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Value Research
May 2016 29 COVER STORY
BLUE
Volume IX, Number 11
8
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4 Wealth Insight May 2016

Columns 7 EDIT 8 WORDS WORTH WISDOM
by DHIRENDRA
Straight from Buffett - II
KUMAR
Two years of 10 MARKET COMPASS

achhe din Big moves
The way is long
and hard but, Index watch
34 MAINSTREET fortunately,
we really are
Achhe din for capital goods
by SAURABH moving on it this More pains for the realty sector
MUKHERJEA time
Decoding PSU shareholding
Demographic Financial crisis: Before and after
delusion No minor issue
Though a significant
part of the Indian Kings of cash
population is young,
its potential is capped
44 STRAIGHT TALK
due to poverty,
unemployment and
by ANAND
TANDON
20 ANALYSTS DIARY
illiteracy Flying high

Convergence Iron ores on fire
and disruption
Convergence of
Beat them if you can
telecom, internet, Junior beats the senior
46 GENERALLY
SPEAKING
video-on-demand,
proprietary content
by VIVEK KAUL
and data storage
may disrupt many
25 DIY
The economist
business models Compare the stocks in
fund manager your portfolio
Due to stock prices
getting impacted by
central banks money 36 INTERVIEW | ARUN JAITLEY
printing, fund
managers now also
48 THE CHARTIST
India stands out and we have
have to worry about
by DEVANGSHU
become aspirational
macroeconomics DATTA
The right
index
51 STOCK ANALYSTS CHOICE
The CPI has proved Our scorecard

to be a better tool
for inflation
targeting than the 54 STOCK IDEAS
WPI. The need is to Quality stocks available cheap
use it in the
calculation of GDP Attractive blue chips
growth as well.
High dividend-yield stocks
Discount to book value
Reasonably priced growth stocks
62 WORDS WORTH NOW
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of Delhi courts only. ALL RIGHTS RESERVED
May 2016 Wealth Insight 5

EDIT
Two years of achhe din

The way is long and hard but, fortunately,
we really are moving on it this time
DHIRENDRA KUMAR
infra problems. For my money, the three star performers
In the two years that have gone past, of this cabinet are Nitin Gadkari (shipping, road
the Narendra Modi government has delivered a long list transport and highways), Piyush Goyal (power, coal and
of reforms. Much to the surprise of the usual suspects renewable energy) and Suresh Prabhu (railways).
in the commentariat, a big part of the focus has been on A few weeks ago, I had a chance to meet Nitin Gadkari
removing bottlenecks from critical points in the at an event. I was amazed to find a man who believes
economy, especially in infrastructure. The other area with an almost religious fervour in the power of
has been what people call (condescendingly, I think), the transport infrastructure to improve lives and create
social sector, but more on this later. These people have wealth. He is fond of quoting Henry Ford on this,
discovered that Modis idea of what is wrong with the American roads are not good because America is rich,
country and what has to be fixed urgently is very but America is rich because America has good roads.
different from theirs. In the context of the ports and coastal infra push that
Towards the end of 2014, just a few months after Gadkari is managing, just one fact shows the scale of
Narendra Modi became prime minister of India, we the task: The port of Colombo, Sri Lanka, can handle
wrote a roundup of the reforms that were needed. At the more container traffic than all Indian ports put together.
time, we had noted that the list of reforms needed was Or that Chinas tenth largest port is 50 per cent larger
frightening. We had also noted that the list was than our largest.
practically the same that the UPA-2 government had The other aspect of Modi governments reform
faced during its tenure. priorities has been the Jan Dhan Yojana and allied
Most of us had the obvious pink-paper list of FDI in schemes to bring most of the population into the fold of
retail, GST, PSU divestment on our minds. What we have the formal financial system. This, coupled with
been shown is that this list suffers from a failure of Aadhaar and the conversion of most subsidies to cash
imagination and an obsession with discrete events that transfers, is the cornerstone of the future fiscal road
are amenable to headlines. The passage of GST? Its a map. The potential revolution in banking that has been
big event, which will get big headlines and big TV unleashed with the new kinds of banks will completely
coverage. But what about the increase of highway transform how money flows.
construction rate from 2 km a day to 30 km a day? Or the The roadblocks for this program of real reforms are
increase in villages electrified from an average of about the obvious ones. A recalcitrant bureaucracy, an elite
200 per year to 7,000 per year? Or the fact that the which does not like its privileges taken away and
dedicated railway freight corridor (talked about literally opposition parties primarily, the Congress, which is
for decades) is on course for a 2019 completion. trying to sabotage everything before the ground under
These are boring background events, and people its feet completely disappears.
somehow think that they do not qualify as reforms. How this struggle turns out will determine, to a large
And yet their impact will be out of all proportion to degree, how the countrys economic future works out.
what their newsworthiness is perceived to be today. Unlike times past, we have a basis for expecting that
What has come as an extremely pleasant surprise is the things that will really unshackle Indias potential will
urgency with which the Modi government has attacked continue to happen.

WORDS WORTH
WISDOM
Straight from Buffett II

Warren Buffetts general world view as reflected
in his 2015 annual letter
T
he annual letters of Berkshire Hathaway, which in turn led to the Great Recession. In the
written by Warren Buffett, are a source of years preceding the meltdown, a destructive and
wisdom for investors worldwide. The 2015 often corrupt pattern of mortgage creation flour-
annual letter was also a masterpiece in itself. It ished whereby (1) an originator in, say,
not only provided Buffetts business and invest- California would make loans and (2) promptly
ment insights, which we published in the previ- sell them to an investment or commercial bank
ous issue of Wealth Insight, but also his views in, say, New York, which would package many
on many other things. In this second and the mortgages to serve as collateral for a dizzyingly
final part of this series, we bring to you a dis- complicated array of mortgage-backed securities
tilled version of Buffetts world view. to be (3) sold to unwitting institutions around
the world.
All praise for the US As if these sins werent sufficient to create an
For 240 years its been a terrible mistake to bet unholy mess, imaginative investment bankers
against America, and now is no time to start. sometimes concocted a second layer of sliced-up
Americas golden goose of commerce and inno- financing whose value depended on the junkier
vation will continue to lay more and larger eggs. portions of primary offerings. (When Wall Street
Americas social security promises will be hon- gets innovative, watch out!) While that was
ored and perhaps made more generous. And, yes, going on, I described this doubling-up practice
Americas kids will live far better than their par- as requiring an investor to read tens of thou-
ents did. sands of pages of mind-numbing prose to evalu-
ate a single security being offered.
Supporter of the market economy Both the originator and the packager of these
Nothing rivals the market system in producing financings had no skin in the game and were
what people want nor, even more so, in deliver- driven by volume and mark-ups. Many housing
ing what people dont yet know they want. My borrowers joined the party as well, blatantly
parents, when young, could not envision a televi- lying on their loan applications while mortgage
sion set, nor did I, in my 50s, think I needed a originators looked the other way. Naturally, the
personal computer. Both products, once people gamiest credits generated the most profits.
saw what they could do, quickly revolutionized Smooth Wall Street salesmen garnered millions
their lives. I now spend ten hours a week play- annually by manufacturing products that their
ing bridge online. And, as I write this letter, customers were unable to understand. (Its also
search is invaluable to questionable as to whether the major rating
me. (Im not ready for agencies were capable of evaluating the more
Tinder, however.) complex structures. But rate them they did.)
The 2008 crisis Downside of productivity gains

There is no question The productivity gains... have delivered awesome
that reckless practices
in home lending Berkshire Hathaway
vs S&P 500
played a major role in
bringing on the
financial panic
of 2008,
April 1980

WORDS WORTH
WISDOM
benefits to society. Thats the reason our citizens, The solution, rather, is a variety of safety nets
as a whole, have enjoyed and will continue to aimed at providing a decent life for those who
enjoy major gains in the goods and services are willing to work but find their specific talents
they receive. judged of small value because of market forces.
To this thought there are offsets. First, the (I personally favor a reformed and expanded
productivity gains achieved in recent years have Earned Income Tax Credit that would try to
largely benefitted the wealthy. Second, productiv- make sure America works for those willing to
ity gains frequently cause upheaval: Both capital work.) The price of achieving ever-increasing
and labor can pay a terrible price when innova- prosperity for the great majority of Americans
tion or new efficiencies upend their worlds. should not be penury for the unfortunate.
We need shed no tears for the capitalists
(whether they be private owners or an army of Mistakes
public shareholders). Its their job to take care of A few, however these are serious mistakes
themselves. When large rewards can flow to I made in my job of capital allocation
investors from good decisions, these parties have very poor returns. In most of these
should not be spared the losses produced by cases, I was wrong in my evaluation of
wrong choices. Moreover, investors who diversify the economic dynamics of the compa-
widely and simply sit tight with their holdings ny or the industry in which it oper-
are certain to prosper: In America, gains from ates, and we are now paying the
winning investments have always far more than price for my misjudgments. At
offset the losses from clunkers. other times, I stumbled in evaluat-
ing either the fidelity or the abil-
Countering workforce redundancy ity of incumbent managers or
zA long-employed worker faces a different equa- ones I later appointed. I will
tion. When innovation and the market system commit more errors; you can
interact to produce efficiencies, many workers count on that. If we luck out,
may be rendered unnecessary, their talents obso- they will occur at our smaller
lete. Some can find decent employment else- operations.
where; for others, that is not an option.
zThe answer in such disruptions is not
the restraining or outlawing of actions
that increase productivity. Americans
would not be living nearly as well as
we do if we had mandated that 11
million people should forever be
employed in The need to act to
farming. counter climate change
This issue bears a similarity to
Pascals Wager on the Existence of
God. Pascal, it may be recalled, argued
that if there were only a tiny probability
that God truly existed, it made sense to
behave as if He did because the rewards could
Visit https://finance.yahoo.com be infinite whereas the lack of belief risked
/brklivestream, and catch eternal misery. Likewise, if there is only a 1%
chance the planet is heading toward a truly
Buffett and Munger live at major disaster and delay means passing a
Berkshire Hathaways annual point of no return, inaction now is foolhardy.
Call this Noahs Law: If an ark may be essen-
general meeting on tial for survival, begin building it today, no
April 30, 2016, at 8:30 pm IST matter how cloudless the skies appear. WI
April 2016

MARKET
C MPASS BIG MOVES: LARGE CAPS
Our large-cap universe has 86 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.
Price to earnings Net profit (` crore)
3M returns (%) 3Y avg RoE (%) 3Y earnings growth (%) 3M price (`) movement
1352
32.4 95.55 300

ABB
Strategic partnerships and robust Q3 numbers led to
a spurt in the stock price. 8.4 29.7 1021
1.4
233
Adani Ports and Special Economic Zone 18.46 2,580 230
The stock had corrected significantly in the last
bearish phase. It retraced its course. 25.2 20.6
-5.6
830
Aurobindo Pharma 25.15 1,549 783
Pharma stocks had corrected due to USFDA concerns.
Aurobindo Pharma, however, undid its losses soon. 28.0 54.5
148
-9.9 -385
BHEL 133
The company posted a loss in Q3, which hit the stock
badly. Fresh order inflows helped it undo its losses. 13.1 -138.5
155
23.5 22.81 -538

Cairn India
18.9 -169.7
The stock had corrected with a declining crude. It started 126
to move up as crude prices hit bottom.
17.3 8.73 8,015

Hindustan Zinc
The company stayed unharmed in the latest bearish
phase. A high dividend further bolstered the stock price. 21.1 9.3 141
166
-7.4 34.6 2,028

Lupin 1668
The stock showed quite some volatility due to USFDA
concerns. It recouped much of its losses. 30.4 23.1
1544
409
12.1 15.6 -1,395

Tata Motors 364
Strengthening JLR sales and the new launches are
expected to boost the bottom line. 26.2 -205.8
333
34.7 5,038
Tata Steel
247
The company got into the mode of selling its
troublesome operations in the UK. -7.0 -1.8
15.9
94
Vedanta -14,574 81
Having corrected sharply, the commodity major got
buying support at lower levels. 1.4 -365.3
Data as on April 14, 2016

MARKET
BIG MOVES: MID CAPS C MPASS
Our mid-cap universe has 216 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.
Price to earnings Net profit (` crore)
222
-25.5 -174
Aditya Birla Fashion and Retail
165
The company demerged from Aditya Birla Nuvo. The
stock fell on listing and went lower subsequently. -41.4
122
10.7 39.17 348

DLF 110
After a sharp correction, the stock witnessed a jump. The
Q3 profit also jumped 24% YoY. 2.2 -16.9
96
25.2 48.45 410

Hindalco Inds.
77
Benefitting from bottom fishing, the stock bounced back
after it had been thrashed severely. 5.0 -39.5
3.8 15.65 -120

Jubilant Life Sciences 382
The company made a profit of `116 crore in Q3 as
against a loss of `5 crore a year ago. 3.9 -267.7 397
860
5.3
817
Just Dial 39.48 154
The stock bounced back after it had been beaten up due
to a decline in Q3 profit. 30.5 66.4
79
-32.8 18.02 558

Reliance Communications
The stock suffered with other telecom stocks, which fell
due to regulatory concerns and higher competition. 2.4 -4.5 53
-15.2
80
Reliance Defence and Engineering -867
The companys loss widened from `70 crore to `294
crore in Q3 YoY. -5.6 -583.8 68
-10.3 14.38 295

Spicejet 79 71
Having rup up a lot on low crude prices and high profits,
the stock took a breather. 46.7
-29.7
21
Suzlon Energy -461
-59.9 22.8
The companys turnaround looks elusive. It posted 15
another loss in Q3.
1572
-34.3 36.02 322

Wockhardt 1033
The company received USFDA warnings for its facilities,
which caused the stock to collapse. 48.4 -32.5

MARKET
C MPASS BIG MOVES: SMALL CAPS
Our small-cap universe (minimum market capitalisation `400 crore) has 591 small-
cap companies, making the last 10 per cent of the total market capitalisation. The
list mentions the stocks that have fluctuated most wildly Price
in the last threeNetmonths.
to earnings profit (` crore)
159
-41.5 58.69 7.41

Adhunik Industries
The company slipped into loss in Q3. It posted a loss of
`3.6 crore against a profit of 58 lakh a year ago. 7.0 22.3 93
74
-22.1 56.52 8.55

Ester Inds. 58
The stock corrected after a sharp jump in the share price
in the last one year. 0.9 59.7
190
86.6 -10.29
Kiri Industries
102
The company has executed agreements to reduce its
debt by 51%. -40.6 22.4
-39.1 2.18 398

Lycos Internet 30
A subsidiary in the US, Ybrant Media, files for
bankruptcy protection. 17.0 22.8
18
-38.5
76
Marksans Pharma 17.47 78.71 47
The companys Goa plant comes under scrutiny by
European authorities. 39.4 38.9
-48.9
712
Ricoh India 29.17 49.6
The stock crashed due to financial irregularities in the
companys books. Some top officials also stepped down. 11.3 58.7
364
303
-6.8 9.45 70.88

326
Shreyas Shipping & Logistics
The stock undid some of its losses after it was hammered
due to low profit numbers. 15.0 67.4
-42.5
64
Signet Industries 64.77 16.72
The company trades at high valuations. The last bear
phase saw the stock getting corrected. 26.5 8.5 37
-46.6
109
High Ground Enterprise 28.01 21.72
Strong selling momentum pulled the stock down amidst
a bearish phase in the market. 32.2 153.4
58
47
-33.2 0.54
Yamini Investments
31
The companys ultra-high price-earnings multiple isnt
realistic, given its earnings. 5.0 178.0

MARKET MARKET
C MPASS C MPASS
Index watch: S&P BSE Auto

20.39
Price to earnings
3.60
Price to book
0.93
Dividend yield (%)
7.17
Market cap
(` lakh crore)
Dynamics of the S&P BSE Auto index Top gainers/losers

Company name Price (`) 1-year change (%)
S&P BSE Auto index is just 6% lower than its all-time high level.
Ashok Leyland 110 45.3
Eicher Motors 19,897 23.9
Bajaj Auto 2,581 22.9
Hero MotoCorp 3,152 22.1
M&M 1,333 6.6
Cummins India 909 3.7
Amara Raja Batteries 900 2.6

Price/earnings is 9% higher than its five-year median of 18.7. Maruti Suzuki 3,735 2.0
Apollo Tyres 169 -9.6

MRF 36,499 -12.8
Motherson Sumi 258 -23.9
Bosch 20,010 -24.2
Tata Motors 409 -26.5
Bharat Forge 829 -36.7
Price/book value is at a 11% discount to the five-year average of 4.05.

