A Research Report On Value Investing

A Research
Report on Value
Investing
By
Mohnish Motwani
v.e.s.i.m.s.r
ACKNOWLEDGEMENT
“Let us rise up and be thankful, for if didn’t learn a lot today, at least we
learned a little, and if we didn’t learn a little, atleast we didn’t get sick,
and if we got sick, atleast we didn’t die; so, let us all be thankful” -
Buddha
I personally learned a lot in this very little time, so would like to thank
all those who made this project possible.
I would like to thank my college for giving me an opportunity to work

on this topic. I would also like to thank my Project mentor Mr.Hemant
Joshi for spending his valuable time with me and giving me his valuable
insights and perspectives which greatly enhanced this project.
Also I would like to thank Mr. Nupur Gupta who guided me throughout
the project and helped in successful completion of the project.
Regards,
Mohnish Motwani
MMS (Finance)
V.E.S.I.M.S.R
Executive Summary
Will Rogers once gave a very famous quotation that "I am

more concerned about the return of my money than the return on my money.”
This seems to be the biggest concern for all the investors in the current scenario.
Therefore today in this kind of market, instead of focusing on how much money
we can make in the stock market, investors should focus rather on how not to
lose money in the stock market. And if we start doing that, if we start becoming
obsessive about not losing money in the stock market we will automatically start
making decisions which will help us to make money in the stock market. This
approach is well explained by the investment paradigm known as ‘Value
Investing’.
Value investing is the most conservative way to invest

your money as value investing is all about curtailment of risk, how not to lose
money in the market. Therefore this report tries to throw some light over the
concept of value investing. The report is divided into two parts-
First section starts with some insight on value investing,

its principles and strategies. Then it speaks about the two most notable value
investors starting with ‘Benjamin Graham’ who gave us the concept of value
investing in the year 1928 and was known to be the Father of value investing.
Later the section speaks about ‘Warren Buffet’ who is the best investor in the
world and also known to be the best student of Benjamin Graham.
Second section presents an Investment argument on 5

stocks from different sectors which have selected after eliminating 45 stocks
using value investing principles and strategies. It also gives a detailed summary on
the basis of selection of these stocks.
Index
Topic Page No.
Acknowledgement 2
Executive Summary 3
Section 1 – Value Investing
Introduction 6
Explaining Value Investing 7
A note on Benjamin Graham 10
Investment Principles of Benjamin Graham 11
Examples of value investments 14
A note about Warren E. Buffett 16
Warren Buffett’s Investment Philosophy 17
Buffett’s Tenets 19
Section 2 – Research Reports
Value Methods 22
Selection of stocks using filters 24
1. ITC LTD 28
2. Bank of Baroda ltd. 37
3. Reliance Communication ltd. 43
4. Lupin Pharmaceuticals ltd. 49
5. Praj Inds ltd 59
Bibliography 65
Section 1- Value
investing
Introduction
PROBLEM
To select a stock for investing which is really value buy in this current market
scenario and which will be least affected from the recession and give a good
return in the long term.
AIM
The aim of this project will be to carry out an analysis of 5 selected sectors and
suggest one stock from each sector which will provide high return to the investors
on their investments. Value investing model will be used to identify such stocks.
METHODLOGY
1. Explaining the concept of value investing.
2. A note about Benjamin Graham & his investment principles.
3. A note about Warren Buffett & his investment philosophy
4. Selecting 5 different sectors which contain 10 stocks each.
5. Applying value method filter on this stocks and finally selecting 1 stock
from each sector.
6. Preparing equity research report of those 5 stocks.

Value Investing
What Does Value Investing Mean?
The strategy of selecting stocks that trade for less than their intrinsic values. Value
investors actively seek stocks of companies that they believe the market has
undervalued. They believe the market overreacts to good and bad news, resulting
in stock price movements that do not correspond with the company's long-term
fundamentals. The result is an opportunity for value investors to profit by buying
when the price is deflated.
Typically, value investors select stocks with lower-than-average price-to-book or

price-to-earnings ratios and/or high dividend yields. The big problem for value
investing is estimating intrinsic value. Remember, there is no "correct" intrinsic
value. Two investors can be given the exact same information and place a
different value on a company. For this reason, another central concept to value
investing is that of "margin of safety". This just means that you buy at a big
enough discounts to allow some room for error in your estimation of value.
Also keep in mind that the very definition of value investing is subjective. Some
value investors only look at present assets/earnings and don't place any value on
future growth. Other value investors base strategies completely around the
estimation of future growth and cash flows. Despite the different methodologies,
it all comes back to trying to buy something for less than it is worth.
Who is a value investor?

The Conventional Definition: A value investor is one who invests in low price-book
value or low price-earnings ratios stocks.
The Generic Definition: A value investor is one who pays a price which is less than
the value of the assets in place of a firm.
The Different Faces of Value Investing Today
�Passive Screeners: Following in the Ben Graham tradition, you screen for stocks that
have characteristics that you believe identify undervalued stocks. Examples would include low
PE ratios and low price to book ratios.
�Contrarian Investors: These are investors who invest in companies that others have
given up on, either because they have done badly in the past or because their future prospects
look bleak.
�Activist Value Investors: These are investors who invest in poorly managed and
poorly run firms but then try to change the way the companies are run.
Stock picking strategies

Value investing is one of the best known stock-picking methods. In the 1930s, Benjamin
Graham and David Dodd, finance professors at Columbia University, laid out what many
consider to be the framework for value investing. The concept is actually very simple: find
companies trading below their inherent worth.
The value investor looks for stocks with strong fundamentals - including earnings, dividends, book
value, and cash flow - that are selling at a bargain price, given their quality. The value investor
seeks companies that seem to be incorrectly valued (undervalued) by the market and therefore
has the potential to increase in share price when the market corrects its error in valuation.
Value, Not Junk!

Before we get too far into the discussion of value investing, let's get one thing straight. Value
investing doesn't mean just buying any stock that declines and therefore seems "cheap" in
price. Value investors have to do their homework and be confident that they are picking a
company that is cheap given its high quality.
It's important to distinguish the difference between a value company and a company that
simply has a declining price. Say for the past year Company A has been trading at about $25 per
share but suddenly drops to $10 per share. This does not automatically mean that the company
is selling at a bargain. All we know is that the company is less expensive now than it was last
year. The drop in price could be a result of the market responding to a fundamental problem in
the company. To be a real bargain, this company must have fundamentals healthy enough to
imply it is worth more than $10 - value investing always compares current share price to
intrinsic value not to historic share prices.
Value Investing at Work
One of the greatest investors of all time, Warren Buffett, has proven that value investing can
work: his value strategy took the stock of Berkshire Hathaway, his holding company, from $12 a
share in 1967 to $70,900 in 2002. The company beat the S&P 500's performance by about
13.02% on average annually! Although Buffett does not strictly categorize himself as a value
investor, many of his most successful investments were made on the basis of value investing
principles.
Buying a Business, not a Stock

We should emphasize that the value investing mentality sees a stock as the vehicle by which a
person becomes an owner of a company - to a value investor profits are made by investing in
quality companies, not by trading. Because their method is about determining the worth of the
underlying asset, value investors pay no mind to the external factors affecting a company, such
as market volatility or day-to-day price fluctuations. These factors are not inherent to the
company, and therefore are not seen to have any effect on the value of the business in the long
run.
Contradictions
While the efficient market hypothesis (EMH) claims that prices are always reflecting all relevant
information, and therefore are already showing the intrinsic worth of companies, value
investing relies on a premise that opposes that theory. Value investors bank on the EMH being
true only in some academic wonderland. They look for times of inefficiency, when the market
assigns an incorrect price to a stock.
Value investors also disagree with the principle that high beta (also known as volatility, or
standard deviation) necessarily translates into a risky investment. A company with an intrinsic
value of $20 per share but is trading at $15 would be, as we know, an attractive investment to
value investors. If the share price dropped to $10 per share, the company would experience an
increase in beta, which conventionally represents an increase in risk. If, however, the value
investor still maintained that the intrinsic value was $20 per share, s/he would see this
declining price as an even better bargain. and the better the bargain, the lesser the risk. A high
beta does not scare off value investors. As long as they are confident in their intrinsic valuation,
an increase in downside volatility may be a good thing
A note about Benjamin Graham
Warren Buffett is widely considered to be one of the greatest investors of all time, but if you
were to ask him who he thinks is the greatest investor he would probably mention one man: his
teacher, Benjamin Graham. Graham was an investor and investing mentor who is generally
considered to be the father of security analysis and value investing.
Benjamin Graham was born in London in 1894, the son of an importer. His family migrated to
America when Ben was very young and opened an importing business. They did not do well,
Graham’s father dying not long after moving to America and his mother losing the family
savings in 1907 during an economic crisis.
Graham, a star student, managed to get to Columbia University and, although offered a
teaching post there after graduation, took a job as a chalker on Wall Street with New burger,
Henderson and Loeb. Before long, his natural intelligence won out when he began doing
financial research for the firm and he became a partner in the firm. He was soon earning over
$500,000 a year, a huge sum; not bad for a 25 year old.
In 1926, Graham formed an investment partnership with another broker called Jerome
Newman. He also started lecturing at night on finance at Columbia, a relationship that was to
continue until his retirement in 1956.
The Crash of 1929 almost wiped Graham out but the partnership survived with the assistance of
friends and the sale of most of the partners’ personal assets. At one stage, Graham’s wife was
forced to return to work as a dance teacher. Graham was soon back on his feet but he had
learned valuable lessons that would soon be brought home to investors in his books.
In 1934, Benjamin Graham together with David Dodd, another Columbia academic, published
the classic Security Analysis which has never been out of print. Despite the crash, the book
proposed that it was possible to successfully invest in common stocks as long as sound
investment principles were applied. Graham and Dodd introduced the concept of ‘intrinsic
value’ and the wisdom of buying stocks at a discount to that value.
Warren Buffett studied under Graham at Columbia and approached him for a job in his
investment firm. Graham declined but Buffett was persistent, and Graham finally yielded, giving
Buffett a job in the firm. This was the start Buffett needed and he has never failed to
acknowledge what he learned from Ben Graham.
It is interesting that one of the Graham Newman investments was GEICO, which, as you
probably know, was an early acquisition of Berkshire Hathaway and which remains today a
major investment vehicle in the Buffett Group. In 1949, Graham wrote “The Intelligent
Investor”, considered the Bible of value investing. That book too has never been out of print.
Benjamin Graham died in 1976, with the reputation of being the ‘Father of Security Analysis.’
The 3 Most Timeless Investment Principles
Benjamin Graham’s main investment principles were-
Principle No.1: Always Invest with a Margin of Safety

