be able to collect from its
customers? Here’s the metric that will give you the answer.
What does it measure? completely at a later period. In such cases,
Bad debtors written off refers to the this metric would not be very helpful.
amount of money that a company is
unable to collect from its customers. This Case in point
measure tells you the size of such an VA TECH WABAG
uncollectible amount.
From FY12 to FY16,
this water-
How to calculate it? treatment-solutions
Bad debtors written off is charged to the
provider saw its
income statement and can be found in the
bad-debtors-
notes to account for ‘other expenses’. Take
written-off-to-sales
the FY22 data for Dr Lal PathLabs (a
ratio climb
provider of diagnostics services).
steadily from 0.5
Bad debtors written off/sales =
per cent to 1.3 per
`0.62 cr/`3701 cr = 0.03 per cent
cent. As of FY17-
The company doesn’t expect to collect `
end, it had 11
0.62 crore (or 0.03 per cent of its FY22
customers that
sales) from its customers.
owed more than
`50 crore each, i.e.,
What does it tell and at least 26 per cent
what doesn’t it? of its accounts
To match their revenue
38
receivable.
with related expenses in
Moreover, the bad-
the same accounting
debtors-written-
period, companies have No. of off-to-sales ratio
to estimate a certain companies in kept marching
amount of accounts the BSE 500 from 1.4 per cent
receivable that will be that recorded in FY17 to 3.8 per
uncollectible (or bad
an increase in cent in FY21. The
debtors). To make this
estimate, companies
the ratio of bad stock lost 66 per
generally count on
debtors written- cent of its value in
their experiences. off to sales in the five years
If, however, there is a FY20 and FY21 ended June 2022.
consistent increase in
this metric of a company, then you should
be suspicious. Compare it with the
company’s peers. Also, if the company
consistently reports a lower value than
peers, then check whether there is a /PNOIHKKLI[VYZ^YP[[LUVMMHZHWLYJLU[VMZHSLZ
credible reason for this or it is a case of
aggressive accounting. Company FY20 FY21 FY22
Do note that some companies have a Indoco Remedies* 0.1 0.7 1.3
policy of classifying a customer as a bad Prism Johnson 0.2 0.3 1.1
debtor after a fixed number of days.
*Data for FY19–21. Filters applied on BSE 500 non-finance companies: value greater than 1% in the latest year (FY22); increasing
However, they may recover their dues trend in the past three years.

CAPITAL WORK-IN-PROGRESS COVER STORY
TO GROSS PROPERTY, PLANT AND EQUIPMENT
Checking frugality
This ratio tells whether or not a company is undertaking any unnecessary
capital expenditure
What does it measure? important to know how the company is
Capital work-in-progress (CWIP) financing its capital expenditure.
represents the money spent on the Note that a high ratio doesn’t
development of fixed assets which are necessarily spell trouble. This especially Case in point
under construction as of the balance-sheet holds true for companies in capital- SICAL LOGISTICS
date. Gross property, plant and equipment intensive industries. Their CWIP is The CWIP-to-gross-
(PPE) represents the total cost that was consistently high. Also, for companies PPE ratio of this
paid to acquire the property, plant and exhibiting strong growth and capacity logistics provider
equipment at the start of the accounting expansion, this metric would be high. was between 70 and
period. This does not include depreciation. 80 per cent during
CWIP as a percentage of gross PPE FY12–16. At the
reflects the magnitude of fixed assets same time, the debt-
under construction. to-equity ratio
increased from 1.4
How to calculate it? times to 2.2 times.
Both CWIP and PPE measures can be The CWIP-to-gross-
taken from the ‘assets’ side of the balance PPE ratio increased
sheet. Let’s use FY22 data of PI Industries from 67 per cent in
(a manufacturer of agricultural chemicals) FY17 to 91 per cent
to calculate this ratio: in FY20. In FY21, it
CWIP/gross PPE = `64 cr/`2420 cr fell to 29 per cent. In
= 2.6 per cent fact, from FY17 to
FY22, the company
What does it tell and saw its profit fall
what doesn’t it? and eventually turn
Expanding the current capacity is an red. The share price
integrated part of the business. However, was down 97 per
companies that report a consistent increase cent in the five years
in this metric are either undertaking ended June 2022.
unnecessary capital expenditure or facing
any delays in commissioning PPE. Both
scenarios are not good. While the former
represents a poor capital-allocation 0UJYLHZPUN*>07HZHWLYJLU[VMNYVZZ77,
decision, the latter signals weak execution. Company FY18 FY19 FY20 FY21 FY22
Be wary of the companies that take more Adani Total Gas 10 16 23 40 54
than two years to commission a plant.
BHEL 3 4 5 6 18
Find out whether the capital expenditure
Cochin Shipyard 27 67 84 104 207
is meant for the core business and not for
Gujarat Alkalies 10 11 14 33 69
any unrelated business. Check whether
HEG 0 1 6 22 93
related parties have been involved in the
transaction. The promoter could be HPCL 9 18 27 37 49
diverting funds. As CWIP is not KIOCL 1 1 5 9 31
depreciated, it could be kept high to avoid Ramco Cements 2 10 19 22 39
the depreciation charge. This would, in SJVN 10 13 21 39 106
turn, inflate the profit. Filters applied on BSE 500 non-finance companies: CWIP as a % of gross PPE increasing in the last five years; 5Y CAGR of CWIP
Keep an eye on borrowings as well. It is more than 20% pa; FY22 figure more than 10%.

COVER STORY
SHORT-TERM DEBT AS A PER CENT OF NET WORTH
In firefighting mode
A consistent increase in the ratio of short-term debt to net worth
should be considered as a decline in a company’s creditworthiness
What does it measure? n withstand a
consistent cash flows can
Short-term debt is a liability payable me.
higher ratio for some time.
usually within a year. Dividing this
amount by the net worth of a company
gives the picture of its magnitude.
How to calculate it?

Both short-term debt and net worth can be Case in point
taken from the ‘Equity and Liabilities’
section of the balance sheet. To cite an
STERLITE
example, let’s take Cipla’s (a TECHNOLOGIES
pharmaceutical company) FY22 data. Between FY13 and
Short-term debt/net worth = `408 FY17, this
cr/`20,842 cr = 2 per cent manufacturer of optic-
Cipla’s short-term debt forms only 2 per fibre cable had a
cent of its net worth. The lower the value, median short-term-
the better it is. debt-to-net-worth ratio
of 59 per cent. The
What does it tell and ratio increased from
what doesn’t it? 40 per cent in FY18 to
Companies take short-term debt mainly for 92 per cent in FY22. In
working-capital purposes. However, if fact, during the same
companies become highly reliant on it for period, the company’s
their day-to-day needs, then it can cause interest paid as a
problems. If there is a hiccup, then it can proportion of EBITDA
erode a company’s net worth. increased from 15 per
Short-term debt as a proportion of the cent to 45 per cent,
net worth of more than 25 per cent is not a while net profit fell
comfortable situation, even for a large from `334 crore to `62
company. crore. The stock gave a
However, this metric doesn’t tell you return of 0.3 per cent
that the company will necessarily falter. A per annum in the five
fundamentally strong company with years till June 2022.
/PNOZOVY[[LYTIVYYV^PUNZHZHWLYJLU[VMUL[^VY[O
Company FY20 FY21 FY22
Adani Green Energy 146 429 688
Bombay Burmah Trading 22 27 334
Britannia Industries 17 38 40
Godrej Agrovet 31 39 64
Hatsun Agro Product 33 55 83
ITI 45 47 50
Lupin 20 22 30
Filters applied on BSE 500 non-finance companies: latest year (FY22) value more than 25%; increasing trend over the past
three years