Valuations
Company name Price to book P/E
Amara Raja Batteries 31.83 7.39
Apollo Tyres 7.47 1.42
Ashok Leyland 35.89 6.64
Bajaj Auto 21.52 5.56
Bharat Forge 26.10 5.16
Bosch 54.29 7.63
Dividend yield is 37 basis points lower than the five-year median of 2.55%. Cummins India 32.37 7.25
Eicher Motors 57.29 15.64
Hero MotoCorp 22.52 7.10
M&M 26.41 3.78
Maruti Suzuki 23.89 4.16
Motherson Sumi 28.40 7.94
MRF 9.51 2.39
Tata Motors 15.60 1.40
April 2011 April 2016
All data as on April 14, 2016

MARKET
C MPASS
Achhe din for capital goods

February 2016 has seen a jump in fresh orders in the capital-goods space.
Power generation and distribution is the main beneficiary.
T
he capital-goods space is moving. Our Market
Compass story Growth in the woods in the
last issue highlighted improved ordering in the
capital-goods space. Of particular note is the growth
in the power-generation space, which saw the second-
highest fresh investments and constituted 18 per cent
of all fresh orders for the period between February
2015 and January 2016.
The growth in fresh capital-goods orders continued
in February as well, with orders up 54 per cent (YoY)
in February 2016. Power generation received the
highest orders, valued at `6,700 crore, among other
sectors. On a 12-month basis, power generation and
distribution combined cornered more than a third (36
per cent) of the fresh orders awarded.
Not all companies are winning orders though. The
1,210 900
latest round of orders is large in size and three players
are lapping it up. These are Bharat Heavy Electricals
(BHEL), Larsen & Toubro (L&T) and BEML.
` cr ` cr
BHEL L&Ts order inflow in BEMLs order inflow in
Indias largest power-plant manufacturer usually
comes on top when power-related orders go out.
February 2016 alone February 2016 alone
BHEL lapped up orders to the tune of `12,000 crore in
the March 2016 quarter. According to media reports, Losing investor favour
that could entail in order-book growth of 45 per cent
in FY16 and could result in BHELs earnings per
share trebling in FY17.
L&T
Indias largest engineering company walks away with
the second-highest order wins of `1,210 crore in
February alone. The going has been so tough for the
sector that for the nine months ended December 2015,
L&T won large orders to the tune of `4,200 crore.
Compare this with the orders won, amounting to Stock-price movement Rebased to 100
`27,000 crore, in the nine months ended December
2014 and orders won worth `41,000 in FY15.
BEML All industry stalwarts, with the exception of BEML,

BEML didnt stay behind either. It won large orders to have been roasted in the markets in the last one year.
the tune of `900 crore in February 2016. This order The company that has suffered the most is BHEL,
win was for metro coaches for the Kolkata metro rail. which has lost close to half of its market capitalisation
BEMLs order intake for nine months ended in this period. L&T lost 31 per cent, while BEML is
December 2015 stood at `6,000 crore. down 22 per cent on a 12-month basis. WI

MARKET MARKET
C MPASS C MPASS
More pains for the realty sector

Amidst piling inventories and waning sentiment, the woes of the real-estate
sector are far from over and are likely to continue
R
eal-estate developers find themselves in a
tough rut. Banks have tightened financing to Chart 2: Real-estate sentiment index
the sector and demand has withered. In the
last one year, the Nifty Realty Index is down 30 per
cent. The two charts in this story show the worst
may still not be over for the sector.
Mounting unsold inventory

The National Capital Region (NCR) is among the
worst hit in the slump that the realty sector is reeling
under. Not only has demand dried up, new enquiries
are down as well. Chart 1 shows that unsold
inventories are piling up. This is on a pan-India basis.
The same chart also shows that both new sales and
Source: FICCI-Knight Frank report for Q3 2015
new launches are way lower than their highs seen in
the fourth quarter of FY12.
The unsold inventories have gained such Frank and FICCI, the FICCI-Knight Frank real-estate
proportions that if the current momentum sustains, sentiment index tracks sentiment of real-estate
it would take more than four years to clear the developers and financial institutions. The index is at
existing inventory in the NCR region, estimates its lowest point in the last two years. A score above 50
Ambit Capital, and more than 3.5 years to clear the denotes positive sentiment while that below 50 means
inventory in the Mumbai metropolitan region. negative sentiment.
Assuming things improve from here, Ambit The current sentiment has been moving down
estimates it would still take eightten quarters to deeper into the pessimism territory. Look
clear the existing inventory. particularly at the future sentiment. While still above
the 50 mark, future sentiment too has fallen to its
The industrys own view of the future lowest levels in the last two years, an indication that
Chart 2 is from within the industry itself. Developed neither industry nor its financers see the scenario
jointly by the real-estate consultancy firm Knight improving in the near term. WI
Chart 1: Pan-India residential real-estate statistics
Source: India Economics - Macro Indicators Chartbook, Morgan Stanley, March 21, 2016

MARKET
C MPASS
Decoding PSU shareholding

Public-sector undertakings (PSUs) may be sleeping giants currently, but they
can well bounce back. Who stands to gain? Its a widely known fact that the
government has the highest shareholding in PSUs. Here are the other key
players that have sizeable stakes in them. All data as of December 31, 2015
`16,50,491cr
Total market capitalisation of listed PSUs
`51,147cr
Mutual-fund investments in PSUs
Top 10 PSU shareholders Shareholding of PSUs vs BSE 500

Other than the government, many PSUs have holdings in other PSUs. The shareholding pattern of PSUs as a whole is quite different
Also, there are as many as four mutual-fund houses. from that of BSE 500 shareholding. Holding of the promoter
Holder Holding value (` cr) % of total PSU value group is high in PSUs as compared to that for BSE 500. Foreign
President of India 1,061,548 64.32 institutions hold very less in PSUs, whereas insurance companies
have a high exposure mainly because of LICs PSU holdings.
LIC of India 139,011 8.42
BSE 500 PSUs
ONGC 27,574 1.67
HDFC Trustee Co. Ltd 12,065 0.73
ICICI Prudential MF 8,538 0.52
Promoter
Reliance Cap. Trustee Co. 5,229 0.32
51.07% group 67.43%
Oil India 5,204 0.32
Hindustan Oil Corporation 3,576 0.22 Mutual
UTI Mutual Fund 3,487 0.21 4.57% funds 3.12%
Govt of Himachal Pradesh 3,349 0.20
Insurance
5.28% companies 7.11%
Top funds and their PSU holdings
Here are the top five fund houses by assets under management (AUM)
and the amounts they have invested in PSUs 15.48% FIIs 8.07%
AMC Equity value (` cr) Equity value (` cr) of PSUs
HDFC Mutual Fund 66,370 12,065 Other
ICICI Prudential Mutual Fund 54,553 8,538 7.71% institutions 5.21%
Reliance Mutual Fund 50,010 5,229
Non-
UTI Mutual Fund 34,890 3,487
15.89% institutions 9.06%
Birla Sun Life Mutual Fund 30,609 2,775
Funds with the highest equity AUM in PSUs

Following are the top five mutual-fund houses which have invested the most in
PSUs as per cent of their equity AUM. Goldman comes on top due to its ETFs.
AMC Equity value Equity value in PSUs PSU as % of total equity value
Goldman Sachs Mutual Fund 3,852 2,313 60.06
Quantum Mutual Fund 451 129 28.68
HDFC Mutual Fund 66,370 12,065 18.18
Religare Invesco Mutual Fund 2,797 487 17.42
ICICI Prudential Mutual Fund 54,553 8,538 15.65
Equity value in ` crore

MARKET MARKET
C MPASS C MPASS
Financial crisis: Before and after

The English playwright Thomas Middleton once said, He that climbs highest
has the greatest fall. It looks like what he said has been corroborated on
the Street. Certain sectors that did well before the financial crisis of 2008
turned into a nightmare after 2008. Others that had been laggards until
2008 actually outperformed the market (i.e., Nifty 50). Take a look.
All value in per cent. All years are calendar years.
Outperformed Underperformed
BEFORE FINANCIAL CRISIS AFTER FINANCIAL CRISIS
Index 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Nifty Commodities
20.3 30.7 108.8 -57.4 108.2 2.0 -34.1 19.3 -8.6 16.7 -9.5
Nifty Energy
56.7 128.2 0.6 30.7 20.1 96.7 -48.2 61.0 3.4 -28.7 13.8 0.4 8.5 -0.7
Nifty Infrastructure
43.5 55.4 95.2 -57.2 39.7 -4.0 -38.5 21.7 -4.2 22.7 -8.9
Nifty Realty
66.6 -82.8 71.0 -22.3 -51.5 52.7 -34.4 10.0 -15.0
S&P BSE Metal

4.4 39.4 121.5 -74.0 233.7 1.1 -47.2 19.1 -10.0 7.9 -31.2
S&P BSE Oil & Gas

-33.8 -13.9 72.1 127.3 -0.4 40.1 40.1 115.3 -54.5 73.1 1.2 -29.0 13.1 3.7 12.0 -3.4
S&P BSE Power

40.5 122.1 -59.8 74.3 -6.3 -39.9 10.9 -14.6 23.0 -6.4
Nifty 50
-14.7 -16.2 3.3 71.9 10.7 36.3 39.8 54.8 -51.8 75.8 17.9 -24.6 27.7 6.8 31.4 -4.1
Nifty FMCG
-1.8 -10.3 -12.6 31.0 -2.7 58.7 17.1 22.3 -19.6 41.6 30.6 8.6 48.5 12.2 18.2 0.3
Nifty India Consumption

37.6 -43.3 51.3 21.2 -10.8 37.5 9.6 29.7 8.0
Nifty IT
-29.6 -37.8 4.3 23.4 -87.5 33.0 39.0 -11.4 -54.6 166.0 28.7 -18.0 -1.9 58.0 17.8 -0.03
Nifty MNC
-17.2 -7.6 -8.8 51.7 -4.9 49.2 31.7 26.4 -43.2 90.7 11.7 -13.2 28.3 7.7 42.5 7.5
Nifty Pharma
5.1 83.3 17.1 0.9 25.0 14.6 -25.6 59.1 35.3 -10.0 31.9 26.5 43.4 9.3
Nifty Service Sector

-25.5 -30.7 7.1 62.6 27.7 34.6 38.4 46.9 -49.8 67.3 19.1 -24.2 26.9 8.8 37.8 -3.2
S&P BSE Auto

-44.4 4.8 34.4 149.5 11.9 50.1 29.7 2.7 -56.9 204.2 37.6 -20.4 40.3 7.3 52.0 -0.6
S&P BSE Consumer Durable

-37.8 -30.6 18.8 92.9 8.0 114.5 9.3 94.6 -72.5 97.8 67.9 -16.9 46.1 -24.6 66.2 24.0
S&P BSE Healthcare

19.3 17.3 -35.3 75.9 33.5 -14.2 37.2 21.1 48.4 15.3

MARKET
C MPASS
No minor issue
Dont read too much into net-profit numbers. The consolidated profit
obtained after adjusting for minority interest is the real profit.
A
subsidiary is a company owned by a parent
company. The parent may own all the shares
in the subsidiary, but there are cases where it
doesnt hold 100 per cent shares in the subsidiary. The
stake which the parent does not own is called
minority interest. Minority interest comprises less
than 50 per cent stake or voting rights in a subsidiary.
Company regulations make it necessary for the
parent to report its consolidated statement, wherein
it also includes the financials of its subsidiaries. The
consolidated net-profit figure may also have some
portion which belongs to minority shareholders
(those who own the minority interest). This is why a
separate entry for net profit is given in the
consolidated profit-and-loss statement after adjusting can be misleading as the portion of minority interest
for the minority interest. It is important to analyse can be substantial and the profit actually belonging
the consolidated profit obtained after adjusting for to the holding company is very low. The following
minority interest as it is the real profit. table lists some companies where minority interest
There are many companies where net-profit figures as per cent of net profit is very high. WI
Companies with high minority interest (MI)

Company name Sector PAT (` cr) MI (` cr) Profit after MI (` cr) MI as % of PAT
Next Mediaworks Media & Entertainment 2.02 1.87 0.15 92.71

Healthcare Global Enterprises Miscellaneous 4.12 3.58 0.55 86.76
Jindal Saw Iron & Steel 14.71 11.18 3.54 75.97
Tata Power Company Power 408.82 289.37 119.45 70.78
Welspun Corp Iron & Steel 213.53 144.49 69.04 67.67
Phoenix Mills Realty 86.40 55.29 31.11 64.00
E.I.D. Parry (India) Agri 276.35 159.56 116.79 57.74
Religare Enterprises Finance 320.99 167.52 153.47 52.19
Polyplex Corporation Plastic Products 77.75 39.80 37.95 51.19
BF Utilities Power 120.68 59.22 61.47 49.07
Oricon Enterprises Crude Oil 84.86 41.61 43.25 49.03
Godrej Industries Chemicals 382.24 186.35 195.89 48.75
Bombay Burmah Trading Agri 695.79 339.13 356.66 48.74
Prism Cement Construction Materials 4.82 2.20 2.62 45.64
Revathi Equipment Capital Goods 6.81 2.90 3.92 42.54
Thermax Capital Goods 148.13 61.64 86.49 41.61
Data as per FY20142015.

MARKET MARKET
C MPASS C MPASS
Kings of cash
Most PSUs are trading at
record highs in terms of their
cash reserves as per cent of
market capitalistion
P
ublic-sector undertakings
(PSUs) are famous for their
hoards of cash. Although PSUs
total cash and equivalents have fallen
in the past five years, the ratio of cash
as per cent of market capitalisation
still remains high. If they are seen
individually, most PSUs are trading at
record highs in terms of their cash
reserves as per cent of market capital-
istion. Cash reserves run as high as 95
per cent in the case of MRPL
(Mangalore Refinery
Petrochemicals). But MRPL is a mis-
and
Tracking PSU cash Cash to market cap (%)
cellaneous case. It is an indirect PSU Cash & equiv Market cap 21.15
20.51
(government doesnt hold it directly FY16HY1 2,09,467 11,01,631 18.92 19.01
but via other PSUs) and its high cash is FY2015 2,09,101 12,85,243
15.67 16.27
due to high unpaid creditors. MOIL, a FY2014 2,28,365 10,79,694
debt-free company, has cash and equiv- FY2013 2,24,455 10,94,501
alents of `2,940 crore, which are 74.4 FY2012 2,30,887 12,20,510
per cent of its market capitalisation.
FY2011 2,32,358 14,83,028
Similarly, there are six PSUs in all
FY FY FY FY FY FY16
which have cash of more than 50 per FY16 data as of September 2015.
2011 2012 2013 2014 2015 HY1
cent of their market capitalisations;
and there are 11 PSUs with cash more Cash-rich PSUs Cash to market cap (%)
than 40 per cent of their market caps.
Company Market cap Cash & equiv* MRPL
There are two major reasons for the 95.10
such high cash-to-market-capitalisa- MRPL 11,944 11,359 MOIL
MOIL 3,953 2,940 74.38
tion ratios. PSUs traditionally trade at Mysore Paper
low valuations, so their market caps Mysore Paper 61 41 67.36
OMDC
are comparatively smaller, thus boost- OMDC 1,269 772 60.80
Oil India
ing the cash-to-market-cap ratio. The Oil India 19,080 10,730 56.24
second reason is that they havent been NALCO
NALCO 10,232 5,369 52.48
able to spot investment opportunities NMDC
NMDC 40,698 19,069 46.85
to deploy their huge cash reserves. The PTC India
PTC India 1,849 804 43.51
government has frequently asked PSUs
Engineers India 5,499 2,313 Engineers India
to either invest their cash hoards or 42.07
pay out dividends to the shareholders. Neyveli Lignite 11,761 4,768 Neyveli Lignite
40.54
This explains why many PSUs have SCI 3,226 1,305 SCI
40.45
high dividend yields. Are dividend
Market cap data as of April 11, 2016. Market cap and cash & equivalent figures in ` cr. *As of September 2015.
investors listening? WI

ANALYSTS
DIARY
Flying high
Improvement in passenger growth and low crude prices
have given a boost to the Indian aviation industry
T
he Indian aviation industry has run into some passenger airline, with a market share of 37 per
good times. Passenger growth is up and so is cent. For 15 months now, Indigos market share has
load factor both requisites for higher been close to or higher than a third of all passenger
profitability of the industry. Low crude prices have also traffic in the country.
benefitted the industry. Jet Airways, the countrys second-largest airline
Passenger growth for February 2016 came in at 24 per trails far behind Indigo, with a market share of 21
cent over the corresponding period of the previous year. per cent, followed by Air India, with a market share
This came on the back of an equally strong January of 15 per cent.
2016 growth of 23 per cent and 21 per cent in the The Indigo stock was battered on the exchange
current financial year. On average, growth is higher after the company declared weaker-than-expected
than that in any of the last two years. Q3 numbers. On top of that, it guided a lower
The passenger- profitability in Q4
load factor or on account of
capacity utilisation currency headwinds
was up at 82.9 per and the delay of
cent in the current fuel-efficient Airbus
financial compared to 79.1 per A320neos, which were
cent in the comparable period expected to provide respite to
of the previous year. All the overheads by reducing the
airlines with the exception of Air India fuel costs by 1015 per cent. The Indigo
reported higher load factors this February stock is still down close to 20 per cent from its pre-
compared to the immediately preceding month. announcement closing. Though the company has
been consistently profitable since 2009, the cloud on
Whos the top gainer? the stock could remain till it gets a clearer picture
Indigo continues to be the countrys largest on new deliveries.
Number of domestic passengers

Millions
Source: DGCA, MOSL

ANALYSTS
DIARY
Who commands how much?
Source: DGCA, MOSL
Lower crude a boon for the sector Indigo. Despite a higher fleet size, fuels costs in the
Jet fuel constitutes close to half of an airlines nine months ended December 2015 are 17 per cent
operating costs. With crude down to $41 per barrel, lower compared to the previous year, taking the
airlines are seeing profits boost. Aviation turbine share of fuel to total sales down from 45 per cent a
fuel price in Delhi, for instance, is 40 per cent lower year ago to 31 per cent at present. These are truly
than what it was two years ago. How does this filter flying times for airlines. WI
down to the airlines bottom lines? Take the case of Ekramul Haque ekramul@valueresearch.in
Iron ores on fire

The recent rally in iron-ore prices isnt sustainable
I
ron-ore prices have jumped 55 per cent since wants to showcase to the world that its pollution-choked
December last year. Mirroring the price rise in industrial belt has the ability of green-living. An
China, ore and steel prices have jumped across the estimated 10 million people are expected to visit the
world. This story looks whether the rally in steel price show. Thats what causing all the buying, as mill owners
will sustain in the months ahead. rush to buy up and increase production before the
Nobodys really clear on whats really behind the restrictions are put in place.
increase in prices. The Chinese government in a bid
to stimulate the economy, especially steel production,
is pumping in money. Crude steel output touched a
record 760.65 million tonne in March this year. (See
the graph.) Exports are up too, by 30 per cent this year.
There are other reasons that could affect prices, too.
One cause is rather unconventional. An upcoming
flower exhibition to be held in Chinas steel heartland of
Tangshan a city that produces a tenth of Chinas total
steel output and more steel than the US manufactured
in 2014 is expected to see production restricted for six
months between April and October this year. China

ANALYSTS
DIARY
Chinas steel scenario the second half of this year, as supply outstrips
demand in China.
1400 Capacity Production Apparent steel use
The markets are searching for increase in demand,
In million tonnes which is not yet visible. Without a corresponding
1200
increase in the Chinese demand, the price rise looks
1000
unsustainable. According to Citigroup, Weaker-than-
800 expected Australian exports and more resilient
600 Chinese steel production have kept prices elevated.
However, both trends are likely to reverse in the
400
medium and long term.
200 Supply is not even an issue. Increasing supply from
0 low-cost mines, higher China port inventories and a
2000 2010 2016 fall in local demand all point towards a continued
2016 is projected. Source: Financial Times glut in the months ahead. Citigroup estimates the glut
position to continue this year and the next before the
Not many are convinced that the price rise will trend finally turns around in FY19.
sustain. Ive said all along that we expect the iron-ore All things considered, without demand picking up
prices will be volatile. Thats what were seeing, said in China, of which there is no indication yet, the
Sam Walsh, CEO, Rio Tinto, the worlds number two recent rally stands on shaky legs. This could very well
iron-ore producer at the recently held annual general be a short blip that is bound to fall. WI
meeting. Walsh added that he expected prices to fall in Ekramul Haque ekramul@valueresearch.in
Beat them if you can

The most-efficient manufacturing companies
E
quity and debt are a companys assets. As an manufacturing companies means that the company
investor, we want optimal returns on them. The is utilising its assets in the most-efficient way. A
widely tracked ratios are return on equity (RoE) high RoA is the result of good management
and return on capital employed planning and presence of a
(RoCE). From a companys moat around the product.
perspective, however, what We wanted to find those
matters is the total assets which companies that have delivered
are available to it to exploit as a not only high RoE and RoCE
resource. Hence, one important but also a high RoA in the past
gauge to measure the efficiency five years. In the list of such
of earnings is to look at the companies, we further refined
return on assets (RoA) ratio. the results by adding good net
Service companies, by margins as another
nature of their business, are requirement. We were left with
asset-light. A high return on just a handful of companies,
assets is a common which are actually the most-
phenomenon for them. On the efficient manufacturers. One
other hand, manufacturing thing common to these
companies assets are a major driver of their companies is that they all have pricing power due to
profitability. A consistently high RoA in the case of their unique positioning and brands.