Margin of safety is the principle of buying a security at a significant discount to its intrinsic
value, which is thought to not only provide high-return opportunities, but also to minimize the
downside risk of an investment. In simple terms, Graham's goal was to buy assets worth $1 for
$0.50. He did this very, very well.
To Graham, these business assets may have been valuable because of their stable earning
power or simply because of their liquid cash value. It wasn't uncommon, for example, for
Graham to invest in stocks where the liquid assets on the balance sheet (net of all debt) were
worth more than the total market cap of the company (also known as "net nets" to Graham
followers). This means that Graham was effectively buying businesses for nothing. While he had
a number of other strategies, this was the typical investment strategy for Graham.
This concept is very important for investors to note, as value investing can provide substantial
profits once the market inevitably re-evaluates the stock and ups its price to fair value. It also
provides protection on the downside if things don't work out as planned and the business
falters. The safety net of buying an underlying business for much less than it is worth was the
central theme of Graham's success. When chosen carefully, Graham found that a further
decline in these undervalued stocks occurred infrequently.
While many of Graham's students succeeded using their own strategies, they all shared the
main idea of the "margin of safety".
Principle No.2: Expect Volatility and Profit from it

Investing in stocks means dealing with volatility. Instead of running for the exits during times of
market stress, the smart investor greets downturns as chances to find great investments.
Graham illustrated this with the analogy of "Mr. Market", the imaginary business partner of
each and every investor. Mr. Market offers investors a daily price quote at which he would
either buy an investor out or sell his share of the business. Sometimes, he will be excited about
the prospects for the business and quote a high price. At other times, he is depressed about the
business's prospects and will quote a low price.
Because the stock market has these same emotions, the lesson here is that you shouldn't let
Mr. Market's views dictate your own emotions, or worse, lead you in your investment
decisions. Instead, you should form your own estimates of the business's value based on a
sound and rational examination of the facts. Furthermore, you should only buy when the price
offered makes sense and sell when the price becomes too high. Put another way, the market
will fluctuate - sometimes wildly - but rather than fearing volatility, use it to your advantage to
get bargains in the market or to sell out when your holdings become way overvalued.
Here are two strategies that Graham suggested to help mitigate the negative effects of market
volatility:
1. Dollar-Cost Averaging
Dollar-cost averaging is achieved by buying equal dollar amounts of investments at
regular intervals. It takes advantage of dips in the price and means that an investor
doesn't have to be concerned about buying his or her entire position at the top of the
market. Dollar-cost averaging is ideal for passive investors and alleviates them of the
responsibility of choosing when and at what price to buy their positions.
2. Investing in Stocks and Bonds

Graham recommended distributing one's portfolio evenly between stocks and bonds as
a way to preserve capital in market downturns while still achieving growth of capital
through bond income. Remember, Graham's philosophy was, first and foremost, to
preserve capital, and then to try to make it grow. He suggested having 25-75% of your
investments in bonds, and varying this based on market conditions. This strategy had
the added advantage of keeping investors from boredom, which leads to the temptation
to participate in unprofitable trading (i.e. speculating).
Principle No.3: Know What Kind of Investor You Are

Graham advised that investors know their investment selves. To illustrate this, he made clear
distinctions among various groups operating in the stock market.
Active vs. Passive

Graham referred to active and passive investors as "enterprising investors" and "defensive
investors".
You only have two real choices: The first is to make a serious commitment in time and energy
to become a good investor who equates the quality and amount of hands-on research with the
expected return. If this isn't your cup of tea, then be content to get a passive, and possibly
lower, return but with much less time and work. Graham turned the academic notion of "risk =
return" on its head. For him, "Work = Return". The more work you put into your investments,
the higher your return should be.
If you have neither the time nor the inclination to do quality research on your investments,
then investing in an index is a good alternative. Graham said that the defensive investor could
get an average return by simply buying the 30 stocks of the Dow Jones Industrial Average in
equal amounts. Both Graham and Buffett said that getting even an average return - for
example, equaling the return of the S&P 500 - is more of an accomplishment than it might
seem. The fallacy that many people buy into, according to Graham, is that if it's so easy to get
an average return with little or no work (through indexing), then just a little more work should
yield a slightly higher return. The reality is that most people who try this end up doing much
worse than average.
In modern terms, the defensive investor would be an investor in index funds of both stocks and
bonds. In essence, they own the entire market, benefiting from the areas that perform the best
without trying to predict those areas ahead of time. In doing so, an investor is
virtually guaranteed the market's return and avoids doing worse than average by just letting
the stock market's overall results dictate long-term returns. According to Graham, beating the
market is much easier said than done, and many investors still find they don't beat the market.
Speculator Vs. Investor

Not all people in the stock market are investors. Graham believed that it was critical for people
to determine whether they were investors or speculators. The difference is simple: an investor
looks at a stock as part of a business and the stockholder as the owner of the business, while
the speculator views himself as playing with expensive pieces of paper, with no intrinsic value.
For the speculator, value is only determined by what someone will pay for the asset. To
paraphrase Graham, there is intelligent speculating as well as intelligent investing - just be sure
you understand which you are good at.
Examples of value investments by Benjamin Graham
1. Du Pont-General Motors
The Du Pont-General Motors arbitrage provides a good example of a typical Graham play. The
Du Pont Corporation, which controlled huge assets and dominated more than a handful of
industries, had used its surplus cash to acquire a large block of GM stock. But despite these
holdings, Du Pont sold on the stock exchange for no more than the value of its GM shares
alone. Graham noticed this oddity and reasoned that either the market was overvaluing the GM
shares or it was ignoring the worth of Du Pont’s own operations.
Graham decided to bet on the probability that the market would over time correct for this
imbalance. So he bought Du Pont common stock and simultaneously sold short seven times as
many shares of General Motors. The market soon vindicated Graham’s expectations as
`DuPont’s share price soared. Graham sold his Du Pont shares and closed out the short position
in GM. Of course, this arrangement carried no risk: if the imbalance had been corrected by a
decline in the price of GM, Graham would have profited by exercising the short position.22
Activities like this one have subsequently become standard tools in the “value investor’s”
repertoire.
2. Northern Pipe Line
The story of Graham’s investment in the Northern Pipe Line illustrates how the underlying value
present in a stock may ultimately be realized. After reading an intriguing ICC annual report on
railroads, Graham requested additional information about what data the pipeline companies
were required to submit. He received a 50-page document full of key financial information of
which most investors were not aware. Further research revealed that each of the eight oil
pipeline companies possessed substantial amounts of investment-grade railroad bonds that, in
some cases, exceeded the total market value of the pipeline company itself. It seemed to
Graham that there was no reason for the companies to continue holding the bonds in reserve,
and he felt that this situation represented an ideal example of a company trading at a price far
less than its true asset value. The most attractive of these pipeline companies was Northern
Pipe Line, trading at $65 but holding a hidden pile of high-grade bonds equal to $95 per share.
Graham battled against the corporate establishment, initially to no avail. The company
president told him that “the pipeline business is a complex and specialized business about
which you know very little, but in which we have spent a lifetime. We know better than you
what is best for the company....If you don’t approve of our policies, you should sell your
shares.”23 Of course, shareholder advocates have long heard similar responses. Graham, who
by then had become the company’s largest outside shareholder, refused to cave in. After much
effort, he attended the 1928 Northern Pipe Line annual meeting with proxies for 38 percent of
the shares and successfully obtained two board seats. Graham finally forced a special $70 per
share distribution to shareholders — and his total profit exceeded $100 per share, nearly a 54
percent return on investment. The other pipeline companies eventually followed the same
course with their own distributions. This transaction was classic Graham: he was interested only
in undervalued assets; he did not care what the company actually did or if management was
capable.
Graham’s message
Graham’s basic message was that the stock market can be a highly illogical place, where greed
and fear — rather than rationality — often prevail and where buyers and sellers from time to
time behave in a herd-like manner. A famous passage made the point: “In other words,” wrote
Graham and Dodd, “the market is not a weighing machine, on which the value of each issue is
recorded by an exact and impersonal mechanism, in accordance with its specific qualities.
Rather should we say that the market is a voting machine, whereon countless individuals
register choices which are the product partly of reason and partly of emotion?”40 The
disciplined investor, according to Graham and Dodd, does not blindly follow the crowd but
instead searches for stocks selling for less than their intrinsic value and then waits for the
market to recognize and correct the disparity.
Conclusion
Graham's basic ideas are timeless and essential for long-term success. He bought into the
notion of buying stocks based on the underlying value of a business and turned it into a science
at a time when almost all investors viewed stocks as speculative. Graham served as the first
great teacher of the investment discipline, as evidenced by those in his intellectual bloodline
who developed their own. If you want to improve your investing skills, it doesn't hurt to learn
from the best; Graham continues to prove his worth in his disciples, such as Warren Buffett,
who have made a habit of beating the market.
A note about Warren E. Buffett
Warren Edward Buffett, who made most of his money from investments, is the world’s second-
richest man. He was born on August 30, 1930 to his father Howard, a stockbroker turned-
Congressman. Warren Buffett, for the first time, purchased stocks at the age of eleven. From
this trading experience, he learned one of the basic lessons of investing: patience is a virtue.
Warren Buffett earned his bachelor’s degree from the University of Nebraska-Lincoln and his
master’s degree from Columbia University. During his graduate study, Warren learned
profound investment principles, especially the principle of intrinsic business value, from Ben
Graham, who wrote Security Analysis and The Intelligent Investor books. Warren also worked
for Ben Graham. It was during this time that the difference between the
Graham and Buffett philosophies began to emerge. Ben simply wanted numbers by looking only
at the balance sheet and income statement, whereas Warren was predominately interested in
a company’s management as a major factor when deciding to invest. After building his personal
capital up to $140,000, Warren returned Omaha and began his next move. Warren Buffett
applied value-investing principles to build Berkshire Hathaway.
Currently, the portfolio of Berkshire Hathaway comprises of utilities (MidAmerican Energy