COVER STORY
LOANS AND ADVANCES TO RELATED PARTIES AS A PER CENT OF NET WORTH
More than a friendly gesture

High loans and advances to related parties as per cent of net worth could
signal fund diversion from the company
What does it measure? However, there could be instances
Loans and advances to related parties where the related party’s project would
and employees can be a way to divert benefit the company. Such instances
funds from the company to the would not be revealed by the metric. Case in point
promoter’s other entities. This measure BOMBAY DYEING
highlights the size of such loans and This home-textile
advances with respect to a company’s manufacturer saw its
net worth. loans and advances
to related parties and
How to calculate it? employees as a
These details can be found in the notes to proportion of the net
account for ‘other long-term loans and worth climb from 10
advances’ on the ‘Assets’ side of the per cent to 37 per
balance sheet. Consider Tata Consumer cent from FY15 to
Products’ (a fast-moving, consumer-good FY17. This was
company) FY22 data. mainly on account of
Loans and advances to related parties lending money to a
and employees/net worth = `14 cr/`15,120 joint venture in
cr = 0.1 per cent Indonesia.
The company has lent only 0.1 per In its FY16 annual
cent of its net worth to related parties report, the
and employees. management opined
that this loan (`25
What does it tell and crore at the time) was
what doesn’t it? fully recoverable.
While loans and advances to related However, in its FY18
parties are common, it is important to annual report, the
figure out the purpose, terms and size of management
such transactions. assessed that the
Loans and advances exceeding 5 per recovery of the loan
cent of a company’s net worth should (which now stood at
raise red flags. This is also a source of `214 crore) was
diverting funds from the company’s doubtful.
coffers to promoter entities. Even a low The metric shot up
but persistent ratio should be scrutinised.
14 to 62 per cent in FY19
from 26 per cent in
/PNOSVHUZHUKHK]HUJLZ[VYLSH[LKWHY[PLZHZHVMUL[^VY[O No. of companies FY18, although this
Company FY20 FY21 FY22 in BSE 500 with was because of the
shrinking net worth.
BPCL 10 11 7 loans and
In FY20 and FY21,
India Cements 18 18 19 advances to the company
Jindal Stainless (Hisar) 49 40 35 related parties and reported a negative
Macrotech Developers* 117 110 17 employees as a per net worth. The stock
Sanofi India 19 22 21 cent of the net returned 3 per cent
*Data for FY20–22. Filter applied on BSE 500 non-finance companies: loans and advances to related parties and employees
worth of more than per annum in the five
more than 5% in each of the last three years 5 per cent in FY21 years till June 2022.

COVER STORY
CONTINGENT LIABILITIES AS A PER CENT OF NET WORTH
What if…
A high ratio of contingent liabilities to net worth indicates the growing threat
posed by off-balance-sheet liabilities to a company’s net worth
What does it measure?
Contingent liabilities are potential
obligations of the future. Their existence
is contingent on the occurrence of a
certain event(s). They are, therefore, not
reported on the balance sheet. Some Case in point
examples include income-tax disputes,
product warranties, pending lawsuits, etc.
GILLETTE INDIA
This manufacturer
The contingent-liabilities-to-net-worth
of shaving razors
ratio shows the extent of off-balance-sheet
reported a median
liabilities as a percentage of the net worth.
contingent-
How to calculate it? liabilities-to-net-
worth ratio of 70 per
Contingent liabilities can be found in the
cent during FY12–16.
notes to accounts. Here is the value of the
The majority of
metric for Asian Paints in FY22.
these were related to
Contingent liabilities/net worth = `520
income tax, excise
cr/`13,798 cr = 4 per cent
duty, service tax and
The company has kept its contingent
customs duty. These
liabilities low at 4 per cent of the net
disputes dragged on
worth.
till FY21 (FY22 data
What does it tell and
what doesn’t it? 66 is not available). The
median ratio for the
period FY17–21 is 120
This metric helps you No. of BSE 500
per cent. If these
identify the threat posed companies materialise, then the
by off-balance-sheet with contingent company’s net worth
liabilities to the liabilities of would get eroded. In
company’s net worth. more than 25 the last five years till
If any of the contingent
per cent of June 2022, the stock
liabilities become a
true liability, then it
their net worth returned -0.39 per
can materially affect
in FY21 cent annually.
the business.
Read the disclosures and /PNOJVU[PUNLU[SPHIPSP[PLZHZHWLYJLU[VMUL[^VY[O
understand the types of contingent Company FY19 FY20 FY21
liabilities. If this metric exceeds 25 per
Adani Enterprises* 38 39 44
cent, then you should (ideally) move
Cochin Shipyard 62 87 99
on to another company.
However, the metric doesn’t tell the Dixon Technologies (India) 130 166 222
probability of a contingent liability HFCL 56 64 66
materialising. So, a company could MMTC 232 279 2,604
continue to report a high number and yet Vedanta 62 68 68
run smoothly. Moreover, the management VIP Industries 32 41 63
has discretion in deciding what to include *Data for FY20–22. Filters applied on BSE 500 non-finance companies: contingent liabilities as a % of net worth more than
in a contingent liability and its quantum. 25% in the base year (FY19); increasing trend in the next three years.

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COVER STORY
Telltale signs of trouble

Here are a few qualitative factors that you should keep a watchful
eye on as they may iindicate that something is wrong with a company
recruitment practices or low lose confidence in any future

morale, owing to poor-retention statement by the management.
policies. In some instances, Vodafone Idea, which was always
especially when independent optimistic, has seen its
directors resign, investors should shareholders’ wealth erode by 82
be wary of some potential fraud or per cent (its market cap was only
other illegal acts being committed `27,975 crore as on July 15, 2022, as
by the management. Only when compared to the combined pre-
N
independent directors of PTC India merger market cap of around
ow that you are aware and its NBFC subsidiary PTC India `1,55,000 crore of Vodafone and
of the quantitative Financial Services resigned on Idea in 2017).
measures used to January 19, 2022, did details of
identify red flags, let’s serious corporate-governance STAKE SALE BY
focus on a few lapses come to the surface. While THE PROMOTER
qualitative indicators. An PTC’s shares tanked by around 16 Considering that
important reason for using these per cent in two days, its markets are
subjective measures is that they subsidiary’s shares fell by more imperfect due to
can convey information that may than 22 per cent. information A steady sale
not be otherwise captured purely asymmetry, it
by numbers. Also, not all investors is natural
of shares by a
are equipped with the analytical that market promoter,
tools to dig deep into company participants will unless clearly
financials and unearth potential contemplate if an explained
signs of trouble. Such investors action, even if it is ahead of
should keep an eye on the various perfectly legal, is time, is often
developments with their portfolio actually a negative
companies. If they find the cue. Note that a
interpreted
following happening with their steady sale of as a lack of
companies, they should turn shares by a confidence in
cautious. promoter, unless the future
OVEROPTIMISM clearly explained prospects of
FREQUENT CHANGES Reputation is built over a lifetime ahead of time, is the business
IN TOP MANAGEMENT but is destroyed in seconds. The often interpreted
When it comes to the smooth analyst community expects the as a lack of confidence in the
sailing of a business, its management to give an outlook of future prospects of the business.
management should be steady. the company in every earnings- Unsurprisingly, the shares of PB
While a reasonable level of conference call. But some Fintech tanked by 16 per cent in
turnover may be acceptable, companies may not give a realistic two days after the promoters sold
investors should always be outlook. If the management always 0.77 per cent of their company’s
concerned when a company keeps painting a rosy picture of shareholding on February 10, 2022.
replaces its CXOs more than once upcoming earnings and fails to live Understandably, shareholders
in two years. Usually, it indicates a up to the stated guidance even prefer a promoter whose interests
toxic work culture, poor during one quarter, markets will are substantially aligned with their