ANALYSTS
DIARY
Bajaj Corp ITC

Average 5Y RoA (%) Average 5Y RoE (%) Average 5Y RoCE (%) Average 5Y RoA (%) Average 5Y RoE (%) Average 5Y RoCE (%)
29.28 34.51 43.59 22.45 34.72 50.61

Bajaj Corp is the market leader in the light hair oil Traditionally, a cigarette company, ITC has moved
market, with a volume market share of 58.7 per cent. into many other businesses as it seeks to put its
Its flagship brand Bajaj Almonds Drops, according cigarette profits to good use. ITCs pricing power
to IMRB, a market-research firm, is consumed by comes from its well-established brands, such as Gold
approximately 12.5 crore Flake Premium, Wills Navy Cut,
individuals on a yearly basis. Classic, 555, Aashirvaad,
The secret of its market Sunfeast, Candyman, Bingo,
penetration is the oil sold Wills Lifestyle, Fiama Di
in sachets. This is like Wills, Vivel, etc. And these
giving an EMI option. This are just a few of the more
strategy has worked well, than 30 brands owned by
especially in rural areas, the company in the cigarette
where incomes tend to be low. and FMCG baskets. ITC has
The company also leads in the almost monopolised the Indian
segment of low-unit-price (LUP) packs, with a cigarette space, with an estimated 85 per cent market
market share of around 95 per cent. The company share. Cigarette smokers are so fond of its brands
has kept its cost structure low and has been able to that they generally do not shift to others just because
maintain the pricing power. their prices go up by a couple of bucks.
La Opala RG Zydus Wellness

Average 5Y RoA (%) Average 5Y RoE (%) Average 5Y RoCE (%) Average 5Y RoA (%) Average 5Y RoE (%) Average 5Y RoCE (%)
17.22 29.39 33.75 27.34 38.50 46.14

La Opala is tableware company, which Zydus Wellness is in the consumer-goods space. It has
manufactures dinner sets, cutlery, glasses, tea sets, grown from a being a single-brand (Nutralite, a butter
mugs, etc. La Opala has worked upon its products substitute) company to one boasting of brands like
and branding in such a way that they are known as Sugar Free and Everyuth. The major reason for its
the leaders in their segments. In efficiency is the premium it
the otherwise fragmented commands due to its dominant
tableware market of India, presence in the fitness and
which was dominated by cosmetics segments, thus
unorganised, little-known cornering a major portion of
manufacturers, La Opala the market share. An ever-
has been able to fill the gap increasing inclination of the
with its brands. Probably, it modern Indian to look great
is the first tableware brand in and feel better drives this
India that customers feel proud of companys growth. Its vision is to
and hence like to show the name La Opala scribed improve lifestyles for those looking for the perfect
on dining plates. With its quality, design and brand image at work and play, those who are willing to shun
value, the company commands higher pricing and calorie-heavy food and those who are diabetic. WI
margins as compared to others. Vikas Vardhan vikas@valueresearch.in

ANALYSTS
DIARY
Junior beats the senior

Here are some companies whose listed subsidiaries have
performed even better than them in terms of RoE
Biocon* Bombay Burmah Trading Corp E.I.D. Parry (India)
Syngene International Britannia Industries Coromandel International
Average 5Y RoE (%) Return (%) Average 5Y RoE (%) 5Y return (%) Average 5Y RoE (%) 5Y return (%)
18.1 18.5 35.0 34.7 12.0 -0.6
23.4 18.5 59.9 47.6 17.7 -9.0
Market cap (` cr) Holdings (%) Market cap (` cr) Holdings (%) Market cap (` cr) Holdings (%)
11,183 | 7,605 2,876 | 34,114 4,187 | 6,415
Price to earnings 83.6 Price to earnings 50.8 Price to earnings 60.8
14.85 | 41.07 | 40.70 | 17.09
Gujarat Fluorochemicals* HDFC HT Media

Inox Wind GRUH Finance Hindustan Media Ventures
Average 5Y RoE (%) Return (%) Average 5Y RoE (%) 5Y return (%) Average 5Y RoE (%) 5Y return (%)
14.8 -23.9 18.4 9.4 12.5 -12.2
40.0 -44.1 32.1 40.7 19.6 12.1
5,903 | 5,659 1,78,096 | 9,310 1,935 | 1,991
10.20 | 15.03 18.19 | 39.74 10.97 | 10.63
Indian Hotels Pennar Industries* Tata Chemicals

Benares Hotels Pennar Engineered Building Rallis India
Average 5Y RoE (%) 5Y return (%) Average 5Y RoE (%) Return (%) Average 5Y RoE (%) 5Y return (%)
-15.7 2.9 12.3 6.3 3.6 0.8
22.4 17.0 22.2 4.5 21.3 4.6
10,684 | 136 625 | 528 10,091 | 3,733
| 15.30 13.66 | 25.22 20.25 | 26.32
Tata Global Beverages Tata Steel Time Technoplast

Tata Coffee Tata Sponge Iron TPL Plastech
Average 5Y RoE (%) 5Y return (%) Average 5Y RoE (%) 5Y return (%) Average 5Y RoE (%) 5Y return (%)
8.4 3.1 -7.0 -11.9 12.3 -1.5
22.3 -1.1 13.4 8.0 19.8 26.0
7,602 | 1,703 32,536 | 796 1,065 | 260
33.85 | 13.80 | 29.88 8.70 | 20.61
Data as on April 11, 2016. RoE means return on equity. *Returns are since the subsidiaries got listed.
Vikas Vardhan vikas@valueresearch.in

DIY
Compare the stocks in

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Use the Compare stocks in My Portfolio tool to get a comparative analysis
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A
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INTERVIEW TANMAYA DESAI, Fund Manager, SBI Pharma Fund
Increased
USFDA
scrutiny
will now be
a given
Over the years, pharma stocks have seen a dream run before they
started limping recently. In this interview with Vibhu Vats,
Tanmaya Desai tells us the inside story of the sector.
Pharma stocks have corrected in recent Mexico, South Africa as well as in this market. Outside the US, per
times. What has led to this? developed markets like the cent share of the generics business
The US business accounts for close European Union and Australia. in the US is the highest for Indian
to 50 per cent of the revenues for companies and hence they are
the sector as a whole. Over the last How serious are those concerns? important in the overall scheme of
one year or so, many Indian Interestingly, not so long ago, a things. This implies increased
pharma companies have faced number of pharma companies of scrutiny by the USFDA going
regulatory issues from the US Food the US origin also faced regulatory forward, too.
and Drug Administration (USFDA). hurdles from the USFDA and they
This has impacted the pace of emerged out stronger. We believe, So are Indian processes and systems
approvals in the US and hence for Indian companies too, these not as good as US ones?
growth has been lower in this issues arent structural in nature We cannot generalise that processes
geography. This, coupled with the and companies should emerge and systems of Indian companies
fact that companies will take some stronger from this heightened are not as good as their US
time to resolve the issues, has scrutiny as they strengthen their counterparts. I think the level of
impacted sector valuations and that processes and systems, and learn scrutiny by the USFDA has evolved
has primarily led to the decline in from the current set of inspections. over the years and they keep
sector returns. Also, growth for Also, outside the US, Indian updating their standards of plant
companies in rest of the world companies have the maximum inspection. With the breadth and
(ROW) markets has been impacted number of plants catering to the US intensity of questions being raised
mostly due to currency volatility in market and they have the maximum increasingly, the USFDA has
key emerging economies Brazil, number of product filings too for constantly been raising the bar of

INTERVIEW
doing business in the US. The cost increased access to medicine, business in different countries.
of doing business in the US has investments in healthcare Lastly, the US pricing environment
surely gone up and it is all about infrastructure and higher incidence is far better than that in other
understanding the requirements of of chronic diseases, growth developed countries.
doing business in the US. continues to be quite promising for
Indian pharma companies in the Should we see China as a competitor or
Can one say that US policies are also domestic market. At 25 per cent of as a prospective market for Indian
protectionist in nature? sales (at the sector level), the pharma companies?
No, one cant say that. Outside the domestic market remains the More than China, Japan could be an
US, Indian pharma companies have second-highest contributor to the interesting opportunity for pharma
the largest share in the US market. revenues of Indian pharma firms. companies. The Japanese
Our share has increased from single government is also taking initiative
digits five years ago to now double Are Indian pharma companies facing to increase the generic penetration
digits of the generic US pie. It is competition in the US market from in its market. Companies like Lupin
only natural for the US authorities other Asian or European countries? and Sun Pharma have a meaningful
to come and inspect our plants. presence in this market. We do not
Earlier the USFDA didnt have any see competition from China on the
offices in India. Today they have a Over the last five formulations side in the near term
number of offices in India and there years the share but China has always been a
are even instances of walk-in competitor on the API side.
inspections. As mentioned earlier, of revenues of Indian
with our share in the US increasing, pharma companies Havent valuations of the pharma sector
it would also mean increased run up a lot? Can pharma stocks and
scrutiny (both in terms of quality from the US market funds see a sharp correction?
and frequency) by the USFDA. has moved up from Valuations are richer for this
sector than what they were five
So this means the US market has a 2530 per cent to years ago. However, comparing
significant role to play in the bottom about 50 per cent todays valuations with those five
lines of Indian pharma companies. years ago isnt the right
Absolutely true. Over the last five Competition from Europe has benchmark because inarguably
years the share of revenues of always been there. As to the the sector too has done well in
Indian pharma companies from competition from Asian countries, this period. The sector has
the US market has moved up from China has traditionally been in the evolved and the growth has been
2530 per cent to about 50 per active-pharmaceutical-ingredient good across geographies.
cent. However, since the cost of (API) business but not in the Companies are constantly
doing business in the US has also formulations business. They are increasing their spend on
gone up, this suits larger players currently looking to enter it. We research and infrastructure. So
more than smaller players in the need to see how they progress with from a three- to five-year time
Indian pharma space. Given their their initiatives for this market. horizon, on a structural basis, the
sizes and experience, larger Chinese scale-up, in our opinion, earnings visibility continues to
companies have rightfully been will take a few more years as their remain good and hence the
investing both in infrastructure as US compliance issues are much valuations have justifiably moved
well as in R&D for the US market. deeper than those of India. up over the last five years or so.
These factors tilt the game in However, there will certainly be
favour of companies serious about For Indian pharma companies, why challenges in the near term;
doing business in the US. havent other developed countries firstly, there are the regulatory
become as important as the US? issues. It will probably take some
How promising is the domestic market There are few reasons for this. First time for growth to come back to
for Indian pharma firms? is the sheer size of the US market. the US market for some of the
The prospects of growth in the The second reason is that the US is companies. Second is the
domestic market continue to remain a homogeneous market, whereas, volatility witnessed on currency
quite good. India is still an under- say, in Europe, there are different front in the ROW markets. So
penetrated market and with rules and regulations of doing even if the constant-currency

INTERVIEW
growth is good, the reported businesses in India and are now India are limited. The first model
growth gets impacted due to spreading their wings in US and is the primary reason for the
currency volatility. other lucrative ROW markets. Since success of Indian pharma
they are small, their potential for companies in the US market.
How much can price controls dent the earnings growth will be higher. But
margins of pharma companies? their growth could also be more Wont patents affect the growth of
The positive stance on the domestic volatile as compared to that of their Indian pharma companies in the US
market emanates primarily because large-cap peers. Valuations of mid- market?
a large part of growth in the and small-cap peers too have moved Largely speaking, patents are not a
domestic market is driven by up and one needs to be selective problem. Majority of competition
volumes as well as new product even here in terms of stock picking. enters post patent expiration. In
launches. To that extent, price those cases where companies
controls do not dent the optimism What role does research play in the intend to enter before the patent
we have on this market. Also, India success of pharma firms? expiry, they enter into a litigation
comprises close to 25 per cent of Research is an extremely important with the patent-holder to invalidate
revenues for the sector as a whole aspect for pharma companies. It can the patent or prove non-
and hence any control impacts only be divided into two broad buckets. infringement. In such cases, the
a portion of the revenue stream. One is the generic research (be it opportunity is lucrative and
India continues to be a market with pure vanilla generic or companies get exclusivity for a
strong growth potential, though certain time period where only
time and again you should expect
government-induced controls or
India continues to they, along with the innovator, are
in the market selling the product.
barriers to this growth story. be a market with Patents are not a roadblock for
Wont intense competition in the

strong growth potential, doing business in the US market.
domestic market be a problem? though time and again Where does growth lie in the various
pharma sub-sectors?
The good part of the Indian pharma
market is that in spite of intense
you should expect Within the formulations business,
competition, growth has been good government-induced the branded-formulations business
and in double digits over the years.
It is a highly fragmented market
controls or barriers to (in India, part of Latin America,
South Africa, etc.) is doing well and
and the top ten players account for this growth story is largely stable. The growth in the
4045 per cent of the total market. vanilla generic business in the US
Every company has certain market can see ups and downs.
strengths that it tries to play on. complex/specialty generic), where Growth can be good if companies
There is enough room for volume the company files for a product, gets keep launching newer products in
growth in the Indian market going product approval and launches that the market and constantly keep
forward, too. product in the respective market. investing in creating a robust
Thats the traditional business pipeline. The nature of the generics
Where do mid and small pharma model that Indian pharma business in the US market is such
companies get their revenues? companies have been following. that competitors can affect the sales
The companies that are large in size Here, the R&D spend has gone up of the existing products (impacting
today were also small at some point from 56 per cent of sales to 810 per price as well as the market share of
in time. With India as their cash cent of sales. The second bucket is existing players), which makes new
cow, the money being made here research on developing new product launches important for
was ploughed back in foreign delivery systems/new chemical growth in this geography. The API
markets, particularly the US. Today entities (NCEs) and licensing those business is volatile and could be
the profits from the US are being NCEs to the big pharma companies quite lumpy from one year to the
invested in the ROW markets and in in the western market so that they other. On the contract-
increasing R&D capabilities further. can take the research further. They manufacturing side, focused
Todays mid and small pharma do so because the cost of companies have done quite well and
companies are following a similar developing an NCE is prohibitively there is tremendous growth
philosophy. They started their high and resources available in potential in this space, too. WI

COVER STORY
BLUE
CHIPS
ON
SALE
Mohammed Ekramul Haque
I
ts been a rocky start for equities this year. The mar- highs of 2007.
kets nosedived early January on account of the eco- If you think only core sectors have taken a hit, take a
nomic slowdown in China. In the background, the look at Jubilant Foodworks of Dominos fame. Once a
crash in commodities and crude destroyed trillions of market darling, the company has been struggling to
dollars of investor wealth. Whole industries are reeling maintain same-store sales growth; demand is not what it
from slowdown. Then there is the slowdown in the core was a couple of years ago.
sectors of the economy. A slower-than-anticipated recov- In this story, we look at erstwhile blue chips, stocks
ery still has many core-sector stocks struggling to that were once market favourites but have fallen foul. All
remain in the green. Many have gone under. stocks in the next couple of pages now trade at a signifi-
Even blue chips in various industries have not been cant discount to their median trading book value. There
spared. Take BHEL for instance. The power-sector is simply no excitement for them.
heavyweight, which saw private-sector investments van- This also then becomes rich hunting grounds for
ish in the past couple of years and government spending value. Fundamentally sound stocks that no one wants,
slow down, trades 74 per cent lower from its lifetime these are gems on the wayside. Read on.