Holdings), insurance (Geico, General Re), apparel (Fruit of the Loom), flight services (Flight
Safety, Net Jets) as well as a fairly large amount of American Express, Coca-Cola, Gillette, and
Wells Fargo).
In June 2006, Warren Buffett announced to give around 80 percent of his $44 billion fortune in
annual installments to the Bill and Melinda Gates Foundation for as long as the couple lives. The
Gates Foundations activities are concentrated on world health (fighting such diseases as
malaria, HIV/AIDS, and tuberculosis) and on improving U.S. libraries and high schools.
Warren Buffett’s Investment Philosophy
1. Economic reality, not accounting reality Warren Buffett stated that financial statements
prepared by accountants conformed to rules that might not adequately represent the economic
reality of a business. Accounting reality was conservative, backward-looking, and governed by
generally accepted accounting principles (GAAP). However, investment decisions should be
based on the economic reality of a business.
Under GAAP, intangible assets such as patents, trademarks, special managerial expertise, and
reputation would be carried at little or no value, but they might be very valuable in economic
reality. GAAP measured results in terms of net profit, whereas, in economic reality, the results
of a business where its flows of cash.
Warren Buffett also defined economic reality at the level of business itself, not the market, the
economy, or the security.
2. The opportunity cost Warren Buffett compared an investment opportunity against the next
best alternative, the lost opportunity. He made his business decisions by framing his choices as
either/or decisions rather than yes/no decisions. In addition, he employed the potential rate of
return from investing in the common stocks of other companies as an important standard of
comparison in testing the attractiveness of an acquisition. He also used the comparison of an
investment against other returns available in the market as a significant benchmark of
performance.
3. The time value of money Warren Buffett defined intrinsic value as the discounted value of
the cash that can be obtained from a business during its remaining life. To calculate intrinsic
value, it is necessary to exhibit a highly subjective figure that will change when estimates of
future cash flows are modified and interest rates alter. In spite of its uncertainty, intrinsic value
is important because it is the only logical way to assess the relative attractiveness of
investments and businesses.
4. Measure performance on the basis of gain in intrinsic value, not accounting profit Warren
Buffett’s long-term economic goal is to maximize Berkshires average annual rate of gain in
intrinsic business value on a per-share basis. He does not measure the economic significance or
performance of Berkshire by its size, but by per-share progress. In addition, he will be
disappointed if the rate of per-share progress does not exceed that of the average large
American corporation.
5. Risk and discount rates Warren Buffett defined risk as the possibility of loss or injury. His
company used almost no debt financing. To avoid risk, he also put a heavy weight of
investments on certainty by focusing on companies with predictable and stable earnings. Thus,
the idea of a risk factor does not make sense to him so that he utilized a risk-free discount rate
such as the rate of return on the long-term (for example, 30-year) U.S. Treasury bond.
6. Diversification Warren Buffett suggested that investors typically purchased far too many
stocks rather than waiting for one exceptional company. Investors should pay attention to only
businesses that they understand. Therefore, the need for diversification decreases
substantially.
7. Invest on the basis of information and analysis with respect to Ben Graham, Warren Buffett
agreed that, instead of following Mr. Market’s opinion, it would be wiser for investors to form
their own ideas of the value of their holdings, based on full reports from the company about its
operation and financial status. Warren Buffett did not believe in the stock market. When he
invested in stocks, he invested in businesses. He behaved according to what is rational rather
than according to what is fashionable. He didn’t try to time the market (i.e., trade stocks based
on expectations of changes in the market cycle). Instead, he employed a strategy of patient,
long-term investing.
8. Alignment of agents and owners to explain his ownership interest in Berkshire Hathaway,
Warren Buffett claimed that he is a better businessman because he is an investor. And he is a
better investor because he is a businessman. More than 50 percent of the family net worth of
four of Berkshires six directors contained shares in Berkshire Hathaway. Moreover, the senior
managers of Berkshire Hathaway subsidiaries held shares in the company, or were
compensated under incentive plans that related to the potential returns from an equity interest
in their business unit.
Buffett’s Tenets
Business Tenets:
• The business the company is in should be simple and understandable.
• The firm should have a consistent operating history, manifested in operating
earnings that are stable and predictable.
• The firm should be in a business with favorable long term prospects.
Management Tenets:
• The managers of the company should be candid. As evidenced by the way he
treated his own stockholders, Buffett put a premium on managers he trusted. •
The managers of the company should be leaders and not followers.
Financial Tenets:
• The company should have a high return on equity. Buffett used a modified
version of what he called owner earnings
Owner Earnings = Net income + Depreciation & Amortization – Capital
Expenditures
• The company should have high and stable profit margins.
Market Tenets:
• Use conservative estimates of earnings and the riskless rate as the discount
rate.
• In keeping with his view of Mr. Market as capricious and moody, even valuable
companies can be bought at attractive prices when investors turn away from
them.
Be like Buffett?
• Markets have changed since Buffett started his first partnership. Even
Warren Buffett would have difficulty replicating his success in today’s market,
where information on companies is widely available and dozens of money
managers claim to be looking for bargains in value stocks.
• In recent years, Buffett has adopted a more activist investment style and has
succeeded with it. To succeed with this style as an investor, though, you would
need substantial resources and have the credibility that comes with investment
success. There are few investors, even among successful money managers, who
can claim this combination.
• The third ingredient of Buffett’s success has been patience. As he has pointed
out, he does not buy stocks for the short term but businesses for the long term.
He has often been willing to hold stocks that he believes to be undervalued
through disappointing years. In those same years, he has faced no pressure from
impatient investors, since stockholders in Berkshire Hathaway have such high
regard for him.
Section 2 –
Research Reports
Value Methods
1. Price to Book ratios: Buy stocks where equity trades at less than or at
least a low multiple of the book value of equity.
2. Price earnings ratios: Buy stocks where equity trades at a low multiple
of equity earnings.
3. Return on Capital Employed (ROCE): A ratio that indicates the
efficiency and profitability of a company's capital investments.
4. Return on Equity (ROE): The amount of net income returned as a
percentage of shareholders equity. Return on equity measures a
corporation's profitability by revealing how much profit a company
generates with the money shareholders have invested.
1. Price/Book Value
 A low price book value ratio has been considered a reliable indicator of
undervaluation in firms.
 The empirical evidence suggests that over long time periods, low price-
book values stocks have outperformed high price-book value stocks and the
overall market.
2. Price/Earnings Ratio Screens

 Investors have long argued that stocks with low price earnings ratios are
more likely to be undervalued and earn excess returns. For instance, this is
one of Ben Graham’s primary screens.
 Studies which have looked at the relationship between PE ratios and
excess returns confirm these priors.
3. Return on Capital Employed - ROCE

 ROCE should always be higher than the rate at which the company
borrows; otherwise any increase in borrowing will reduce shareholders'
earnings.
 ROCE is used in finance as a measure of the returns that a company is
realizing from its capital employed. It is commonly used as a measure for
comparing the performance between businesses and for assessing whether
a business generates enough returns to pay for its cost of capital.
Calculated as:
4. Return on Equity - ROE

 The ROE is useful for comparing the profitability of a company to that of
other firms in the same industry.
 Investors may also calculate the change in ROE for a period by
first using the shareholders' equity figure from the beginning of a
period as a denominator to determine the beginning ROE. Then, the end-
of-period shareholders' equity can be used as the denominator to
determine the ending ROE. Calculating both beginning and ending ROEs
allows an investor to determine the change in profitability over the period.
Calculated as:
Good Companies are not necessarily Good Investments

 Any investment strategy that is based upon buying well-run, good
companies and expecting the growth in earnings in these companies to
carry prices higher is dangerous, since it ignores the reality that the current
price of the company may reflect the quality of the management and the
firm.
 If the current price is right (and the market is paying a premium for
quality), the biggest danger is that the firm loses its luster over time, and
that the premium paid will dissipate.
 If the market is exaggerating the value of the firm, this strategy can lead to
poor returns even if the firm delivers its expected growth.
 It is only when markets under estimate the value of firm quality that this
strategy stands a chance of making excess returns.
Selection of stocks using filters
The following companies have been short listed for carrying out Value investing
research
FMCG
1. Dabur
2. Britannia
3. HUL
4. ITC
5. Marico
6. Godrej consumer
7. Colgate Palmolive
8. Tata Tea
9. Gillete
10. Nestle
CAPITAL/ENGINEERING
1. L&T
2. BHEL
3. Punj Lloyd
4. Siemens
5. Thermax
6. Alstom Projects
7. Everest Kanto
8. Praj Inds.
9. Walchannagar
10. Crompton greaves
BANKS
1. SBI
2. Axis
3. HDFC Bank
4. BOB
5. ICICI
6. Federal
7. IndusInd
8. DCB
9. Kotak
10. Corporation
PHARMA
1. Lupin
2. Glaxo
3. Aventis
4. Ranbaxy
5. Piramal
6. Wockhardt
7. Cipla
8. Matrix
9. Cadila
10. Divis
TELECOM
1. Idea
2. Bharti
3. Rcom
4. Mtnl
5. Onmobile
6. Tata Com
7. Tulip Com
8. Nettlinx
Using the first Filter P/E (3 stocks with high P/E) was eliminated and following stocks was shortlisted
FMCG
1. Britannia
2. ITC
3. Marico
4. Godrej consumer
5. Colgate Palmolive
6. Tata Tea
7. Gillete
CAPITAL/ENGINEERING
1. L&T
2. BHEL
3. Siemens
4. Thermax
5. Praj Inds.
6. Walchannagar
7. Crompton greaves
BANKS
1. SBI
2. Axis
3. HDFC Bank
4. BOB
5. ICICI
6. Federal
7. Corporation
PHARMA
1. Lupin
2. Glaxo
3. Aventis
4. Piramal
5. Wockhardt
6. Cadila
7. Divis
TELECOM
1. Idea
2. Bharti
3. Rcom
4. Mtnl
5. Tulip Com
6. Nettlinx
Using the second filter Price/Book (further 3 stocks with high price to book value) was eliminated.
Following stocks were shortlisted
FMCG
1. Britannia
2. ITC
3. Tata Tea
4. Gillete
CAPITAL/ENGINEERING
1. L&T
2. Siemens
3. Praj Inds
4. Walchannagar
BANKS
1. BOB
2. ICICI
3. Federal
4. Corporation
PHARMA
1. Lupin
2. Aventis
3. Wockhardt
4. Cadila
TELECOM
1. Rcom
2. Mtnl
3. Tulip Com
4. Nettlinx
Using the third filter ROCE (2 companies with low ROCE) from each sector were eliminated.
FMCG
1. ITC
2. Gillete
CAPITAL/ENGINEERING
1. Siemens
2. Praj Inds.
BANKS
1. BOB
2. ICICI
3. Federal
4. Corporation
PHARMA
1. Lupin
2. Aventis
TELECOM
1. Rcom
2. Mtnl
Finally using the last filter ROE one stock from each sector was selected for further research
1. FMCG-ITC
2. CAPITAL/ENGINEERING-PRAJ INDS
3. BANK-BOB
4. PHARMA-LUPIN
5. TELECOM-RCOM
ITC LTD.
AS ON 5TH MARCH 2009 INVESTMENT ARGUMENT
PRICE- Rs.170.55 Increasing contribution from non-