COVER STORY
own rather than a promoter with a more than doubled to `740 crore as designed it in such a way that it
very small degree of alignment. of FY22. Unsurprisingly, would highlight its strengths rather
shareholders rejected a proposal than its weaknesses. Further, non-
PROMOTER that would have authorised the standardised metrics are difficult
PLEDGING company to extend loans up to for investors to understand and
This is a simple `5,000 crore. lack verifiability as each player has
variant of a differently defined metric. The
promoters selling ‘contribution profit’ cited by One 97
their stake. Communications is a case in point.
Although pledging is technically Although its contribution profit
not a sale, it has a similar effect – (which could be misleading
the promoters can lose their because of the word ‘profit’)
shares to the extent of the pledge. jumped four times in FY22 to `1,498
Therefore, unless the pledge is crore, the company’s net loss
created to provide security for the widened to `2,396 crore from `1,701
company’s borrowing, investors crore. In conclusion, if someone
should proceed with the tries to take the focus away from
assumption that the pledged profits, always be sceptical.
shares belonging to the promoters
don’t actually belong to them LITIGATION
anymore. The stock price of RESIGNATION OF AUDITORS In addition to the
Thyrocare Technologies declined by This is an extremely alarming huge business risk
around 53 per cent in the last one situation, as auditors are the only associated with
year (ending June 2022) after its effective check on the integrity of the operation of
promoters disclosed that they had financial statements. Given that a any enterprise,
pledged 100 per cent of their stake company’s management plays a uncertainty about a court
during the September 2021 quarter. significant role in appointing the ruling in the future is often a large
auditors, investors should always concern for investors. Investors
RELATED-PARTY be wary of the relationship should always watch out for any
TRANSACTIONS between a company’s auditors and litigation regarding the company
Among the transactions conducted its management. A cozy and its promoters. However, in
by a company, related-party relationship between the two raises addition to investigating the
transactions are the ones that questions about the validity of the number of cases, investors should
require the most scrutiny. These audit. Moreover, the most probable conduct a qualitative assessment
transactions, conclusion when an auditor resigns of the nature of the cases so that
especially with While investors abruptly is that there were they can get deeper insights into
entities that are should be disagreements over the existing problems that are
not fully-owned wary of all management’s questionable plaguing a company. While some
subsidiaries, are related-party practices pertaining to the books of amount of litigation in the usual
often utilised by accounts. In October 2020, KPMG course of business is
transactions,
unscrupulous resigned as the auditor of UPL. understandable, investors should
managements to
they should Thereafter, its shares declined by 9 be careful of companies facing
siphon off money also consider per cent. The company had to settle repeated problems with either
from a company any loans with SEBI in May 2022 by paying regulators or suppliers/customers.
in a concealed being extended around `20 lakh. For instance, Nuvoco Vistas, a
manner. While to unlisted cement manufacturer, came out
investors should
companies as USE OF NON-STANDARD with its IPO in 2021. It disclosed
be wary of all
a red flag
METRICS the pendency of 421 actions by
related-party Whenever a company brags about regulatory bodies, 139 material
transactions, they should also its performance based on non- civil cases, 210 tax proceedings
consider any loans being extended standardised metrics, investors and 277 criminal cases. Only time
to unlisted companies as a red flag. must turn wary. If there is no will tell whether and to what
From `350 crore at the end of FY18, precedent for the metric, it should extent these proceedings will
Britannia’s loans to related parties be assumed that the company has affect the company.

STOCK ADVISOR
The right path to

investment success
Picking the right stocks involves deep research that most
investors can’t do on their own. Here’s how the suite of
Value Research products and Stock Advisor can help.
DHIRENDRA KUMAR
There are two radically different Advisor comes in.

approaches to equity investing. One says that choosing Undoubtedly, the most hands-off equity investing
good stocks and making money off them is supposed to experience that you can have is to go purely through
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luck, too. The other emphasises process, research, visit our website, www.valueresearchonline.com, and
principles, rules, etc. For the most part, individual read our magazines (‘Mutual Fund Insight’ and
investors seem to believe in the former approach, while ‘Wealth Insight’) do mostly that. However, long
institutions and professional investors profess a belief experience has shown me that over time, a certain
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However, the path to investing success is a little more more and add some direct equity investing to their
complex than that. repertoire. Value Research’s equity products – ‘Wealth
Does this mean that as an individual, you cannot be Insight’ and Stock Advisor – are meant for this subset
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There is likely no individual investor in the world Stock Advisor, you are given recommendations by us,
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STOCK ADVISOR
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recommendations over the last five years. Far from

STRAIGHT TALK
Revolutionising e-commerce
ONDC is an ambitious initiative by the Government of India to enable
e-commerce inter-operability. Here are its promises and challenges.
ANAND TANDON
Online e-commerce transactions in communicate. Similarly, any bank using the UPI protocol
India (approximately $70 billion) are still in single-digit can participate in funds transfer. ONDC is the newest
percentage of overall retail despite the rapid growth attempt by the Government of India (and perhaps a
witnessed in recent years. The entry of Jio made data unique attempt in the world) to create a protocol to enable
affordable and COVID increased the share of online e-commerce inter-operability.
dramatically. Despite this, e-commerce has yet to penetrate Unlike transactions that deal with a fungible and
large parts of the country. A key reason for the lack of dematerialised item – like money – e-commerce has a
penetration is the dependence on a few platforms. physical leg to the transaction, making it non-fungible and
Amazon, Flipkart and others have done a remarkable requiring fulfilment in the form of physical delivery. As a
job of on-boarding millions of buyers and sellers, yet it protocol, ONDC defines how a buyer will interact with a
remains a herculean task to do this at population scale. seller, a logistics partner (for delivery) and a payment
Also, creating a two-sided market (finding both buyers and partner (for financial transactions). Once defined and
sellers) is a high-cost business. This reduces the number working, the attempt is to induce as many buyers, sellers,
of participants that can afford to develop and two-sided applications to adhere to
this market. High cost of market Introduction of this protocol. An example can help explain.
development and a duopolistic market ONDC will lead to Let us assume that State Bank of India
structure encourage the creation of market enables ONDC protocol in its YONO app,
silos. A buyer on one platform cannot buy
unbundling of allowing its clients to onboard as a buyer
from a seller of another platform, reducing services, so a or a seller or both. Assume that telecom
overall transactions but protecting the logistics company companies like Airtel and Jio also do the
economic margins of the platform. can now offer its same. We have suddenly increased the
Operating silos are not as common as it number of users in the system to
seems at first sight. A cheque issued by one
services in a approximately one billion. Compare this
bank can be encashed by another. Similarly, competitive manner to one million sellers that Amazon
an email sent from one ‘client’ (say, Google) to enable the seller announced it had onboarded by December
can be received and read in another (say, to deliver to the 2021. So long as ONDC protocol is followed,
Outlook). A recent example of inter- a YONO user will be able to access a seller
operability is UPI, where one can pay
buyer enabled by Airtel.
using one platform and receive using A key aspect of e-commerce is delivery
another. What distinguishes these platforms from those of and returns. Introduction of ONDC will lead to unbundling
e-commerce and what would it take to make things of services, so a logistics company can now offer its
platform-independent? Enter ONDC. services in a competitive manner to enable the seller to
deliver to the buyer. Unbundling also means that a variety
Open Network for Digital Commerce (ONDC) of transactions will now be enabled, e.g., those which do
Email inter-operability works so long as every email front- not allow returns (and are presumably lower-priced) as
end uses SMTP (simple mail transfer protocol) to compared to full-service, higher-priced alternatives.