COVER STORY
Bharat Heavy Electricals (BHEL) Kaveri Seed Company

5-year median P/B Current P/B Discount to median 5-Year median P/B Current P/B Discount to median
1.81 0.99 45% 5.42 3.03 44%

The elephants on Green shoots
the move again in sight
First, lets get the bad news out of the way.
Revenue for the just concluded financial year was
down 13.7 per cent (YoY, provisional). The bottom
line too took a knock-down of 19.5 per cent.
BHEL has been an underperformer in the mar-
kets for some time now. Its Achilles heel is the
slow execution of orders, especially in the power
segment, which constitutes 35 per cent of the
order book. That, along with increased competi- Kaveri Seed has lost 62 per cent in the last one
tion in an industry where private-sector orders year. Its ongoing tussle with Monsanto over royalty
have dried up, has knocked down the payments has been at the core of the stocks under-
countrys top power-plant manufac- performance. On top of that, demand for cotton-
turer. It still has a 74 seeds remained weak for the whole of the last
per cent market financial year, hitting the companys performance.
share in the power- Kaveri sells genetically modified BT cotton seeds
utility industry. in the country and, with a 17 per cent market
Things are turning share, has done quite well for itself. Problems with
around for BHEL. The pro- Monsanto cropped up when the former decided to
visional results for FY16 cut royalty payments. The government jumped
reveal the capital- into the conflict, ruling that prices of genetically
goods behemoth modified seeds need to be regulat-
The stock has
has seen a turnaround in been hit due to ed and promptly cut Monsantos
operations, with EBITDA turn- two reasons: royalty fee in the process by 74 per
ing positive, at `800 crore, in royalty-payment cent. Monsanto, after threatening
the last quarter. issue with to quit the country, has challenged
If you want to get a feel of the
Monsanto and the governments move to regulate
low demand for
state of affairs of the company, cotton seeds prices in the Delhi High Court,
look at some of the soft indicators where the matter carries on.
that analysts are not talking about. Kaveri is thus stuck between weak demand and
In the midst of a weak order-execu- royalty uncertainty. Though the governments rul-
tion environment, BHEL executed the ing was in its favour, the unpredictability of a court
highest-ever commissioning of projects in its his- ruling hangs over the stock. The markets have not
tory in FY16 and booked the most orders in any sided with Kaveri on this and have treated the `66
of the last five years. Order booking was up 42 crore royalty payment as payable to Monsanto.
per cent over the preceding year. An above-normal monsoon predicted this year
The markets have bludgeoned the BHEL stock will lead to higher revenue growth for Kaveri,
down to 50 per cent in the last year. Thats what which has guided 20 per cent growth in cotton and
makes it attractive now. The movement in the sec- other seeds this financial year.
tor and BHELs improving order book point to a Weak demand following last years poor mon-
reversal of fortunes. The stock that trades at book soons and the royalty issue have knocked the
is a value buy at these valuations. Just dont expect stock. Use the prevailing uncertainty and low valu-
it to become a market favourite very soon. ations to load up on this fine-pedigree company.

COVER STORY
Oil and natural Gas Corporation Colgate-Palmolive

5-Year median P/B Current P/B Discount to median 5-Year median P/B Current P/B Discount to median
2.00 1.20 40% 30.00 19.25 36%

A crude No smile yet
play Colgate dominates the countrys toothpaste indus-
try, with a market share of 57.3 per cent. Yet, thats
little comfort for the company battling stagnating
growth. How bad is the situation? Compared to the
The countrys largest oil-exploration com- 10 per cent volume growth that it witnessed
pany has hit rough weather ever since between FY10 and FY15, company trackers at Axis
crude prices tanked worldwide. In the Securities think the runrate could fall to 57 per
last one year, the ONGC stock has cent in the next five years.
lost 33 per cent of its value. The A new and real threat to the MNC is the rise of
A recovery in
crude from $40 to OPEC (Organization of the home-grown competition Patanjali, which, in no
$50 per barrel in Petroleum Exporting time, has captured a 2.5 per cent market share.
FY17 can result in a Countries) oil producers, in a According to Kotak Securities, Patanjali could be
jump in ONGCs bid to maintain market share looking at a share of 7.5 per cent by FY18.
earnings per share
in competition with US shale There are two things to keep in mind.
by 18 per cent
producers, decided to flood the First, Patanjali is not the first
market with more oil. That led to serious threat to challenge
an oversupply situation, which, though Colgate. There have been
helped the OPEC to maintain its market-share goal, companies that have chal-
dealt a heavy blow to all crude producers. ONGC, lenged Colgates dominance
after diesel-price deregulation and the 20 per cent on and off. There was Close-
ad-valorem cess, is now a pure crude play, dependent Up in the 1980s, followed by
on prevailing crude prices for its profitability. Pepsodent in the 1990s. Even
Things may be changing for crude pricing. While today, it faces off with
the production increase was intended to shake off Hindustan Unilever, the sec-
US shale producers, that has not happened, and, in ond largest in toothpastes.
the meantime, theres only so much loss OPEC can Then there are desi con-
withstand. With oil-exporting economies witnessing tenders, like Dabur, Vicco and
serious economic contractions, a growing consensus Himalaya. Patanjali thus is not
has emerged to freeze production. the first contender to take a
But the road to recovery of crude prices is diffi- shot at Colgate.
cult. Shale is still alive and strong. Iran is looking to The second is how Colgate fights
increase production, while Russia reels from lower off Patanjali. As of today, Colgate
In spite of the
prices. All these factors rule out a strong rally in many competi- does not have a strong alternative
crude to a large extent. tors in the tooth- based in Ayurveda. A launch in this
While the company battles with low crude prices paste segment, vertical could be coming or it could
and the market has tempered its view on earnings Colgate still acquire an Ayurvedic product.
commands a
growth, ONGC now trades at 11 times earnings. A
market share of Price-cuts in the existing portfolio
recovery in Brent crude prices from present levels of over 57 per cent could also be a strategy as can be
$40 per barrel to $50 per barrel in FY17, according to higher marketing spends.
Motilal Oswal, can result in a jump in ONGCs earn- The twin issues of declining volume growth
ings per share by 18 per cent. and the threat of Patanjali have resulted in the
For hard-core value investors, ONGCs trading company losing favour and the stock losing 22
price of 1.2 times its book value and the 3 per per cent of its value in the last one year. The pre-
cent dividend yield make it a difficult proposition miums Colgate once commanded are cooling.
to pass on. Keep watching.

COVER STORY
Jubilant Foodworks Engineers India

16.44 11.00 33% 3.03 2.12 30%

A domino fall On a slippery
ahead? slope
Jubilant Foodworks Engineers India is a public-sector company in the
was once the darling of oil-sector-consulting business. Think of it like this:
the markets. It seemed when oil companies want to expand capacity, they
the Dominos pizza take the services of Engineers India (EIL). The
maker would go only problem is that the oil sector is in the midst of
through the skies. At one of its worst slumps in a long time.
one time, it command- How does the slump in oil prices affect the for-
ed a premium of more tunes of EIL? Its revenue fell by 27 per cent in
than 100 times. Today, FY14 and then 6 per cent in FY15. The bottom line
Jubilant struggles with declined 17 per cent in FY14 and by 34 per cent in
same-store sales growth FY15. This year, the revenue is down 1.2 per cent
and lower than anticipated and the net profit is down 5 per cent.
demand growth. The stock is The markets have naturally been unforgiving.
down 35 per cent from its lifetime peak The EIL stock is down 20 per cent in the last one
and has declined by 20 per cent in the last one year. year. It has lost close to 50 per cent of its value in
There are three major issues that Jubilant has the last two years.
been grappling with: What is the revenue outlook for EIL then? To get
First, the slowdown in the economy has resulted a sense, look at the capex programmes of the three
in people not eating out as much as they did oil-marketing companies (OMCs). OMCs, post the
between 2003 and 2013, when the number of times fall in crude and diesel deregulation, are in a much
a customer ate out increased from three times a fitter state and are raring to expand
month to 8.6 times. In 2015, that number fell to capacities. BPCLs Bina and Kochi
around five times. expansion (worth `20,000 crore
Fall in same-
store sales and Second, the size of the Indian and `4,588 crore,
higher employee market has attracted a number of respectively) are
and rental costs global competitors, ranging from both likely in
have together Burger King, Taco Bell, Box 8 FY17. Other expan-
brought Faasos, Subway, Yo! China, sion projects by
Jubilants
margins down Dunkin and Papa Johns, besides HPCL (Vizag and
the already present KFC, Pizza Mumbai refiner-
Hut and McDonalds all eyeing the same cus- ies), amounting
tomers wallet. to `22,600 crore,
Third, there is the issue of cost management. and IOCL
Jubilants margins at 12 per cent (Q3FY16) are a far (Panipat, Gujarat and
cry from peak margins of 19 per cent (FY12). Fall in Mathura refineries), amounting to `21,500 crore,
same-store sales growth and higher employee and are still in the pipeline without any clarity on the
rental costs have together brought margins down. date of execution.
Jubilant continues to operate in a difficult envi- Engineers India could see some rough weather
ronment. As long as consumer demand does not before fresh orders are issued by the OMCs.
recover, the stock could continue to languish. Stay Without a significant pick-up in orders, valuations
away till definitive improvement appears in same- are not likely to move up. Wait for the order posi-
store sales growth. tion to improve.

COVER STORY
Titan Company Just Dial

11.37 8.73 23% 8.70 7.60 12.6%

Waiting to shine Losing the plot?
Its tough to be a jeweller these days. Protests and
a 40-day strike against the governments move to
make mandatory disclosure of PAN for purchases
above `2 lakh and the 1 per cent excise duty have
not yielded any result.
Thats not the only headache the industry has
to face. Weak demand, high cost of marketing
and overhead expenses to
cover new stores have
ONLINE
seen many compa- STORE
nies pulling back
from further
expansion.
Lower competi- The countrys premier online-search services com-
tive intensity is pany was once the toast of the market. Just Dial
something Titan was one rare online company that was profit-mak-
stands to gain from. ing and earned hard cash as compared to other
There are two lucra- online ventures that operated only on the promise
tive segments of the jewellery of future earnings.
market the `30,000 crore dia- Somewhere along the line, Just Dial seems to
Weak demand, mond market and the `15,000 have lost the plot. Paid campaigns, the companys
high marketing
costs and over- crore wedding-jewellery market. primary revenue driver, are going up at a lower
head expenses Titan has made some headway in rate, traffic is down, employee count has fallen and
to cover new the latter segment, bringing in 20 new initiatives have fallen behind. There are two
stores have per cent of its jewellery sales. main issues that Just Dial faces. The entry of spe-
impacted expan- Titans watches still have a 30 cialised services and delay in its new initiatives.
sion of jewellery
makers per cent volume and 50 per cent In recent times, specialised online services, like
market share (according to Practo for medical services and Zomato for restau-
Motilal Oswal estimates). The trend of online rants, have emerged. These specialised services
shopping has brought new life in the watch seg- present a real threat to Just Dial. As a consumer,
ment, with a number of foreign brands now sell- which would you rather do: search for medical
ing in the country. Titan has launched the Juxt services on the general Just Dial app or look them
brand to address the growing demand for smart up on Practo?
watches. Its still early days to assess what per Just Dial operates in an industry that has no
cent of total sales smart watches would control. high entry barrier to prevent new entrants. True,
The Titan stock has lost 15 per cent of its value it has a base of 16.1 million listings spread across
in the last one year. It is now available at a 23 per 2,000 cities as its core advantage. Yet these newer
cent discount to the median trading book value. players are changing the game itself in ways we
Industry strikes and its effects may well play out cannot fathom.
in this financial year, even as demand growth The second issue is internal. Delay of its new
remains an issue. Titans competitive position, initiatives, fall in unique visitor base and the
however, appears to have withstood headwinds. employee count can do irreparable harm to an
Though it could take time for the jewellery sector entity that operates to fulfil instant requirements.
to regain its lost sheen, Titan could still remain The longer it takes for Just Dial to get its act
in a rewarding proposition. together, the more it will fall behind. WI

MAINSTREET
Demographic delusion
Though a significant part of the Indian population is young, its potential is
capped due to poverty, unemployment and illiteracy
SAURABH MUKHERJEA
Economic theory suggests that when Firstly, lets take Indias gender ratio. Women
the proportion of young people in a region increases, constitute only 48 per cent of Indias population. This
a significant boost to economic growth should is the poorest among its emerging-market peers. This
materialise. The years after World War II saw the can be largely attributed to INBs poor gender ratio
West, in general, and the US, in specific, benefit from women constitute only 47 per cent of the population
this dynamic as baby boomers delivered record which disturbingly has deteriorated in the noughties
productivity. However, even as Indias demographic after recording an improvement in the nineties.
profile today is similar to that of the US in 1960, Consequently, now INB accounts for only 43 per cent
contrary to popular belief, a demographic dividend of Indias female population compared with 57 per
is very unlikely to accrue to India anytime soon. cent of the male population. Secondly, the youthful
This is mainly because a large share of structure of Indias demographic
Indias youth today lacks education as profile can also be attributed to INB as
well as jobs to deliver this
NORTH INDIA VS this region is characterised by the
productivity. To add to the imbalance, SOUTH INDIA youngest population structure in the
Indias gender ratio is skewed country 20 per cent of INBs
significantly in favour of men.
The South would be population is aged between 15 and 24.
Indias rapid economic progress able to produce light However, owing to lack of skill and
over the past two decades masks its industrial products education (only 71 per cent of the
abysmal progress on social indicators. people in INB are literate compared to
Worryingly, this imbalance between
effectively, making the 80 per cent in South India), INB wont
rapid economic progress and North increasingly less be able to reap the benefits of its
stagnant-cum-awful social metrics is relevant as an youthful demographic structure.
particularly glaring
northern belt (INB; the region
in Indias
economic growth driver Thirdly, unemployment too is a bigger
problem in INB than in the rest of
spanning Rajasthan in the west to in the decades to come India a fact that does not augur well
Bihar in the east). Despite the fact that for North India in light of its youthful
INB is the youngest region in India, the region runs demographic structure. Astonishingly, 64 people out
the risk of exploding as millions of barely literate of every 100 in INB are unemployed (the
men face a lifetime without jobs and without women. corresponding number for South India is 36). Lastly,
Despite its rich cultural heritage, the noughties have agriculture, which accounts for 60 per cent of
seen the INB deal with the emergence of four employment in INB has consistently grown at a
dangerous socio-economic problems, namely, (1) the slower pace than the industrial and services sectors
persistence of a skewed gender ratio, (2) the emergence for the last two decades.
of a youth bulge (3) that is largely uneducated and/or Indias adverse standing on the poverty headcount
unemployed, and (4) GDP growth in the most prominent ratio 21 per cent of Indias population lives on less
sector of this region, i.e., agriculture, being consistently than $1.9/day is mainly attributable to the
low. Let me elaborate upon these four points. widespread economic destitution in INB, which

MAINSTREET
accounts for a much higher share of Indias poor constructively in South India, thus helping the South
population. My maths suggests that over two-thirds of avoid North-Indian-style socio-economic destitution.
Indias destitute people live in INB. Thanks to a reasonably well-educated and aspirational
The combination of a predominantly young society in South India, the southern states labour
population, large-scale economic destitution and markets are in better shape as compared to INB, which
unemployment has resulted in higher crime rates in suffers from an oversupply of under-skilled labour.
INB. The persistence of inequalities and poor Furthermore, even the southern states public
employment opportunities has also led to an increase in finances are better managed and state-level balance
instances of communal tension in INB. For instance, sheets are characterised by lower levels of debt and
Uttar Pradesh witnessed the highest number of superior tax-collection abilities.
communal incidents among the states during calendar India could get stuck in a low-income trap if its
years (CY) 201014. Besides the increase in crime rates North fails to improve its abysmal standing on socio-
and social tensions, a combination of skewed gender economic parameters. Economic theory as well as cross-
ratio, economic destitution and a large population of country evidence suggest that: (1) unequal societies are
unemployed youth has resulted in social unrest and, unlikely to deliver sustainable growth; and (2) high
consequently, explicit economic losses. For instance, youth unemployment limits consumption growth.
Uttar Pradesh has lost 416 man-days in CY13 due to Furthermore, in a globalised age, where sweat-shop-
various disturbances such as strikes and lockouts. type unskilled labour is no longer required, North
In contrast, the South is almost like a middle- Indias destitute and poorly educated people run the risk
income country with superior performance (and of becoming increasingly irrelevant. Given that Indias
improving) on a range of socio-economic competitive advantage in the global export market lies
parameters. For example, per capita income in South in producing light industrial products that are capital-
India is $2,000 versus $1,200 for INB. The gender ratio light but knowledge-intensive, the South would be able
in the South is 995 women for every 1,000 men, to produce the same effectively, making the North
whereas in INB there are only 901 women for every increasingly less relevant as an economic growth driver
1,000 men. The opposing forces of a democratic in the decades to come. WI
political system and a social system characterised by Saurabh Mukherjea is CEO - Institutional Equities at Ambit Capital and
caste politics have interplayed with each other the author of Gurus of Chaos: Modern Indias Money Masters.