cigarette FMCG business ITC has been
RECOMMENDATION- BUY very aggressive in launching new products
in the FMCG space, which now contributes
52 WEEK RANGE- Rs.232.4/132.05 around 17% to the top line from 12% in
2006.
Margins improved drastically as prices

of key raw material palm oil have
cooled off sharply.
KEY SHARE DATA Strong pricing power due to dominant

market share in the cigarettes.
MARKET CAP- Rs 62,179.91Crs.
Fastest growing company in the
FACE VALUE- Rs.1 processed food sector.
EQ. CAPITAL- Rs.376.86Crs. Cigarette business continues to be a

major contributor to ITC’s top line. The
BSE- 500875 ITC continues to sustain its leadership
position in the cigarette industry.
NSE- ITC
Excellent long term potential in its rural
BOOK VALUE- Rs.31.81 initiative of EChoupal and Choupal Sagar.
Hotels and Paperboard businesses have

achieved self sustenance levels.
Lifestyle retailing: Lifestyle retailing

SHAREHOLDING PATTERN reported sales growth of 15% in the
0% quarter
15% Valuations- Currently the stock is trading

at 3.6X FY08BV, 20.5X FY08EPS and 0.85X
47% Intrinsic value. Therefore the stock is
highly undervalued, so I recommend a
38%
BUY with a long term perspective.
PROMOTERS
FII
INSTITUTIONS
PUBLIC/BODY CORPORATES
ITC LTD.
COMPANY BACKGROUND
Company description
ITC is an associate of BAT (British American Tobacco) controls more than 2/3rd of
the cigarette market in India.ITC has emerged as a diversified conglomerate with
leading presence in Paperboards, Hotels and Processed foods. EChoupal, the agri
rural initiative of the company has been widely appreciated for its foresight in
harnessing the potential in the rural market.
Sector view
 Many analysts have a cautious view on the sector on the back of
inflationary tendency in the economy, which might impact volumes as well
as profit margins of companies.
 Companies with low competitive pressures and broad product portfolios will
be able to better withstand any slowdown in a particular segment.
 Longer-term prospects are bright, given rising incomes and low penetration.
ITC LTD.
SEGMENT RESULTS
FMCG – Cigarettes
Cigarette business registered a sales growth of 10.5% to Rs 3901.5 crores with volumes showing
a decline of 3.5% after sales of non-filter cigarettes, which formed 19% of total volumes, were
discontinued. This was after an increase in excise duty on non-filter cigarettes in the 2008
Union budget. This resulted in consumers shifting to cheaper options thus impacting the overall
cigarette volumes. The Company increased the prices of some of its brands. The PBIT grew by
18% to Rs 1134.1 crores as the margins expanded by 190 bps to 29.1%. Going forward, we
expect cigarette volumes to decline further as a result of increasing headwinds such as
imposing of VAT, increase in excise duty and ban on smoking in public places.
Other FMCG business
The ‘Other FMCG’ business registered a growth of 11.7% in sales to Rs 722.3 crores.The losses
of the business increased by 97% to Rs 127 crores mainly due to newer business. The margins
declined by 760 bps YoY.
Branded Packaged Foods
This segment witnessed modest growth due to slowdown in urban demand due to the
economic downturn. High raw material costs and input prices impacted margins during the
quarter.
Lifestyle Retailing
The economic slowdown and weak consumer sentiment has adversely affected growth. The
business is re-negotiating rental costs and rationalizing unviable stores to improve store
margins.
Personal Care Products
The business continued to register healthy growth and improved its footprint among the
national branded players through its range of personal care products under the brands ‘Fiama
Di Wills’, ‘Vivel Di Wills’, ‘Vivel’ and ‘Superia’. The product portfolio was further enhanced with
the launch of the ‘Vivel’ Ultrapro range of anti-dandruff shampoo. High raw material cost and
increase in advertising spend has impacted the operating performance of the division.
CONT...
Hotels
Hotel business recorded a decline of 13.7% in revenues to Rs 270.5 crores and a fall of 34% in
PBIT to Rs 91.1 crores with margins declining by 10.2% to 33.7%. Economic slowdown and
terror attacks in Mumbai resulted in a sharp drop in traffic triggering a significant slide in
occupancies and average room rates. Construction activity in respect of the super deluxe luxury
hotel projects at Bangalore and Chennai is progressing satisfactorily as per the respective
project plans.
Paperboards, Specialty Papers & Packaging
Revenues of this business increased by 10.9% to Rs 669.9 crores. High raw material costs and
high depreciation impact of new investments in the pulp and paper machine facilities resulted
in a 6.1% fall in PBIT to Rs 111.1 crores while margins declined by 300 bps to 16.6%.
Agriculture Business
Agri business reported a decline of 6.2% in revenues to Rs 621.5 crores due to lower soya
volumes and rationalisation of the agri-commodity portfolio. PBIT increased by 80% to Rs 50.2
crores on increase in margins by 390 bps to 8.1%.
ITC LTD.
FINANCIAL HIGHLIGHTS
 Net Sales grew by 10.9% Y-o-Y in Dec08Qtr to Rs 3833 crore, Operating Profit grew by
14.9% to Rs 1378 crore and net profit grew by 8.7% to Rs 903 crore.
 During the quarter under review, net sales grew by 11.1% to Rs 3833.3 crores.
Slowdown in the hotel segment and lower growth in cigarettes resulted in slower
growth in revenues. Operating profit grew by 9.6% to Rs 1378 crores, while the margins
maintained a flat trend. PAT grew by 8.7% to Rs 903.2 crores.
 Cigarette business registered a sales growth of 10.5% to Rs 3901.5 crores with volumes
showing a decline of 3.5% after sales of nonfilter cigarettes, which formed 19% of total
volumes, were discontinued. The PBIT grew by 18% to Rs 1134.1 crores as the margins
expanded by 190 bps to 29.1%.
 The ‘Other FMCG’ business registered a growth of 11.7% in sales to Rs 722.3 crores. The
losses of the business increased by 97% to Rs 127 crores mainly due to newer business.
The margins declined by 760 bps YoY.
 Hotel business recorded a decline of 13.7% in revenues to Rs 270.5 crores and a fall of
34% in PBIT to Rs 91.1 crores with margins declining by 10.2% to 33.7%. Economic
slowdown and terror attacks in Mumbai resulted in a sharp drop in traffic triggering a
significant slide in occupancies and average room rates.
 Revenues of this business increased by 10.9% to Rs 669.9 crores. High raw material
costs and high depreciation impact of new investments in the pulp and paper machine
facilities resulted in a 6.1% fall in PBIT to Rs 111.1 crores while margins declined by 300
bps to 16.6%.
 Agriculture business reported a decline of 6.2% in revenues to Rs 621.5 crores due to

lower soya volumes and rationalization of the agricommodity portfolio. PBIT increased
by 80% to Rs 50.2 crores on increase in margins by 390 bps to 8.1%.
ITC LTD.
KEY HIGHLIGHTS
Key Developments:
 Buoyed by the success in personal care products (PCP) in 2008, ITC Ltd is planning to
enter into anti dandruff shampoo category through Vivel brand. Anti dandruff shampoo
is one of the fastest growing categories of PCP with annualize growth of 16%.
 At a time when liquidity crunch and global meltdown appears to have deterred almost
all companies across different segments to put their future growth plans on hold, ITC is
looking to spice up its spices business in a big way. The company is planning to set up
modernized processing infrastructure in Rajasthan for grading, sorting and cleaning of
seed spices like cumin, coriander and pepper.
 The proposed integrated ‘cleaning-cum-sorting’ facility will enable ITC supply clean and
graded seed spices procured from the mandis of Rajasthan, Gujarat and Madhya
Pradesh to a growing and discerning domestic and international customers. The
mechanized processing is intended to create value for customers in terms of supply of
consistent hygienic products, adhering to specific quality specifications. The new facility
will be in addition to ITC’s spices cleaning, grinding, packing and steam sterilization
facility at Guntur.
 Launch of Vivel Shampoo.
 Exit from the non-filter cigarette segment.
Key investment risks

 A high indirect tax regime could dampen cigarette growth.
 Higher than expected losses in New FMCG business will impact profitability.
 The requirement of pictorial health warnings on tobacco products.

ITC LTD.
FINANCIALS
INCOME STATEMENT
Mar ' 08 Mar ' 07 Mar ' 06
Income:
Operating income 14,032.20 12,313.83 9,798.33

Expenses
Material consumed 6,275.33 5,484.52 4,130.04
Manufacturing expenses 383.42 318.32 295.25
Personnel expenses 745 630.15 541.4
Selling expenses 1,044.40 803.29 627
Adminstrative expenses 1,266.57 1,116.23 853.39

Expenses capitalised -112.75 -42.52 -15.78
Cost of sales 9,601.97 8,309.99 6,431.30
Operating profit 4,430.23 4,003.84 3,367.03
Other recurring income 479.82 300.14 273.22
Adjusted PBDIT 4,910.05 4,303.98 3,640.25
Financial expenses 24.61 16.04 21.1
Depreciation 438.46 362.92 332.34
Other write offs - - -
Adjusted PBT 4,446.98 3,925.02 3,286.81

Tax charges 1,480.97 1,263.07 1,027.57
Adjusted PAT 2,966.01 2,661.95 2,259.24

Non recurring items 36.68 -23.92 -70.02
Other non cash adjustments 117.41 61.94 46.13
Reported net profit 3,120.10 2,699.97 2,235.35

Earnigs before
appropriation 3,767.63 3,262.03 2,846.76
Equity dividend 1,319.01 1,166.29 995.12

Preference dividend - - -
Dividend tax 224.17 198.21 139.58
Retained earnings 2,224.45 1,897.53 1,712.06

ITC LTD.
FINANCIALS
QUATERLY RESULTS
Dec ' 08 Sep ' 08 Jun ' 08 Mar ' 08

Sales 3,858.65 3,862.67 3,899.70 3,934.39
Operating profit 1,378.04 1,215.39 1,127.12 1,044.67
Interest 0.45 2.78 1.41 2.7
Gross profit 1,475.15 1,323.06 1,240.06 1,205.65
EPS (Rs) 2.39 2.13 1.99 1.95
Quarterly results in
details
Dec ' 08 Sep ' 08 Jun ' 08 Mar ' 08
Other income 97.56 110.45 114.35 163.68
Stock adjustment -48.03 -108.24 -48.37 53.05