STRAIGHT TALK
Why will existing platforms join? From technical to do all this. The more user friendly the
A common push-back is that existing front-end, the more likely it is to be used,
platforms, like Amazon, are unlikely to
glitches to poor and user front-end design is wisely not
join – why would they let go the share they completion rates to being handled by ONDC.
get from the seller for introducing the difficulty in Onboarding sellers is still an onerous
buyer and for fulfilment? This argument choosing who to task – someone needs to verify the vendor
misses the point that the seller is not tied is genuine, create the catalogue and
to one platform. Given a choice, sellers will
deal with and ensure that contract conditions are met.
like to sell on as many platforms as possible therefore having This can introduce new intermediaries
and pay as less a commission as they can poor customer – identity verification, transaction
get away with. Going forward, one can experience are all certifier/insurer, etc.
expect companies that are not currently in
the e-commerce business to be able to
possible issues that Challenges
enable transactions (like the examples can arise as ONDC Nothing of the scale envisaged can be
cited above). Amazon may find its sellers rolls out without its fair share of problems. From
prefer other platforms to sell on. technical glitches to poor completion
Intermediary fees are likely to drop. What rates to difficulty in choosing who to deal
would you do – settle for lower fees but more transactions with and therefore having poor customer experience are
or target a discerning sliver of the market? In either case, all possible issues that can arise as ONDC rolls out. It is
it doesn’t matter to ONDC. understandable why the roll-out is limited to a few
districts in the initial stages. However, the design has
Unbundled services, hyperlocal retail side-stepped a few major issues: (a) it is not an application
Unbundling can offer other benefits other than inter- – hence does not compete with other applications in the
operability. One can easily foresee the development of market or those that may come in later; (b) it doesn’t try
hyperlocal markets. A small farmer with a limited crop to develop a two-sided market – on-boarding buyers and
of, say, high-quality mangoes may decide that delivery is sellers remains the domain of other entities; (c) it does
possible only within an area of 10 km, given the need to not attempt to fix transaction rates between
deliver the perishable produce fresh. He can engage the intermediaries – it leaves it to the market; (d) it doesn’t
services of a local delivery company and enable orders store transaction details, so tracking which product is
only from a geographical area within his specified selling well and which is not is not its concern; (e) and it
distance criteria. is not a payment app – it leaves that to other existing and
Buyers benefit through a single check-out. Buying an future methods of payment.
airline ticker, booking a cab to the airport, booking a Finally, it potentially democratises access to e-commerce
hotel room, purchasing appropriate clothes for a trip for all participants and reduces friction in the system as a
can all be done on one platform without having to move whole. If this experiment succeeds, it can serve as a
between specialised platforms like MakeMyTrip or template for transactions world-wide. That’s a high bar to
Uber. And this does not require a single ‘killer’ app – set for a government initiative of global scale.
any app that has enabled the ONDC protocol will be able Anand Tandon is an independent analyst.

EVERYDAY
ECONOMICS
Living beyond means

What caused the Sri Lankan crisis and
can such a situation occur in India as well?
PUJA MEHRA
If you have been to Colombo, you may be prime minister after Rajapaksa reluctantly agreed to
be familiar with the story of the Independence Square, step down. Wickremasinghe started negotiating for a
the beautiful colonial building that – I was told by the bailout with the International Monetary Fund (IMF) and
local people – long ago served as an asylum for prisoners submitted to the country’s parliament the severity of the
suffering from poor mental health. It was repaired and crisis the country is in: Sri Lanka is facing bankruptcy
restored as a swish shopping arcade a few years ago by the that has left it with no foreign currency for importing
Sri Lankan government. National resources were diverted food or fuel. For the first time in its history, it was forced
to the project. Architecture and restoration experts were by the economic crisis to default on a foreign-borrowing
hired and flown in from foreign countries for the job. The repayment. More sovereign defaults are expected. The
stores that came up in it, though, have not managed to do IMF estimates that the economy is shrinking and the
well. But they find it tough to shut down because then the GDP growth could be negative. The IMF is going to have
political heavyweights behind the project to wait for an acting government
will find themselves in a spot – an The World Food acceptable to the Sri Lankan
unsustainable situation clearly. people to stabilise the immediate
The beautiful country of Sri Lanka has
Programme has said that situation before it can resume
many such white elephants: vanity as much as a quarter of talks for bailing out the country.
projects built by political cult figures that the Sri Lankan population Dwindling foreign-exchange
are now monuments to the years of of 22 million doesn’t reserves and a currency crisis
economic mismanagement and all sorts know where its next meal have made food, fuel and even
of poor policy choices, all of which have will come from essential medicines unaffordable
run it into financial ruin. The Sri Lankan for the island nation that is so
people, usually pleasant and happy, have heavily dependent on imports
finally had enough. Furious with the politicians, they for most supplies.
poured out into the streets, protesting the economic The acute shortages have forced a weekly allocation
crisis. The world watched as an angry mob of protesting of petrol quota based on the vehicle identification
Sri Lankans stormed into the official presidential number. The last digit of each registered vehicle’s
residence. State of emergency has been declared in the registration number determines who gets petrol first.
country after its President Gotabaya Rajapaksa formally Priority is given to tourists and foreigners in Colombo
resigned on July 15, having fled the country to escape the for purchasing petrol.
fury of the Sri Lankan people. Food inflation is at 80 per cent. The falling value of the
The political crisis follows decades of disastrous Sri Lankan rupee has not helped affordability of food and
economic policies that have pushed the country into a other essentials. The World Food Programme has said
severe debt crisis. The man who is now president, Ranil that as much as a quarter of the Sri Lankan population of
Wickremesinghe, had failed to win even a single seat in 22 million doesn’t know where its next meal will come
parliament in the 2020 election and got a seat only through from. The Sri Lankan people are furious – so furious that
a national list that tops up the legislature, yet he agreed to those protesting on the streets torched homes of politicians