INTERVIEW ARUN JAITLEY, Finance minister
Photo: Sanjeev Verma / Hindustan Times

India stands out and we have
become aspirational
Though challenges for the Indian economy remain, the finance minister is
quite confident of Indias potential and economic future
T
he Indian economy, even meetings of the International place an enabling environment to
critics admit, is seeing Monetary Fund (IMF) and the facilitate speedy disposal of some of
the stirrings of a revival. World Bank in Washington, he the chronic bad loans that banks
Finance minister Arun granted an interview jointly to have inherited. Edited excerpts:
Jaitley concurs and believes that Mint and The Economic Times.
India is in the middle of its most During the interview, the What will be the big message you will
important phase of economic minister spoke candidly on a range be delivering at the upcoming Fund-
reforms since 1991. of issues, including possible Bank meetings?
Ahead of his departure for the downside risks to growth and how See, these are regular meetings
US to attend the annual spring the government was keen to put in held twice a year. So I have the

INTERVIEW
bilateral with the United States, To this, a fifth challenge has towards social sector and
plus I have G-20, BRICS (Brazil, been added. So far, we have been infrastructure spending, both of
Russia, India, China, South able to transact with reasonable which are perfectly acceptable.
Africa), IMF and World Bank. success so that we dont allow our There is also a temptation in the
Then I come to New York and I own reform success to slow down. name of welfare to go in for
am addressing some investors and So (we have to ensure) the whole cheque distribution.
there is a United Nations meeting process of step-after-step, session-
on narcotics, the UNGA (United after-session, is moving. Earlier, you had said we will need two
Nations General Assembly I think the immediate challenge years to repair the state of the
special session). now is going to be (passage of) economy. Have you sort of completed
The key meetings are the ones bankruptcy (law) followed by GST that repair?
in Washington where you get an (goods and services tax). I think what we are seeing is a
idea which way the global And I have a third one ready very important phase of structural
economy is heading. now, which is we are going to reforms. Each one of these steps,
So far, the meetings I have amend the Sarfaesi (The whether it is direct tax, indirect
attended regularly give me the Securitisation and Reconstruction tax, FDI (foreign direct investment)
impression that even the of Financial Assets and reforms, auctions rather than
developed world and the global Enforcement of Security Interest discretioneach one of them is a
financial agencies dont have an Act) and the DRT (Debt Recovery big-bang step.
idea how long the present phase is When the history of reforms is
going to last.
Nobody predicted the decline of
Gold will have being written, post 91, in addition
to what happened in 91, this will
oil prices and people only have a to become a go down as one of the most
speculation that it will settle
around $40 to $50 (per barrel).
part of the GST [goods important phases.
The only area I had not
Youve now started hearing an and services tax]. You anticipated two years ago was
economic argument that you
never heard earlier that slightly
cant have gold not three things on the downside and
one on the plus.
higher prices may be good for being taxed and its The three downsides are firstly
global economy; earlier, the world
was arguing to the contrary.
exemption be subsi- that the global slowdown is
so intensive.
The global situation is gloomy dized by taxing aam Two, the adverse impact of
and compared to the rest of the
world, India stands out and we
aadmi commodities. sectoral stress on the banks, such
that the ability of the banks to
have become aspirational, so lend for growth would itself
neither we nor the country is Tribunal) laws in order to make be impaired.
satisfied as to where we are, we recoveries faster and quicker. So Three, the extent of the stress on
want to get more. they will have to come in tune with the private sector, wherein the
The variables on which our the bankruptcy law. government itself has to shoulder
future growth will depend are: both policy and economic activity.
One, how long the present oil price So, you will introduce the Sarfaesi On the favourable side, I think
situation will remain. The present amendment in the second half of this oil prices partly compensated and
regime suits us, its gloomy for session? it improved the ability of the
some but a boon for us. I am intending to. government to spend more.
Two, we keep our fingers
crossed as to what sort of Are you seeing a recalibration of On the banking side, there still is a lot
monsoon we will see. spending by state governments after of stress.
Three, the monsoon will have an the implementation of the There are two things which are
impact on domestic demand, which recommendations of the 14th Finance taking place. We have to create
in turn will impact private sector. Commission, which provided them both a political and an economic
Four, when will global more fiscal room? environment for the banks to have
headwinds really become You see, I think its a mixed bag. a healthy recovery. That cant take
tailwinds? There is a greater tendency now place in an environment of

INTERVIEW
suspicion. Business losses cause minister) and Mr Rahul Gandhi So, you havent yet formally retouched
the twin balance sheet problem. (Congress vice president) have base?
You have to address the sector and suggested, there is no way you No, I keep talking to a lot of their
reverse the cycles. That is more can maintain 18%. So its a leaders at various levels.
important. strange thing, they impose an
Banks must have flexibility to 18% condition and want to keep (Former prime minister) Manmohan
settle. Settlements cant be looked luxury items out, a principal item Singh is an old friend of yours, so he
at with suspicion. Amending the out of taxation so that 18% can would be a good point person?
Prevention of Corruption Act and never be achieved. Well certainly appeal to people
creating an ombudsman like him who understand this issue
mechanism, both will help. You wont, sort of, go back on the much better.
jewellery taxation?
This is what is already in the works No, you see, this is the movement The RBI (Reserve Bank of India)
Prevention of Corruption Act. towards the GST. Gold will have to governor last week made a very
Ombudsman is already empowered. become a part of the GST. You interesting observation. He said
When I say ombudsman, a body cant have gold not being taxed that, basically, a lot of things have
which will cushion the bank and its exemption be subsidized come together in the last 20-odd
officials on the settlements. by taxing aam aadmi months, in a sense that India is now
commodities. poised for a fresh take-off.
Can you actually see the kind of See, we have reformed, we are
reform that we are looking at in the spending more, we are spending
public sector banks without a in the right direction and we are
change in their ownership structure? sticking to fiscal prudence. So, we
I dont think Indias political are doing all the right things in...
opinion is ready for that. Why a global environment, which is
Photo: Jasjeet Plaha / Hindustan Times
should I theoretically embark on not (otherwise) friendly.

an area for which the polity is So, assuming these things had
not ready? happened in a friendlier
I think politics is ready for environment, you would certainly
professionalizing their be growing... much faster.
management, for having board-
governed banks, for going in for He was saying that this is the
consolidation, for more competition beginning of another phase of
from the private sector, for more sustained economic growth. What
public sector banks to be run as would your thoughts be?
private sector banks. Dont forget it is the richest in I think the economy is picking up.
India who consume 80% of the We can certainly see a booming
Recently you mentioned that you are gold. It is the upper middle class service sector, we can see
going to reach out to the Congress and rich classes in India that improvement in the
once again for GST. consume 80% of Indias gold. manufacturing sector, a lot more
My preference will be to do GST I have personally assured activity in the mining sector, and I
through consensus, because jewellers that there will be no am sure if agriculture does well, it
everyone including the Congress harassment by the authorities will leave an impact.
(state) governments have to and it will be only on the basis of
implement it. And everybody must self-certification. So, the monsoon would be critical.
be prepared. You see the only I think its extremely important.
sticking point now is (a revenue- How do you propose to build this
neutral GST rate of) 18%. I have no consensus, with the Congress And all indications are that El Nino
difficulty in accepting the figure of primarily? will not be strong this year.
18%. Its just that it should not be You see, in principle, they accept For the first two years, the rain
in the Constitution. the GST, and therefore I hope gods have not been very kind to
And if you keep gold out, as Mr theyll see the reasoning in voting us. I hope.
(Arvind) Kejriwal (Delhi chief for it.

INTERVIEW
If they are not kind for another year, borrow (more than their limit). of the banking system.
can the economy absorb the shock? Yes, so they have more fiscal space
We have a strong economy. I think to borrow for development. NITI Aayog said that the strategic sale
we can live with whichever list would be ready and handed to
situation is created. But well be Do you worry that states unable to DIPP (department of industrial policy
better off with a good monsoon. keep up or adapt quickly will fall and promotion) and to MoF (ministry
behind and there will be a regional of finance). Has it happened?
Your recent budget was so strongly growth disparity? I am so far not aware of it and it
intended to target rural distress, are I think, quite to the contrary, has not been brought to my notice.
the results beginning to show? there will be incentive for states
I think these results slowly come to reform... among the big states, Do you think the non-economic issues
out. I think irrigation is the first the only ones that are (in) deficit that keep cropping up have taken
which will show an impact. are West Bengal and Kerala and away credit for reform measures from
Electrification is already showing Andhra Pradesh. the government?
impact. Swachh Bharat in schools Andhra is only temporarily (in) I think both are independent. I
and other places has shown a deficit because of the division, think the media is more obsessed
good impact. All our financial Hyderabad going to Telangana with non-economic issues because
inclusion schemes have been a we will support Andhra Pradesh they understand them better.
thunderous success. till it becomes surplus and it will
Panama has not really moved ahead
Going back to what the RBI governor I think the econ- on talks on TIEA (tax information
said, the government has interacted exchange agreement) since 2013; is
with rating agencies; are you getting omy is picking the government looking at blacklisting
an upgrade from the rating agencies? up. We can certainly it like it did in the case of Cyprus?
I wont be able to comment on that. We will strictly go by what the
see a booming service global attitude is and practices
Transmission of interest rates doesnt sector, we can see are going to be. But even though
seem to be happening. these are referred to as Panama
From 1 April, we have an improvement in the Papers, money is parked in
alternative system in place. Even
before the new policy was
manufacturing sector, offshore locations other than
Panama. Its just that evidence of
announced, some banks had a lot more activity in that money happened to be in
already transmitted some, so I
think greater transmission will
the mining sector... Panama... some of those locations
are reasonably helpful.
now take place. Notwithstanding
the health of the banks. in the next few years. Will you use Aadhaar in income tax
State Bank of India has brought Therefore, Kerala and West clean-up?
it (interest rate) down to 9.4% on Bengal will have to see whether Lets see how Aadhaar picks up.
housing loansloans are already the policies they have followed for All doubts which some people have
in the single digits. And if we the last four to five decades have over Aadhaar should also be
keep inflation under control, look cost them. cleared, especially given that
at the way government securities Aadhaar is no invasion of
rates have come down, which (UB Holdings chairman) Vijay Mallya privacyits a great national asset.
means pressure on all state didnt appear before ED
governments and central (Enforcement Directorate). Now what On Vodafone, the government has
government for fiscal deficit will options are there? filed an SLP (special leave petition).
be much less because we are now The ED will decide. I think all Isnt it confusing foreign investors?
paying lower interest. these bodies, whether it is Every Vodafone case is not a
bankers or ED, they will decide retrospective case, this one
Recently, you cleared the 14th strictly in accordance with the certainly is not. WI
Finance Commission law; in case of ED, by the legal By Anil Padmanabhan
recommendations allowing some provisions, and banks will go by In arrangement with HT
states which are fiscally prudent to whatever is in the larger interest Syndication | Mint

HISTORY
The economics of
Ambedkar
Known widely for his political
prowess, B.R. Ambedkar
was also ahead of his
times with his
economic
views
A
fter long years of neglect, the ideas of B.R. back it up with foreign currency reserves of such coun-
Ambedkar seem to be gaining currency. While tries as are on the gold standard.
his thoughts on Indian society and politics have Ambedkar argued in favour of a gold standard as
garnered more attention, some of his economic ideas opposed to the suggestion by British economist John
too deserve greater attention. Maynard Keynes that India should embrace a gold
Known largely as the father of the Indian exchange standard. He argued that a gold exchange stan-
Constitution and a leader of Dalits, Ambedkar began his dard allowed the issuer greater freedom to manipulate
career as an economist, making important contributions the supply of money, jeopardizing the stability of the
to the major economic debates of the day. monetary unit.
He was, in fact, among the best educated economists Ambedkar's Columbia dissertation was on the state-
of his generation in India, having earned a doctorate in centre financial relations under the guidance of Edwin
economics from Columbia University in the US and Seligman, one of the foremost authorities on public
another from the London School of Economics. finance in the world.
Ambedkar's London doctoral thesis, later published Ambedkar argued that under a sound administrative
as a book, was on the management of the rupee. At that system, each political unit should be able to finance its
time, there was a big debate on the relative merits of the expenditure by raising its own resources, without hav-
gold standard vis-a-vis the gold exchange standard. ing to depend too heavily on another.
The gold standard refers to a convertible currency in Ambedkar's views on the rupee and on public finance
which gold coins are issued, and may be complemented were responses to the raging economic problems of the
with paper money, which is pledged to be fully day and not all of his analysis may be relevant today.
redeemable in gold. In contrast, under the gold exchange But some of the principles he enunciated, such as that of
standard, only paper money is issued, which is kept price stability and of fiscal responsibility, remain rele-
exchangeable at fixed rates with gold and authorities vant even today.

HISTORY
Of all his academic publications, the one that has before Lewis formulated his famous two-sector model
aged best and has great relevance for contemporary of the economy.
economic debates is a 1918 essay on farming and farm Lewis presumed that developing economies had sur-
holdings published in the journal of the Indian plus and idle labour in the farm sector, and showed
Economic Society. how transferring labour from farms to factories would
In that essay, Ambedkar considered the problem of raise savings and productivity levels in both sectors,
small landholdings in India and their fragmentation. leading to overall growth. The model Lewis formulated
After examining various proposals to consolidate and in 1954 was far more elaborate than what Ambedkar
enlarge such landholdings that were being debated in outlined in his essay, but there are striking similarities
those days, Ambedkar came to the conclusion that in the way both framed the issue.
such proposals were fundamentally flawed. Ambedkar returned to this theme in a 1927 speech
Ambedkar argued that land was only one of the made on the floor of the Bombay legislative assembly
factors of production required to produce crops, and (as it was then called), which was debating a proposal
unless it was used in an optimal proportion with for regulating landholdings.
other factors of production, it would be inefficient. Ambedkar warned of the folly of such regulation,
Landholdings should, therefore, not be fixed but reiterating his arguments made in the 1918 essay. He
should ideally vary with the availability of other fac- argued that the enlargement of landholdings by con-
tors of production: increasing with the availabili- trolling the partition of immovable property and
ty of farm equipment and shrinking if the sale of consolidated holdings would create a
latter shrank. small crust of wealthy landowners and a
Any proposal to enlarge holdings In large mass of landless "paupers".
can be entertained only if it can be short, Despite his objections to many
shown that the availability of farm
implements has grown consider- strange though it social customs sanctioned by
Hindu scriptures, Ambedkar
ably in the country, argued may seem, industri- voiced his approval of the Hindu
Ambedkar. And he then mar- alization of India is law of inheritance, which,
shalled data to demolish that
argument by showing that capi- the soundest remedy according to him, prevented the
creation of plutocracy, which
tal stock had, in fact, declined. for the agricultural primogeniture (the right of suc-
Ambedkar argued that the problems of cession belonging to the first-
real challenge lay in raising the
stock of capital and that will be India, said born child) would surely have cre-
ated. A better way of addressing
possible only if there is greater sav- Ambedkar the problem of fragmentation was to
ings in the economy. This was not pos- introduce cooperative farming, and "to
sible as long as a great mass of people compel owners of small strips
depended on land for their livelihoods, he rea- included therein to join in cultivation with-
soned. Therefore, he posited industrialization as the out destroying private ownership".
answer to India's agricultural problem. In later years, Ambedkar's energies were devoted
"In short, strange though it may seem, industrializa- more to politics and social change rather than econom-
tion of India is the soundest remedy for the agricultural ic analysis, but even his writings and speeches on poli-
problems of India," Ambedkar concluded. "The cumula- tics reflected a deep engagement with economic issues
tive effects of industrialization, namely a lessening pres- and questions of political economy.
sure (on land) and an increasing amount of capital and Just as his politics are today being appropriated by
capital goods, will forcibly create the economic necessity politicians of all hues, his economics today has
of enlarging the holding. Not only this, industrialization become a battleground between the left and the right,
by destroying the premium on land will give rise to few with both sides claiming that he was actually on their
occasions for its sub-division and fragmentation." side. But a careful reading of Ambedkar's writings dis-
What is most remarkable about Ambedkar's analy- pels the view that he was either a champion of a lais-
sis is that he was able to conceive of the notion of sez-faire economy or a revolutionary socialist.
"disguised unemployment" much before it came into Ambedkar's views on economics were as complex as
vogue in development economics, and that he was his views on politics and it is likely that one shaped
able to anticipate one of the key insights of Nobel the other. As his views on India's agrarian problems
Prize-winning economist Arthur Lewis three decades indicate, he saw no contradiction between advocating for

HISTORY
tal rights, Ambedkar argued that such a view would be

based on a very narrow understanding of fundamental
rights. If the objective of such rights was to protect
individual liberty, his proposals did the same,
Ambedkar argued.
Ambedkar argued that an economy based purely on
Photo: Hindustan Times

the profit motive violated two tenets of political
democracy: one, it allowed private employers, rather
than the state, to govern the lives of individuals, and
two, it may force an individual to give up his constitu-
tional rights to gain a living.
"If a person who is unemployed is offered a choice
between a job of some sort, with some sort of wages,
with no fixed hours of labour and with an interdict on
joining a union and the exercise of his right to free-
dom of speech, association, religion, etc., can there be
any doubt as to what his choice will be?" Ambedkar
wrote. "The fear of starvation, the fear of losing a
house, the fear of losing savings if any... are factors too
strong to permit a man to stand out for his
Fundamental Rights."
Responding to libertarian lawyers who argued for
industrialization on the one hand and cooperative farm- minimum state intervention to protect liberty, he
ing on the other. And in both cases, he supported his argued that withdrawal of the state may lead to liberty
arguments with examples of countries in other parts of but that liberty is "liberty to the landlords to increase
the world which had adopted the solutions he was advo- rents, for capitalists to increase hours of work and
cating. More than doctrine, empirical evidence seems to reduce rate of wages".
have guided many of his policy positions. "In an economic system employing armies of work-
Although Ambedkar spoke out in favour of industri- ers, producing goods en masse at regular intervals,
alization and urbanization, he also warned of the ills someone must make rules so that workers will work
of capitalism, arguing that unfettered capitalism could and the wheels of industry run on," he wrote. "If the
turn into a force of oppression and exploitation. state does not do it, the private employer will. Life oth-
It was Ambedkar who proposed to the Constituent erwise will become impossible. In other words, what is
Assembly that the chapter on fundamental rights in called liberty from the control of the state is another
the Constitution should include both negative rights name for the dictatorship of the private employer."
(relating to civil liberties) as well as positive rights Both the political and economic structure should be
(relating to social and economic justice). In a memo- defined by law to translate the rule of one man, one
randum on this subject, Ambedkar outlined his vision vote to the doctrine of one man, one value, Ambedkar
of the rights of citizenship in a free India, and argued. Countries such as India should profit from the
explained why it would entail extensive state control experiences of other countries and define the shape
over the economy. and structure of the economy in the Constitution
Ambedkar included a section on remedies against itself, he felt.
"economic exploitation", which proposed, among other Yet, Ambedkar's radical proposals did not win the
things, that key industries should be owned and run by support of the Constituent Assembly. Instead, many of
the state and that agriculture should be a state indus- the provisions outlined in his memorandum found
try. Ambedkar argued that a modified form of state place in the Directive Principles of State Policy, which,
socialism in industry was necessary for rapid industri- though important, are not justiciable in a court of law.
alization, and that collective farming was the only sal- Ambedkar seemed to have accepted that compro-
vation for landless labourers belonging to the mise with equanimity when the chapter on directive
"untouchable" castes. principles was finalized in late 1948, even though just a
Anticipating the objections of "constitutional year earlier (in 1947), he had made an impassioned
lawyers" who may think that Ambedkar's formulation plea for making socioeconomic rights justiciable. "How
went beyond the scope of the usual kind of fundamen- and why Ambedkar's position on social and economic