Raw material 1,298.39 1,435.94 1,336.20 1,322.40
Employee expenses 212.95 237.67 218.11 191.07
Other expenses 1,017.30 1,081.91 1,266.64 1,323.20

Depreciation 144.2 133.99 126.11 121.49
Taxation 427.74 386.35 365.28 348.52
Net profit / loss 903.21 802.72 748.67 735.64
Equity capital 377.15 377.02 376.86 376.86
Agg.of non-prom.
shares (Lacs) 37500.75 37456.05 37429.64 37415.01
Agg.of non
promotoholding
(%) 99.43 99.35 99.32 99.28
OPM (%) 35.71 31.47 28.9 26.55
GPM (%) 37.29 33.3 30.89 29.42
NPM (%) 22.83 20.2 18.65 17.95
ITC LTD.
VALUATIONS
Calculation of intrinsic value:

Year 2004-05 2005-06 2006-07 2007-08
EPS (Rs) 4.91 6.08 7.19 8.29
CAGR: 4.91 (1 + x)3 = 8.29
x = 0.19
x = 19%
EPS1 = 4.91(1+ 0.19) = 9.87
P/E:Share price as on 31st March, 2008 = 206.35
P/E = 206.35 / 8.29 = 24.89
P/E value (Projected EPS × current P/E) = 245.7
Book value per share = 32
Current market price (market price as on 6th March, 2009) = 192.4
1st method 2nd method
1/3 of P/E value 81.91 60% of P/E value 147.43
1/3 of Book value 10.67 10% of book value 3.2
1/3 of current market price 56.85 30% of current price value 51.71
Total (in Rs) 149.42 Total (in Rs) 201.8

BANK OF BARODA LTD.
PRICE- Rs.192.4 Bank of Baroda’s (BoB) focus has shifted to

growth from treasury, and re‐branding and
RECOMMENDATION- BUY reshaping of the business is more or less
complete. Bank of Baroda has improved its NII
52 WEEK RANGE- Rs.363.3/184.25 performance where it has been laggard in last
few quarters. It was done by reducing reliance on
bulk deposits as well as expanding yield on
advances. NIM of 3.3% was surprising. Even if
management expects to maintain it around 3.2%
in coming quarters, it is believed that margins will
KEY SHARE DATA settle down slightly above 3% mark. Expectations
are that the loan growth will be in the region of
MARKET CAP- Rs 7,078.49Cr
23-24% on the back of overseas expansion. Cost
FACE VALUE- Rs.10 to income ratio is also expected to be in the
region of 45% mark after accounting for
EQ. CAPITAL- Rs.365.53Crs. increased wage provisions. Core fee income
growth is expected to be above 20%. Aggressive
BSE- 532134 loan disbursement in overseas markets is
worrisome for us even though management
NSE- BANKBARODA sounds confident. Similarly higher than expected
provisions on international investments is
BOOK VALUE- Rs.302.3
another concern. Superior asset quality still
remains a key factor in the valuation.
Valuations- Currently the stock is trading at 0.6X
FY08BV, 6X FY08EPS and 0.7X Intrinsic value.
Therefore the stock is highly undervalued, so I
SHAREHOLDING PATTERN recommend a BUY with a long term perspective.
9%
18%
54%
19%
PROMOTERS FII
INSTITUTIONS PUBLIC
BANK OF BARODA LTD.
COMPANY BACKGROUND
Bank of Baroda is the fifth largest bank in India. It has total assets in excess of Rs.
1.78 lakh crores, or Rs. 1,780 bn., a network of over 2800 branches and offices,
and about 1000+ ATMs. Bank of Baroda offers a wide range of banking products
and financial services to corporate and retail customers through a variety of
delivery channels and through its specialised subsidiaries and affiliates in the
areas of investment banking, credit cards and asset management. Starting in 1908
from a small building in Baroda to its new hi‐rise and hi‐tech Baroda Corporate
Centre in Mumbai is a saga of vision, enterprise, financial prudence and corporate
governance.
Company History
Maharajah of Baroda Sir Sayajirao Gaekwad III founded the bank on July 20, 1908
in the princely state of Baroda, in Gujarat. Bank of Baroda started its operation in
the year 1908 in Baroda though its Corporate Centre is in Mumbai now. Its
mission is "to be a top ranking National Bank of International Standards
committed to augment stake holders' value through concern, care and
competence". The Bank was brought into existence by a Ordinance issue on 19th
July, by the Central Government. The Bank is a Government of India Undertaking
and carries on all types of banking business including foreign exchange. The
Ordinance was replaced by the Banking Companies (Acquisition and Transfer of
Undertaking) Act, 1969.
BANK OF BARODA LTD.
KEY HIGHLIGHTS
Marginal CASA improvement very positive: The most impressive thing about BOB’s Q3FY09
result was sequential improvement in CASA. CASA improved by 25 bps to 36.10% in Q3FY09
from 35.85% in Q2FY09. This was completely against industry trend where most of the banks
reported significant drop in CASA sequentially. It seems that the bank has been able to use its
extensive branch network, which cannot be said with respect to other banks.
Improvement in margins very positive: BOB has been able to show continuous improvement in
NIMs as NIMs for the 3rd quarter FY09 improved to 3.3% as compared to 2.8% in Q2FY09 and
3.0% in Q3FY08. Margins improved due to better cost of fund management and improved yield
on advances. Improvement in margins was indeed very positive. The bank expects it to maintain
the margins around 3.2% in coming quarters but I expect margins to stabilize slightly above
3.0% mark.
Improvement in asset quality continues: The bank has done very well on asset quality front. It
has continued improvement in asset quality by maintaining lower delinquencies as well as very
aggressive recoveries. Gross NPAs improved to 1.50% in Q3FY09 as compared to 1.62% in
Q2FY09 and 2.11% in Q3FY08.
Capital adequacy ratio comfortable at 13.20% at the end of 3rd quarter: CAR for the 9 month
ended December 31, 08 stood at 13.20%, out of which tier I ratio is 8.50%. The bank still has
headroom to raise Rs. 75 bn in tier I and tier II ratio. Tier I ratio improved due to ploughing back
of profits and reduced risk weight on selected advances by RBI.
Fee income growth is expected to remain strong: Core fee income growth (commission,
exchange, and brokerage) during Q3FY09 was 26%. We expect core fee income growth to
remain strong in the region of 21-22% in coming quarters. Considering the aggressive expansion
in overseas market, it should be able to achieve said growth targets for fee income.
BANK OF BARODA LTD.
VALUATIONS

Year 2004-05 2005-06 2006-07 2007-08
EPS (Rs) 23.08 28.83 28.18 39.41
CAGR: 23.08 (1 + x)3 = 39.41
x = 0.1941
x = 19.41%
EPS1 = 39.41(1+ 0.1941) = 47.06
P/E = 280.45 / 39.41 = 7.12
Book value per share = 303.18

BANK OF BARODA LTD.
KEY FINANCIALS
INCOME STATEMENT
Mar ' 08 Mar ' 07 Mar ' 06

Income:
Expenses
Personnel expenses 1,803.76 1,644.06 1,523.79
Selling expenses 33.18 25.7 25.64
Adminstrative
expenses 1,301.33 907.42 1,064.20
Cost of sales 3,138.28 2,577.18 2,613.63
Operating profit 2,093.87 1,544.86 805.2

Adjusted PBDIT 2,782.44 2,033.64 1,193.13
Financial expenses 7,901.67 5,426.56 3,875.09
Depreciation 232 194.28 111.13
Adjusted PBT 2,550.44 1,839.35 1,082.00
Tax charges 771.63 627.8 287.64
Adjusted PAT 1,435.16 1,013.62 1,050.37
Non recurring items 0.37 12.85 -0.3
Other non cash
adjustments - - -223.11
Reported net profit 1,435.52 1,026.46 826.96
Earnigs before
appropriation 1,435.52 1,026.46 826.96
Equity dividend 340.94 252.46 207.68
Retained earnings 1,094.58 774.01 619.28

BANK OF BARODA LTD.
KEY FINANCIALS
QUATERLY FINANCIALS
Dec ' 08 Sep ' 08 Jun ' 08 Mar ' 08

Sales 4,108.00 3,550.98 3,293.82 3,331.07
Interest 2,646.16 2,417.21 2,236.81 2,302.57
Gross profit 1,345.64 845.63 860.19 814.45
EPS (Rs) 17.49 10.81 10.15 7.56
Quarterly results in details

Dec ' 08 Sep ' 08 Jun ' 08 Mar ' 08
Other income 846.49 475.92 512.55 554.63

Excise - - - -
Other expenses 295.42 300.6 246.65 347.53
Provisions made 350.1 241.91 280.31 424.95
Depreciation - - - -
Taxation 356.24 208.43 209.02 113.06
Net profit / loss 639.3 395.29 370.86 276.44
Extra ordinary item 69.07 - - -

Equity capital 365.53 365.53 365.53 365.53
Agg.of non-prom. shares
(Lacs) 1682.67 1682.67 1682.66 1682.66
Agg.of non promotoholding

(%) 46.19 46.19 46.19 46.19
OPM (%) 68.04 71.67 69.95 64.17
GPM (%) 27.16 21 22.6 20.96

NPM (%) 12.9 9.82 9.74 7.11
Reliance Communications Ltd.
PRICE- Rs.137.9 GSM Strategy- Reliance communications has

launched its GSM services in the month of
RECOMMENDATION- BUY January this year. The subscriber numbers have
been strong at 5 million (GSM and CDMA) in the
52 WEEK RANGE- Rs.610.1/131.6 first month itself which is much above market
expectations driven by both first time subscribers
users and existing wireless users. The
management further expects to maintain
subscriber acquisition momentum as services
have been rolled out in all circles and
KEY SHARE DATA
town/population coverage is being rapidly
MARKET CAP.- Rs 28,462.93cr expanded.
Operating Margin- Management expects
FACE VALUE- Rs.5 operating margins to remain around the current
range the next 2-3 quarters. Management is
EQ. CAPITAL- Rs.1032.01Crs. confident of its dual strategy and sees positives
from participation in the large GSM market,
BSE- 532712 leverage of GSM/CDMA to create unique
propositions. Reduction in FY09 capex from
NSE- RCOM Rs 30bn to Rs 25bn was achieved largely from
lower equipment costs and supplementary access
BOOK VALUE- Rs.120.35
to USO-funded towers for nationwide expansion.
Profitability- As the network is operationalized, a
part of the existing capital work-in process of Rs
19bn, will be capitalized in the gross block
resulting in higher depreciation expenses going
SHAREHOLDING PATTERN forward. Tax rate has been low due to telecom-
related tax benefits and deferred tax benefits.
These benefits are likely to continue going
15% forward.
10% FY08BV, 11X FY08EPS and 0.37X Intrinsic value.
8%
recommend a BUY with a long term perspective.
67%
PROMOTERS FII
INSTITUTIONS PUBLIC
COMPANY BACKGROUND
A dream come true