EVERYDAY
ECONOMICS
unviable; the largest such vanity project

being the port in Hambantota, the
constituency of the Rajapaksas.
A question that keeps coming up these
days is: can India’s economy also go the
Sri Lanka way? The fears are
exaggerated but there is never room
for complacency. In July 1991, 31 years
ago, India too had negotiated a bailout
with the IMF to overcome a balance-of-
payments crisis. In the decades running
up to the crisis, India had been making
poor policy choices and living beyond
means. But when the crisis hit, India
finally took the right, corrective steps.
Prime Minister P V N Rao was persuaded
by Finance Minister Manmohan Singh
and officials. The only thing holding back Sri Lankans and a bunch of technocrats and economists
from escaping to India through the coast of Tamil Nadu is in government to not default on sovereign obligations
the lack of fuel supplies. For those able to wait for hours and agree to the bailout conditions set by the IMF, as they
in queues, petrol sells at about `2,000 a litre in the main were in the medium-term interest of India’s economy.
cities, and at least twice that in the black market. These corrective steps over time put India’s economy on
The humanitarian crisis the Sri Lankan people are the road to reforms, and some tough decisions were
suffering from is a consequence of the country attempting taken. Political resistance, including from the ruling
to live beyond its means. The country is in a severe debt Congress party was overcome. Thanks to the Singh–Rao
crisis that will take a lot of difficult economic reforms duo, India has never looked back, and has in fact grown
and many years to repair. It didn’t happen all of a sudden. by leaps and bounds, as successive governments kept on
The mismanagement and conditions of anarchy were the same path.
worsening over the years. And so, when the shock of Today, despite the challenges posed by the pandemic,
COVID-19 struck, the economy lacked India is not in a risky situation like
the resilience, the systems and the A harebrained tax cut Sri Lanka and other economies on
policymaking capacity required for reduced fiscal revenues, the verge of debt crises. Its debt
responses that would have helped it profile, both for sovereign and private,
creating the perfect
weather the storm or take corrective is not a concern, yet India will have to
steps. First, the pandemic brought
conditions for a debt- remain watchful to strengthen
tourism, a key foreign-exchange- crisis-led insolvency institutions, systems and capacity for
earning sector of the economy, to a preventing politicians and
halt. Same for textile and tea exports, the other two bureaucrats from accumulating economic controls and
mainstays of the economy. An ill-advised ban on import sound economic policymaking. It has become a fad to
of chemical fertilisers meant to conserve precious foreign reject and denounce those economic policies as not good
exchange worsened the country’s problems by hurting for India. Many pre-1991 policies are making a return.
farming, increasing dependency on food imports, and From the increase in import duties for providing
reducing farming incomes at the same time. With the protection to uncompetitive local industries or
export earnings disappearing, foreign exchange reserves compensation for poor ease-of-doing business conditions
started dwindling. People lost trust and started taking to the production-linked incentives (PLI) scheme, it’s a
their money out of Sri Lanka. A harebrained tax cut throwback to the pre-1991 economic-policy regime when
reduced fiscal revenues, creating the perfect conditions politicians and bureaucrats had the powers to pick select
for a debt-crisis-led insolvency. These are all the proximate sectors and companies for fiscal incentives and protection,
reasons that tipped the country into bankruptcy. The debt bypassing market forces. These will have to stop.
crisis had been brewing. Sri Lanka has been taking
Puja Mehra is a Delhi-based journalist and author of
infrastructure loans, especially from China, to finance ‘The Lost Decade (2008-18): How India’s Growth Story
projects that are politically backed but commercially Devolved Into Growth Without a Story’

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Consistent compounding:
India vs China
In spite of the greater size and growth of its GDP, China lags behind India in
terms of consistent compounding by its companies. Here’s why.
SAURABH MUKHERJEA
As is well known, not only have Compounders (CC) by country’.

emerging markets (EMs) grown twice as fast as Moreover, if we just apply 10 per cent revenue
developed markets (DMs) over the past decade, growth filter and 10 per cent ROCE filter each at a
China and India have been the fastest-growing EMs time (rather than simultaneously applying the two
if measured by growth in real GDP over the past criteria – as has been done in table ‘Number of
decade (see chart ‘Real GDP growth, 2010–2020’). Consistent Compounders (CC) by country’), we get
Unsurprisingly, therefore, when it comes to a similar conclusion, i.e., India and China stand far
producing Consistent Compounders (CCs), i.e., above other EMs and the Indian companies
companies which grow their revenues by at least 10 significantly outperform the Chinese companies in
per cent every year for 10 consistent years and terms of shareholder returns. See tables ‘Companies
generate a minimum ROCE of 10 per cent throughout delivering at least 10 per cent YoY revenue growth
that period, India and China are head and shoulders pa for the last 10 years’ and ‘Companies delivering
ahead of any other EM. What is more intriguing, at least 10 per cent ROCE pa for the last 10 years’.
however, is that although China’s economy is five India produces more Consistent Compounders
times larger than India’s ($14,862.56 billion vs than China and the Indian Consistent Compounders
$2667.69 billion in 2020; source: www.statista.com), compound almost three times as fast as the Chinese
India has produced significantly more Consistent ones. Not only do the Indian Consistent
Compounders than China! Even more intriguingly, Compounders outperform the local stock market
the Indian Consistent Compounders have far more comprehensively than their Chinese
compounded their share prices more than twice as counterparts, at a broad index-level basis, the Nifty
fast as their Chinese counterparts (26 per cent vs 10 50 Total Return Index (TRI) has also outperformed
per cent). See table ‘Number of Consistent Shanghai SE Composite (SSEC) TRI on a one-,
9LHS.+7NYV^[O¶
6.8 Emerging markets Developed markets
1.7
1.4 1.3
5.0
4.6
1.1 1.1
0.9 0.9
2.6 2.6
1.7 0.4
1.3
0.3
China India Indonesia Republic South Russian Brazil Median United Canada Norway Germany Netherlands United France Median
of Korea Africa Federation States Kingdom

MAIN STREET
5\TILYVM*VUZPZ[LU[*VTWV\UKLYZ** *VTWHUPLZKLSP]LYPUNH[SLHZ[WLYJLU[@V@
I`JV\U[Y`¶ YL]LU\LNYV^[OWHMVY[OLSHZ[`LHYZ
Avg. ret (%) in USD Avg. returns (%) in
No. of Consistent As a % of total from identification** Yearly (%) in USD from Index
Country Compounders (CC) listed companies CC to 29th Oct ’21 avg. no. identification to performance Difference
Country of companies 29th Oct 2021** (%) (% pt)
China 126 2.8 10.1
China 32 12.8 7.6 5.2
India 162 4.6 26.1 India 34 24.3 20.2 4.1
Indonesia 10 1.5 5.9 Indonesia 3 7.9 1.8 6.2
Republic of Korea 10 0.4 12.0 Republic of Korea 2 11.5 12.3 -0.7
Russian Federation 12 6.1 1.6 Russian Federation 1 2.4 7.4 -5.0
Brazil^ 0 0.0 NA Brazil 1 -0.3 -1.4 1.1
Source: Marcellus Investment Managers. Reuters data used for all countries except India. For India, data Source: Marcellus Investment Managers; Reuters used for all countries except India. For India, data used
from Ace Equity is used. Consistent Compounders filtered on 10% YoY revenue growth & 10% ROCE is from Ace Equity. Consolidated data taken wherever available. *Note: (a) The underlying time period
criteria for the past 10 years. Consolidated data taken wherever available. *Note: (a) the underlying for this analysis is 2010 to 2021; and (b) financial-services companies have been excluded from this
time period for this analysis is 2010 to 2021 (E.g., a 2010 CC is identified by clearing the filters from analysis. **Note further: (a) The year of identification is the first year in which the company passes the
2001 to 2010); (b) financial-services companies have been excluded from this analysis; and (c) there criteria of 10% revenue growth per annum (10 years in a row); and (b) all returns are in USD terms.
are some CC companies which appear in multiple years and therefore the total number of unique CCs is
lower than the figures given in the first column of this table. **Note further: (a) The year of identification
is the first year in which the company passes the CC criteria of 10% revenue growth and 10% ROCE (10
years in a row); and (b) all returns are in USD terms. ^None of the Brazilian companies passed the CCP China, what we can see from the data available for
filters for the period under consideration. market-leading Chinese and Indian companies is
that the polarisation of profits (i.e., the share of the
three-, and five-year CAGR basis [see chart ‘Nifty 50 country’s profit after tax, PAT, accruing to the top 20
and Shanghai SE Composite Index (TRI)’]. PAT generators) has been far more rapid in India
So, why do India’s Consistent Compounders than in China. See chart ‘3Y moving average of PAT
perform so much better than China’s? What of top 20 listed companies to PAT of listed
underpins this consistent superiority both in companies’.
underlying fundamentals and in share price As shown in chart ‘3Y moving average of PAT of
performance? top 20 listed companies to PAT of listed companies’
and table ‘Percentage of total profit generated by
Polarisation of profits is far more pronounced in the top 20 companies in FY20’, the share of PAT
India than China accounted for by the top 20 PAT generators in India
Whilst we do not know exactly what is happening in is: (a) twice the level of their Chinese counterparts;
and (b) has almost doubled (from 45 per cent to 85
*VTWHUPLZKLSP]LYPUNH[SLHZ[WLYJLU[
96*,WHMVY[OLSHZ[`LHYZ 5PM[`HUK:OHUNOHP:,*VTWVZP[L0UKL_;90
Avg. returns (%) in Nifty 50 Shanghai SE Composite*
Yearly (%) in USD from Index
average no. identification to performance Difference 52.4
Country of companies 29th Oct 2021** (%) (% pt)
China 111 8.4 7.6 0.8