HISTORY
rights changed remains a puzzle," writes political sci- failed to take into account caste while planning for
entist Niraja Gopal Jayal in her 2013 book, Citizenship class struggle. In that brilliant but undelivered speech
and Its Discontents. written in 1935, The Annihilation of Caste, Ambedkar
Although Ambedkar resented Jawaharlal Nehru for, argued that it was impossible for the poor to form a
among other things, not including him in the cabinet common front against the rich as long as they main-
committee on economic affairs (and cited that as one tained caste distinctions.
of the reasons for his resignation from the cabinet), Ambedkar argued that it was not enough for the
his views on the economy and the role of the state mir- socialist to say that he himself did not believe in caste;
rored those of Nehru. if he wanted to be taken seriously, he would have to
Both Nehru and Ambedkar advocated state owner- undertake a vigorous programme of social reform to
ship of key industries to drive rapid industrial remove caste distinctions in society.
growth without closing avenues for private enter- "That the social order prevalent in India is a matter
prise in the country. Like Nehru, Ambedkar was which a socialist must deal with; that unless he does so,
influenced by the dominant intellectual paradigm of he cannot achieve his revolution; and that if he does
the day, which emphasized a large role of the state in achieve it as a result of good fortune, he will have to
economic affairs. grapple with the social order if he wishes to realize his
Both men were also likely influenced by the ideas of idealis a proposition which in my opinion is incontro-
Fabian socialists, and their social democrat counter- vertible," wrote Ambedkar. "He will be compelled to
parts in the US. One of the biggest influ- take account of caste after the revolution if
ences on Ambedkar was American edu- he does not take account of it before the
cationist and philosopher John
While revolution."
Dewey, who became the president of
the League of Industrial John Maynard Despite his disagreements with
Marxist methods, and his resent-
Democracy in 1939, and who sub- Keynes advocated ment against socialists for not tak-
scribed to a broad conception of
that India should ing caste seriously, Ambedkar
social democracy.
Despite accepting certain adopt the gold shared their concerns about eco-
nomic inequality in the country.
insights from Marxism, particu- exchange standard, In his concluding speech to the
larly the concept of exploitation
Ambedkar was in Constituent Assembly, he warned
in society by one group against
another, Ambedkar differed with favour of the gold that without economic and social
equality, political equality will
Marxists in many respects. In an standard eventually be jeopardized. Political
essay titled Buddha or Karl Marx, democracy will last only if we make it
written a few weeks before his death, he a social democracy as well, he said.
analysed the similarities and differences "On the 26th of January 1950, we are
between the ideas of Buddha and those of Marx, going to enter into a life of contradictions," said
and argued that the ideas of the former were more Ambedkar. "In politics, we will have equality, and in
appealing. social and economic life, we will have inequality. In
Ambedkar pointed out that even Buddha had spo- politics, we will be recognizing the principle of one
ken about the evils of exploitation in society, even if man, one vote and one vote, one value. In our social
he did not use the Marxist parlance of class conflict, and economic life, we shall, by reason of our social
and had warned that private property brought sorrow and economic structure, continue to deny the principle
and suffering to the world. According to him, both of one man, one value. How long shall we continue to
Buddhism and Marxism aimed to root out exploitation live this life of contradictions? How long shall we con-
and suffering, but the means were different. tinue to deny equality in our social and economic life?
While one appealed to the conscience of man to If we continue to deny it for long, we will do so only by
change himself, the other relied on violence and the putting our political democracy in peril. We must
dictatorship of the proletariat to achieve it. The lat- remove this contradiction at the earliest possible
ter was unacceptable to him because it did not recog- moment or else those who suffer from inequality will
nize the value of human life. To him, the three ideals blow up the structure of political democracy which
of liberty, fraternity and equality were compatible this Assembly has so laboriously built up." WI
only with Buddhism. By Pramit Bhattacharya
Ambedkar was also critical of Indian socialists who In arrangement with HT Syndication | Mint

STRAIGHT TALK
Convergence and disruption

Convergence of telecom, internet, video-on-demand, proprietary content and
data storage may disrupt many business models
ANAND TANDON
In the late 1990s, rapid penetration an appropriate price point, has the capability to
of cell phones and development of mobile technology disrupt not only the business models of other telecom
triggered expectations of a convergence of telecom, providers but of cable TV, direct-to-home providers, TV
media and technology (TMT). AOL, valued at about $200 channel bouquets and internet-service providers. Will
billion, was then a dial-up internet-service provider for convergence work now when it didnt earlier?
much of the USA. Times Warner, a staid media
producer and cable owner, had attempted and failed to This time is different
establish an online presence. A path-breaking merger There are three fundamental differences in the eco-
was announced, forming a company with $350 billion in system which makes the new combined offering more
market value. Soon, the dot-com bubble burst. Two years powerful:
post the merger, AOL Times Warner had to take a $99 1. Deep and improving penetration of mobile devices
billion write-off no chump change even by todays (cell phones and tablets) that are internet connected at
liberal valuation standards. In 2015, the demerged AOL broadband speed allows users to consume content based
was taken over by Verizon for around $4 billion. The on individual interests rather than collective interest, as
residual Times Warner trades at less than $60 billion. in the case of a family gathered around a single
Many of the assumptions around the merger were television screen. Except for blockbuster live events like
based on forecast of how consumers would consume marquee sports games, each individual can watch
media in the new, internet connected world. Several of content that is relevant to him or her. This challenges
these assumptions have actually panned out though the output of large media producers, who have to create
perhaps in ways that were unimaginable 15 years ago. stuff relevant to each individual. It also empowers small
producers of content to develop programs and market
Reliance Jio: The worlds largest startup them at a much lower price point or for niche audiences.
Reliance has reportedly made investments totalling `15 2. Media is no longer consumed in a linear program
billion for its re-entry into the telecommunication space. mode as in television. The availability of streaming
Unlike its previous avatar which rapidly penetrated the media from varied sources allows viewing on a time-
market through its low-priced offering, this time the shifted, on-demand basis. This challenges the business
market is far more competitive. Penetration levels are models of not only channels but also infrastructure
extremely high, and pricing remains amongst the lowest providers like cable TV and direct-to-home providers.
in the world. Just aggressive pricing is not likely to help With users no longer dependent on watching
in gaining consumers. Reliance is reportedly working programming coming onto the TV set from the cable or
on a convergence platform a bundled service of satellite dish, the bargaining power of pipe providers
telecom, internet, video-on-demand, its proprietary reduces in comparison to that of content developers.
content and data storage. Consumers now have an incentive to drive down the cost
The actual service is yet to be unveiled. Media reports of pay TV or perhaps to drop it altogether.
suggest a soft launch next quarter, with a real roll-out 3. Availability of advertising models that can move
later in the year. Such a bundled service, if launched at advertising dollars on a real-time basis based on

STRAIGHT TALK
instant feedback on program viewership and irrespective of how access is provided.

preferences of the viewer. Advertising remains the Online content aggregators will continue to have to
primary source of income for media ecosystem and an protect their positions by aggressive addition to high-
inter-segment shift in advertising revenues can upset value content.
business models quickly. Telecom providers are already feeling the heat of
these changes as OTT (over the top) programs like
And the winner is WhatsApp and Facebook Messenger eat into first the
In the emerging ecosystem, a key winner will be a messaging business and now into voice.
business that is able to help viewers quickly find The movie-theatre business is at an interesting
relevant content. Content is now available across juncture. Much of urban India watches movies in
internet aggregators, TV and social media. No one has multiplexes due to the experience of new releases, large
yet created a mechanism to allow users to use a single screen and comfortable surroundings. However, once
point of navigation to access these diverse streams. original content is released either first on the net or
Surprisingly, cable TV providers (a part of the chain simultaneously with a theatre release, demand may
that seemed headed to extinction) with internet offering change rapidly. Content producers are less likely to
may be best positioned to create the linkages with agree to share approximately half their revenues with
internet aggregators, TV channels and other media theatres, especially if viewers decide that a home
services to provide the go-to mechanism for search. DTH theatre is not nearly as bad when it comes at a fraction
providers or internet providers without TV content are of the cost of a theatre viewing.
unlikely to find it as easy. In all this flux, investors would be well advised to
Proprietary content either self-created or through watch how the space unravels without making big
transmission rights can provide significant barriers. bets in existing business models. Investing,
This is now a costly proposition as marquee programs, especially for the long term in this field, may be
high on the watchability index, will necessarily be bid fraught with unmeasurable risks as businesses strive
for aggressively. On the other end of the spectrum, niche to retain their relevance. While technology drives
content for special-interest groups will always find an changes in business models, perhaps the only
audience. General run-of-the-mill content is less likely to segment that seems to win in almost all scenarios is
attract eyeballs and will consequently go down in value. the content owner. Pipe owners seem particularly
Despite this, it is clear that content is king and more vulnerable. Choose carefully. WI
than anyone else, the content provider gains Anand Tandon is an independent analyst.

GENERALLY
SPEAKING
The economist fund manager

Due to stock prices getting impacted by central banks money printing, fund
managers now also have to worry about macroeconomics
VIVEK KAUL
The year was 2005. Mutual funds fact that how their short-term performance is followed,
were launching new fund offers dime a dozen. Almost they need to generate returns in the short term. In this
every week there used to be a press conference at either scenario, it is important to figure out what is
the Taj Hotel at the Gateway of India or at the Oberoi happening in the global economy. That will determine
Hotel on the Marine Drive. what central banks will do. Depending on what central
Given that these new funds had nothing new to offer, banks do, foreign money will come into the stock
the fund managers used to try hard to make a sales market or go out of it.
pitch. The pitch used to revolve around how they would Investing changed in the aftermath of the financial
be picking up different kinds of stocks or use a crisis that started in September 2008 after Lehman
different method to pick stocks for this new fund. Brothers, the fourth largest central bank on Wall
Ultimately, most new funds had nothing new to offer. Street, went bust. In the aftermath of the financial
This was just a way of raising more money, given the crisis, Western central banks, led by the Federal
fascination of investors of getting more units at the Reserve and followed by the Bank of England, the Bank
launch price of Rs 10. of Japan and finally the European Central Bank,
Nevertheless, back then fund started to print money.
managers used to talk about stocks. This was done in order to drive down
While they were not allowed to talk UP, UP AND AWAY long-term interest rates. The hope was
about specific stocks, they used to essentially on two fronts. At lower
make an effort to talk about sectors
The entire idea of interest rates people would borrow and
and the various methods they used to central banks, investors spend more. This would benefit
pick stocks. like to believe, is to companies and in the process help
I can safely say 11 years later that economic growth.
most fund managers dont talk about
make people feel richer Further, as the former governor of
stocks anymore. This comes with the and get them to spend. Bank of England, Mervyn King, writes
disclaimer that I do not have the same And this ends up driving in his new book The End of Alchemy:
access to fund managers as I used to 11 Money, Banking and the Future of the
years ago, given that I am no longer a
up stock markets. Global Economy, The immediate effect
part of the regular news media. of a fall in the interest rates is to raise
But from what I hear on television and read in papers the prices of assets across the board. When interest
as well as on the web, I can safely say, more and more rates go down, bond values go up. Also, with lower
fund managers now sound like macroeconomists. Most interest rates on offer on fixed-income financial
of the times they are trying to figure out and products, investors are more likely to invest in the
communicate in which direction the global economy, in stock market. This drives up stock prices up. Higher
particular the economies of the United States, Europe bond and stock prices makes people feel richer. And
and China, are heading. this is where the hope is that wealth effect will come
And you really cannot blame them for this. Given the into play.

GENERALLY
SPEAKING
As people feel richer, they are likely to

spend more and this, in turn, benefits the
economy. This worked for a while and then
it didnt. As King writes, Monetary stimulus via low
interest rates works largely by giving incentives to bring
forward spending from the future to the present. After
a time, tomorrow becomes today. Then we have to
repeat the exercise and bring forward
spending from the new tomorrow to the
new today. As time passes, we will be
digging larger and larger holes into future
demand. There was a third impact of the low
interest rates as well. Large financial
institutions started to borrow money at very low
interest rates and investing it in financial markets all
over the world. When this flow of money comes into
any stock market, the market rallies. Given this, it
becomes very important for fund managers to keep
track of the global macroeconomics and how it is
playing out in order to do well in the short to
medium term.
Also, it has led to a peculiar situation where bad
economic news has become good news for the stock
market. As Mohammed El-Erian writes in his new book
The Only Game in Town, The determined efforts of
central banks and their unquestionable influence on Reserve of the United States, said, Even if the federal
financial assets have translated to markets operating funds rate were to return to near zero, the Federal Open
under the mantra that bad economic news is good for Market Committee would still have considerable scope
markets. Rather than lead to a downward revision in to provide additional accommodation. In particular, we
investors assessment of fundamentals, and therefore, could use the approaches that we and other central
what constitutes fair financial value, disappointing banks successfully employed in the wake of the
economic news has been interpreted as implying that financial crisis to put additional downward pressure
central banks will be even more engaged in repressing on long-term interest rates and so support the
volatility, pushing asset prices to higher artificial economy. What this meant was that, if required, the
levels, and by making people feel richer, getting them Federal Reserve would print money, as it had earlier.
to spend more. Hence, when there is bad economic This statement immediately led to stock markets
news coming from the Western world, investors expect around the world rallying.
more money printing by the central banks to drive To conclude, in the world that we live in, if fund
down interest rates. The entire idea of central banks, managers are looking for good short-term and medium-
investors like to believe, is to make people feel richer term performance, they need to be good
and get them to spend. And this ends up driving up macroeconomists, along with having an ability to pick
stock markets. In fact, even a reference to money stocks as well. WI
printing can lead to markets running higher. Vivek Kaul is the author of the Easy Money trilogy. He can be reached
Recently, Janet Yellen, the chairperson of the Federal at vivek.kaul@gmail.com.