The Late Dhirubhai Ambani dreamt of a digital India — an India where the
common man would have access to affordable means of information and
communication. Dhirubhai, who single-handedly built India’s largest private
sector company virtually from scratch, had stated as early as 1999: “Make the
tools of information and communication available to people at an affordable cost.
They will overcome the handicaps of illiteracy and lack of mobility.”
It was with this belief in mind that Reliance Communications (formerly Reliance
Infocomm) started laying 60,000 route kilometres of a pan-India fibre optic
backbone. This backbone was commissioned on 28 December 2002, the
auspicious occasion of Dhirubhai’s 70th birthday, though sadly after his
unexpected demise on 6 July 2002.
Reliance Communications has a reliable, high-capacity, integrated (both wireless
and wireline) and convergent (voice, data and video) digital network. It is capable
of delivering a range of services spanning the entire infocomm (information and
communication) value chain, including infrastructure and services — for
enterprises as well as individuals, applications, and consulting.
Today, Reliance Communications is revolutionising the way India communicates

and networks, truly bringing about a new way of life.
Key Highlights
 Expect 3G rollover cost to be lower than other players as its current GSM
network requires s/w update and additional slot to be compatible with 3G.
 GSM additions of 5,000,000 subscribers in January 2009 were the highest

ever.
 RCOM is in last phase of its investment cycle and expects to be FCF positive
by FY11. However, FCF target can be extended depending on the intensity
of upcoming tariff war and bidding for 3G license.
 Tenancy rates of RTIL towers is currently at 1.7x with a capacity of 4.0x.

Company is actively seeking deals with new telecom operators to lease the
towers.
 FYO9 capex reduced from 30,000 cr to 25,000 cr
Concerns
 Realized forex losses of Rs 1.2bn for 9M of FY09 are attributed to vendor

payments. A substantial portion of the current vendor payments of Rs 12bn
are not hedged and could result in forex losses going forward.
 The profitability of Global Business is expected to be partially impacted by

global recessionary trends, but remain stable at 24% levels.
Valuations

Year 2006-07 2007-08
EPS (Rs) 11.78 12.53
CAGR: 11.78 (1 + x)1 = 12.53
x = 0.0637
x = 6.37%
EPS1 = 11.78(1+ 0.0637) = 13.32
P/E = 509.75 / 12.53 = 40.6
Reliance Communications
Total (in Rs) Total (in Rs)
Ltd.
266.82 378.74
KEY FINANCIALS
INCOME STATEMENT
Mar ' 08 Mar ' 07

Income:
Operating income 14,792.05 12,756.30

Expenses
Material consumed 15.15 16.48
Manufacturing expenses 4,144.21 3,358.34
Personnel expenses 858.65 684.4
Selling expenses 1,067.76 1,399.88
Adminstrative expenses 2,532.99 1,784.19
Cost of sales 8,618.76 7,243.29

Operating profit 6,173.29 5,513.01
Other recurring income 28.68 169.61
Adjusted PBDIT 6,201.97 5,682.62
Financial expenses 870.05 456.55
Depreciation 1,843.66 1,836.12
Adjusted PBT 3,488.26 3,389.95

Tax charges 1,393.66 1,043.38
Adjusted PAT 2,094.60 2,346.57
Non recurring items 491.85 62.28
Reported net profit 2,586.45 2,408.85
Earnigs before appropriation 4,881.35 2,414.50

Equity dividend 154.8 102.23
Dividend tax 26.31 17.37

Reliance Communications
Retained earnings 4,700.24
Ltd.
2,294.90
KEY FINANCIALS
Quarterly results
Dec ' 08 Sep ' 08 Jun ' 08 Mar ' 08

Sales 3,334.22 3,545.65 3,557.97 3,455.35
Operating profit 867.48 1,183.70 1,190.43 1,279.06
Interest 569.91 119.26 248.74 328.04
Gross profit 362.08 1,065.97 942.78 952.6
EPS (Rs) 1.92 2.27 1.68 2.48
Quarterly results in details

Dec ' 08 Sep ' 08 Jun ' 08 Mar ' 08
Other income 64.51 1.53 1.09 1.58
Admin and selling expenses - - - -593.66
Other expenses 2,240.47 2,145.94 2,144.67 2,551.76

Provisions made - - - -
Depreciation 617.81 527.56 529.43 467.46
Taxation 3.9 5 2 -26.29
Net profit / loss 397.04 468.74 347.38 511.43
Extra ordinary item 656.67 -64.67 -63.97 -
Equity capital 1,032.01 1,032.01 1,032.01 1,032.01
Agg.of non-prom. shares
(Lacs) 6992.16 6992.16 6992.16 6992.16
Agg.of non promotoholding
(%) 33.88 33.88 33.88 33.88
OPM (%) 26.02 33.38 33.46 37.02
GPM (%) 10.65 30.05 26.49 27.56

NPM (%) 11.68 13.21 9.76 14.79
LUPIN PHARMACEUTICALS LTD.
PRICE- Rs.577 Strong product pipeline for the US market

Lupin has emerged as one of the fastest
growing companies in the US (revenue CAGR of
RECOMMENDATION- BUY 237% over FY05-FY08) despite being a late
market entrant.
52 WEEK RANGE- Rs.782/485 Manufactures niche products with high
entry barriers Lupin focuses on niche offerings
for the US and other regulated markets. it has
been able to capture a significant market share
for key products such as ceftriaxone, cefdinir
and cefprozil .
Captive API sourcing alleviates pricing
KEY SHARE DATA pressure For non-antibiotics, which have
grown at a fast pace, Lupin has been able to
MARKET CAP.- 4778.59crs garner market share.
Frontrunner in branded formulation sales
FACE VALUE- Rs.10 in the US Lupin is the first to identify branded
generics as an alternative to the highly
EQ. CAPITAL- Rs.82.08Crs. competitive plain vanilla generic segment.
Successfully transitioning to chronic
therapy in India
BSE- 500257 Lupin has been amongst the fastest
growing companies in the domestic
NSE- LUPIN formulations space, recording revenue CAGR
of 25% over FY05-FY08 as compared to the
BOOK VALUE- Rs.159.12 industry growth of 12% over the same period.
Higher-margin chronic segment
contributed 23% to sales in FY08 The
chronic segment which includes cardio-vascular
system (CVS) and diabetes products now
contributes 24% to sales as against 16% in
FY05. Lupin has significantly reduced its
SHAREHOLDING PATTERN
exposure to the low-margin anti-TB space,
which accounts for only 17% of sales as against
33% in FY05.
11% Domestic formulations a key revenue
driver
Valuations- Currently the stock is trading at
23% 3.6X FY08BV, 10.7X FY08EPS and 1.1X Intrinsic
51% value. Therefore the stock is highly undervalued,
so I recommend a BUY with a long term
15% perspective.
PROMOTERS FII
INSTITUTIONS PUBLIC
COMPANY BACKGROUND
Established in 1968, Lupin develops and markets a wide range of generic & branded
formulations and APIs in multiple markets across the world. The company has gained
recognition as the world’s largest manufacturer of tuberculosis drugs. Over the years, Lupin has
moved up the value chain from intermediates and APIs to build a robust formulations business.
It has a significant presence in the cephalosporin, cardiovascular (prils and statins), diabetology,
asthma and NSAID therapy segments. Over the last four years, the company’s business mix has
improved with 70% of its revenues coming from formulations and 30% from APIs. Lupin has a
wide onshore and offshore presence with its products available in close to70 countries. In
terms of overall revenues, the overseas business constitutes close to 55%, while the balance
comes from the domestic market. The US is Lupin’s largest market overseas where it has
developed a robust branded and generic business. The company’s manufacturing facilities are
approved by international regulatory agencies such as the USFDA, UK MHRA, TGA Australia,
WHO, and MCC South Africa.
Lupin incurs ~6–7% of sales on R&D and has an intellectual pool of over 400 scientists focused
on NCE and NDDS programmes. The company has been successful in monetizing its research
capabilities by licensing out intellectual property related rights to Servier for €40mn.
Industry overview
India: Among the fastest growing pharma markets

India’s pharmaceutical market is valued at ~US$ 7.8bn and has grown at an estimated CAGR of
12% over the past four years. The chronic segment has posted a 16% CAGR over this period,
while the acute space exhibited a growth of 12%. According to industry research, the domestic
market is expected to grow to US$ 20bn by 2015 and will figure among the top 10
pharmaceutical markets of the world.
This growth will be led by increasing disposable incomes, a growing middle-class, expansion of
medical infrastructure, greater penetration of healthcare insurance, adoption of the product
patent regime, and the rising incidence of chronic and lifestyle diseases. Rural areas in India are
expected to contribute one-third of the country’s consumption growth over the next two years.
Fragmented and highly competitive

The domestic pharmaceutical industry is centered on branded generics and is intensively
competitive. The top 10 players account for only 36% of the market share and the industry
remains highly fragmented. The introduction of a new patent regime in 2005 has implied that
the growth from new products will slow considerably in the coming years. Companies are
looking at other avenues for growth such as in-licensing tie-ups with multinational companies
and a wider geographical reach.
FINANCIAL HIGHLIGHTS
 Revenues for the quarter have moved up by 36 % to Rs 9.8 bn. The revenue growth has
been driven by 22 % growth in domestic formulations business and formulations exports
to regulated markets which have grown by 70 % to Rs 4990 mn.
 US revenues have shown strong numbers of Rs3200 mn while Japan clocked Rs 1319 mn
revenues. The operating margins of the company were lower at 17.9 % as against 20.7 %
estimated by us. The lower margins had been due to lower gross margins, higher staff
and other expenses on back of Kyowa and other acquisitions done by the company
recently.
 The company's profits were higher by 10.5 % to Rs 1178 mn due to higher interest,
depreciation and taxes. Reported Profits are lower by 35 % to Rs 1165 mn on account of
one time sale of Perindropril which was accounted in the corresponding quarter of the
previous year.
 The company's revenues for the 9 month period were up by 40 % to Rs 27890 mn. The
revenues have netted off forex loss of Rs 550 mn for thenine month period.
 The key growth drivers have been domestic formulations and formulations exports
which have doubled to Rs 12.2 bn for the nine month period on back of US revenues of
Rs 7500 mn and Japan revenues of Rs 3200 mn for the nine month period. Operating
margins for the nine month period have moved up from 16.2 % to 19.2 %.
 Improvement in gross margins has been the sole driver of increase in operating
margins. The company's profits for the nine month period have moved up by 57 % to Rs
3737 mn. Reported profits for the nine month period were up 10.2% to Rs 3442 mn
after accounting for 295 mn of VRS in the current 9 month period while the company
had a onetime Perindropril income in the corresponding period of the previous year.
KEY HIGHLIGHTS
1. Strong product pipeline for the US market