20.4
India 293 28.4 20.2 8.1
13.9 14.6 14.2
Indonesia 40 8.5 7.7 0.9
9.3
Republic of Korea 48 11.5 12.3 -0.7
3.9 3.6
Russian Federation 15 10.8 15.8 -5.0
Brazil 15 1.8 -1.7 3.5 1Y return (%) 3Y CAGR (%) 10Y CAGR (%)
5Y CAGR (%)
Source: Marcellus Investment Managers; Reuters used for all countries except India. For India, data from
Ace Equity is used. Consolidated data taken wherever available. *Note: (a) The underlying time period for Source: Marcellus Investment Managers, National Stock Exchange website for Nifty 50 TRI and Reuters
this analysis is 2010 to 2021; and (b) financial-services companies have been excluded from this anal- for Shanghai SE Composite. *TRI was not available for Shanghai SE Composite Index and therefore, the
ysis. **Note further: The year of identification is the first year in which the company passes the criteria of CAGR calculated is on adjusted close prices. **All share prices are for the trading date ending 29th
10% or more ROCE (for 10 years in a row); and (b) all returns are in USD terms. October 2021 and all share prices are in USD terms.

MAIN STREET
@TV]PUNH]LYHNLVM7(;VM[VWSPZ[LK 7LYJLU[HNLVM[V[HSWYVMP[NLULYH[LKI`[OL
JVTWHUPLZ[V7(;VMSPZ[LKJVTWHUPLZ [VWJVZPU-@
India China Profit generated Avg. stock performance Index avg.
by top 20 cos (%, YoY) for top 20 PAT performance (%, YoY)
70 %
(as a % of total generators from Mar from Mar 2000 Difference
3-year moving average of ratio of PAT of top 20
Country listed PAT for FY20) 2000 to Mar 2020* to Mar 2020* (% pt)
65
companies to PAT of listed corporations
China 48 9.5 10.4 -0.9

60
India 85 20.5 16.5 4.1
55 Source: Marcellus Investment Managers; Reuters data used for China and Ace Equity data used for India.
Consolidated PAT taken wherever available. *All share price returns are in USD terms.
50
45 per cent). A decade ago, around 44 million Indians

were taking flights each year. Now thrice as many
40 Indians are flying each year (CAGR of 13 per cent).
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Fifteen years ago, only one in three Indian families
Source: Marcellus Investment Managers; Reuters used for all countries except India. For India, data from had a bank account; now nearly all Indian families
Ace Equity is used. Consolidated PAT taken wherever available.
Note: We have used listed companies’ PAT for both countries because data for PAT for unlisted compa-
have a bank account.
nies was not available for China. As a result of this networking of the Indian
economy, efficient companies with strong
distribution systems have pulled away from regional
per cent) over the past 10 years. These datapoints and local players. For example, as the economy gets
raise two questions: (a) why has corporate integrated, lending, which was once dominated by
profitability in India polarised in such a dramatic regional players, is now seeing the emergence of a
manner and (b) why has corporate profitability not few national leviathans like HDFC Bank and HDFC,
polarised in China? with both lenders entering the list of top 20 PAT
Focusing on point ‘(b)’, one possibility that exists generators over the last 10 years (note: HDFC Bank
is that in China, economic growth has been so is a part of many of Marcellus portfolios.)
broad-based that smaller companies have grown The global dynamic is the rise of affordable,
faster than top 20 PAT generators. However, we easy-to-use enterprise technology, which, if
don’t have in-depth knowledge about Chinese implemented, increases profit margins, reduces
economy to be able to address this issue in a working-capital cycles and
competent manner. increases asset turnover.
Focusing on ‘(a)’, The rise in corporate India’s best
the rise in corporate profitability of India’s top compounders are
profitability of using such technology
20 PAT generators has
India’s top 20 PAT to create wealth for
generators has been
been underpinned by the their shareholders.
underpinned by the drivers of polarisation India’s Consistent
d r ive r s of which are rippling through Compounders
polarisation which the Indian economy mightily outgun their
are rippling through Chinese counterparts –
the Indian economy. both on fundamentals and on
For example, over the past 10 years, the length of share prices – due to their ability to use the
roads in India has increased from 3.3 million km to changes taking place in India to build dominant
5.9 million km (CAGR of 6 per cent). The number of positions in the Indian market.
mobile phone subscribers has increased over the Saurabh Mukherjea is part of the Investments team at
same period from 392 million to 1,161 million (CAGR Marcellus Investment Managers (www.marcellus.in). He is the
of 12 per cent). The number of broadband users has author of ‘Diamonds in the Dust: Consistent Compounding for
Extraordinary Wealth Creation’.
increased from 6 million to 563 million (CAGR of 57

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Quality stocks available cheap

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A
stock screen filters out companies based on companies that cleared the essential checks. This
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helps you generate stock ideas with just a few valuation are selected.
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This screen lays stress on the soundness of mean that a stock is investment-worthy. Consider the
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STOCK
SCREEN
REASONS TO INVEST THE FILTERS

Safety Market cap greater than PEG less than 1 No. of companies that
cleared the filters
Soundness `500 cr P/E to median P/E less
Z-Score greater than 2.99 than 1.5 1,249
Good performance
Reasonable valuations F-Score greater than or equal to 7 Earnings yield greater than 5% 819
C-Score less than 4 196
Banking and finance companies were removed from this analysis as the metrics don’t apply to them. 185
71
Top companies by market cap