THE CHARTIST
The right index

The CPI has proved to be a better tool for inflation targeting than the WPI.
The need is to use it in the calculation of GDP growth as well.
DEVANGSHU DATTA
Economists follow many sets of data. government subsidies, which cause retail prices (as
Some of those may seem irrelevant to the layperson. For charged by the government) to be lower than wholesale
example, you could live out a comfortable life without prices (paid by the government to procure food).
knowing anything about the money supply or foreign The WPI has the following weights. About 20 per cent
exchange rates. But some indicators have an obvious weight is for primary articles, including some food
impact on daily life. These are considered politically items, cotton, jute, minerals, etc. Just under 15 per cent
sensitive for that very reason. One such typical weight is for fuels, including electricity. The largest
indicator is inflation. Everyone understands mehngai. basket, with a weight of almost 65 per cent, is
Fear of inflation drives much political policy. Another manufactured goods. Changes in the WPI may not
politically sensitive indicator is employment. immediately affect individuals but retail prices should
Everybody has an instinctive understanding of how move in the same direction as wholesale.
employment affects the economy and society. The Consumer Price Index (CPI), the second inflation
Inflation and employment also affect each other. High index, measures the impact of inflation at the retail
employment is desirable. Low inflation is desirable. But level. The weights of the CPI are roughly as follows: 46
high employment can lead to high inflation. This is for per cent weight given to food, 6.5 per cent to clothing and
two reasons. First, everybody has money in their footwear, 10 per cent to housing, 6.8 per cent to fuel, and
pockets, so demand for goods and services is high. At the miscellaneous (which includes travel, medicare,
same time, since everybody is employed, there is less education, communication, personal hygiene, etc.)
slack capacity to meet demand. So prices rise. Therefore, receives a weight of 28 per cent.
policy makers have to find ways of balancing them to Its important to note that the price indices dont tell
maximise employment and minimise inflation. you much about the cost of services. The WPI tells you
Obviously, they need reliable data to make effective little or nothing about the prices of services. However,
policy. Sadly, those data are lacking. Inflation data have the CPI basket does include many services and service-
improved somewhat, even though there are some major heavy components, like telecom, travel, medicare, house
problems. Employment data are a black hole. rentals, insurance, banking, etc.
India uses two inflation-tracking indices. The Sector-by-sector contributions (for 201415) to Indias
Wholesale Price Index (WPI) tracks the prices of GDP can be split up as follows: services 53 per cent,
manufactured goods at the factory gate. It also tries to industry 30 per cent and agriculture 17 per cent.
use the wholesale prices for agricultural and non- Logically, the CPI will be more accurate than the WPI
agricultural commodities and mined products. This is because it does reflect at least some of the inflation in
quite complicated. Agri products are sold at different the largest sector, services. The RBI started using the
wholesale rates in different wholesale markets. The CPI as its key inflation measure only in 201314. Prior to
farmer sells at a wholesale rate at the farm gate. That that, the WPI was always used.
produce is then sold on again, at both urban and rural The WPI and the CPI generally move in the same
wholesale markets. Tricky adjustments must be made direction, but there can be major divergences and in the
for seasonality, etc. Further complications arise due to past couple of years, there have been wide spreads

THE CHARTIST
Normalised CPI and WPI YoY change (%) in WPI and CPI
125 10
Normalised WPI Normalised CPI CPI peak (we hope!) YoY change WPI YoY change CPI
8
120
CPI plateaus & falls
6
115
4
110 2
16 months of negative WPI
Wide divergence 0
105
WPI peak
-2
WPI YoY goes negative
100
-4
Rebased to 100
95 -6
January 2013 February 2016 January 2014 February 2016
between the changes in the two indices. (See the graphs.) by using a deflator to remove the effects of inflation. If
The WPI has been trending negative for 16 months. inflation has been high, the deflator will adjust the high
This has coincided with the fall in international fuel nominal growth downwards. If there has been deflation,
prices. However, while the CPI has trended down, it has the growth will be adjusted upwards.
not become negative. One reason is that fuel prices have For example, if nominal GDP grows from 100 to 110,
not fallen so much at the retail level. The central with an inflation rate of 5 per cent, the adjusted real
government has imposed taxes to mop up revenue, while GDP will be calculated as 110/105 100 or about 104.77. If
keeping prices locked at a fairly high level. Another GDP has gone from 100 to 110 during a period of
reason is that the food basket has a much higher weight deflation, say when inflation was -5 per cent, the
in the CPI and food prices have moved up substantially adjusted real GDP would be 110/95 100 or 115.8.
due to two years of drought, among other things. The deflator used in the calculation of Indias GDP is
The WPI has been signalling deflation since the based on an averaged value of the WPI. Since the WPI
OctoberDecember 2014 quarter. If that signal was acted has been negative since November 2014, the deflator has
upon, the RBI would have started taking strong anti- adjusted real GDP upwards! This, to some extent at
deflationary measures then. As it stands, the CPI least, explains the puzzling high values of GDP in the
dropped to the levels the RBI considered acceptable only past two fiscals. The WPI is not a very accurate
in early 2015. The RBI did start cutting policy rates. But reflection of the inflation in the services sector. So half
it has done so gradually. Even now, the CPI has shown no the GDP is being adjusted by a misleading index. The
signs of going negative (in February 2016, it was deflator used for services should be based on the CPI,
running at 5.2 per cent YoY). The decision to target which has always been positive. Using a CPI-based
inflation via the CPI has led to better policy. If the RBI deflator would adjust GDP growth down. Government
had started easing money supply and cutting rates too budgeting (and investment flows to some extent) is
early and too much, due to using the WPI, it would have based on GDP projections to some degree. So there could
caused more inflation. be problems with the misleading real GDP numbers.
The RBI targeted pushing CPI inflation below 6 per At the very least, inflation data are high-speed in
cent by January 2016. That target has been achieved. that there are monthly updates. It is also possible for a
The next target is 5 per cent by January 2017. Eventually, private institution, or even for individuals, to get a sense
the central bank hopes to maintain retail inflation at an of inflation simply by tracking publicly available prices
averaged 4 per cent from 201617, that is, within a band of a basket of common commodities. But no individual
of +/- 2 per cent. If CPI is outside that zone for three would really be capable of checking the official
consecutive quarters, the RBI will give a comprehensive calculations because they involve sampling many prices
explanation to the government. across many markets. The dangerous aspects of
Inflation is also a key variable in the calculation of miscalculation of inflation are, of course, the policy
GDP and it isnt being used logically there. That results errors it induces. WI
in misleading GDP data. GDP growth is always adjusted The writer is an independent financial analyst.

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STOCK ANALYSTS
CHOICE
Our scorecard
O Performance
ver the years we have analysed and recommended sever-
al stocks. The table below shows our performance since
July 2011. Yes, we have a few failures, but we also have Total returns* since July 2011
23.8% 10.6%
many successful picks. A portfolio comprising the stocks below
has delivered an IRR of 23.78 per cent, including dividends,
assuming one had invested `10,000 in each of the stocks at the
time of the recommendation. In all one would have invested
`10,10,000. The current value comes to `21,27,493 (including divi-
dends) on April 14, 2016, whereas investing the same amount in Stock Analysts Choice Nifty 50 Index
the Nifty would have generated `14,32,695 (including dividends),
yielding 10.64 per cent, as per the total returns index. WI *As on April 13, 2016
Recommended Current Value of `10K

Recommendation date price (`) price (`) invested (`) Total return (% per annum)
Jul-11 Asian Paints 295 874 29,623 26.41

Bosch 6,917 20,029 28,956 25.56
Castrol India 244 380 15,559 11.26
Colgate-Palmolive 458 836 18,247 15.44
CRISIL 693 1,930 38,602 25.48
Cummins India 481 906 18,845 16.60
Exide Industries 149 134 8,990 -0.84
ITC 185 331 17,920 14.95
Larsen & Toubro 1,095 1,235 11,277 3.70
Nestle India 3,888 6,117 15,732 11.12
NMDC 258 101 3,937 -12.72
Pidilite Industries 159 614 38,550 33.65
Titan Company 229 353 15,412 9.76
Aug-11 Lupin 461 1,549 33,631 29.80
Opto Circuits 213 10 469 -47.03
Sep-11 Bank of Baroda 152 152 10,055 0.91
Castrol India 254 380 14,951 10.70
Power Grid Corporation 103 145 14,126 9.95
Rural Electrification 173 163 9,391 5.33
Tata Coffee 70 91 12,878 6.03
Torrent Power 211 227 10,755 3.08
Zee Entertainment Ent. 123 402 32,556 29.80
Oct-11 CMC# 858 2,032 23,674 25.67
Graphite India 78 75 9,645 3.41
Zylog Systems 197 4 183 -56.82
Returns for less than one year are absolute. Total returns include dividend income. Returns as on April 13, 2016. Transactional fees not taken into account.
#
CMC merged with TCS with effect from September 29, 2015. Its current price is the last traded price.

STOCK ANALYSTS
CHOICE
Nov-11 Godrej Consumer Products 397 1,375 34,673 32.87

Tata Consultancy Services 1,087 2,526 23,249 23.85
Transformers & Rectifiers 197 267 13,565 7.17
Dec-11 Gujarat State Petronet 92 137 14,862 10.33
Noida Toll Bridge 23 23 9,700 7.51
Tata Motors 180 409 24,819 22.66
Jan-12 GAIL 388 370 9,517 1.14
Mahindra Lifespace 245 440 17,931 16.95
MRF 6,859 36,596 53,320 47.73
Mar-12 Bajaj Finance 828 7,430 99,590 72.53
Gabriel India 23 94 41,143 42.23
Opto Circuits 221 10 453 -52.33
Apr-12 Shriram Transport Finance 581 986 16,958 15.05
TTK Prestige 2,647 4,591 17,343 15.27
May-12 Bata India 423 545 12,893 7.28
GSK Consumer Healthcare 2,770 6,027 21,756 22.53
Swaraj Engines 395 1,106 28,005 35.37
Jun-12 Ajanta Pharma 75 1,482 1,96,480 115.76
Elecon Engineering 53 64 11,944 7.01
Kirloskar Pneumatic 470 704 14,985 13.29
Aug-12 Hero Motocorp 2,082 3,148 15,120 14.97
Supreme Industries 237 778 32,869 40.68
VST Industries 1,695 1,692 9,983 3.19
Sep-12 Amara Raja Batteries 195 900 46,139 53.19
Redington India 71 113 15,752 14.31
Oct-12 Lupin 567 1,549 27,301 33.17
MindTree 172 692 40,229 50.40
Solar Industries 984 3,442 35,001 43.23
Nov-12 Grindwell Norton 260 653 25,104 32.63
KPIT Technologies 120 148 12,299 7.09
Mcleod Russel 306 198 6,462 -10.10
Dec-12 City Union Bank 53 97 19,743 21.37
Petronet LNG 158 260 16,476 16.97
Wockhardt 1,647 1,033 6,273 -12.15
Feb-13 Balkrishna Industries 290 628 21,629 27.89
KEC International 64 130 20,369 25.81
Torrent Pharmaceuticals 365 1,471 40,265 57.89
Mar-13 Emami 410 978 23,833 33.05
Gruh Finance 108 258 23,960 33.37

STOCK ANALYSTS
CHOICE
Apr-13 Berger Paints India 96 252 26,235 37.75

Innoventive Industries 103 4 427 -65.72
May-13 Kaveri Seed Company 252 401 15,938 17.97
Navneet Education 57 88 15,401 19.99
V-Guard Industries 485 936 19,302 25.74
Aug-13 Cairn India 296 155 5,249 -18.19
Indraprastha Gas 309 574 18,596 27.39
Nesco 730 1,537 21,053 32.18
Nov-13 Bajaj Corp 237 399 16,818 27.92
HCL Technologies 581 838 14,426 18.56
Dec-13 Voltas 89 284 31,779 63.20
Feb-14 J&K Bank 135 59 4,349 -30.06
Tata Consultancy Services 2,213 2,526 11,413 8.57
Mar-14 Cummins India 433 906 20,907 44.84
Swaraj Engines 622 1,106 17,792 36.15
Apr-14 AIA Engineering 560 989 17,658 33.72
Godrej Consumer Products 764 1,375 17,998 33.52
May-14 Rallis India 167 190 11,361 7.82
Titan Company 256 353 13,802 18.81
Jun-14 Finolex Cables 164 283 17,235 34.28
NBCC 297 988 33,263 90.18
Aug-14 Gateway Distriparks 232 277 11,978 13.70
GMDC 154 65 4,237 -36.81
V-Guard Industries 657 936 14,253 23.69
Sep-14 Finolex Industries 297 369 12,428 16.10
Hindustan Media Ventures 155 262 16,904 38.45
Oct-14 Mahindra Holidays & Resorts 299 417 13,957 24.46
Tata Coffee 93 91 9,727 -0.91
Nov-14 Infosys 966 1,173 12,135 15.61
Tata Motors 482 409 8,857 -10.62
Jan-15 Apollo Tyres 208 169 8,151 -13.63
Mar-15 Ipca Laboratories 681 493 7,242 -24.09
Voltas 256 284 11,081 10.01
Apr-15 Astral Poly Technik 449 433 9,638 -3.25
VST Tillers Tractors 1,380 1,771 12,832 28.33
May-15 Just Dial 1,253 860 6,860 -31.34
Shriram Transport Finance 1,099 986 8,970 -9.47
PORTFOLIO TOTAL 20,56,202 23.78%


STOCK
IDEAS
Ideas to delve deeper

S
ound investment methods outlast cycles and them to your portfolio. Each stock idea explains the
fads and generate profits over the long run. reason behind the stock and its suitability to investors,
Value Research presents stock ideas based on which over time will help you develop your own
time-tested principals that have been validated investing rules. As we will be evolving such models and
for every type of investor. implementing changes to the methodology to be in line
In each issue, we share a listing of attractive stocks with economic and market cycles, the list will be
based on objective principles of sound investment. We dynamic and updated periodically.
apply stock filters carefully crafted by Value Research In the following pages of Stock Ideas, we present
analysts on the universe of Indian stocks to identify five stock ideas that collectively list 66 unique stocks
these attractive stocks. The filters are devised to that have strong reasons to find a way into your
identify stocks of the following kind: portfolio. With these, you will be well-equipped to
Quality stocks available cheap select stocks to build your own portfolio. If you think
Attractive blue chips that this is a lot of hard work, you can get started with
Stocks available at a steep discount to book value the stock ideas and with time understand the way the
High dividend-yield stocks ideas are shaping to make your own judgement on
Growth stocks available at reasonable prices stock selection. Great investments are not easy to
We believe that stocks listed in this section are a good find, but practice, patience and sound principles are
starting point to start a close scrutiny before adding all that you need.
Glossary
Current ratio It is the ratio of a companys current assets (the most liquid assets, implies that it can service more than twice its current interest charges.
such as cash and cash equivalents, account receivables, etc.) to its current liabil- Debt-equity ratio (DE Ratio) The debt-equity ratio is calculated as the ratio of
ities (liabilities that are closest to maturity and hence need to be paid back first). total outstanding borrowings of the company to its total equity capital. The DE ratio
By comparing the latter with the former, an investor can get an idea of how liquid essentially tells which companies use excessive leverage to achieve growth.
a companys assets are. Conventionally, the DE ratio of less than two is considered safe.
However, in certain circumstances, a high current ratio could be due to the fact Return on equity (RoE) This is measured by taking profit after tax as a per-
that the company is facing problems in recovering its receivables. Alternatively, it centage of net worth of the company. It indicates how efficiently the company has
could be facing a problem in selling its inventory, which is why the current ratio may been able to utilise investors money.
be unusually high. Net worth Net worth is the net value of the company that shareholders can claim
Universe companies (867) We have revised our universe. We checked if the in case of a bankruptcy. It is composed of broadly the equity capital and the
companies traded on all the days for the last two quarters. We considered the com- reserves held by a company. One risk in using this indicator is that companies
panies with a market capitalisation of more than `400 crore. could potentially inflate this figure by issuing more equity at regular intervals.
Price to book value (P/BV) Price to book value is the ratio of the price of a Stock return (stk return) Stock return is calculated by taking the percentage
stock to the book value per share of the company. It shows how much premium change in the price of the stock adjusted for bonus or split.
investors are willing to pay for the underlying net assets of the company. Dividend yield (yield) This is defined as the percentage of the dividend paid per
Price to earnings (P/E) The price-to-earnings ratio, or the P/E ratio, is simply share to the current market price of the stock. Since the denominator in this ratio
the ratio of the price of a stock to its earnings per share. It shows in multiples how is the market price, a stocks dividend yield changes every day.
much investors are willing to pay for the earnings. The thumb rule of valuing a stock Price-earnings to growth (PEG) This ratio demonstrates how high a price we are
is that a high-growth stock will have a high P/E ratio, while a value stock will have paying for the growth that we are purchasing. It is the ratio of price to eanings to EPS
a relatively lower P/E ratio. growth of the stock. In all our analyses, we have taken five-year historic EPS growth.
Earnings per share (EPS) Earnings per share, or EPS, is calculated by dividing Dividend payout ratio (DPR) This is the total dividend paid to the sharehold-
the companys net profit with the total number of outstanding shares. ers as a percentage of net profit
Earnings yield EBIT divided by enterprise value. Enterprise value is market cap Operating profit margin (OPM) OPM is operating profit as a percentage of net
added to total debt and less cash and equivalents. sales.
Net sales This is simply the income that a company derives by Net profit margin (NPM) NPM is the net profit as a percentage of total
selling the goods and services that it produces. income (sales plus other income)
The downside of taking sales as an indicator of growth is that it may not be
Growth Value
Stock style It indicates the style of the
matched by a similarly scintillating bottom-line performance. A company may be
earning revenue at a high rate. But if it is doing so by incurring a very high cost,
stock. It is derived from a combination of Large
the stocks valuation growth or value
the bottom line may not grow in proportion to the growth in the top line.
Interest coverage ratio (ICR) This indicator is generally used to gauge whether a
and its market capitalisation large, mid Mid
and small. For example, on the right we
company has the ability to service its debt. The interest coverage ratio is calculated as have shown the stock style of a large-cap
the ratio of operating profit to interest outgo. A company with ICR of more than two growth stock.
Small

STOCK
IDEAS
Quality stocks available cheap

T
hese stocks are filtered out research. Banking and finance
after applying the following companies were removed from this
essential safety and analysis as the metrics dont apply to
performance metrics: them. For more information on the
Altman Z-Score: Predicts the metrics, you can see the stock pages
likelihood of financial distress at the Value Research website. WI
REASONS TO INVEST
Modified C-Score: Tells the Safety
probability of creative accounting THE FILTERS Soundness
Piotroski F-Score: Highlights Z-Score greater than 2.99
financial performance as compared
Good performance
F-Score greater than or equal to 8
to the previous year C-Score less than 4 Reasonable valuations
Reasonable valuations: Valuation PEG less than 1
filters are listed in the adjacent box. P/E to median P/E less than 1.5
These filters give us potentially Earnings yield greater than 5%
sound companies for further
Companies that clear all the essential checks

For updated numbers, visit: www.ValueResearchOnline.com
Stock Altman Piotroski Modified Earnings Market Share 52-week
Company style Z-Score F-Score C-Score yield (%) P/E PEG cap (` cr) price (`) high/low (`)
Allcargo Logistics
Logistics
4.89 9 1 8.88 14.72 0.98 3,896 155 218-128
Bharat Electronics
Electronics - Components
3.69 8 1 7.20 22.25 0.69 28,614 1,192 1,417-975
Bharat Forge
Forgings
4.31 9 1 5.75 26.10 0.66 19,306 829 1,337-721
Cadila Healthcare
Pharmaceuticals & Drugs
6.85 8 2 6.03 22.07 0.72 32,760 320 454-296
Century Plyboards
Wood & Wood Products
6.53 8 0 5.46 23.13 0.89 4,060 183 248-135
Dredging Corporation
Shipping
3.89 8 2 5.28 13.41 0.93 1,110 396 484-290
Fiem Industries
Electric Equipment
5.16 9 2 7.70 19.84 0.31 1,015 848 943-475
Greenply Industries
Wood & Wood Products
4.75 8 2 7.68 16.96 0.28 2,287 190 226-152
Kalyani Steels
Steel/Sponge Iron/Pig Iron
3.19 8 2 18.72 6.72 0.33 729 167 192-106
Maruti Suzuki India