Lupin has emerged as one of the fastest growing companies in the US (revenue CAGR of
237% over FY05-FY08) despite being a late market entrant. We believe product offerings in
niche areas, vertical integration in key products and a presence in branded formulations
have been key growth contributors for the company in the competitive US market.
2. Manufactures niche products with high entry barriers

Lupin focuses on niche offerings for the US and other regulated markets. In the antibiotics
space, the company offers sterile injectible products which require dedicated facilities and a
complex manufacturing process. Given these entry barriers to competitors, it has been able
to capture a significant market share for key products such as ceftriaxone, cefdinir and
cefprozil from its portfolio of 15 products.
3. Captive API sourcing alleviates pricing pressure

For non-antibiotics, which have grown at a fast pace, Lupin has been able to garner market
share and absorb the intense pricing pressure mainly due to vertical integration in key
products. The company sources its own API for most products which is a crucial advantage
in a highly competitive market. As a result, Lupin has the highest sales per product amongst
its peer group for the US market.
4. Frontrunner in branded formulation sales in the US

With the entry of second and third tier Indian pharmaceutical companies into the US
market, pricing pressure has intensified. Lupin has harvested rich dividends by being one of
the first to identify branded generics as an alternative to the highly competitive plain vanilla
generic segment After Ranbaxy’s Sotret , Lupin is only the second Indian company to have a
presence in the branded generic US market. The company launched its first branded
product, Suprax Dry Suspension (cefixime), in 2004–05. Suprax is targeted at the paediatric
segment and is marketed through a 50-people sales team covering ~10,000 paediatricians.
The key differentiator between Suprax and competing drugs like azithromycin and cefdinir
are its taste masking properties. Over the years the company has also launched line
extensions in the form of Suprax Double Strength suspension powder (in 2007) and Suprax
400mg tablets (in 2008).
Revenues from this brand have grown to ~US$ 37mn in FY08 (55% prescription growth and
52% sales growth), a remarkable achievement in three years.
5. Successfully transitioning to chronic therapy in India
Lupin has been amongst the fastest growing companies in the domestic formulations space,
recording revenue CAGR of 25% over FY05-FY08 as compared to the industry growth of 12%
over the same period. Initially focused on antibiotics, which contributed ~60% of domestic
pharmaceutical sales, the company has gradually shifted its business mix towards the
chronic segment, thereby improving its margins.
6. Higher-margin chronic segment contributed 23% to sales in FY08

The chronic segment which includes cardio-vascular system (CVS) and diabetes products
now contributes 24% to sales as against 16% in FY05. Lupin has significantly reduced its
exposure to the low-margin anti-TB space, which accounts for only 17% of sales as against
33% in FY05. For FY08, Lupin outperformed the market in key areas of asthma, diabetes and
CVS. We estimate revenue CAGR of 15.8% to Rs 14.7bn in the domestic market over FY08-
FY11 on the strength of new product launches and consolidation of marketing share for
existing products.
7. Domestic formulations a key revenue driver

 The company's deliberate shift from being a TB dominated company to a company
having greater focus on segments outside price control and those in the chronic
segments has paid dividends. Key therapy areas include Diabetics, Cardiovasculars,
Respiratory, Oncology, Wound Management and CNS. In all the chronic segments
the company grew twice the industry.
 The company has banked on niche product introductions such as Gemifloxacin an
advanced quinolone, Engraf a biotech product for wound management, Percin
(Purlifloxacin) a superior fluroquinolone used in management of respiratory, urinary
and gastro-intestinal tract infections. These niche products help in differentiation
and enable the company to extend its franchise in the medical fraternity. The
company's products in key segments of Anti-infectives and Cephs, CVS+ Diabetes,
Anti TB and Asthma rank among the top 3.
 The company has a policy of using marketing teams based on therapy segments like
its peers. Lupin currently has a MR staff strength of 2500 people. The company's top
10 products comprise 27 % of the company's domestic formulations business.
KEY STRATEGIES
Acquisitions an entry strategy for new markets:

1. Japan :
Lupin acquired 90 % stake in Kyowa in October 2007. Lupin has paid USD 60 mn for the USD 63
mn company. The company has Rs 2bn yen denominated debt on its books. Kyowa,
manufactures and markets a range of generics in Japan. Kyowa has a rich product portfolio in
the Psychiatry and Neurological therapeutic categories as well as in Cardiovascular, Respiratory
& Allergies and Digestive system. The company received 10 product approvals in April 2008
including Amlodipine and Risperidone. Both the products are gaining market share. Japan's
generic market is 6 % currently and is expected to ramp upto 10-12 % in a span of 3 years.
2. Germany:
Lupin further consolidated its operations in Europe in Q2 FY09 with the acquisition of
Hormosan, a German generics company specialized in the CNS segment. Hormosan had
revenues of Euro 6.8 mn for the year ended December 2007. Lupin has reported its first
strategic win in the German market through Hormosan in the first quarter having received the
results of the AoK tender where it has been offered 1 product in all 5 regions of Germany
covering all Aok insured persons. The AoK tender is currently under judicial review.
3. Australia :
Lupin has acquired management stake in Generic Health Australia. Revenues are around USD 8-
10 mn. The company is marginally profitable. Lupin has already filed for 16 dossiers of generic
products which have a market size of AUD 850 mn. And has approvals for 14 of these. We
believe the current generics market of AUD 3bn in Australia would double in the next couple of
years.
4. Pharma Dynamics South Africa

Lupin has acquired a majority stake of 50 % plus in Pharma Dynamics South Africa. The
company has not disclosed the acquisition amount. The revenues are to the tune of USD 20 mn.
The company is expected to grow by 30-35 % per annum. The company has strong presence in
marketing in fast growing segments we believe these acquisitions have enabled the company to
gain access to critical markets and will serve as valid strategic entry for key markets.
5. Rubamin acquisition:
Lupin acquired 100 % stake in Rubamin a contract manufacturing company in September 2007.
It has now called Novodigm. The company used to do business with global pharmaceutical and
specialty chemical companies in US, Europe, Japan and other parts of the world. Novodigm now
wants to be a part of the entire value chain in the CRAMS space. Lupin is now focusing on
expanding the business of Novodigm through alliances, JVs and strategic partnerships. We have
factored revenues of Rs 528 mn in FY 2009E and Rs 750mn in FY 2010E. This business would be
margin accretive in a time span of two years.
Hedging:
The company at any point of time does not hedge more than 30-35 % of its revenues at any
point of time. The company has not entered into exotic derivative contracts and majority of
revenues are hedged in dollars. However currently the company does not forsee rupee rate
beyond Rs 55 and hence has hedged more revenues at current rates. The company would have
forex loss or gain depending upon the rate at the end of each quarter.
FCCB implications:
Lupin is treating FCCBs as equity. Hence, the company is not taking the same as Debt and has
not accounted FCCBs translation loss every quarter. The conversion price is Rs 567 and has
been done at a fixed price of Rs 46.26 to a dollar. 30 % of the company FCCBs has been
converted to debt.
FINANCIALS
INCOME STATEMENT
Mar ' 08 Mar ' 07 Mar ' 06

Income:
Expenses
Material consumed 6,275.33 5,484.52 4,130.04
Manufacturing expenses 383.42 318.32 295.25
Personnel expenses 745 630.15 541.4
Selling expenses 1,044.40 803.29 627
Adminstrative expenses 1,266.57 1,116.23 853.39
Expenses capitalised -112.75 -42.52 -15.78
Cost of sales 9,601.97 8,309.99 6,431.30
Operating profit 4,430.23 4,003.84 3,367.03
Adjusted PBDIT 4,910.05 4,303.98 3,640.25
Depreciation 438.46 362.92 332.34
Other write offs - - -
Adjusted PBT 4,446.98 3,925.02 3,286.81
Tax charges 1,480.97 1,263.07 1,027.57
Adjusted PAT 2,966.01 2,661.95 2,259.24
Non recurring items 36.68 -23.92 -70.02
Other non cash adjustments 117.41 61.94 46.13
Reported net profit 3,120.10 2,699.97 2,235.35
Earnigs before appropriation 3,767.63 3,262.03 2,846.76
Equity dividend 1,319.01 1,166.29 995.12
Preference dividend - - -
Dividend tax 224.17 198.21 139.58
Retained earnings 2,224.45 1,897.53 1,712.06
FINANCIALS
QUATERLY RESULTS
Dec ' 08 Sep ' 08 Jun ' 08 Mar ' 08

Sales 3,858.65 3,862.67 3,899.70 3,934.39
Interest 0.45 2.78 1.41 2.7
Gross profit 1,475.15 1,323.06 1,240.06 1,205.65
EPS (Rs) 2.39 2.13 1.99 1.95
Dec ' 08 Sep ' 08 Jun ' 08 Mar ' 08

Other income 97.56 110.45 114.35 163.68
Stock adjustment -48.03 -108.24 -48.37 53.05
Raw material 1,298.39 1,435.94 1,336.20 1,322.40
Power and fuel - - - -
Employee
expenses 212.95 237.67 218.11 191.07
Other expenses 1,017.30 1,081.91 1,266.64 1,323.20
Depreciation 144.2 133.99 126.11 121.49
Taxation 427.74 386.35 365.28 348.52
Net profit / loss 903.21 802.72 748.67 735.64
Equity capital 377.15 377.02 376.86 376.86
Agg.of non-prom.
shares (Lacs) 37500.75 37456.05 37429.64 37415.01
Agg.of non
promotoholding
(%) 99.43 99.35 99.32 99.28
OPM (%) 35.71 31.47 28.9 26.55
GPM (%) 37.29 33.3 30.89 29.42
NPM (%) 22.83 20.2 18.65 17.95
VALUATIONS

Year 2004-05 2005-06 2006-07 2007-08
EPS (Rs) 21.02 45.52 37.6 54.02
CAGR: 21.02 (1 + x)3 = 54.02
x = 0.3697
x = 36.97%
EPS1 = 73.9911
Share price as on 31st March, 2008 = 493.90
P/E = 493.90 / 54.02 = 9.14
Current market price (market price as on 5TH Mar, 2009) = 577