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 (`)
NMDC
Minerals 3.9 8 1 51.3 3.3 0.18 30,639 104 187-100
KPR Mills
Cotton & Blended Yarn 14.9 9 2 6.8 21.6 0.90 18,140 557 772-330
JK Cement Ltd
Cement 5.9 8 1 7.3 25.3 0.38 17,370 2,237 3838-2004
DCM Shriram
Diversified 4.2 8 3 12.5 13.3 0.99 15,392 985 1264-855
National Aluminium Co
Aluminium 4.0 8 2 36.3 4.6 0.44 13,720 75 133-67
Tanla Platforms
Software 24.9 8 1 5.4 24.9 0.37 13,411 1,003 2097-789
Chambal Fert & Chemicals
Nitrogenous Fertilizer. 4.4 9 1 12.9 8.5 0.12 13,202 314 516-261
Gujarat Narmada Valley
Nitrogenous Fertilizer. 5.0 8 0 28.5 6.1 0.19 10,345 656 912-314
Finolex Industries
Plastic Tubes & Pipes 7.3 9 3 14.0 8.2 0.34 8,578 137 268-125
Supreme Petrochem
Other Forms-Primary Plastic 19.2 8 1 12.1 12.6 0.42 8,349 879 1027-426
TV18 Broadcast
Media & Entertainment 6.2 8 3 13.7 12.6 0.15 6,549 38 83-33
Mastek
Software 9.2 8 0 8.8 20.8 0.35 6,153 2,080 3669-1851
Greenpanel Industries
Wood 11.3 9 1 5.9 25.0 0.10 6,012 500 626-222
Lux Industries
Cloth 10.8 8 1 8.7 17.0 0.43 5,759 1,906 4644-1685
Craftsman Automation
Auto Ancillaries 4.0 8 2 5.5 33.7 0.50 5,485 2,588 2778-1835

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Transport Corp Of India

Road Transport 21.1 8 1 5.8 18.9 0.59 5,480 706 859-388
JK Lakshmi Cement
Cement 4.0 9 1 14.1 11.5 0.08 5,318 457 816-366
Jindal Poly Films
Packaging & Containers 3.9 9 2 38.3 3.8 0.11 4,571 1,051 1449-880
PDS
Trading 3.9 8 2 8.0 18.2 0.37 4,441 1,722 2100-1107
Usha Martin
Steel Wires 4.9 8 1 8.4 13.6 0.60 3,949 126 165-57
Tinplate Company Of India
Stainless Steel 5.1 9 2 16.7 10.0 0.15 3,547 337 443-211
Hikal
Drugs & Pharma 3.8 9 1 6.7 20.0 0.76 3,206 257 742-212
LT Foods
Other Agriculture Products 3.2 9 1 12.9 10.1 0.52 2,935 93 101-58
Rupa & Company
Readymade Garments 7.4 9 1 9.4 15.1 0.70 2,898 359 586-301
Ion Exchange (India)
Other Machinery 4.0 8 0 11.5 17.2 0.32 2,792 1,877 2687-1486
Action Const Equipment
Other Machinery 5.3 8 2 6.2 25.5 0.46 2,681 226 292-175
Cosmo Films
Packaging & Containers 3.6 9 2 19.0 6.6 0.19 2,628 955 1428-725
Thirumalai Chemicals
Organic Chemicals 4.9 8 0 18.2 9.3 0.29 2,609 253 357-157
Somany Home Innovation
Ceramic tiles 6.8 9 1 7.8 11.6 0.04 2,346 332 486-263
LG Balakrishnan & Brothers
Auto Ancillaries 5.5 8 3 16.0 8.7 0.57 2,138 663 736-399
Garware Hi-Tech Films
Plastic Films 11.5 8 3 14.0 12.7 0.25 2,137 843 1225-583
Surya Roshni
Steel Tubes & Pipes 3.8 9 0 12.4 10.2 0.50 2,081 379 868-343
Gufic Biosciences
Drugs & Pharma 6.7 9 1 6.6 21.0 0.35 2,015 205 290-172
Insecticides (India)
Pesticides 4.2 8 2 7.8 18.0 0.96 1,925 980 990-583
Morepen Laboratories
Drugs & Pharma 5.0 8 1 7.0 18.9 0.38 1,912 38 71-32

STOCK
SCREEN

Everest Kanto Cylinder

Storage & Distribn. 9.5 8 3 19.1 7.1 0.26 1,891 169 292-86
Stylam Industries
Wood 17.7 9 1 5.6 29.9 0.85 1,822 1,051 1420-761
Gravita India
Non-Ferrous Metal 5.5 8 1 10.1 13.0 0.39 1,805 263 398-164
Manali Petrochemicals
Indo Rama Synthetics (I)
Synthetic Yarn 3.1 8 2 13.9 6.4 0.16 1,712 65 91-43
Acrysil
Granite & Stones 7.3 8 2 5.9 26.2 0.50 1,700 628 935-468
Punjab Chem & Crop Pro
Pesticides 5.4 8 2 7.2 19.5 0.44 1,631 1,304 1934-1137
Sunflag Iron & Steel Co
Finished Steel 3.1 8 2 20.0 7.0 0.35 1,523 84 137-57
NACL Industries
Pesticides 3.9 8 2 9.0 19.9 0.48 1,458 78 105-52
Gulshan Polyols
KCP
Cement 5.4 8 2 25.5 7.4 0.75 1,399 109 169-99
Data as of July 20, 2022. This is not the full list. For the full list, visit https://www.valueresearchonline.com/stocks/selector/.
.SVZZHY`
<UP]LYZLJVTWHUPLZ! In order to arrive at our universe of companies, enterprise value. Enterprise value is the market cap added to total debt
we checked if the companies traded on all the days for the last two quar- and less cash and equivalents.
ters. We considered the companies with a market capitalisation of more (S[THUA:JVYL! Developed by Edward Altman of New York University,
than `500 crore. the Z-Score predicts a company’s financial distress or the possibility of its
7YPJL[VIVVR]HS\L7)! Price to book value is the ratio of the price going bankrupt within two years. A Z-Score of more than three is desirable.
of a stock to the book value per share of the company. It shows how 7PV[YVZRP -:JVYL! Developed by Joseph Piotroski, the F-Score high-
much premium investors are willing to pay for the underlying net assets lights financial performance as compared to that in the previous year. It
of the company. thus points out the current outperformer in terms of profitability and
7YPJL[VLHYUPUNZ7,! The price-to-earnings ratio is simply the ratio of financial improvement. An F-Score of seven or above is good.
the price of a stock to its earnings per share. It shows in multiples how 4VKPMPLK*:JVYL! It tells the probability of financial manipulations. In
much investors are willing to pay for the earnings. The thumb rule of order to develop it, we have modified James Montier’s C-Score. A
valuing a stock is that a high-growth stock will have a high P/E ratio, while C-Score of less than four is desirable.
a value stock will have a relatively lower P/E ratio. :[VJR:[`SL! It indicates the style of the stock. It Growth Value
7YPJLLHYUPUNZ[VNYV^[O7,.! This ratio demonstrates how high a is derived from a combination of the stock’s Large
price we are paying for the growth that we are purchasing. It is the ratio valuation – growth or value – and its market
Mid
of price to earnings to the EPS growth of the stock. In all our analyses, capitalisation – large, mid and small. For exam-
we have taken five-year historic EPS growth. ple, on the right, we have shown the stock style Small
,HYUPUNZ `PLSK! Earnings before interest and taxes (EBIT) divided by of a large-cap growth stock.