Automobiles - Passenger Cars
9.91 8 3 6.11 23.89 0.87 112,815 3,735 4,789-3,202
Minda Corporation
Auto Ancillary
4.06 8 1 6.05 22.95 0.23 2,462 118 119-69

STOCK
IDEAS
For updated numbers, visit www.ValueResearchOnline.com
Stock Altman Piotroski Modified Earnings Market Share 52-week
Company style Z-Score F-Score C-Score yield (%) P/E PEG cap (` cr) price (`) high/low (`)
Motherson Sumi
Auto Ancillary
4.56 8 2 6.99 28.40 0.53 34,083 258 396-206
Navneet Education
Printing And Publishing
7.76 9 1 9.10 15.99 0.85 2,100 88 114-76
NHPC
Power Generation/Distribution
3.23 9 2 12.37 8.86 0.56 26,404 24 24-16
Nocil
Chemicals
3.69 8 3 12.39 11.64 0.38 842 52 65-36
Sandesh
Printing And Publishing
6.41 8 2 21.55 7.53 0.30 573 757 1,010-507
Sharda Motor
Auto Ancillary
3.42 9 1 10.03 14.12 0.09 514 865 1,190-701
SJVN
6.01 8 3 16.76 8.31 0.52 12,017 29 34-22
Skipper
Steel & Iron Products
3.79 8 2 10.10 17.91 0.14 1,599 156 220-116
TVS Srichakra
Tyres & Allied
5.20 8 1 12.20 10.75 0.15 1,932 2,523 3,249-1,600
Welspun India
Textile
3.39 8 1 10.21 13.63 0.13 9,148 91 111-36
Data as on April 14, 2016. Indicates new entrants.
Attractive blue chips

B
lue-chip stocks are shares more than two. There is a belief
in the largest, consistently that such stocks are less risky as
profitable and the most compared to smaller stocks, which
prestigious companies. is true to a certain extent, because
These stocks command a valuation
premium because of their
the intrinsic risk is low as many of
these have high market shares and
REASONS TO INVEST
consistency in performance and strong balance sheets.
Liquidity
because of the fact that these stocks However, blindly buying a blue Large companies in
have already been discovered. chip irrespective of the valuations respective businesses
Conservative stock investors may cause more harm than good. Strong balance sheets
generally go for blue chips. The risk of capital loss may
Our stock selection is based on actually be heightened when you Liked by institutions
stocks that have over a 20 per cent purchase blue chips at any rate and
CAGR on EPS over the past five valuation. It is for this reason that
years, debt-equity ratio of less than we have included stocks with five-
two and interest-coverage ratio of year average return on equity of

STOCK
IDEAS
more than 20 per cent, without
declining more than 10 per cent in a THE FILTERS Interest coverage ratio should be
more than two
year, and price-to-earnings growth Companies with a capitalisation of
(PEG) of less than 1.5. above `3,200 crore Five-year average return on equity
This months list features 17 stocks
Annual earnings growth of more above 20 per cent
in all. The recent correction in the
than 20 per cent over the past five Average ROE should not have fallen
Indian markets has made available
years more than 20 per cent in any year
several blue chips, which otherwise
traded at premium valuations. WI Debt-equity ratio of less than two PEG of less than 1.5
Attractive blue chips

Stock Debt-equity Int coverage RoE avg EPS growth Mkt cap Share 52-week
Company style P/E PEG ratio ratio 5Y (%) 5Y (%) (` cr) price (`) high/low (`)
Adani Ports & SEZ 18.46 0.70 1.66 3.1 24.22 26.54 48,264 233 375-170
Port
Ajanta Pharma 35.24 0.63 0.09 78.0 32.82 56.23 13,013 1,479 1,720-1,103
Amara Raja Batteries 31.83 1.16 0.04 2531.5 29.50 27.45 15,377 900 1,132-773
Batteries
Atul 20.49 0.93 0.29 13.7 21.69 21.95 5,128 1,729 1,805-1,083
Chemicals
Britannia Industries 42.21 0.79 0.12 247.0 49.88 53.30 33,053 2,755 3,435-2,009
Consumer Food
Divis Laboratories 26.75 1.27 0.01 373.6 26.44 20.98 27,131 1,022 1,242-838
Dr. Reddys Laboratories 21.63 0.96 0.44 27.8 24.40 22.61 52,900 3,101 4,383-2,750
HCL Technologies 16.39 0.44 0.03 100.9 31.71 37.62 118,176 838 1,048-786
IT - Software
Hexaware Technologies 19.60 0.69 0.00 230.6 23.91 28.62 7,708 255 334-203
IT - Software
Kajaria Ceramics
Ceramics/Marble/Granite
36.85 1.27 0.33 9.6 28.09 29.01 7,917 996 1,001-607
Mindtree
IT - Software
20.06 0.58 0.00 6909.0 27.51 34.60 11,552 689 804-577
Relaxo Footwears
Leather 46.11 1.41 0.65 8.7 28.46 32.74 6,000 500 615-327
Syngene International
Pharmaceuticals & Drugs 40.87 1.10 0.19 26.8 21.37 37.04 7,153 358 436-295
TCS
IT - Software 23.05 1.13 0.01 253.4 41.57 20.46 497,169 2,523 2,769-2,119

STOCK
IDEAS
Stock Debt-equity Int coverage RoE avg EPS growth Mkt cap Share 52-week
Company style P/E PEG ratio ratio 5Y (%) 5Y (%) (` cr) price (`) high/low (`)
Torrent Pharmaceuticals
15.27 0.37 1.10 6.4 32.26 41.46 24,898 1,471 1,720-1,133
Vakrangee
IT - Software
30.35 0.66 0.44 7.5 22.41 45.99 10,933 207 229-87
Zensar Technologies
IT - Software
13.93 0.70 0.15 33.8 31.45 20.00 4,329 970 1,120-637
Data as on April 14, 2016. Growth rates are all annualised.
High dividend-yield stocks

F
alling markets give little When looking for high dividend-
room for capital yield stocks, look for companies
appreciation. However, with a sustained dividend payout.
investors can benefit by A very high dividend payout
investing in companies that pay ratio (dividend paid as per cent of
dividends. High dividend-paying total profits) can put the future
REASONS TO INVEST
stocks with solid fundamentals are a growth of the company in dark as it Cushion against volatility
safe way to generate a solid return in is left with less funds to reinvest in Higher total return
the market. But picking a stock that the future. WI
boasts of the highest dividend yield
Generate regular
does not help. You need to go deeper
tax-free income
and examine the reasons behind the
high dividend payout. Many times a
THE FILTERS
company that pays healthy dividends Stocks with sustained per share
can have weak fundamentals, which
dividend and amount over the past
will keep the stock price down. For
five years
instance, the company could have Dividend payout ratio of less than
been distributing the profits because 40 per cent
of an extraordinary income. Stocks with a current dividend yield
Blindly chasing the current yield of more than 3 per cent
would be a recipe for disaster.
High dividend yield

Stock Dividend Dividend Dividend pay- Avg div Mkt cap Share 52-week
Company style P/E PEG per share (`) yield (%) out ratio (%) 5Y (%) (` cr) price (`) high/low (`)
Gujarat Industries Power 8.70 2.21 2.50 3.04 29.94 25.00 1,244 82 94-66
JM Financial 8.36 0.53 1.35 3.35 32.01 89.00 3,176 40 58-33

Finance - Investment
Neyveli Lignite 8.33 1.31 2.80 3.93 29.74 27.00 11,945 71 94-60

STOCK
IDEAS
Stock Dividend Dividend Dividend pay- Avg div Mkt cap Share 52-week
Company style P/E PEG per share (`) yield (%) out ratio (%) 5Y (%) (` cr) price (`) high/low (`)
PFC 3.53 0.22 9.10 5.31 20.01 72.20 22,639 172 289-140
Finance Term Lending
PTC India
7.58 0.48 2.20 3.43 25.41 17.60 1,899 64 82-50
RCF
Fertilizers
10.88 48.51 1.80 4.13 28.80 14.60 2,403 44 69-35
REC
Finance Term Lending
2.89 0.16 10.70 6.57 19.77 86.90 16,071 163 342-153
SJVN
8.31 0.90 1.05 3.61 25.90 9.46 12,017 29 34-22
Karnataka Bank
Bank - Private
4.51 0.35 5.00 4.72 20.87 39.00 1,997 106 158-85
Data as on April 14, 2016.

E
veryone loves a good of liquidation value. Buying a
bargain. Value investors stock below book can provide what
hunting for inexpensive Graham called a margin of safety. REASONS TO INVEST
stocks often face a A stock trading near or below Really cheap
daunting challenge in bull markets. book value is of most interest,
Relatively undervalued
Since the market has already run up since such a company can be
significantly, it is difficult to spot bought for close to or, better yet, Companies with assets
value buys. less than what it is worth. WI
The idea of value can differ
from person to person. What
investors need to understand is that THE FILTERS
book value is a measure of Price at least 10 per cent below the book value
shareholder equity and is derived
Return on net worth of more than 10 per cent in the most recent year
by subtracting debt and other
liabilities from assets. Famed Debt-equity ratio of less than 1.5 per cent
investors like the late Benjamin Companies must have a five-year earnings growth of more than 10 per cent
Graham used book value as a gauge

Stock Dividend Debt-equity Mkt cap Share 52-week
Company style P/B P/E PEG yield (%) ratio (%) RoE (%) (` cr) price (`) high/low (`)
BS 0.85 6.80 0.44 0.00 1.17 13.70 556 13 44-12

Transmission Towers
Noida Toll Bridge 0.75 4.88 0.23 13.22 0.04 16.14 423 23 37-22
Engineering - Construction

STOCK
IDEAS
Stock Dividend Debt-equity Mkt cap Share 52-week
Company style P/B P/E PEG yield (%) ratio (%) RoE (%) (` cr) price (`) high/low (`)
GE Shipping 0.59 4.44 0.34 3.34 0.88 10.54 4,965 329 420-275
Shipping
Karnataka Bank 0.54 4.51 0.35 4.72 0.31 14.03 1,997 106 158-85
Bank - Private
Tree House Education 0.48 6.04 0.11 2.59 0.16 11.68 326 77 470-70
Educational Institutions
Data as on April 14, 2016. Growth rates are all annualised. Indicates new entrants.

G
rowth at a reasonable GARP stock is the PEG ratio or the
price (GARP) is a price/earnings growth ratio. PEG
combination of both shows the ratio between a
growth and
investing. This strategy was
value companys P/E ratio (valuation)
and its expected earnings growth
REASONS TO INVEST
popularised by Peter Lynch. While a rate over the next several years. A All-weather style
growth strategy is more focused on GARP investor would seek out Companies with strong
a companys earnings growth and stocks that have a PEG of one or fundamentals
value investing seeks companies less, which helps find reasonably
Greater stability vis-a-vis
priced stocks. WI
having their prices below their
value or growth
intrinsic value, growth at a
reasonable price, as a strategy,
hunts for stocks that have both
growth potential and are also THE FILTERS
trading at a reasonable price. A Earnings growth of:
typical GARP investor seeks to At least 20 per cent in the past
invest in companies that have had a five years
positive performance over the past At least 20 per cent in the trailing 12 months YOY
few years and also have positive At least 20 per cent in latest quarter YOY
projections. Stocks with a price-to-earning (P/E) of less than 15
A solid benchmark to spot a

Stock Industry Quarterly EPS TTM EPS EPS growth Mrkt cap Share 52-week
Company style P/E P/E PEG growth (%) growth (%) 5Y (%) (` cr) price (`) high/low (`)
Allcargo Logistics
Logistics 14.72 30.00 0.55 71.4 170.1 27.0 3,896 155 218-128
Bajaj Finserv
Finance - Investment 14.17 27.96 0.62 25.9 21.4 23.0 29,009 1,823 2,160-1,250
BPCL
Refineries 8.65 11.27 0.20 170.1 22.8 42.5 66,918 925 987-704
Ceat
Tyres & Allied 10.43 9.63 0.21 27.0 64.0 49.7 4,546 1,124 1,318-597

STOCK
IDEAS
Stock Industry Quarterly EPS TTM EPS EPS growth Mrkt cap Share 52-week
Company style P/E P/E PEG growth (%) growth (%) 5Y (%) (` cr) price (`) high/low (`)
Essel Propack
Plastic Products 14.52 20.61 0.45 41.3 51.8 31.9 2,701 172 176-119
Garware-Wall Ropes
Textile 13.76 22.78 0.63 43.3 48.9 21.8 782 357 438-172
Hindustan Media Ventures

Printing And Publishing 11.14 17.87 0.40 28.1 33.6 27.5 1,921 262 302-200
KEI Industries
Cable 14.57 17.87 0.46 66.7 109.5 31.7 793 103 127-58
KNR Construction
Engineering - Construction 11.96 21.24 0.55 120.4 66.4 21.7 1,525 542 652-408
LT Foods
Consumer Food 6.76 37.60 0.15 54.9 23.6 44.3 596 224 314-114
Nandan Denim
Textile 9.91 22.78 0.30 23.8 28.1 33.0 615 135 174-69
PC Jeweller
Diamond & Jewellery 14.37 26.24 0.47 33.7 29.4 30.8 6,352 355 494-296
Pokarna
Ceramics/Marble/Granite
8.95 26.65 0.03 203.3 69.4 297.1 531 857 1,425-660
PTC India Fin Services

Finance - NBFC
6.24 19.68 0.17 26.7 86.9 37.3 2,234 40 62-30
Sarla Performance Fibres 11.44 18.68 0.49 161.5 69.8 23.5 565 68 91-39
Textile - Manmade Fibres
Srikalahasthi Pipes 7.09 10.24 0.26 93.7 106.9 26.8 1,015 255 349-132
Steel/Sponge Iron/Pig Iron
TVS Srichakra 10.75 9.63 0.28 81.9 96.6 38.5 1,932 2,523 3,249-1,600
Tyres & Allied
Vindhya Telelinks 8.78 17.87 0.08 62.3 198.0 105.6 818 690 1,090-480
Cable
Welspun India 13.63 22.78 0.29 21.2 22.5 46.7 9,148 91 111-36
Textile
Data as on April 14, 2016. Growth rates are all annualised. Indicates new entrants.

WORDS WORTH
NOW
As a central banker, I have to be Compared to the rest of the world, we are

pragmatic and I cannot get euphoric growing much faster; in fact the fastest.
that Indias is the fastest-growing Compared to our own potential, we can do
economy. Our current growth better. So at 7.5% growth rate any other
certainly reflects the hard work of the country in the world would be celebrating,
govenrnment, but we but its a tribute to Indias
have to repeat this growth story that at 7.5%
performance for the we are still impatient
next 20 years. because we know our
RAGHURAM RAJAN potential is to do
RBI Governor, distinctively better.
The Financial Express,
April 21, 2016 ARUN JAITLEY Finance minister,
Mint, April 20, 2016
We found that there were inconsistencies with respect

to the fuel consumption testing data. The company
conducted testing improperly to present better fuel
consumption rates than the actual rates.
TETSURO AIKAWA President, Mitsubishi, Financial Chronicle, April 21, 2016
What we found is that There is immense potential in this [shipping and ports]
Google pursues an segment, and is possibly even higher than roads. What we
overall strategy on are looking at is developing a Blue Economy, ushering in a
mobile devices to Blue Revolution... the total planned
protect and expand its investment in the next ten years is of Rs 12
dominant position in lakh crore. In fact, we will try to finish that
internet search with in half the time five years.
unjustified restrictions NITIN GADKARI Transport minister,
and conditions on phone The Economic Times, April 18, 2016
makers and carriers.

MARGRETHE VESTAGER From a sector and market point of view, we do not see any
Competition
Commissioner, major headwinds. The headwinds that we saw
EU, Financial last year may have eased out but in many,
Chronicle,
April 21, 2016 the growth will tend to be flat. But there will
be no de-growth.
N CHANDRASEKARAN CEO & MD, TCS,
Business Standard, April 20, 2016


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May 2016 29 COVER STORY

Data source for stocks

2016 Value Research India Pvt. Ltd.

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Two years of 10 MARKET COMPASS

illiteracy Flying high

The CPI has proved Our scorecard

62 WORDS WORTH NOW

May 2016 Wealth Insight 5

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Two years of achhe din

May 2016 Wealth Insight 7

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Straight from Buffett II

The 2008 crisis Downside of productivity gains

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32.4 95.55 300

23.5 22.81 -538

17.3 8.73 8,015

-7.4 34.6 2,028

12.1 15.6 -1,395

10 Wealth Insight May 2016

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10.7 39.17 348

25.2 48.45 410

3.8 15.65 -120

-32.8 18.02 558

-10.3 14.38 295

-34.3 36.02 322

May 2016 Wealth Insight 11

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-41.5 58.69 7.41

-22.1 56.52 8.55

-39.1 2.18 398

-6.8 9.45 70.88

12 Wealth Insight May 2016

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Index watch: S&P BSE Auto

Dynamics of the S&P BSE Auto index Top gainers/losers

Eicher Motors 19,897 23.9

Bajaj Auto 2,581 22.9

Hero MotoCorp 3,152 22.1

M&M 1,333 6.6

Cummins India 909 3.7

Amara Raja Batteries 900 2.6

Apollo Tyres 169 -9.6

Price/book value is at a 11% discount to the five-year average of 4.05.

All data as on April 14, 2016

May 2016 Wealth Insight 13

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Achhe din for capital goods

BEML All industry stalwarts, with the exception of BEML,

14 Wealth Insight May 2016

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More pains for the realty sector

Mounting unsold inventory

Chart 1: Pan-India residential real-estate statistics

May 2016 Wealth Insight 15

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Decoding PSU shareholding