PRAJ INDUSTRIES LTD.
PRICE- Rs.48.15 Praj Industries(PIL) reported a 11.8% growth in

topline to Rs 154.8 crore in Q1FY09 as against Rs
RECOMMENDATION- BUY 138.5 crore in Q1FY08. This is mainly from rising
revenues in engineering services. The revenue
52 WEEK RANGE- Rs.221.1/45.05 from ethanol distillery projects contributed 85%
to the topline, whereas brewery projects
contributed 15%. It is believed that the volatality
in crude oil prices have increased the viability of
ethanol as an alternative fuel. Simultaneously a
KEY SHARE DATA sharp decline in corn prices in the United States
has intensified the viability for Ethanol
MARKET CAP- Rs 883.22Cr production. Domestically, 10% mandatory
blending with petrol would be the major demand
FACE VALUE- Rs.2 driver for the company. We believe 10%
mandatory blending itself would bring more than
EQ. CAPITAL- Rs.36.63Crs. Rs 3000 crore of investment, which would
directly benefit Praj industries. The emerging
BSE- 522205 opportunity from lignocellulosic (non-food grain)
feedstock is huge, though commercially the
NSE- PRAJIND
company will benefit from this technology only
BOOK VALUE- Rs.19.13 after 2010.
FY08BV, 5.7X FY08EPS and 0.31X Intrinsic value.
recommend a BUY with a long term perspective.
SHAREHOLDING PATTERN
22%
8%
55%
15%
PROMOTERS
FII
INSTITUTIONS
PUBLIC/BODY CORPORATES
COMPANY BACKGROUND
Praj is a global Indian company that offers innovative solutions to significantly add
value in bio-ethanol, bio-diesel, brewery plants and process equipment & systems
for customers, worldwide. Praj is a knowledge based company with expertise and
experience in Bioprocesses and engineering. It has one of the largest resource
bases in the industry with over 450 references across all five continents. Led by an
accomplished and caring leadership, Praj is a socially responsible corporate
citizen. Praj, which is the founding member of Global Growth Companies (part of
World Economic Forum), is listed on the Bombay and National Stock Exchanges of
India. Energy equations around the world are changing rapidly, making renewable
energy sources a part of every nation’s energy policy. Biofuels has been
acknowledged as a proven alternative to fossil fuels like petrol (gasoline) and
diesel for transportation. Praj has been creating innovative technology platforms
to make biofuels a sustainable and attractive choice for all stakeholders for the
past 25 years. Apart from making agri-linkages stronger, biofuels work towards
mitigation of greenhouse gases for a cleaner, greener environment.
Business Lines-
 Alcohol/Fuel Ethanol Plants

 Biodiesel Plants
 Brewery Plants
 Bio nutrients
 Customized Engineering and Manufacturing
 Agri-services
KEY HIGHLIGHTS
Praj’s net revenue grew by 16.5% Y-o-Y to INR 2100.5 million in 3QFY09. Net
revenue is expected to grow by 10% in FY10 based on following ethanol demand
drivers:
�EU Parliament has adopted mandate of 10% biofuels blending in all transport
fuels by the year 2020, thereby entailing opportunity of additional 12-14 billion
litres capacity for ethanol.
�USA has pre-poned its Renewable Fuels targets of 11 billion gallons from 2012
to 2009. This move is expected to support the capacity build-up.
New orders-
 The company has received an order worth Rs 120 crore from Vivergo Fuels,
UK for the supply of key equipments through its subsidiary, BioCnergy
Europa B. V. The plant is designed to produce approximately 400 million
litres of fuel ethanol a year (1,200,000 litres per day).
 The company has also bagged an order worth approximately Rs 42 crore

from Maple Etanol S.R.L., Peru, a subsidiary of Maple Energy plc.
 Pantaleon Group of Guatemala, one of Central America’s largest sugar

groups, has given Praj Industries an order worth Rs 110 crore to supply the
technology and equipment for two ethanol plants one of 450,000 LPD (litre
per day) and another of 300,000 LPD (litre per day).
Concerns
 EBITDA margin of PIL was impacted by 130 bps Y-o-Y to 19.7% due to
increase in raw material and employee cost. We believe the benefit of
softening raw material prices to start kicking in from next quarter and
expect PIL to post EBITDA margin of 23.1% in FY09 and 24.5% in FY10.
 The company has not yet got any breakthrough in Brazil, due to weak
ethanol demand environment and difference in design norms. The
company expects the demand to pick up in next couple of quarters.
Valuations

Year 2005-06 2006-07 2007-08
EPS (Rs) 3.01 10.31 8.38
CAGR: 3.01 (1 + x)2 = 8.38
x = 0.66.85
x = 66.86%
EPS1 = 8.38(1+ 0.6685) = 13.98
P/E = 136.15 / 8.38 = 16.25

KEY FINANCIALS
INCOME STATEMENT
Mar ' 08 Mar ' 07 Mar ' 06

Income:
Operating income 701.63 592.3 261.76
Expenses
Material consumed 406.45 386.89 172.41
Manufacturing expenses 40.24 27 13.6
Personnel expenses 49.76 28.62 17.13
Selling expenses 8.87 6.59 3.65
Adminstrative expenses 52.12 35.37 19.42
Cost of sales 557.44 484.46 226.21
Operating profit 144.19 107.84 35.55
Adjusted PBDIT 153.12 113.64 36.77
Depreciation 5.54 3.16 2.65
Adjusted PBT 147.55 107.37 31.13
Tax charges 18.48 23.84 7.49
Adjusted PAT 129.08 83.53 23.63
Non recurring items 28.05 3 1.26
Other non cash adjustments -3.58 - -0.48
Reported net profit 153.54 86.53 24.41
Earnigs before appropriation 233.46 113 41.12
Equity dividend 36.25 22.62 10.22
Dividend tax 6.16 3.17 1.43
Retained Earning 191.05 87.2 29.47

KEY FINANCIALS
Quarterly statements
Dec ' 08 Sep ' 08 Jun ' 08 Mar ' 08

Sales 210.05 200.2 154.76 212.62
Operating profit 46.85 32.14 29.81 67.87
Interest 0.08 - - -
Gross profit 56.63 37.68 31.84 66.4
EPS (Rs) 2.58 1.65 1.35 3.2
Quarterly results in
details
Dec ' 08 Sep ' 08 Jun ' 08 Mar ' 08
Other income 9.86 5.54 2.03 -1.46
Stock adjustment - - - 0.46
Raw material 121.07 106.97 78.11 39.37
Power and fuel - - - -
Excise - - - -
Other expenses 26.02 43.58 32.66 91.25
Depreciation 2.2 1.93 1.73 1.59
Taxation 7.12 5.57 5.36 8.89
Net profit / loss 47.31 30.18 24.75 58.66
Extra ordinary item - - - 2.74

Equity capital 36.69 36.69 36.65 36.63
Agg.of non-prom.
shares (Lacs) - - 1441.92 1441.15
Agg.of non
promotoholding (%) - - 78.69 78.68
OPM (%) 22.3 16.05 19.26 31.92
GPM (%) 25.75 18.31 20.31 31.45
NPM (%) 21.51 14.67 15.79 27.78
Bibliography
www.nseindia.com
www.bseindia.com
www.bankofbaroda.com
www.google.com
www.wikipedia.com
www.investopedia.com
www.moneycontrol.com
www.praj.net
www.lupinpharmaceuticals.com
www.finance.yahoo.com
www.itcportal.com
www.rcom.co.in
Research reports
The evolution of the idea of “value investing”: from benjamin graham to warren buffett
By Robert F. Bierig Duke University Durham, North Carolina
Reports by Enam, Emkay, Motilaloswal, KR Choksey.

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A Research

I would like to thank my college for giving me an opportunity to work

Will Rogers once gave a very famous quotation that "I am

Value investing is the most conservative way to invest

First section starts with some insight on value investing,

Second section presents an Investment argument on 5

2. A note about Benjamin Graham & his investment principles.

3. A note about Warren Buffett & his investment philosophy

4. Selecting 5 different sectors which contain 10 stocks each.

6. Preparing equity research report of those 5 stocks.

Typically, value investors select stocks with lower-than-average price-to-book or

Who is a value investor?

Stock picking strategies

Value, Not Junk!

Buying a Business, not a Stock

Principle No.1: Always Invest with a Margin of Safety

Principle No.2: Expect Volatility and Profit from it

2. Investing in Stocks and Bonds

Principle No.3: Know What Kind of Investor You Are

Active vs. Passive

Speculator Vs. Investor

2. Northern Pipe Line

Currently, the portfolio of Berkshire Hathaway comprises of utilities (MidAmerican Energy

2. Price/Earnings Ratio Screens

3. Return on Capital Employed - ROCE

4. Return on Equity - ROE

Good Companies are not necessarily Good Investments

AS ON 5TH MARCH 2009 INVESTMENT ARGUMENT

PRICE- Rs.170.55 Increasing contribution from non-

Margins improved drastically as prices

KEY SHARE DATA Strong pricing power due to dominant

EQ. CAPITAL- Rs.376.86Crs. Cigarette business continues to be a

Hotels and Paperboard businesses have

Lifestyle retailing: Lifestyle retailing

15% Valuations- Currently the stock is trading

Other FMCG business

Branded Packaged Foods

Personal Care Products

Paperboards, Specialty Papers & Packaging

 Agriculture business reported a decline of 6.2% in revenues to Rs 621.5 crores due to

 Launch of Vivel Shampoo.

 Exit from the non-filter cigarette segment.

Key investment risks

 The requirement of pictorial health warnings on tobacco products.

Operating income 14,032.20 12,313.83 9,798.33

Adminstrative expenses 1,266.57 1,116.23 853.39

Adjusted PBT 4,446.98 3,925.02 3,286.81

Adjusted PAT 2,966.01 2,661.95 2,259.24

Other non cash adjustments 117.41 61.94 46.13

Reported net profit 3,120.10 2,699.97 2,235.35

Equity dividend 1,319.01 1,166.29 995.12

Retained earnings 2,224.45 1,897.53 1,712.06

Dec ' 08 Sep ' 08 Jun ' 08 Mar ' 08

Stock adjustment -48.03 -108.24 -48.37 53.05

Employee expenses 212.95 237.67 218.11 191.07

Other expenses 1,017.30 1,081.91 1,266.64 1,323.20

Equity capital 377.15 377.02 376.86 376.86

Calculation of intrinsic value:

EPS (Rs) 4.91 6.08 7.19 8.29

CAGR: 4.91 (1 + x)3 = 8.29

EPS1 = 4.91(1+ 0.19) = 9.87

P/E:Share price as on 31st March, 2008 = 206.35