STOCK
SCREEN
Want more? Here you go

Here are the other screens available on the Value Research website, along
with their themes and some of their stocks
([[YHJ[P]LIS\L 1. Chambal Fert & Chemicals 6. APL Apollo Tubes

JOPWZ 2. Deepak Nitrite 7. KPR Mills
3. Petronet LNG
Gives you large caps with strong fundamentals 4. Sanofi India
and solid growth that are trading at a 5. Coromandel International
reasonable valuation
+PZJV\U[[VIVVR 1. NMDC 6. CESC

]HS\L 2. Indian Oil Corporation 7. Jindal Steel & Power
3. Uflex 8. Indian Metals & Ferro Alloys
Presents companies that are available at less 4. Kirloskar Industries 9. Hindustan Petroleum Corp
than their net worth 5. Oil India 10. Sunflag Iron & Steel Company
9LHZVUHIS`WYPJLK 1. Ambika Cotton Mills 6. GAIL (India)

NYV^[OZ[VJRZ 2. Finolex Industries 7. Glaxosmithkline Pharma
3. Sanofi India 8. Gujarat Ambuja Exports
Combines growth and value investing and 4. JK Paper 9. Monte Carlo Fashions
spills out companies with high earnings growth 5. Jubilant Industries 10. Nahar Spinning Mills
trading at a cheap valuation
/PNOKP]PKLUK`PLSK 1. HCL Technologies 6. Hinduja Global Solutions

Z[VJRZ 2. Mahanagar Gas 7. Cochin Shipyard
3. REC 8. Banco Products (India)
A screen for those looking for a steady stream 4. Manappuram Finance 9. Oil India
of dividends 5. Tata Steel 10. Rail Vikas Nigam
:THSSJHWNYV^[O 1. Valiant Organics 6. United Drilling Tools

JVTWHUPLZ 2. Rajratan Global Wire 7. Raghav Productivity Enhancers
3. Lux Industries 8. NGL Fine-Chem
Wades through the small-cap maze and gives 4. Bajaj Healthcare 9. HG Infra Engineering
out fundamentally strong small caps that are
5. Kama Holdings 10. Apollo Tricoat Tubes
available at a reasonable valuation
For the complete lists of stocks in real

time and for customisable screens, visit
www.valueresearchonline.com/stocks/selector
WORDS WORTH
NOW
India wants to become a I have never seen [the

company] face such a global
chipmaker from a chip supply constraint it has in
taker. Investment is rapidly terms of the sheer capacity of
increasing in India to semiconductors…It is difficult
increase production of to predict when this supply
semiconductors. scarcity will end. But till then,
this will constrain…production
Narendra Modi Prime Minister,
Business Standard, July 5, 2022 volumes…
Niraj Bajaj Chairman, Bajaj Auto,
Financial Express, July 6, 2022
As the RBI has estimated, till the
start of the second half of the year,
both the RBI and the government
will have to be mindful. I will keep
monitoring item by item to rein
in prices for anything that goes
haywire. This pointed attack on
inflation will need to continue.
Nirmala Sitharaman Finance minister,
The Economic Times, July 13, 2022
We thought the pandemic was over with the

global economy doing well withh a high-
growth environment, despite highigh inflation.
ONDC (Open Network for
Then you see a commodity crisis, is, a
Digital Commerce) is going
supply-chain crisis in semiconductors
ductors
to be gradually scaled up…
and war, that certainly affected global
ONDC is a democratisation of
growth. We are going to be in a
the digital commerce world. It
low-growth, high-inflation
can trigger off many startups
environment definitely this
to bring technology into the
year and probably longer.
remotest corners of India.
N Chandrasekaran, Chairman Tata
Sons, Business Standard, July 14, 2022 Piyush Goyal Commerce and industry
minister, Financial Express, July 15, 2022
Our planning is to make an

electric highway from Delhi to
Mumbai. Just like trolleybus, you
can run trolley trucks also…I
request heavy vehicle owners to
use alternative fuel like ethanol,
methanol and green hydrogen as
they are cost effective.
Nitin Gadkari Road and transport minister,
Financial Express, July 12, 2022

SPOT OPPORTUNITIES
IN EMERGING MARKETS
Templeton India Equity Income Fund is an
open-ended equity scheme predominantly
investing in dividend yielding stocks. The fund
invests in Indian and overseas companies that
have the potential to provide growth through
capital appreciation as well as regular income
through dividends.
Over 78,000 unique investors^ in this fund,

call your Mutual Fund Distributor or visit
www.franklintempletonindia.com
PRODUCT LABEL
Alternative to: Suitable for: This fund is suitable for investors who
are seeking*:
• Long term capital appreciation
• A fund that focuses on Indian and
emerging market stocks - a value fund
Investments in Retirement Long Term Education taking into account dividend yield of stocks
Dividend Corpus Wealth Corpus
Paying Creation *Investors should consult their financial
Companies advisers if in doubt about whether the Riskometer is as on June 30, 2022
product is suitable for them.
âs on June 30, 2022

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A PAIR THAT CAN

HDFC LARGE AND MID CAP FUND

Contact your Mutual Fund Distributor or Registered Investment

investors who are seeking*:

y To generate long-term capital appreciation / income

schemes and gold ETF/schemes.

Subscription copy of [tejas.kothari.7@gmail.com]. Redistribution prohibited.

4 Wealth Insight August 2022

54 10 MARKET MOVES 26 MARKET COMPASS

by PUJA MEHRA The plot thickens

The right path to investment success

August 2022 Wealth Insight 5

6\VWHPDWLF,QYHVWPHQW3ODQ 6,3IDFLOLW\LVJHQHUDOO\DYDLODEOHLQ'DLO\0RQWKO\ 4XDUWHUO\IUHTXHQF\

Subscription copy of [tejas.kothari.7@gmail.com]. Redistribution prohibited.

August 2022 Wealth Insight 7

Vishal Khandelwal - Impatience - Leverage - Derivatives

Followers - Overconﬁdence - FOMO - and the like

8 Wealth Insight August 2022

Telcos panic as Adani bids in the 5G auction

Reliance Retail enters the food and beverage

10 Wealth Insight August 2022

Bharat Forge and its Grasim Industries

August 2022 Wealth Insight 11

EMBEDDED VALUE OF LIC AS OF 150000

MARCH 31, 2022, AN INCREASE OF 100000

0.3 PER CENT OVER ITS SEPTEMBER 50000

DGCA reprimands 0UMSH[PVU!*VUZ\TLY7YPJL0UKL_

Debt-ridden airline SpiceJet 7

NSE appoints 120

NSE has received SEBI’s -60

Musk backs out of the 70

Twitter deal July 2020 July 2022

Elon Musk, Tesla’s CEO, has pulled out

12 Wealth Insight August 2022

Hitting new lows

14 Wealth Insight August 2022

Source: https://www.currency-converter.org.uk/currency-rates/historical/table/CNY-INR.html Inverted scale

August 2022 Wealth Insight 15

16 Wealth Insight August 2022

The commodities behemoth

18 Wealth Insight August 2022

Return on equity Debt to equity

Jul 15, 2022

Aug 2, 2013 Mar 30, 2020

August 2022 Wealth Insight 19

Large caps Price to earnings Net profit (` crore)

29.8 22.7 4,912

10.8 276.7 1,264

-26.9 677.2 488

-31.5 2.8 41,100

-44.2 4.7 23,709

20 Wealth Insight August 2022

Mid caps Price to earnings Net profit (` crore)

35.9 4.2 2,951

-20.8 3.5 6,607

-23.5 15.7 685

-28.2 22.2 1,735

-36.1 8.1 1,260

-36.4 4.7 7,723

-38.4 3.2 9,392

August 2022 Wealth Insight 21

Small caps Price to earnings Net profit (` crore)

6\VWHPDWLF,QYHVWPHQW3ODQ6,3IDFLOLW\LVJHQHUDOO\DYDLODEOHLQ'DLO\0RQWKO\ 4XDUWHUO\IUHTXHQF\